1. Student Version © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Process Cost Systems Chapter 20 These slides should be viewed using the presentation mode (click the icon to start presentation). Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reeve Warren Duchac PRINCIPLES OF ACCOUNTING ACCOUNTING PRINCIPLES Using excel for Success 2e 24e

2. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 1 1.Describe process cost systems.

3. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Process Cost System  A process manufacturer produces products that are indistinguishable from each other using a continuous production process.  The cost accounting system used by process manufacturers is called the process cost system. LO 1

4. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparing Job Order and Process Cost  Process and job order cost systems are similar in that each system:  Records and summarizes product costs.  Classifies product costs as direct materials, direct labor, and factory overhead.  Allocates factory overhead costs to products. (continued) LO 1

5. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparing Job Order and Process Cost  Uses perpetual inventory system for materials, work in process, and finished goods.  Provides useful product cost information for decision making. LO 1  Process cost systems are used to manufacture homogeneous products, such as tennis balls, bars of soap, and boxed cereal.

6. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparing Job Order and Process Cost  In contrast, job cost systems are used to manufacture unique products or provide unique services. Examples are:  Custom-built homes  Landscape design services  Custom cabinets  Airplanes LO 1

7. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 Cost Flows for a Process Manufacturer

8. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 2 1.Describe process cost systems. 2.Prepare a cost of production report.

9. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost of Production Report  The cost of production report summarizes the production and cost data for a department as follows:  The units the department is accountable for and the disposition of those units.  The product costs incurred by the department and the allocation of those costs between completed (transferred out) and partially completed units. LO 2

10. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost of Production Report LO 2  Preparing a cost of production report requires making a cost flow assumption.  Like merchandise inventory, costs can be assumed to flow through the manufacturing process using one of several methods.  In the following example, the first-in, first-out (FIFO) method is used because it is often the same as the physical flow of units.

11. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Determine the Units to be Assigned Costs  To determine the units to be assigned costs, first know that a unit can be any measure of completed production, such as tons, gallons, pounds, barrels, or cases. LO 2

12. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Determine the Units to be Assigned Costs LO 2 Step 1:

13. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Compute Equivalent Units of Production  Whole units are the number of units in production during a period, whether completed or not.  Equivalent units of production are the portion of whole units that are complete with respect to either materials or conversion (direct labor and factory overhead) costs. LO 2

14. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Compute Equivalent Units of Production A 1,000-gallon batch (vat) of ice cream is only 40% complete in the mixing process on May 31. Thus, the batch is only 40% complete as to conversion costs. Conversion Costs Step 2:

15. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Compute Equivalent Units of Production Direct Materials Frozen Delight adds all the materials at the beginning of the mixing process.

16. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Conversion Equivalent Units  To compute equivalent units for conversion costs, it is necessary to know how direct labor and factory overhead enter the manufacturing process.  It is assumed that Frozen Delight incurs conversion costs evenly throughout its manufacturing process. LO 2

17. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Conversion Equivalent Units LO 2

18. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Determine the Cost per Equivalent Unit Step 3: Direct Materials Cost per Equivalent Unit Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials = Conversion Cost per Equivalent Unit Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs =

19. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Determine the Cost per Equivalent Unit

20. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Determine the Cost per Equivalent Unit Direct Materials Cost per Equivalent Unit Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials = Direct Materials Cost per Equivalent Unit $66,000 60,000 gallons = $1.10 per gallon Direct Materials Cost per Equivalent Unit = Direct Materials

21. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Determine the Cost per Equivalent Unit Conversion Cost Conversion Cost per Equivalent Unit $17,775 59,250 gallons = Conversion Cost per Equivalent Unit $0.30 per gallon = Conversion Cost per Equivalent Unit Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs =

22. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Allocating Costs to Units  Product costs must be allocated to the units transferred out and the partially completed units on hand at the end of the period. LO 2 Step 4:

23. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Allocating Costs to Units The total production costs to be assigned for Frozen Delight in July are $90,000.

24. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Allocating Costs to Units The units to be assigned these costs are shown below. The costs to be assigned these units are indicated by question marks.

25. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Allocating Costs to Units Group 1: Inventory in Process on July 1 The 5,000 gallons of inventory in Group 1 were completed and transferred out to the Packaging Department in July. The cost is determined as follows:

26. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Group 2: Started and Completed Allocating Costs to Units The 57,000 units started and completed in July (Group 2) incurred all of their direct materials and conversion costs in July. The cost assigned to these 57,000 units is shown below.

27. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Group 2: Started and Completed Allocating Costs to Units The total cost transferred to the Packaging Department in July of $86,475 is the sum of the beginning inventory cost and the costs of the units started and completed in July. Group 1 Cost of July 1 in-process inventory$ 6,675 Group 2 Cost of the units started and completed in July 79,800 Total costs transferred to Packaging Department in July$86,475 LO 2

28. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Group 3: Inventory in Process on July 31 Allocating Costs to Units The 3,000 gallons in process on July 31 (Group 3) incurred all of their direct materials costs and 25% of their conversion costs in July for a total cost of $3,525.

29. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Group 3: Inventory in Process on July 31 Allocating Costs to Units LO 2 The total manufacturing costs for Frozen Delight in July were assigned as shown below. Note that amounts now appear where question marks appeared earlier.

30. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Preparing the Cost of Production Report LO 2 (continued)

31. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Preparing the Cost of Production Report LO 2

32. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 3 1.Describe process cost systems. 2.Prepare a cost of production report. 3.Journalize entries for transactions using a process cost system.

33. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Journal Entries for Frozen Delight a.Purchased materials, including milk, cream, sugar, packaging, and indirect materials on account, $88,000.

34. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Journal Entries for Frozen Delight b.The Mixing Department requisitioned milk, cream, and sugar, $66,000. Packaging materials of $8,000 were requisitioned by the Packaging Department. Indirect materials for the Mixing and Packaging departments were $4,125 and $3,000, respectively. direct materials indirect materials

35. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 c.Incurred direct labor in the Mixing and Packaging departments of $10,500 and $12,000, respectively. LO 3 Journal Entries for Frozen Delight

36. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 d.Recognized equipment depreciation for the Mixing and Packaging departments of $3,350 and $1,000, respectively. LO 3 Journal Entries for Frozen Delight

37. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 e.Applied factory overhead to Mixing and Packaging departments of $7,275 and $3,500, respectively. Journal Entries for Frozen Delight

38. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 f.Transferred costs of $86,475 from the Mixing Department to the Packaging Department per the cost of production report. Journal Entries for Frozen Delight

39. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 g.Transferred goods of $106,000 out of the Packaging Department to Finished Goods according to the Packaging Department cost of production report (not illustrated). Journal Entries for Frozen Delight

40. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 h.Recorded cost of goods sold out of the finished goods inventory of $107,000. Journal Entries for Frozen Delight

41. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Frozen Delight’s Cost Flows The ending inventories for Frozen Delight are reported on the July 31 balance sheet as follows:

42. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 4 1.Describe process cost systems. 2.Prepare a cost of production report. 3.Journalize entries for transactions using a process cost system. 4.Describe and illustrate the use of cost of production reports for decision making.

43. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 4 Using the Cost of Production Report The cost of production report for the Mixing Department shows that the 5,000 units in the beginning inventory cost $6,225. This inventory cost of $6,225 consists of the following costs:

44. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 4 Using the Cost of Production Report June costs per equivalent unit of materials and conversion costs can be determined as follows: Direct Materials Cost per Equivalent Unit Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials = Direct Materials Cost per Equivalent Unit $5,000 5,000 gallons = $1.00 per gallon Direct Materials Cost per Equivalent Unit = (continued)

45. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 4 Using the Cost of Production Report Conversion Cost per Equivalent Unit Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs = Conversion Cost per Equivalent Unit $0.35 per gallon= $1,225 (5,000 x 70%) gallons = Conversion Cost per Equivalent Unit

46. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Yield  In addition to unit costs, managers of process manufacturers are also concerned about yield trends. The yield is computed as follows: LO 4 Yield = Quantity of Material Output Quantity of Material Input

47. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Yield Assume that 1,000 pounds of sugar enter the Packaging Department, and 980 pounds of sugar were packed. The yield is 98% as computed below. LO 4 Yield = Quantity of Material Output Quantity of Material Input Yield = 980 pounds 1,000 pounds = 98%

48. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 5 1.Describe process cost systems. 2.Prepare a cost of production report. 3.Journalize entries for transactions using a process cost system. 4.Describe and illustrate the use of cost of production reports for decision making. 5.Compare just-in-time processing with traditional manufacturing processing.

49. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 5 Just-In-Time (JIT) Processing  Just-in-time (JIT) processing is a management approach that focuses on reducing time and cost and eliminating poor quality.  In a just-in-time system, processing functions are combined into manufacturing cells that perform several manufacturing steps.  Workers are cross-trained to perform more than one function. This provides flexibility and increases worker pride and involvement in the final product.

50. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The activities supporting the manufacturing process are called service activities.  Repair and maintenance of manufacturing equipment are service activities. LO 5 Just-In-Time (JIT) Processing

51. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 5 Just-In-Time (JIT) Processing  The primary objective of JIT systems is to increase the efficiency of operations by:  Eliminating waste  Simplifying the production process  Continually improving the manufacturing process and product quality

52. Student Version © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Process Cost Systems The End