1 Click to edit Master title style Process Cost Systems 18

2 Click to edit Master title style Explain and illustrate the characteristics and cost flows for a process manufacturer. 2. Prepare a cost of production report accounting for completed units under the Fifo method. After studying this chapter, you should be able to:

3 Click to edit Master title style Prepare journal entries for transactions of a process manufacturer. 4. Use cost of production reports for decision making. 5. Contrast just-in-time processing with conventional manufacturing practices. After studying this chapter, you should be able to:

4 Click to edit Master title style Explain and illustrate the characteristics and cost flows for a process manufacturer. Objective

5 Click to edit Master title style Both systems: Comparing Job Order and Process Cost Systems 1.Accumulate product costs. 2.Categorize manufacturing costs into direct material, direct labor, and factory overhead. 3.Allocate costs to products. (Continued) 18-1

6 Click to edit Master title style Both systems: 4.Maintain perpetual materials, work in process, and finished goods inventory records. 5.Use product cost data for decision making. 18-1

7 Click to edit Master title style Primary differences: 1.Manufacturing costs are accumulated to departments, rather than jobs. 2.Manufacturing costs are allocated to products based on units of production. 3.Manufacturing costs are accumulated and transferred between departments. (Continued) 18-1

8 Click to edit Master title style Primary differences: 4.Work in process inventory consists of partially completed production within a department, rather than the sum of job cost sheets of partially completed jobs (Concluded)

9 Click to edit Master title style (Continued) 18-1

10 Click to edit Master title style 10 (Concluded) 18-1

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12 Click to edit Master title style Materials WIP – Mixing (a) Purchases DM WIP – Packaging DM (b) Direct Materials Exhibit 3 Cost Flows for a Process Manufacturer DMDM 18-1

13 Click to edit Master title style Materials WIP – Mixing DM (a) Purchases DM DM WIP – Packaging (c) Direct Labor—Mixing Exhibit 3 Cost Flows for a Process Manufacturer DL DM 18-1

14 Click to edit Master title style Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging Exhibit 3 Cost Flows for a Process Manufacturer DL IM (d) Factory overhead incurred Factory OH – Mixing DM IM (d) Indirect materials 18-1

15 Click to edit Master title style Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (e) Factory overhead applied—Mixing FOA (d) Factory overhead incurred DM 18-1

16 Click to edit Master title style Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out (f) Costs transferred in CTI CTI DM 18-1

17 Click to edit Master title style Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out (g) Direct labor in Packaging CTI DL DL DM 18-1

18 Click to edit Master title style Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out CTI DL DM FOA (h) Factory overhead applied—Packaging FOA FOA 18-1

19 Click to edit Master title style 19 Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out CTI DL DM FOA (i) Costs trans- ferred out Finished Goods FOA (i) Cost transferred in from WIP—Packaging CTI CTI

20 Click to edit Master title style 20 Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out CTI DL DM FOA (i) Costs trans- ferred out Finished Goods FOA (j) Cost transferred to Cost of Goods Sold CGS CTI 24 CGS Cost of Goods Sold CGS 18-1

21 Click to edit Master title style 21 Prepare a cost of production report accounting for completed and partially completed units under the FIFO method. Objective

22 Click to edit Master title style 22 Inventory in process, July 1, 5,000 gallons Direct materials cost, 5,000 gallons$ 5,000 Conversion costs, 5,000 gallons, 70% completed 1,225 Total inventory in process, July 1$ 6,225 Direct materials cost for July, 60,000 gallons$66,000 Direct labor for July10,500 Factory overhead applied for July 7,275 83,775 Total production costs to account for$90,000 Goods transferred to Packaging in July (including units in process on July 1), 62,000 gallons? Inventory in process, July 31, 3,000 gallons, 25% complete as to conversion costs? 18-2 Mixing Department of Frozen Delight 26

23 Click to edit Master title style 23 Step 1:Determine the Units to Be Assigned Costs Total gallons charged to production: In process July 15,000 gallons Received from materials storage60,000 gallons Total units accounted for by the Mixing Department65,000 gallons 18-2

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25 Click to edit Master title style 25 Total Units to Be Assigned Costs A.Inventory in process, July 1, completed in July5,000 gal. B.Started and completed in July57,000 gal. Transferred out to the Packaging Department in July62,000 gal. C.Inventory in process, July 31 3,000 gal. Total gallons to be assigned costs65,000 gal. 18-2

26 Click to edit Master title style 26 Step 2:Calculate Equivalent Units of Production 18-2 Whole units are the number of units in production during a period, whether completed or not. Equivalent units of production are the number of units that were completed with respect to either materials or conversion costs within a given accounting period.

27 Click to edit Master title style Frozen Delight’s Equivalent Units Computation for Materials in July PercentEquivalent TotalMaterialsUnits for WholeAddedDirect Unitsin JulyMaterials Inventory in process, July 15,0000%0 Started and completed in July (62,000 – 5,000) 57,000100% 57,000 Transferred out to Packaging Dept.62,000—57,000 Inventory in process, July 31 3,000100% 3,000 Total gallons to be assigned cost65,00060,000 Important: Note the word “Added” 18-2

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29 Click to edit Master title style 29 Conversion Equivalent Units The direct labor and applied factory overhead are often combined as conversion costs because they are both usually incurred evenly throughout a process. 18-2

30 Click to edit Master title style Percent TotalConversionEquivalent WholeCompletedUnits for Unitsin JulyConversion Inventory in process, July 1 (70% complete)5,00030%1,500 Started and completed in July (62,000 – 5,000) 57,000100% 57,000 Transferred out to Packaging Dept.62,000—58,500 Inventory in process, July 31 (25% complete) 3,00025% 750 Total gallons to be assigned cost65,00059,

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32 Click to edit Master title style Step 3:Determine the Cost per Equivalent Unit Inventory in process, July 101,500 Started and completed in July (62,000 – 5,000) 57,00054,000 Transferred out of Packaging Dept. In July57,00058,500 Inventory in process, July 31 3, Total gallons to be assigned costs60,00059,250 Direct MaterialsConversion Equivalent Units from Step

33 Click to edit Master title style Conversion Equivalent Unit Cost Conversion Equivalent Unit Cost Direct Materials Equivalent Unit Cost Direct Materials Equivalent Unit Cost $0.30 per equivalent unit of con- version = $17,775 conversion cost 59,250 conversion equivalent units $66,000 direct materials cost 60,000 direct materials equivalent units $1.10 per equivalent unit of direct materials = 18-2

34 Click to edit Master title style Inventory in process, July 1, balance $6,225 Equivalent units for completing the July 1 in-process inventory01,500 Equivalent unit costx $1.10x $0.30 Cost of completed July 1 in- process inventory0$ Cost of July 1 in-process inventory transferred to Packaging Department$6,675 Direct Conver- MaterialssionTotal CostsCostsCosts Step 4:Allocate Costs to Transferred and Partially Completed Units 18-2

35 Click to edit Master title style Units started and completed in July57,00057,000 Equivalent unit costx $1.10x $0.30 Cost to complete the units started and completed in July$62,700$17,100$79,800 Direct MaterialsConversionTotal CostsCostsCosts Costs Associated With the Units Started and Completed 18-2

36 Click to edit Master title style Equivalent units in ending inventory3, Equivalent unit costx $1.10x $0.30 Cost to ending inventory$ 3,300$ 225$3,525 Direct MaterialsConversionTotal CostsCostsCosts Costs Associated With the Partially Completed Units in the Ending Inventory 18-2

37 Click to edit Master title style 37 Cost of Production Report A cost of production report is normally prepared for each processing department at periodic intervals. 18-2

38 Click to edit Master title style Cost of Production Report for Frozen Delight’s Mining Department—FIFO (Continued) 18-2

39 Click to edit Master title style Cost of Production Report for Frozen Delight’s Mixing Department—FIFO (Concluded) 18-2

40 Click to edit Master title style 40 The cost of production report provides the following production quantity and cost data:  The units for which the department is accountable and the disposition of those units.  The production costs incurred by the department and the allocation of those costs between completed and partially completed units. 18-2

41 Click to edit Master title style 41 Prepare journal entries for transactions of a process manufacturer. Objective

42 Click to edit Master title style 42 Journal Entries for Frozen Delight a.Materials, including milk, cream, sugar, packaging, and indirect materials, were purchased on account, $88,000. Materials88,000 Accounts Payable88,

43 Click to edit Master title style 43 b.Milk, cream, and sugar were requisitioned by the Mixing Department, $66,000. Another $8,000 of packaging materials was requisitioned by the Packaging Department. Indirect materials for the Mixing and Packaging Department were $4,125 and $3,350, respectively. 18-3

44 Click to edit Master title style 44 b.Work in Process—Mixing 66,000 Work in Process—Packaging8,000 Factory Overhead—Mixing4,125 Factory Overhead—Packaging3,000 Materials81,

45 Click to edit Master title style 45 c.Direct labor in the Mixing and Packaging departments was $10,500 and $12,000, respectively. Work in Process—Mixing10,500 Work in Process—Packaging12,000 Wages Payable22,

46 Click to edit Master title style 46 d.Equipment depreciation for the Mixing and Packaging departments was $3,350 and $1,000, respectively. Factory Overhead—Mixing3,350 Factory Overhead—Packaging1,000 Accumulated Depreciation— Equipment4,

47 Click to edit Master title style 47 e.The factory overhead applied to Mixing and Packaging was $7,275 and $3,500, respectively. Work in Process—Mixing7,275 Work in Process—Packaging3,500 Factory Overhead— Mixing7,275 Factory Overhead— Packaging3,

48 Click to edit Master title style 48 f.The amount of costs transferred from the Mixing Department to the Packaging Department was $86,475 per the cost of production report in Exhibit 7. Work in Process—Packaging86,475 Work in Process—Mixing86,

49 Click to edit Master title style 49 g. The goods transferred out of the Packaging Department to Finished Goods according to the Packaging Department cost of production report was $106,000. Finished Goods—Ice Cream106,000 Work in Process— Packaging106,

50 Click to edit Master title style 50 h. The cost of goods sold out of the finished goods inventory was $107,000. Cost of Goods Sold107,000 Finished Goods—Ice Cream107,

51 Click to edit Master title style Ending Inventories for Frozen Delight July 31 Materials$ 6,875 Work in Process—Mixing Dept.3,525 Work in Process—Packaging Department7,725 Finished Goods 4,000 Total inventories$22,

52 Click to edit Master title style 52 Use cost of production reports for decision making. Objective

53 Click to edit Master title style Cost of Production Reports Holland Beverage Company—Blending Department For the Months Ended April 30 and May 31, 2008 AprilMay Direct materials$ 20,000$ 40,600 Direct labor15,00029,400 Energy8,00020,000 Repairs4,0008,000 Tank cleaning 3,000 8,000 Total$ 50,000$ 106,000 Units completed/ 100,000/ 200,000 Cost per unit$ 0.50$

54 Click to edit Master title style Per-Unit Expense Comparisons 18-4

55 Click to edit Master title style 55 In addition to unit production cost trends, managers of process manufacturers are also concerned about yield trends. Yield is the ratio of materials output quantity to the input quantity. 18-4

56 Click to edit Master title style 56 Example Exercise The cost of energy consumed in producing good units in the Bottling Department of Rocky Springs Beverage Company was $8,400 and $7,400 for March and April, respectively. The number of equivalent units produced in March and April was 70,000 and 74,000 liters, respectively. Evaluate the cost of energy between the two months. 74

57 Click to edit Master title style 57 For Practice: PE18-8A, PE18-8B Follow My Example Energy cost per liter, March: $8,400 70,000 liters = $0.12Energy cost per liter, April: $7,400 74,000 liters = $0.10 The cost of energy has appeared to improve by 2 cents per liter between March and April.