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Chapter 17

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. . Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 17. Process Cost Systems. Financial and Managerial Accounting 8th Edition

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Chapter 17

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  1. © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 17 Process Cost Systems Financial and Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

  2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

  3. Objectives 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. After studying this chapter, you should be able to:

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

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

  6. Comparing Job Order Costing and Process Costing Process Cost System Work in Process Account Work in Process Account to Finished Goods Direct materials DEPT. A DEPT. B Factory Overhead Direct Labor Factory Overhead Direct Labor

  7. Comparing Job Order Costing and Process Costing • determine a product costby measuring the amount of direct materials and direct labor used and allocating overhead costs. • allocate overhead using apredetermined overhead rate(or activity-based costing). • maintain perpetual inventory records with subsidiary ledgers for Materials,Work inProcess, and Finished Goods. Both systems:

  8. Physical Flows for a Process Manufacturer Scrap Metal Materials Melting Department Casting Department

  9. To finished goods Physical Flows for a Process Manufacturer Molten metal transferred from Melting Melting Department Casting Department

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

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

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

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

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

  15. FOA Actual costs incurred Cost Flows for a Process Manufacturer WIP – Casting Materials WIP – Melting Purchases of direct and indirect materials DM DM TO TI IM DL DL FOA Factory OH – Casting Factory OH – Melting Finished Goods FOA FOA Actual costs incurred Cost of Goods Sold DL Direct labor used in production FOA Factory overhead applied

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

  17. Actual costs incurred COGS Cost Flows for a Process Manufacturer WIP – Casting Materials WIP – Melting Purchases of direct and indirect materials DM DM TO TI TO IM DL DL FOA FOA Factory OH – Casting Factory OH – Melting Finished Goods FOA FOA TI COGS Actual costs incurred Cost of Goods Sold COGS Cost of goods sold

  18. The First-in, First-out (Fifo) Method

  19. 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 tons 50,000 Conversion costs for July 9,690 Goods transferred to Casting in July, 1,100 tons ? Inventory in process, July 31, 400 tons, 25% complete as to conversion costs ?

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

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

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

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

  24. + 2 Started & Completed 600 Tons Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Transferred 1,100 Tons 1 Beginning Inventory 500 Tons Ending Inventory 400 Tons Started 1,000 Tons

  25. + 2 Started & Completed 600 Tons Transferred Out 1,100 Tons 3 Ending Inventory 400 Tons = Total units 1,500 Tons Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Transferred 1,100 Tons 1 Beginning Inventory 500 Tons Ending Inventory 400 Tons Started 1,000 Tons = + Total tons to be assigned costs

  26. 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

  27. Step 2: Calculate Equivalent Units of Production Total Percent Equivalent Units Added Units Materials Equivalent Units Inventory in process, July 1 500 0% 0 Started and completed in July 600 100% 600 Transferred out to Casting Dept. 1,100 600 Inventory in process, July 31 400 100% 400 Total tons to be assigned cost 1,500 1,000

  28. 400 tons ending inventory 600 tons started and completed EU of materials EU of materials 600 400 Inventory in process, July 1 100% materials added in July 100% materials added in July Note: Started and completed Inventory in process, July 31 Step 2: Calculate Equivalent Units of Production 1,000 Equivalent Units JULY 1 JULY 31 500 tons beginning inventory EU of materials 500 100% materials added in June No materials equivalent units added to beginning inventory for July

  29. Step 2: Calculate Equivalent Units of Production Conversion Equivalent Units Total Percent Equivalent Units Added Units Inventory in process, July 1 500 30% 150 Started and completed in July 600 100% 600 Transferred out to Casting Dept. 1,100 750 Inventory in process, July 31 400 25% 100 Total tons to be assigned cost 1,500 850

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

  31. Step 3: Determine the Cost per Equivalent Unit Equivalent Units Direct Materials Conversion Inventory in process, July 1 0 150 Started and completed in July (1,100 – 500) 600600 Transferred out to Casting Dept. in July 600 750 Inventory in process, July 31 400100 Total tons to be assigned cost 1,000 850

  32. $50.00 per EU of DM = Materials $50,000 1,000 direct materials equivalent units Conversion Costs $9,690 $11.40 per EU of con- version = 850 conversion equivalent units Step 3: Determine the Cost per Equivalent Unit Work in Process – Melting Beginning Inventory $28,150 Direct Materials Equivalent Unit Cost $50,000 direct materials cost Conversion Equivalent Unit Cost $9,690 conversion cost

  33. Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Inventory in process, July 1 beginning balance $28,150 Equivalent units for completing the July in-process inventory 0 150 Equivalent unit cost x $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

  34. Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Units started and completed in July 600 600 Equivalent unit cost x $50.00x $11.40 Cost to complete the units started and completed in July $ 30,000 $ 6,840 $36,840

  35. Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Equivalent units in ending inventory 400 100 Equivalent unit cost x $50.00x $11.40 Cost of ending inventory $ 20,000 $ 1,140 $21,140

  36. Step 4: Allocate Costs to Transferred and Partially Completed Units Costs Work in Process – Melting Beginning cost $28,150 M 500 x 0% x $50.00 = 0 C 500 x 30% x $11.40 = 1,710 $29,860 Beginning Inventory $28,150 Beginning Inventory $29,860 Materials Costs $50,000 Started and Completed $36,840 M 600 x 100% x $50.00 = $30,000 C 600 x 100% x $11.40 = 6,840 $36,840 Conversion Costs $9,690 Ending Inventory $21,140 M 400 x 100% x $50.00 = $20,000 C 400 x 25% x $11.40 = 1,140 $21,140 Total Costs Charged $87,840 Total Costs Assigned $87,840 Total Costs Assigned $87,840

  37. A cost of production reportis prepared for each processing department at periodical intervals.

  38. 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.

  39. A cost of production reportalso is used to control costs.

  40. Step 1 Step 2 Cost of Production Report—Melting Department Equivalent Units Units Whole Direct Units Materials Conversion Units charged to production: Inventory in process, July 1 500 Received from materials 1,000 Total units accounted for 1,500 Units to be assigned cost: Inventory in process, July 1 (70% complete) 500 0 150 Started and completed in July 600 600 600 Transferred to Casting Dept. 1,100 600 750 Inventory in process, July 31 (25% complete) 400 400 100 Total units to be assigned cost 1,500 1,000 850

  41. Cost of Production Report—Melting Department Costs Costs Direct Materials Conversion Total Costs 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 Step 3

  42. Step 4 Cost of Production Report—Melting Department Costs Direct Conversion Total Materials Costs Costs Costs charged to production: Inventory in process, July 1 $28,150 Cost incurred in July 59,690 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 $1,710 1,710 Started and completed in July 30,000 6,840 36,840 Transferred to Casting Dept. $66,700 Inventory in process, July 31 $20,000 $1,140 21,140 Total costs assigned $87,840

  43. Journal Entries for a Process Cost System Transaction Journal Entry Debit Credit a. Materials purchased on account. b. Direct and indirect materials requisitioned. c. Direct labor used. d. Depreciation expenses. Materials 62,000 Accounts Payable 62,000 Work in Process–Melting 50,000 Factory Overhead–Melting 4,000 Factory Overhead–Casting 3,000 Materials 57,000 Work in Process–Melting 5,000 Work in Process–Casting 4,500 Wages Payable 9,500 Factory Overhead–Melting 1,000 Factory Overhead–Casting 7,000 Accumulated Depreciation 8,000

  44. Journal Entries for a Process Cost System Transaction Journal Entry Debit Credit e. Factory overhead applied. f. Costs transferred to Casting Department g. Casting Department transferred to Finished Goods h. Goods sold. Work in Process–Melting 4,690 Work in Process–Casting 9,640 Factory Overhead–Melting 4,690 Factory Overhead–Casting 9,640 Work in Process–Casting 66,700 Work in Process–Melting 66,700 Finished Goods 78,600 Work in Process–Casting 78,600 Cost of Goods Sold 73,700 Finished Goods 73,700

  45. Just-in-Time Processing (JIT) • JIT is a business philosophythat focuses on reducing time and costand 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 involvementin the final product. • Because products have limited movementbetween departments, the nonvalue-added cost of transporting products and parts is reduced.

  46. Just-in-Time Processing (JIT) Traditional Production Line Drilling Dept. Sanding Dept. Staining Dept. Cutting Dept. Wood Upholstery Dept. Assembly Dept. Varnishing Dept.

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

  48. Chapter 17 The End

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