1. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 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. Process Cost Systems Chapter 18 Student Version These slides should be viewed using the presentation mode (left click your mouse on the icon).

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

3. © 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. 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. © 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. 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 LO 1

5. © 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. Cost Flows for a Process Manufacturer a. The cost of materials purchased is recorded in the materials account. Materials a. Purchased LO 1 (continued) F D

6. © 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. LO 1 Cost Flows for a Process Manufacturer 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 (continued) F D

7. © 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. LO 1 Cost Flows for a Process Manufacturer 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 (continued) F D

8. © 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. Materials Factory Overhead– Mixing Department d. Indirect materials Indirect materials Factory Overhead– Packaging Department d. Indirect materials LO 1 Cost Flows for a Process Manufacturer d.The cost of indirect materials is recorded in the factory overhead accounts for each department. (continued) F D

9. © 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. Factory Overhead– Mixing Department d. Depreciation of factory machinery Factory Overhead– Packaging Department LO 1 Cost Flows for a Process Manufacturer d.Depreciation for each department is recorded, and its related accumulated depreciation account is credited. d. Depreciation of factory machinery (continued) F D

10. © 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. Factory Overhead– Mixing Department d. Utilities Factory Overhead– Packaging Department LO 1 Cost Flows for a Process Manufacturer d.Other factory overhead costs, such as utilities and indirect labor, are recorded. d. Utilities (continued) F D

11. © 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. Factory Overhead– Mixing Department d. Factory overhead incurred Factory Overhead– Packaging Department LO 1 Cost Flows for a Process Manufacturer d.In Exhibit 3 (in your textbook) these items are combined as factory overhead incurred. d. Factory overhead incurred (continued) F D

12. © 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. Factory Overhead– Mixing Department d. Factory overhead incurred LO 1 Cost Flows for a Process Manufacturer 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. (continued) F D

13. © 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. Factory Overhead– Packaging Department d. Factory overhead incurred LO 1 Cost Flows for a Process Manufacturer 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. (continued) F D

14. © 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. LO 1 Cost Flows for a Process Manufacturer 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 (continued) F D

15. © 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. LO 1 Cost Flows for a Process Manufacturer 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 (continued) F D

16. © 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. LO 1 Cost Flows for a Process Manufacturer 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 (continued) F D

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

18. © 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. 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.

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

20. © 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. 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

21. © 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. 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: F D

22. © 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. 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

23. © 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. Conversion Equivalent Units LO 2 F D

24. © 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. 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 =

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

26. © 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. 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 F D

27. © 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. 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 = F D

28. © 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. 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:

29. © 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. LO 2 Allocating Costs to Units The total production costs to be assigned for Frozen Delight in July are $90,000. F D

30. © 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. 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: F D

31. © 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. 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. F D

32. © 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. 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 F D

33. © 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. 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. F D

34. © 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. 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. F D

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

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

37. © 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. 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 F D

38. © 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. 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 F D

39. © 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. 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 F D

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

41. © 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. 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 F D

42. © 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. 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 F D

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

44. © 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. LO 3 Frozen Delight’s Cost Flows The ending inventories for Frozen Delight are reported on the July 31 balance sheet as follows: F D

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

46. © 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. 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) F D

47. © 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. 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 F D

48. © 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. 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

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

50. © 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. 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. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 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. Process Cost Systems The End