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Product Cost Process

Product Cost Process

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Chapter 17

Process Cost Systems
Financial and Managerial Accounting 8th Edition Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting Pepperdine University © 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.

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Objectives
1. Distinguish between jobthis costing After studying order and process costing systems. chapter, you should 2. Explain and illustrate to: physical flows be able the 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.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

.

500 tons Conversion costs.000 tons Conversion costs for July Goods transferred to Casting in July.600 $28.Melting Department of McDermott Steel Inc. July 1. 500 tons: Direct materials cost. July 1 Direct materials cost for July.000 9.550 3.690 ? ? .150 50.100 tons Inventory in process. 1. 400 tons. 1. Inventory in process. 500 tons. July 31. 70% completed Total inventory in process. 25% complete as to conversion costs $24.

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

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

Step 1: Determine the Units to be Assigned Costs Work in Process ± Melting Beginning Inventory 500 Tons Started 1.000 Tons Transferred 1.100 Tons Ending Inventory 400 Tons 1 Beginning Inventory 500 Tons .

Step 1: Determine the Units to be Assigned Costs Work in Process ± Melting Beginning Inventory 500 Tons Started 1.000 Tons Transferred 1.100 Tons Ending Inventory 400 Tons 1 Beginning Inventory 500 Tons + 2 Started & Completed ? Tons .

000 Tons Transferred 1.100 Tons Ending Inventory 400 Tons 1 Beginning Inventory 500 Tons + 2 Started & Completed 600 Tons .Step 1: Determine the Units to be Assigned Costs Work in Process ± Melting Beginning Inventory 500 Tons Started 1.

100 Tons Ending Inventory 400 Tons 1 Beginning Inventory 500 Tons + 2 Started & Completed 600 Tons = Transferred Out 1.100 Tons 400 Tons 1.500 Tons + 3 Ending Inventory Total tons to be assigned costs = Total units .Step 1: Determine the Units to be Assigned Costs Work in Process ± Melting Beginning Inventory 500 Tons Started 1.000 Tons Transferred 1.

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 .

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

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

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

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

100 ± 500) Transferred out to Casting Dept. July 31 Total tons to be assigned cost 0 600 600 400 1. in July Inventory in process.000 Conversion 150 600 750 100 850 .Step 3: Determine the Cost per Equivalent Unit Equivalent Units Direct Materials Inventory in process. July 1 Started and completed in July (1.

000 Conversion Costs $50.40 per EU of conversion .000 direct materials equivalent units = $50.000 direct materials cost 1.690 conversion cost 850 conversion equivalent units $9.690 = $11.00 per EU of DM Conversion Equivalent Unit Cost $9.Step 3: Determine the Cost per Equivalent Unit Work in Process ± Melting Beginning Inventory $28.150 Materials Direct Materials Equivalent Unit Cost $50.

710 1.40 $1.00 $0 150 x $11. July 1 beginning balance Equivalent units for completing the July in-process inventory Equivalent unit cost Cost of completed July 1 inprocess inventory Cost of July 1 in-process inventory transferred to Casting Department $28.150 0 x $50.860 .Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Inventory in process.710 $29.

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Units started and completed in July Equivalent unit cost Cost to complete the units started and completed in July 600 x $50.840 $36.00 600 x $11.40 $ 30.840 .000 $ 6.

000 100 x $11.40 $ 1.140 .140 $21.Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Equivalent units in ending inventory Equivalent unit cost Cost of ending inventory 400 x $50.00 $ 20.

140 Total Costs Assigned $87.840 $50.840 Ending Inventory $21.150 $50.690 Total Costs Charged $87.860 Started and Completed $36.000 $11.140 Total Costs Assigned $87.840 Beginning Inventory $29.40 = 1.40 = 6.840 .00 = 0 $11.000 $11.00 = $20.Step 4: Allocate Costs to Transferred and Partially Completed Units Work in Process ± Melting Beginning Inventory $28.150 Materials Costs $50.710 $29.140 $21.860 $50.840 Beginning cost M 500 x 0% x C 500 x 30% x M 600 x 100% x C 600 x 100% x M 400 x 100% x C 400 x 25% x Costs $28.000 Conversion Costs $9.840 $36.00 = $30.40 = 1.

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

 The production costs incurred by the department and the allocation of those costs between completed and partially completed units. .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.

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

July 31 (25% complete) Total units to be assigned cost Whole Units 500 1.000 1. July 1 (70% complete) Started and completed in July Transferred to Casting Dept.Cost of Production Report²Melting Department Report² Units Units charged to production: Inventory in process.100 400 1.000 850 Step 2 . July 1 Received from materials Total units accounted for Units to be assigned cost: Inventory in process.500 Step 1 0 600 600 150 600 750 400 100 1. Inventory in process.500 Equivalent Units Direct Materials Conversion 500 600 1.

000 $ 50.00 $9.690 ÷ 850 $11.Cost of Production Report²Melting Department Report² Costs Unit costs: Total costs for July in Melting Department Total equivalent units (from Slide 43) Cost per equivalent unit Costs Direct Materials Conversion Total Costs $50.40 Step 3 .000 ÷ 1.

July 1 To complete inventory of July 1 Started and completed in July Transferred to Casting Dept.840 $66.840 $ 0 30.150 59.150 1.710 36. July 1 Cost incurred in July Total costs accounted for Costs allocated to completed and partially completed units Inventory in process.140 Step 4 $20.Cost of Production Report²Melting Department Report² Costs Costs charged to production: Inventory in process.700 21.710 6.840 $1.840 . Inventory in process.000 $1.000 $28. July 31 Total costs assigned Direct Conversion Total Materials Costs Costs $28.140 $87.690 $87.

c.000 62. Materials purchased on account.000 57.000 5.000 50.000 3.000 8.000 Credit d. b.000 4.Journal Entries for a Process Cost System Transaction a.500 1.000 7.000 4. Direct labor used. Journal Entry Materials Accounts Payable Work in Process±Melting Factory Overhead±Melting Factory Overhead±Casting Materials Work in Process±Melting Work in Process±Casting Wages Payable Factory Overhead±Melting Factory Overhead±Casting Accumulated Depreciation Debit 62. . Depreciation expenses. Direct and indirect materials requisitioned.500 9.

Journal Entry Work in Process±Melting Work in Process±Casting Factory Overhead±Melting Factory Overhead±Casting Work in Process±Casting Work in Process±Melting Finished Goods Work in Process±Casting Debit 4.700 .690 9.600 78.700 66.700 73. Goods sold. Costs transferred to Casting Department g. Factory overhead applied.700 78.Journal Entries for a Process Cost System Transaction e.640 4. Cost of Goods Sold Finished Goods 73.690 9. Casting Department transferred to Finished Goods h.640 66.600 Credit f.

the nonvalue-added cost of transporting products and parts is reduced. .Just-inJust-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.  Because products have limited movement between departments.  Workers are cross-trained to perform more than one task. This provides flexibility and worker pride and involvement in the final product.

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

Just-inJust-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 .

Chapter 17 The End .

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