1. Chapter 19 Process Cost Systems Accounting, 21st Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3. After studying this chapter, you should be able to:
Objectives
1. Distinguish between job order costing and process costing systems.
2. Explain and illustrate the physical flows and cost flows for a process manufacturer.
3. Calculate and interpret the accounting for completed and partially completed units under the fifo method.
4. Prepare a cost of production report.
After studying this chapter, you should be able to:

4. Objectives
5. Prepare journal entries for transactions of a process manufacturer.
6. Use cost of production reports for decision making.
7. Contrast just-in-time processing with conventional manufacturing practices.

5. Comparing Job Order Costing and Process Costing
Job Order Cost System
to Finished Goods
Work in Process
Account
Job Cost
Sheets
Dept. A and Dept. B
Direct labor
Direct materials
Factory overhead

6. Comparing Job Order Costing and Process Costing
Process Cost System
Work in Process
Account
Work in Process
Account
to Finished Goods
Direct
materials
DEPT. A
DEPT. B
Factory Overhead
Direct
Labor
Direct
Labor
Factory Overhead

7. Comparing Job Order Costing and Process Costing
Both systems:
determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhead costs.
allocate overhead using a predetermined overhead rate (or activity-based costing).
maintain perpetual inventory records with subsidiary ledgers for Materials, Work in Process, and Finished Goods.

8. Physical Flows for a Process Manufacturer
Scrap Metal Materials
Melting
Department
Casting
Department

9. Physical Flows for a Process Manufacturer
Molten metal transferred from Melting
Melting
Department
Casting
Department
To finished goods

10. Cost Flows for a Process Manufacturer
Materials
WIP – Melting
WIP – Casting
Purchases of direct and indirect materials DM DM
Factory OH – Melting
Factory OH – Casting
Finished Goods
Cost of Goods Sold DM
Direct materials used in production

11. Cost Flows for a Process Manufacturer
Materials
WIP – Melting
WIP – Casting
Purchases of direct and indirect materials DM DM DL
Factory OH – Melting
Factory OH – Casting
Finished Goods
Actual
costs
incurred
Cost of Goods Sold DL
Direct labor used in production

12. Cost Flows for a Process Manufacturer
Materials
WIP – Melting
WIP – Casting
Purchases of direct and indirect materials DM DM IM DL
Actual
costs
incurred
Actual
costs
incurred
Factory OH – Melting
Factory OH – Casting
Finished Goods
Cost of Goods Sold IM
Indirect materials used in production

13. Cost Flows for a Process Manufacturer
Materials
WIP – Melting
WIP – Casting
Purchases of direct and indirect materials DM DM IM DL
Actual
costs
incurred
FOA
Factory OH – Melting
Factory OH – Casting
Finished Goods
FOA
Actual
costs
incurred
Cost of Goods Sold
FOA
Factory overhead applied

14. Cost Flows for a Process Manufacturer
Materials
WIP – Melting
WIP – Casting
Purchases of direct and indirect materials DM DM TO TI IM DL
Actual
costs
incurred
FOA
Factory OH – Melting
Factory OH – Casting
Finished Goods
FOA
Actual
costs
incurred
Cost of Goods Sold
TO/TI
Cost transferred out/transferred in

15. Cost Flows for a Process Manufacturer
Materials
WIP – Melting
WIP – Casting
Purchases of direct and indirect materials DM DM TO TI IM DL DL
Actual
costs
incurred
FOA
FOA
Factory OH – Melting
Factory OH – Casting
Finished Goods
FOA
FOA
Actual
costs
incurred
Cost of Goods Sold DL
Direct labor used in production
FOA
Factory overhead applied

16. Cost Flows for a Process Manufacturer
Materials
WIP – Melting
WIP – Casting
Purchases of direct and indirect materials DM DM TO TI TO TI IM DL DL
Actual
costs
incurred
FOA
FOA
Factory OH – Melting
Factory OH – Casting
Finished Goods
FOA
FOA
Actual
costs
incurred
Cost of Goods Sold
TO/TI
Cost transferred out/transferred in

17. Cost Flows for a Process Manufacturer
Materials
WIP – Melting
WIP – Casting
Purchases of direct and indirect materials DM DM TO TI TO IM DL DL
Actual
costs
incurred
FOA
FOA
Factory OH – Melting
Factory OH – Casting
Finished Goods
FOA
FOA TI
COGS
Actual
costs
incurred
COGS
Cost of Goods Sold
COGS
Cost of goods sold

18. The First-in,
First-out (Fifo)
Method

19. Melting Department of McDermott Steel Inc.
Inventory in process, July 1, 500 tons:
Direct materials cost, 500 tons $24,550
Conversion costs, 500 tons, 70% completed 3,600
Total inventory in process, July 1 $28,150
Direct materials cost for July, 1,000 tons 50,000
Conversion costs for July 9,690
Goods transferred to Casting in July, 1,100 tons ?
Inventory in process, July 31, 400 tons, 25%
complete as to conversion costs ?

20. Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Started
1,000 Tons

21. Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
In a perpetual inventory system, outflows are recorded as they occur.
Beginning
Inventory
500 Tons
Transferred
1,100 Tons
Started
1,000 Tons

22. Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Transferred
1,100 Tons 1
Beginning Inventory 500 Tons
Ending
Inventory
400 Tons
Started
1,000 Tons

23. Step 1: Determine the Units to be Assigned Costs
Beginning
Inventory
500 Tons
Work in Process – Melting
Started
1,000 Tons
Transferred
1,100 Tons
Ending
400 Tons
Step 1: Determine the Units to be Assigned Costs
Beginning Inventory 500 Tons 1
Started & Completed ? Tons + 2

24. Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Transferred
1,100 Tons 1
Beginning Inventory 500 Tons
Ending
Inventory
400 Tons
Started
1,000 Tons
Started & Completed 600 Tons + 2

25. Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Transferred
1,100 Tons
Transferred Out 1,100 Tons 1
Beginning Inventory 500 Tons
Ending
Inventory
400 Tons
Started
1,000 Tons
Started & Completed 600 Tons + 2 = +
Ending Inventory 400 Tons 3
Total tons to be assigned costs
Total units 1,500 Tons =

26. Step 2: Calculate equivalent units of production
The equivalent units of production are the number of units that could have been completed within a given accounting period.
Step 2: Calculate equivalent units of production

27. Step 2: Calculate Equivalent Units of Production
Total Percent Equivalent
Units Added Units
Materials Equivalent Units
Inventory in process, July % 0
Started and completed in July % 600
Transferred out to Casting Dept. 1,
Inventory in process, July %
Total tons to be assigned cost 1,500 1,000

28. Step 2: Calculate Equivalent Units of Production
JULY 1
JULY 31
Note: Started and completed
500 tons beginning inventory
500
EU of materials
600
EU of materials
600 tons started and completed
100% materials added in July
100% materials added in June
No materials equivalent units added to beginning inventory for July
Inventory in process, July 1
400
EU of materials
400 tons ending inventory
100% materials added in July
Inventory in process, July 31

29. Step 2: Calculate Equivalent Units of Production
Conversion Equivalent Units
Total Percent Equivalent
Units Added Units
Inventory in process, July % 150
Started and completed in July % 600
Transferred out to Casting Dept. 1,
Inventory in process, July % 100
Total tons to be assigned cost 1,

30. Step 2: Calculate Equivalent Units of Production
JULY 1
JULY 31
500 tons beginning inventory
600 tons started and completed
Inventory in process, July 31 (75% to be completed for conversion in August)
150
350 EU EU
70% completed for conversion in June
30% completed for conversion in July
600 EU
Inventory in process, July 1
100% completed for conversion in July
400 tons ending inventory
100 EU
300 EU
25% completed for conversion in July

31. Step 3: Determine the Cost per Equivalent Unit
Equivalent Units
Direct Materials Conversion
Inventory in process, July
Started and completed in July (1,100 – 500)
Transferred out to Casting Dept. in July
Inventory in process, July
Total tons to be assigned cost 1,

32. Step 3: Determine the Cost per Equivalent Unit
Work in Process – Melting
Beginning
Inventory
$28,150
Direct Materials Equivalent Unit Cost
$50.00 per EU of DM =
$50,000 direct materials cost
Materials
$50,000
1,000 direct materials equivalent units
Conversion
Costs
$9,690
Conversion Equivalent Unit Cost
$11.40 per EU of con-
version =
$9,690 conversion cost
850 conversion equivalent units

33. Step 4: Allocate Costs to Transferred and Partially Completed Units
Direct Materials Conversion Total Costs Costs Costs
Inventory in process, July beginning balance $28,150
Equivalent units for completing the July in-process inventory 0 150
Equivalent unit cost x $50.00 x $11.40
Cost of completed July 1 in- process inventory $0 $1, ,710
Cost of July 1 in-process inventory transferred to Casting Department $29,860

34. Step 4: Allocate Costs to Transferred and Partially Completed Units
Direct Materials Conversion Total Costs Costs Costs
Units started and completed in July
Equivalent unit cost x$50.00 x$11.40
Cost to complete the units started and completed in July $30,000 $6,840 $36,840

35. Step 4: Allocate Costs to Transferred and Partially Completed Units
Direct Materials Conversion Total Costs Costs Costs
Equivalent units in ending inventory
Equivalent unit cost x$50.00 x$11.40
Cost of ending inventory $20,000 $ 1,140 $21,140

36. Work in Process – Melting
Step 4: Allocate Costs to Transferred and Partially Completed Units
Costs
Work in Process – Melting
Beginning cost $28,150
M 500 x 0% x $50.00 =
C 500 x 30% x $11.40 = 1,710
$29,860
Beginning
Inventory
$28,150
Beginning
Inventory
$29,860
Materials
Costs
$50,000
Started and
Completed
$36,840
M 600 x 100% x $50.00 = $30,000
C 600 x 100% x $11.40 = 6,840
$36,840
Conversion
Costs
$9,690
Ending
Inventory
$21,140
M 400 x 100% x $50.00 = $20,000
C 400 x 25% x $11.40 = 1,140
$21,140
Total Costs
Charged
$87,840
Total Costs
Assigned
$87,840
Total Costs Assigned $87,840

37. A cost of production report is prepared for each processing department at periodical intervals.

38. Cost of Production Report
The cost of production report provides the following production quantity and cost data:
The units for which the department is accountable and the deposition of those units.
The production costs incurred by the department and the allocation of those costs between completed and partially completed units.

39. A cost of production report also is used to control costs.

40. Cost of Production Report—Melting Department
Step 2
Equivalent Units
Units
Step 1
Whole Direct
Units Materials Conversion
Units charged to production:
Inventory in process, July 1 500
Received from materials 1,000
Total units accounted for 1,500
Units to be assigned cost:
Inventory in process, July (70% complete)
Started and completed in July
Transferred to Casting Dept. 1,
Inventory in process, July (25% complete)
Total units to be assigned cost 1,500 1,

41. Cost of Production Report—Melting Department
Costs
Costs
Direct Materials Conversion Total Costs
Unit costs:
Total costs for July in Melting Department $50,000 $9,690
Total equivalent units (from Slide 43) ÷ 1,000 ÷ 850
Cost per equivalent unit $ $11.40
Step 3

42. Cost of Production Report—Melting Department
Costs
Direct Conversion Total
Materials Costs Costs
Costs charged to production:
Inventory in process, July 1 $28,150
Cost incurred in July 59,690
Total costs accounted for $87,840
Costs allocated to completed and partially completed units
Inventory in process, July 1 $28,150 To complete inventory of July 1 $ $1,710 1,710
Started and completed in July 30,000 6, ,840
Transferred to Casting Dept. $66,700
Inventory in process, July 31 $20,000 $1, ,140
Total costs assigned $87,840
Step 4

43. Journal Entries for a Process Cost System
Transaction Journal Entry Debit Credit
a. Materials purchased on account.
b. Direct and indirect materials requisitioned.
c. Direct labor
used.
d. Depreciation expenses.
Materials 62,000
Accounts Payable 62,000
Work in Process–Melting 50,000
Factory Overhead–Melting 4,000
Factory Overhead–Casting 3,000
Materials 57,000
Work in Process–Melting 5,000
Work in Process–Casting 4,500
Wages Payable 9,500
Factory Overhead–Melting 1,000
Factory Overhead–Casting 7,000
Accumulated Depreciation 8,000

44. Journal Entries for a Process Cost System
Transaction Journal Entry Debit Credit
e. Factory overhead applied.
f. Costs transferred to Casting Department
g. Casting Department transferred to Finished Goods
h. Goods sold.
Work in Process–Melting 4,690
Work in Process–Casting 9,640
Factory Overhead–Melting 4,690
Factory Overhead–Casting 9,640
Work in Process–Casting 66,700
Work in Process–Melting 66,700
Finished Goods 78,600
Work in Process–Casting 78,600
Cost of Goods Sold 73,700
Finished Goods 73,700

45. Just-in-Time Processing (JIT)
JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality.
JIT organizes work cells that perform several manufacturing steps.
Workers are cross-trained to perform more than one task. This provides flexibility and worker pride and involvement in the final product.
Because products have limited movement between departments, the nonvalue-added cost of transporting products and parts is reduced.

46. Just-in-Time Processing (JIT)
Traditional Production Line
Cutting Dept.
Drilling Dept.
Sanding Dept.
Staining Dept.
Wood
Assembly Dept.
Upholstery Dept.
Varnishing Dept.

47. Just-in-Time Processing (JIT)
Just-in-Time Production Line
Work Center One
Work Center Two
Wood
Cutting drilling and sanding
Staining and varnishing
Work Center Three
Upholstery and assembly

48. Chapter 19
The End