1. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Process Cost Systems Chapter 3

2. Learning Objectives 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.

3. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe process cost systems. 1

4. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Process Cost System o A process manufacturer produces products that are indistinguishable from each other using a continuous production process. o The cost accounting system used by process manufacturers is called the process cost system.

5. P ROCESS C OST S YSTEMS

6. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Comparing Job Order and Process Cost o 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)

7. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 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.

8. (continued) C OMPARING J OB O RDER AND P ROCESS C OST

9. (continued) C OMPARING J OB O RDER AND P ROCESS C OST

10. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Comparing Job Order and Process Cost o Process cost systems are used to manufacture homogeneous products. Examples are:  Tennis balls  Motor oil  Candy bars  Soft drinks

11. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Comparing Job Order and Process Cost o 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

12. C OST F LOWS FOR A P ROCESS M ANUFACTURER

13. a. The cost of materials purchased is recorded in the materials account. Materials a. Purchased

14. b. The cost of direct materials used by the Mixing and Packaging departments is recorded in the work in process accounts for each department. Materials a. Purchased Work in Process– Mixing Department b. Direct materials Direct materials Work in Process– Packaging Department b. Direct materials C OST F LOWS FOR A P ROCESS M ANUFACTURER

15. c. The cost of direct labor used by the Mixing and Packaging departments is recorded in the work in process accounts for each department. Work in Process– Mixing Department c. Direct labor Work in Process– Packaging Department c. Direct labor C OST F LOWS FOR A P ROCESS M ANUFACTURER

16. Materials Factory Overhead– Mixing Department d. Indirect materials Indirect materials Factory Overhead– Packaging Department d. Indirect materials d.The cost of indirect materials is recorded in the factory overhead accounts for each department. C OST F LOWS FOR A P ROCESS M ANUFACTURER

17. Factory Overhead– Mixing Department d. Depreciation of factory machinery Factory Overhead– Packaging Department d.Depreciation for each department is recorded, and its related accumulated depreciation account is credited. d. Depreciation of factory machinery C OST F LOWS FOR A P ROCESS M ANUFACTURER

18. Factory Overhead– Mixing Department d. Utilities Factory Overhead– Packaging Department d.Other factory overhead costs, such as utilities and indirect labor, are recorded. d. Utilities C OST F LOWS FOR A P ROCESS M ANUFACTURER

19. Factory Overhead– Mixing Department d. Factory overhead incurred Factory Overhead– Packaging Department d.In Exhibit 3, these items are combined as factory overhead incurred. d. Factory overhead incurred C OST F LOWS FOR A P ROCESS M ANUFACTURER

20. Factory Overhead– Mixing Department d. Factory overhead incurred Work in Process– Mixing Department b. Direct materials c. Direct labor e. Factory overhead applied e.The factory overhead incurred in the Mixing Department is applied to the work in process account. C OST F LOWS FOR A P ROCESS M ANUFACTURER

21. Factory Overhead– Packaging Department d. Factory overhead incurred Work in Process– Packaging Department b. Direct materials c. Direct labor e. Factory overhead applied e.The factory overhead incurred in the Packaging Department is applied to the work in process account. C OST F LOWS FOR A P ROCESS M ANUFACTURER

22. Work in Process– Mixing Department b. Direct materials c. Direct labor e. Factory overhead applied f.The cost of units completed in the Mixing Department is transferred to the Packaging Department. Work in Process– Packaging Department b. Direct materials c. Direct labor e. Factory overhead applied f. Costs of units transferred out f. Costs of units trans- ferred in C OST F LOWS FOR A P ROCESS M ANUFACTURER

23. g.The cost of units completed in the Packaging Department is transferred to Finished Goods. b. Direct materials c. Direct labor e. Factory overhead applied f. Costs of units trans- ferred in Finished Goods g. Costs of units transferred in g. Costs of units transferred out Work in Process– Packaging Department C OST F LOWS FOR A P ROCESS M ANUFACTURER

24. h.The cost of units sold is transferred to Cost of Goods Sold. Finished Goods g. Costs of units transferred in Cost of Goods Sold h. Cost of goods sold C OST F LOWS FOR A P ROCESS M ANUFACTURER

26. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Prepare a cost of production report. 2

27. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of Production Report o 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.

28. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of Production Report o Preparing a cost of production report requires making a cost flow assumption. o Like merchandise inventory, costs can be assumed to flow through the manufacturing process using one of several methods. o 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.

29. C OST OF P RODUCTION R EPORT Mixing Department of Frozen Delight Preparing a cost of production report will provide these missing amounts.

30. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Determine the Units to be Assigned Costs o 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.

31. Determine the Units to be Assigned Costs

32. D ETERMINE THE U NITS TO BE A SSIGNED C OSTS

33. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Compute Equivalent Units of Production o Whole units are the number of units in production during a period, whether completed or not. o 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.

34. 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

35. Direct Materials Compute Equivalent Units of Production Frozen Delight adds all the materials at the beginning of the mixing process.

36. C OMPUTE E QUIVALENT U NITS OF P RODUCTION

37. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Conversion Equivalent Units o To compute equivalent units for conversion costs, it is necessary to know how direct labor and factory overhead enter the manufacturing process. o It is assumed that Frozen Delight incurs conversion costs evenly throughout its manufacturing process.

38. C ONVERSION E QUIVALENT U NITS

40. 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 = Conversion Cost per Equivalent Unit Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs =

41. D ETERMINE THE C OST PER E QUIVALENT U NIT

42. 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

43. 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 = Determine the Cost per Equivalent Unit

44. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Costs to Units o Product costs must be allocated to the units transferred out and the partially completed units on hand at the end of the period.

45. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Costs to Units o The total production costs to be assigned for Frozen Delight in July are $90,000.

46. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Costs to Units o The units to be assigned these costs are shown below. The costs to be assigned these units are indicated by question marks.

47. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Costs to Units o 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:

48. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Costs to Units o 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.

49. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 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 Allocating Costs to Units o 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.

50. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Costs to Units o 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.

51. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Costs to Units o The total manufacturing costs for Frozen Delight in July were assigned as shown below. Note that amounts now appear where question marks appeared earlier.

52. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Preparing the Cost of Production Report o A cost of production report is prepared for each processing department at periodic intervals. The report summarizes 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.

53. (continued) P REPARING THE C OST OF P RODUCTION R EPORT

55. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Journalize entries for transactions using a process cost system. 3

56. Journal Entries for Frozen Delight a. Purchased materials, including milk, cream, sugar, packaging, and indirect materials on account, $88,000.

57. direct materials indirect materials 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.

58. Journal Entries for Frozen Delight c. Incurred direct labor in the Mixing and Packaging departments of $10,500 and $12,000, respectively.

59. Journal Entries for Frozen Delight d. Recognized equipment depreciation for the Mixing and Packaging departments of $3,350 and $1,000, respectively.

60. Journal Entries for Frozen Delight e. Applied factory overhead to Mixing and Packaging departments of $7,275 and $3,500, respectively.

61. Journal Entries for Frozen Delight f. Transferred costs of $86,475 from the Mixing Department to the Packaging Department per the cost of production report.

62. Journal Entries for Frozen Delight 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).

63. Journal Entries for Frozen Delight h. Recorded cost of goods sold out of the finished goods inventory of $107,000.

64. F ROZEN D ELIGHT ’ S C OST F LOWS

65. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Frozen Delight’s Cost Flows o The ending inventories for Frozen Delight are reported on the July 31 balance sheet as follows:

66. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe and illustrate the use of cost of production reports for decision making. 4

67. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Cost of Production Report o The cost of production report for the Mixing Department (Exhibit 7) shows that the 5,000 units in the beginning inventory cost $6,225. This inventory cost of $6,225 consists of the following costs:

68. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 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) Using the Cost of Production Report o June costs per equivalent unit of materials and conversion costs can be determined as follows:

69. 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 Using the Cost of Production Report

70. H OLLAND B EVERAGE C OMPANY

72. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Yield o In addition to unit costs, managers of process manufacturers are also concerned about yield trends. The yield is computed as follows: Yield = Quantity of Material Output Quantity of Material Input

73. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Yield o 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. Yield = Quantity of Material Output Quantity of Material Input Yield = 980 pounds 1,000 pounds = 98% = 98%

74. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Compare just-in-time processing with traditional manufacturing processing. 5

75. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Just-In-Time (JIT) Processing o Just-in-time (JIT) processing is a management approach that focuses on reducing time and cost and eliminating poor quality.

76. J UST -I N -T IME (JIT) P ROCESSING

77. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Just-In-Time (JIT) Processing o In a just-in-time system, processing functions are combined into manufacturing cells that perform several manufacturing steps. o Workers are cross-trained to perform more than one function. This provides flexibility and increases worker pride and involvement in the final product.

78. J UST -I N -T IME (JIT) P ROCESSING

79. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Just-In-Time (JIT) Processing o The activities supporting the manufacturing process are called service activities. o Repair and maintenance of manufacturing equipment are service activities.

80. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Just-In-Time (JIT) Processing o 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

81. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix Average Cost Method

82. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. S&W Ice Cream Company o S&W Ice Cream Company mixes direct materials in refrigerated vats and has two manufacturing departments, Mixing and Packaging.

83. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. S&W Ice Cream Company o The manufacturing data for the Mixing Department for July 2014 are as follows:

84. S&W Ice Cream Company

88. (continued) S&W I CE C REAM C OMPANY

90. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Process Cost Systems The End