Process Cost Systems

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Process Cost Systems

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Student Version

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1

Describe process cost systems.

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Process Cost System

A process manufacturer produces products that are indistinguishable from each other using a continuous production process. The process system used by process manufacturers is called the process cost system.

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Process cost systems are used to manufacture homogeneous products. Examples are:• Tennis balls

• Motor oil

• Candy bars

• Soft drinks

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Materials WIP – Mixing WIP – Packaging

Cost Flows for a Process Manufacturer—Frozen Delight

(a) Direct and indirect materials

(a) The cost of materials are purchased and recorded in materials.

Debit Materials and credit Accounts

Payable when direct and indirect materials are purchased.

(continued)

1

Exhibit 3

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Materials WIP – Mixing

DMDM

WIP – Packaging

DMDM (b) Direct Materials

DMDMDMDM


(b) The cost of direct materials used by the Mixing and Packaging department are recorded in the work in process account for each department.

Cost Flows for a Process Manufacturer—Frozen Delight (continued)

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Exhibit 3

(continued)

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DMDM

WIP – Packaging

DMDMDMDM


(c) The cost of direct labor used by the Mixing and Packaging departments is recorded in process accounts for each department.

DLDL (c) Direct Labor—Mixing

DLDL DLDL

1Cost Flows for a Process Manufacturer—Frozen Delight (continued)

Exhibit 3

(continued)

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DMDM

WIP – Packaging

DMDMDMDM


(d) The cost of factory overhead incurred for indirect materials and other factory overhead, such as depreciation, is recorded in the factory overhead accounts for each department.

DLDL DLDL


Exhibit 3

(continued)

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DMDM

WIP – Packaging

DMDMDMDM


DLDL

Factory OH – Packaging

IMIM

(d) Factory overhead incurred


Factory OH – Mixing

IMIM (d) Indirect materials

DLDL


Exhibit 3

(continued)

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DMDM

WIP – Packaging

DMDMDMDM


DLDL


IMIM




(e) The factory overhead incurred in the Mixing and Packaging departments is applied to the work in process accounts for each department.

DLDL


Exhibit 3

(continued)

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DMDM

WIP – Packaging

DMDMDMDM


DLDL


IMIM




FOAFOA

FOAFOA

(e) Factory overhead applied—MixingFOAFOA

(e) Factory overhead applied—PackagingFOAFOA

FOAFOA

FOAFOA

DLDL


Exhibit 3

(continued)

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FOAFOA


DMDM

WIP – Packaging

DMDMDMDM


DLDL


IMIM




FOAFOA

FOAFOA

DLDL

FOAFOA

(f) The cost of units completed in the Mixing Department is transferred to the Packaging Department.


Exhibit 3

(continued)

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DMDM

WIP – Packaging

DMDMDMDM


DLDL


IMIM




FOAFOA

FOAFOA

(f) Costs transferred in (to packaging)CTICTI

(f) Costs trans-ferred out

CTICTI

DLDL

FOAFOA

FOAFOA


Exhibit 3

(continued)

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CTICTI


DMDM

WIP – Packaging

DMDMDMDM


DLDL


IMIM




FOAFOA

FOAFOA


DLDL

FOAFOA

(g) The cost of units completed in the Packaging Department is transferred to Finished Goods.

FOAFOA


Exhibit 3

(continued)

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CTICTI


DMDM

WIP – Packaging

DMDMDMDM


DLDL


IMIM




FOAFOA

FOAFOA


DLDL

FOAFOA

FOAFOA

Finished Goods

CTI

(i) Cost transferred in from WIP—PackagingCTI

(i) Costs trans-ferred out


Exhibit 3

(continued)

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CTICTI


DMDM

WIP – Packaging

DMDMDMDM


DLDL


IMIM




FOAFOA

FOAFOA


DLDL

FOAFOA

FOAFOA

Finished Goods

CTI


(h) The cost of units sold is transferred to Cost of Goods Sold.


Exhibit 3

(continued)

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CTICTI


DMDM

WIP – Packaging

DMDMDMDM


DLDL


IMIM




FOAFOA

FOAFOA


DLDL

FOAFOA

FOAFOA

Finished Goods

CTI


(j) Cost transferred to Cost of Goods Sold

CGS CGS

Cost of Goods Sold

CGS

1Cost Flows for a Process Manufacturer—Frozen Delight (concluded)

Exhibit 3

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2

Prepare a cost of production report.

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Inventory in process, July 1, 5,000 gallons:Direct materials cost, 5,000 gallons $ 5,000Conversion costs, 5,000 gallons, 70% completed 1,225Total inventory in process, July 1 $ 6,225

Direct materials cost for July, 60,000 gallons $66,000Direct labor for July 10,500Factory overhead applied for July 7,275 83,775Total production costs to account for $90,000Goods transferred to Packaging in July (including

units in process on July 1), 62,000 gallons ?Inventory in process, July 31, 3,000 gallons, 25%

complete as to conversion costs ?

Production Report—Mixing Department

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Step 1: Determine the Units to Be Assigned Costs

Total units (gallons) charged toproduction:In process July 1 5,000 gallonsReceived from materials storage 60,000 gallonsTotal units accounted for by the

Mixing Department 65,000 gallons

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Total Units to Be Assigned Costs

A. Inventory in process, July 1, completedin July 5,000 gal.

B. Started and completed in July 57,000 gal.*

Transferred out to the Packaging Department in July 62,000 gal.

C. Inventory in process, July 31 3,000 gal.

Total gallons to be assigned costs 65,000 gal.

*62,000 – 5,000

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Step 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.

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Frozen Delight’s Equivalent Units Computation for Materials in July

Percent EquivalentTotal Materials Units for

Whole Added DirectUnits in July Materials

Inventory in process, July 1 5,000 0%0

Started and completed in July (62,000 – 5,000) 57,000 100% 57,000

Transferred out to Packaging Dept. 62,000 —57,000

Inventory in process, July 31 3,000 100% 3,000

Total gallons to be assigned cost 65,00060,000

Important: Note the word

“Added”

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PercentTotal Conversion Equivalent

Whole Completed Units forUnits in July Conversion

Inventory in process, July 1 (70% complete) 5,000

30% 1,500Started and completed in July

(62,000 – 5,000) 57,000100% 57,000

Transferred out to Packaging Department in July 62,000

— 58,500Inventory in process, July 31

(25% complete) 3,00025% 750

Total gallons to be assigned cost 65,00059,250

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Cost per Equivalent Unit

Direct Materials Cost per Equivalent Unit

Total Direct Materials Cost for

the PeriodTotal Equivalent Units of Direct

Materials

=

Conversion Cost per Equivalent Unit

Total Conversion Costs for the Period

Total Equivalent Units of Conversion

Costs

=

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Step 3: Determine the Cost per Equivalent Unit

Inventory in process, July 1 0 1,500Started and completed in July

(62,000 – 5,000) 57,000 57,000Transferred out to Packaging

Dept. in July 57,000 58,500Inventory in process, July 31 3,000 750Total gallons to be assignedcosts 60,000 59,250

DirectMaterials Conversion

Equivalent Units from Step 2

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Conversion Cost per Equivalent UnitConversion Cost per Equivalent Unit

$0.30 per gallon=

$17,775 conversion costs

59,250 gallons

Direct Materials Cost per Equivalent UnitDirect Materials Cost per Equivalent Unit

$66,000 direct materials costs60,000 direct materials equivalent units

$1.10 per gallon=

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Inventory in process, July 1, balance $6,225Equivalent units for completing the July 1 in-process inventory 0 1,500Equivalent unit cost × $1.10 × $0.30Cost of completed July 1 in-process inventory 0 $450 450Cost of July 1 in-process inventory

transferred to Packaging Department $6,675

Direct Conver-Materials sion Total

Costs Costs Costs

Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units

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Units started and completedin July 57,000 57,000

Equivalent unit cost × $1.10 × $0.30Cost to complete the units

started and completed inJuly $62,700 $17,100 $79,800

Direct Materials Conversion TotalCosts Costs Costs

Costs Associated With the Units Started and Completed

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Equivalent units in endinginventory 3,000 750

Equivalent unit cost × $1.10 × $0.30Cost to ending inventory $ 3,300 $ 225 $3,525

Direct Materials Conversion TotalCosts Costs Costs

Costs Associated With the Partially Completed Units in

the Ending Inventory

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Summary

Inventory in process, July 1,completed in July 5,000 gallons $ 6,675

Started and completed in July 57,000 79,800Transferred out to the Packaging

Department in July 62,000 gallons $86,475Inventory in process, July 31 3,000 3,525 Total 65,000 gallons $90,000

TotalGallons

Costs

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Cost of Production Report for Frozen Delight’s Mixing Department—FIFO

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Exhibit 7

Step 1 Step 2

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Cost of Production Report for Frozen Delight’s Mixing Department—FIFO (continued)

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Exhibit 7S

tep

3S

tep

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3

Journalize entries for transactions using a process cost system.

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Journal Entries for Frozen Delight

a. Purchased materials, including milk, cream, sugar, packaging, and indirect materials on account, $88,000.

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b. Milk, cream, and sugar were requisitioned by the Mixing Department, $66,000. Another $8,000 of packaging materials was requisitioned by the Packaging Department. Indirect materials for the Mixing and Packaging Department were $4,125 and $3,000, respectively.

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c. Direct labor in the Mixing and Packaging departments was $10,500 and $12,000, respectively.

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d. Equipment depreciation for the Mixing and Packaging departments was $3,350 and $1,000, respectively.

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e. The factory overhead applied to Mixing and Packaging was $7,275 and $3,500, respectively.

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f. The amount of costs transferred from the Mixing Department to the Packaging Department was $86,475 per the cost of production report in Exhibit 7.

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g. The goods transferred out of the Packaging Department to Finished Goods according to the Packaging Department cost of production report was $106,000.

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h. The cost of goods sold out of the finished goods inventory of $107,000.

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Ending Inventories for Frozen Delight

July 31

Materials $ 6,875Work in Process—Mixing Dept. 3,525Work in Process—Packaging

Department 7,725Finished Goods 4,000Total inventories $22,125

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5

Compare just-in-time processing with traditional manufacturing processing.

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JIT organizes manufacturing 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.

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Documents

Process Cost Systems