1. Process Cost Systems COACHING CLASSES FOR PROFESSIONAL STUDENTS COACHING CLASSES FOR PROFESSIONAL STUDENTS

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5. 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. ObjectivesObjectives

6. 5.Prepare journal entries for transactions of a process manufacturer. ObjectivesObjectives 6.Use cost of production reports for decision making. 7.Contrast just-in-time processing with conventional manufacturing practices.

7. Job Order Cost System Job Cost Sheets Dept. A and Dept. B Comparing Job Order Costing and Process Costing Direct materials Factory overhead Direct labor Work in Process Account to Finished Goods

8. Process Cost System Direct materials materials Work in Process Account Account DEPT. ADEPT. B Factory Overhead DirectLabor DirectLabor to Finished Goods Comparing Job Order Costing and Process Costing

9. 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. Both systems: Comparing Job Order Costing and Process Costing

10. Physical Flows for a Process Manufacturer Scrap Metal Materials MeltingDepartmentCastingDepartment

11. Molten metal transferred from Melting To finished goodsCastingDepartmentMeltingDepartment Physical Flows for a Process Manufacturer

12. Materials WIP – Melting Factory OH – Melting DM Purchases of direct and indirect materials Direct materials used in production DMDM Finished Goods Cost of Goods Sold Factory OH – Casting WIP – Casting Cost Flows for a Process Manufacturer

13. Materials WIP – Melting DM DL DM Direct labor used in productionDL Purchases of direct and indirect materials Finished Goods Cost of Goods Sold Factory OH – Casting Actual costs incurred WIP – Casting Factory OH – Melting Cost Flows for a Process Manufacturer

14. Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Indirect materials used in productionIM Purchases of direct and indirect materials IM Factory OH – Casting Factory OH – Melting Actual costs incurred Actual costs incurred Cost Flows for a Process Manufacturer

15. Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Factory overhead appliedFOA Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA Actual costs incurred FOA Factory OH – Melting Cost Flows for a Process Manufacturer

16. Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Cost transferred out/transferred in TO/TI Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA Actual costs incurred FOA TO TI Factory OH – Melting Cost Flows for a Process Manufacturer

17. Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA Actual costs incurred FOA TOTI DL Factory overhead appliedFOA Direct labor used in productionDL FOA FOA Factory OH – Melting Cost Flows for a Process Manufacturer

18. Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA Actual costs incurred FOA TOTI DL FOA FOA Cost transferred out/transferred inTO/TI TO TI Factory OH – Melting Cost Flows for a Process Manufacturer

19. Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA Actual costs incurred FOA TOTI DL FOA FOA Cost of goods soldCOGS TO TICOGS COGS Factory OH – Melting

21. 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 tons50,000 Conversion costs for July9,690 Goods transferred to Casting in July, 1,100 tons? Inventory in process, July 31, 400 tons, 25% complete as to conversion costs?

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

23. BeginningInventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons In a perpetual inventory system, outflows are recorded as they occur. Step 1: Determine the Units to be Assigned Costs

24. BeginningInventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Step 1: Determine the Units to be Assigned Costs Beginning Inventory 500 Tons 1

25. BeginningInventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Step 1: Determine the Units to be Assigned Costs Beginning Inventory 500 Tons 1 Started & Completed? Tons + 2

26. BeginningInventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Step 1: Determine the Units to be Assigned Costs Beginning Inventory 500 Tons 1 Started & Completed 600 Tons +2

27. BeginningInventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Beginning Inventory 500 Tons 1 Started & Completed 600 Tons +2 = Transferred Out1,100 Tons + Ending Inventory400 Tons3 Total units1,500 Tons = Step 1: Determine the Units to be Assigned Costs Total tons to be assigned costs

28. 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

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30. Step 2: Calculate Equivalent Units of Production Materials Equivalent Units TotalPercentEquivalent UnitsAddedUnits Inventory in process, July 15000%0 Started and completed in July 600100% 600 Transferred out to Casting Dept.1,100600 Inventory in process, July 31 400100% 400 Total tons to be assigned cost1,5001,000

31. Step 2: Calculate Equivalent Units of Production 500 EU of materials 500 tons beginning inventory 100% materials added in June JULY 1 600 EU of materials 600 tons started and completed 100% materials added in July JULY 31 400 EU of materials 400 tons ending inventory 100% materials added in July 1,000 Equivalent Units Inventory in process, July 1 Note: Started and completed Inventory in process, July 31 No materials equivalent units added to beginning inventory for July

32. Step 2: Calculate Equivalent Units of Production Conversion Equivalent Units Conversion Equivalent Units Inventory in process, July 150030%150 Started and completed in July 600100% 600 Transferred out to Casting Dept.1,100750 Inventory in process, July 31 40025% 100 Total tons to be assigned cost1,500850 Total Percent Equivalent UnitsAddedUnits

33. 350 EU 500 tons beginning inventory 70% completed for conversion in June JULY 1 600 EU 600 tons started and completed 100% completed for conversion in July JULY 31 100 EU 400 tons ending inventory 25% completed for conversion in July 850 Equivalent Units Inventory in process, July 1 Step 2: Calculate Equivalent Units of Production 150 EU 300 EU Inventory in process, July 31 (75% to be completed for conversion in August) 30% completed for conversion in July

34. Step 3: Determine the Cost per Equivalent Unit Equivalent Units Direct Materials Conversion Inventory in process, July 10150 Started and completed in July (1,100 – 500) 600600 Transferred out to Casting Dept. in July600750 Inventory in process, July 31 400100 Total tons to be assigned cost1,000850

35. Beginning Inventory $28,150 Work in Process – Melting Materials $50,000 Conversion Costs $9,690 Conversion Equivalent Unit Cost Conversion Equivalent Unit Cost Direct Materials Equivalent Unit Cost Direct Materials Equivalent Unit Cost $11.40 per EU of con- version = $50,000 direct materials cost 1,000 direct materials equivalent units $9,690 conversion cost 850 conversion equivalent units Step 3: Determine the Cost per Equivalent Unit $50.00 per EU of DM =

36. Inventory in process, July 1 beginning balance$28,150 Equivalent units for completing the July in-process inventory0150 Equivalent unit costx $50.00x $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 MaterialsConversionTotal CostsCostsCosts

37. Units started and completed in July600600 Equivalent unit costx $50.00x $11.40 Cost to complete the units started and completed in July$ 30,000$ 6,840$36,840 Direct MaterialsConversionTotal CostsCostsCosts Step 4: Allocate Costs to Transferred and Partially Completed Units

38. Equivalent units in ending inventory400100 Equivalent unit costx $50.00x $11.40 Cost of ending inventory$ 20,000$ 1,140$21,140 Direct MaterialsConversionTotal CostsCostsCosts Step 4: Allocate Costs to Transferred and Partially Completed Units

39. Beginning Inventory $28,150 Materials Costs $50,000 Started and Completed $36,840 Beginning Inventory $29,860 Work in Process – Melting Total Costs Charged $87,840 Ending Inventory $21,140 Conversion Costs $9,690 Total Costs Assigned $87,840 M600x100%x$50.00=$30,000 C600x100%x$11.40= 6,840 $36,840 M400x100%x$50.00=$20,000 C400x25%x$11.40= 1,140 $21,140 Beginning cost$28,150 M500x0%x$50.00= 0 C500x30%x$11.40=1,710 $29,860 Total Costs Assigned $87,840 Costs Step 4: Allocate Costs to Transferred and Partially Completed Units

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

41. 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.

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

43. Units Step 1 Step 2 Units charged to production: Inventory in process, July 1500 Received from materials1,000 Total units accounted for1,500 Units to be assigned cost: Inventory in process, July 1 (70% complete)5000150 Started and completed in July 600600600 Transferred to Casting Dept.1,100600750 Inventory in process, July 31 (25% complete)400400100 Total units to be assigned cost1,5001,000850 WholeDirect UnitsMaterialsConversion Equivalent Units Cost of Production Report—Melting Department

44. Costs Direct MaterialsConversionTotal Costs Costs Step 3 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 Cost of Production Report—Melting Department

45. Costs DirectConversionTotal MaterialsCostsCosts Step 4 Costs charged to production: Inventory in process, July 1$28,150 Cost incurred in July59,690 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$1,7101,710 Started and completed in July30,0006,840 36,840 Transferred to Casting Dept.$66,700 Inventory in process, July 31$20,000$1,140 21,140 Total costs assigned$87,840 Cost of Production Report—Melting Department

46. Journal Entries for a Process Cost System Materials62,000 Accounts Payable62,000 Work in Process–Melting50,000 Factory Overhead–Melting4,000 Factory Overhead–Casting3,000 Materials57,000 Work in Process–Melting5,000 Work in Process–Casting4,500 Wages Payable9,500 Factory Overhead–Melting1,000 Factory Overhead–Casting7,000 Accumulated Depreciation8,000 a. Materials purchased on account. b. Direct and indirect materials requisitioned. c. Direct labor used. d.Depreciation expenses. TransactionJournal EntryDebitCredit

47. Work in Process–Melting4,690 Work in Process–Casting9,640 Factory Overhead–Melting4,690 Factory Overhead–Casting9,640 Work in Process–Casting66,700 Work in Process–Melting66,700 e. Factory overhead applied. f. Costs transferred to Casting Department g.Casting Department transferred to Finished Goods h. Goods sold. Journal Entries for a Process Cost System Finished Goods78,600 Work in Process–Casting78,600 Cost of Goods Sold73,700 Finished Goods73,700 TransactionJournal EntryDebitCredit

48. 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.

49. Upholstery Dept. Assembly Dept. Just-in-Time Processing (JIT) Cutting Dept. Traditional Production Line Drillin g Dept. Sanding Dept. Staining Dept. Varnishing Dept.

50. Just-in-Time Processing (JIT) Just-in-Time Production Line Work Center One Cutting drilling and sanding Work Center Two Staining and varnishing Work Center Three Upholstery and assembly

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