1. Principles of Managerial Accounting
Process Cost Systems
Principles of Managerial Accounting
11e
Chapter 3
Student Version
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Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
Reeve Warren Duchac

2. Describe process cost systems.
Learning Objective 1
Describe process cost systems.

3. LO 1
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.

4. Comparing Job Order and Process Cost
LO 1
Comparing Job Order and Process Cost
Process cost systems are used to manufacture homogeneous products. Examples are:
Tennis balls
Motor oil
Candy bars
Soft drinks

5. Cost Flows for a Process ManufacturerD
Materials
a. Purchased
a. The cost of materials purchased is recorded in the Materials account.
(continued)

6. Cost Flows for a Process ManufacturerD
Work in Process– Mixing Department
Materials
a. Purchased
Direct materials
b. Direct materials
b. The cost of direct materials used by the Mixing and Packaging departments is recorded in the Work in Process accounts for each department.
Work in Process– Packaging Department
b. Direct materials
(continued)

7. Cost Flows for a Process ManufacturerD
Work in Process– Mixing Department
c. Direct labor
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– Packaging Department
c. Direct labor
(continued)

8. Cost Flows for a Process ManufacturerD
Factory Overhead– Mixing Department
Materials
Indirect materials
d. Indirect materials
d. The cost of indirect materials is recorded in the Factory Overhead accounts for each department.
Factory Overhead– Packaging Department
d. Indirect materials
(continued)

9. Cost Flows for a Process ManufacturerD
Factory Overhead– Mixing Department
d. Depreciation of factory machinery
d. Depreciation for each department is recorded, and its related Accumulated Depreciation account is credited.
Factory Overhead– Packaging Department
d. Depreciation of factory machinery
(continued)

10. Cost Flows for a Process ManufacturerD
Factory Overhead– Mixing Department
d. Utilities
d. Other factory overhead costs, such as utilities and indirect labor, are recorded.
Factory Overhead– Packaging Department
d. Utilities
(continued)

11. Cost Flows for a Process ManufacturerD
Factory Overhead– Mixing Department
d. Factory overhead incurred
d. In Exhibit 3 (in your textbook) these items are combined as factory overhead incurred.
Factory Overhead– Packaging Department
d. Factory overhead incurred
(continued)

12. Work in Process– Mixing Department Factory Overhead– Mixing Department
LO 1
Cost Flows for a Process Manufacturer F D
Work in Process– Mixing Department
Factory Overhead– Mixing Department
b. Direct materials
c. Direct labor
d. Factory overhead incurred
e. Factory overhead applied
e. Factory overhead applied
e. The factory overhead incurred in the Mixing Department is applied to the Work in Process—Mixing Dept. account.
(continued)

13. Cost Flows for a Process ManufacturerD
Work in Process– Packaging Department
Factory Overhead– Packaging Department
b. Direct materials
c. Direct labor
d. Factory overhead incurred
e. Factory overhead applied
e. Factory overhead applied
e. The factory overhead incurred in the Packaging Department is applied to the Work in Process—Packaging account.
(continued)

14. Cost Flows for a Process ManufacturerD
Work in Process– Mixing Department
Work in Process– Packaging Department
b. Direct materials
c. Direct labor
f. Costs of units transferred out
b. Direct materials
c. Direct labor
e. Factory overhead applied
e. Factory overhead applied
f. Costs of units trans-ferred in
f. The cost of units completed in the Mixing Department is transferred to the Packaging Department.
(continued)

15. Work in Process– Packaging Department
LO 1
Cost Flows for a Process Manufacturer F D
Work in Process– Packaging Department
Finished Goods
b. Direct materials
c. Direct labor
g. Costs of units transferred out
g. Costs of units transferred in
e. Factory overhead applied
g. The cost of units completed in the Packaging Department is transferred to Finished Goods.
f. Costs of units trans-ferred in
(continued)

16. Cost Flows for a Process ManufacturerD
Finished Goods
Cost of Goods Sold
g. Costs of units transferred in
h. Cost of goods sold
h. Cost of goods sold
h. The cost of units sold is transferred to Cost of Goods Sold.
(continued)

17. Prepare a cost of production report.
Learning Objective 2
Prepare a cost of production report.

18. Cost of Production Report
LO 2
Cost of Production Report
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.

19. Determine the Units to be Assigned Costs
LO 2
Determine the Units to be Assigned Costs F D
Step 1:

20. Compute Equivalent Units of Production
LO 2
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.

21. Compute Equivalent Units of Production
LO 2
Compute Equivalent Units of Production F D
Step 2:
Conversion Costs
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.

22. Conversion Equivalent Units
LO 2
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.

23. Conversion Equivalent Units
LO 2
Conversion Equivalent Units F D

24. Determine the Cost per Equivalent Unit
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 = 24

25. Determine the Cost per Equivalent Unit
LO 2
Determine the Cost per Equivalent Unit F D

26. Determine the Cost per Equivalent Unit
LO 2
Determine the Cost per Equivalent Unit F D
Direct Materials
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 =

27. Determine the Cost per Equivalent Unit
LO 2
Determine the Cost per Equivalent Unit F D
Conversion Cost
Conversion Cost per Equivalent Unit
Total Conversion Costs for the Period
Total Equivalent Units of Conversion Costs =
Conversion Cost per Equivalent Unit
$17,775
59,250 gallons =
Conversion Cost per Equivalent Unit
$0.30 per gallon =

28. Allocating Costs to Units
Step 4:
Product costs must be allocated to the units transferred out and the partially completed units on hand at the end of the period.

29. Allocating Costs to UnitsF D
The total production costs to be assigned for Frozen Delight in July are $90,000.

30. Allocating Costs to UnitsF D
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:

31. Allocating Costs to UnitsF D
Group 2: Started and Completed
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.

32. Allocating Costs to UnitsF D
Group 2: Started and Completed
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

33. Allocating Costs to UnitsF D
Group 3: Inventory in Process on July 31
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.

34. Allocating Costs to UnitsF D
Group 3: Inventory in Process on July 31
The total manufacturing costs for Frozen Delight in July were assigned as shown below. Note that amounts now appear where question marks appeared earlier.

35. Journalize entries for transactions using a process cost system.
Learning Objective 3
Journalize entries for transactions using a process cost system.

36. Journal Entries for Frozen Delight
LO 3
Journal Entries for Frozen Delight F D
a. Purchased materials, including milk, cream, sugar, packaging, and indirect materials on account, $88,000.

37. Journal Entries for Frozen Delight
LO 3
Journal Entries for Frozen Delight F D
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
direct materials
indirect materials
indirect materials

38. Journal Entries for Frozen Delight
LO 3
LO 3
Journal Entries for Frozen Delight F D
c. Incurred direct labor in the Mixing and Packaging departments of $10,500 and $12,000, respectively.

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

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

41. Journal Entries for Frozen Delight
LO 3
Journal Entries for Frozen Delight F D
f. Transferred costs of $86,475 from the Mixing Department to the Packaging Department per the cost of production report.

42. Journal Entries for Frozen Delight
LO 3
LO 3
Journal Entries for Frozen Delight F D
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).

43. Journal Entries for Frozen Delight
LO 3
Journal Entries for Frozen Delight F D
h. Recorded cost of goods sold out of the finished goods inventory of $107,000.

44. Frozen Delight’s Cost Flows
The ending inventories for Frozen Delight are reported on the July 31 balance sheet as follows:

45. Learning Objective 4
Describe and illustrate the use of cost of production reports for decision making.

46. Using the Cost of Production Report
LO 4
Using the Cost of Production Report F D
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)

47. Using the Cost of Production Report
LO 4
Using the Cost of Production Report F D
Conversion Cost per Equivalent Unit
Total Conversion Costs for the Period
Total Equivalent Units of Conversion Costs =
$1,225
(5,000 x 70%) gallons =
Conversion Cost per Equivalent Unit
Conversion Cost per Equivalent Unit
$0.35 per gallon =

48. Quantity of Material Output Quantity of Material Input
Yield
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

49. Learning Objective 5
Compare just-in-time processing with traditional manufacturing processing.

50. Just-In-Time (JIT) Processing
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.

51. Process Cost Systems
The End