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

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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:

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.

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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 ?

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

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

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

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

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

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 =

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

Step 2: Calculate Equivalent Units of Production Total Percent Equivalent Units Added Units Materials Equivalent Units Inventory in process, July 1 500 0% 0 Started and completed in July 600 100% 600 Transferred out to Casting Dept. 1,100 600 Inventory in process, July 31 400 100% 400 Total tons to be assigned cost 1,500 1,000

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

Step 2: Calculate Equivalent Units of Production Conversion Equivalent Units Total Percent Equivalent Units Added Units Inventory in process, July 1 500 30% 150 Started and completed in July 600 100% 600 Transferred out to Casting Dept. 1,100 750 Inventory in process, July 31 400 25% 100 Total tons to be assigned cost 1,500 850

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

Step 3: Determine the Cost per Equivalent Unit Equivalent Units Direct Materials Conversion Inventory in process, July 1 0 150 Started and completed in July (1,100 – 500) 600 600 Transferred out to Casting Dept. in July 600 750 Inventory in process, July 31 400 100 Total tons to be assigned cost 1,000 850

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

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Inventory in process, July 1 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 1,710 Cost of July 1 in-process inventory transferred to Casting Department $29,860

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Units started and completed in July 600 600 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

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Equivalent units in ending inventory 400 100 Equivalent unit cost x$50.00 x$11.40 Cost of ending inventory $20,000 $ 1,140 $21,140

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 = 0 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

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

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.

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

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 1 (70% complete) 500 0 150 Started and completed in July 600 600 600 Transferred to Casting Dept. 1,100 600 750 Inventory in process, July 31 (25% complete) 400 400 100 Total units to be assigned cost 1,500 1,000 850

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 $ 50.00 $11.40 Step 3

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 $ 0 $1,710 1,710 Started and completed in July 30,000 6,840 36,840 Transferred to Casting Dept. $66,700 Inventory in process, July 31 $20,000 $1,140 21,140 Total costs assigned $87,840 Step 4

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

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

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.

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

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

Chapter 19 The End