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    8 views25 pages

    CH6

    Uploaded by

    sajjad

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    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 25
    _ Process costing O Cost of production Report Lost unit Calculations 6 yf _ Cost accumulation procedures used by manufacturing concerns are clas- sified ay either (1) job order costing or (2) process costing. The preceding chapter discussed procedures applicable to job order costing. It is important to understand that, except for some modifications, the accumulation of mate- rials costs, labor costs, and factory overhead also applies to process costing. Process costing methods are used for industries producing chemicals. pe- troleum, textiles, steel, rubber, cement, flour, pharmaceuticals, shoes, plas- tics, sugar, and coal. This type of costing is also used by firms manufacturing items such as rivets, screws. bolts, and small electrical parts. A third type of industry using process costing methods is the assembly-type industry which manufactures such things as typewriters, automobiles, airplanes, and house hold electric appliances (washing machines, refrigerators, toasters. irons, radios, television sets, etc.). Finally, certain service industries, such as gaSy water, and heat, cost their products by using process costing methods. Thus, process costing is used when products are manufactu-ed under conditions of continuous processing or under mass production methods. In fact, process costing procedures are often termed ‘continuous or mass production’’ cost accounting procedures. 116 arr 6 PROCESS COSTING: COST OF PRODUCTION REPORT nn? he type of manufacturing operations performed determines the cost pro- cejures that must be used. For example, a company manulacturng custom cepinery will use job order costing, whereas a chemical company will we veras costing. Hn the case of the machinety-manufacturer. a job order cost Matis prepared for each order, accumulating the costs of nrsterials. labor, sM tactory overhead. In contrast, the chemical company cannot identify ma imals, labor. and factory overhead with each order. sinee each order is part ii batch oF t continuous process. ‘The individual order wlentity is lost, and cost of a completed unit must be computed by dividing total cost incurred ‘the jing a period hy total units completed. The summarization of the costy tukes place via the cost of production report, which is an extremely efficient, economical, and timesaving device for the collection of large amounts of dat The entire process costing discussion is presented in this and the follow- ingtwo chapters ‘This chapter considers the (1) cost of production reports. (2) culation of departmental unit costs, 3) costing of work in process. 4) com fulation of costs transferred to other departments or to the finshed Loos Mureroom, and (5) effect of lost units on unit costs Chapter 7 deals with CD special problems involved in adding materials in departments other than the jst, Q) problems connected with the beginning work in process, and (3) the possibility of using costing methods ether than those previously discussed Chapter 8 discusses the costing of by-products «and joint products, CHARACTERISTICS AND PROCEDURES OF PROCESS COSTING The characteristics of process costing are: 1. A cost of production report ts used to collect. summarize. and compute total and unit costs Production is accumulated and reported by departments Costs ure posted to departmental work in process «counts, . Production in process at the end of a period is restated in terms of c-mpleted units. Toial cost charged to a dey duciion of the department in order to cific period. 6. Costs of completed units of a department arc transferred to the next processing department in order to arrive at ihe total costs of the fin- ished products during a period. At the same time, costs ate assigned to units stiil in proce: - artment is divided by total computed pro- eterm:ne a unit cost for a spe- The procedures of process costing are designed to: 1. Accumulate materials. labor, and factor ; ate ma labor, and factory overh © by dep; acon ad costs by depart- 2. Determine a unit vost for euch department. ‘Transfer costs from one depute: n tothe next and te fi 4. Assign costs to the inventory of work stil ines ‘o finished goods, . CEDURES, PART 2 FORMATION SYSTEM; ACCUMULATION PRO cost IN to be established by process cost. mtary costs are ag with units produced in the nust be entific unit and inve fs. costs of a period 7 DEPARTMENTS uring operations in firms using rakes piece . tly such that work on 2 product takes place in order cost procedures G00 Trocedure, departmentalization of materia, ments. ith ether Pree cation of responsibilty ry averhead costs fal specific operation or process towards or example, after the Blending Departmens The nature of manufact sever depart jor, and fact aeenaeey infer to the finished goods storeroom. Both unite ate depar J work in process accounts are used to charge each depan. 1s. luhor, and factory overhead used to complete its share riment for the mate: ing invalves averaging cests for n particular period twee e The cost of a completed unitis ! cost of a period by the total units produced uning departmental production for a period includes s. The breakdown of costs for the computation >f total unit costs and for cesting units transferred and departmental work in osess Inventiones ts also desituble for cost control purposes. Departmental total and unit costs are determined by the use of the cost of Production report, which is described and illustrated in detail in later sections of this chapter. Most of the activity in process Costing involves the accumula- ‘wom of data needed for the preparation of these cost reports. nit cost 1g the period evaluating units still in proc FRODUCT FLOW A product can flow through a factory in numerous ways. Three product flow formats associated wit ng — sequential, parallel, and se- hat basically the same costing pro- uct flow situations. th process costi lective — are illustrated here to indicate u cedures can be applied to all types of prod Sequential Jn a sequential product flow, each item Product same set of operitions, as illustrated at the top of the Next page, Materials are Flaw placed imo production in the Blending Department, and labor and factory overhead are added. When the work is finished in the Blending Department. it Manufactured goes through the CHAPTER 6 PROCESS COSTING: COST OF PRODUCTION REPORT 1" Wore m Process — Bcewoma Dreanracnt Wonk In Process Matenals Testing Derannarnr Labor Won in Proce Factory Labor Tesnamat Orvasermarnt overhead Factory overhead Tater Frsnen Gonos Factory overhoad moves to the Testing Department. The second process, and any succeeding processes, may add more materials or simply work on the partially completed input from the preceding process, adding only labor and factory overhead. :is in this example. After the product has been processed by the Terminal De. partment, it is a completed product and hecomes a part of finished goods in- ventory Ina parallel product flow, certain portions of the work are done simulta Paraltel neously and then brought together in a final process or processes for comple- Prod low tion and transfer to finished goods inventory. As in the previous illustration, materials may be added in subsequent processes. Pictorially, this might be shown as. Work in Process — Curtine DeranTment Materials Labor Factory overhead Wor mw Process — Mecting DepantMent Materials Labor Factory overhead abor ee ed —— Factory Mavenais overhead! Labor se Labor Factory Work iw Process — Pung AND Sanona DePanTuent Worx m Process — Assematy DEPARTMENT Factory overhead, Work in Process — Castine Devantivent overhead! ‘Wor iN Process ~~ ~ _Pamrina Depannue Materials Labor Factory overhead, _Fiwsn€o Goons Seiective Fro” Fiow ——— 1 ost INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART 2 the product moves tO different departments thin the plant, depending upon the desired final Product. es exam ee ene ener the initial butchering process. some of the product goes meat processing © ing Department and then to finished goods inventory; threetly (0 the Pec ne ing Department and then to the Packaging Department ous to the Sm) gous inventory; some goes 10 the Grinding Depart. to the Packuging Department, and lastly to finished goods inven. an nansfer of coxts from the Rutchering Department involves joint cost od illustrated in Chapter &. A selective product flow for In a selective product flow. some und finally to finishes tory allocation, diycussed and meat processing might be shown as sviiows. Work in Process — yr cuseINS DEPARTMENT ‘Work IN PROCESS — ei i PACKAGING DEPARTMENT wererials actor svteae J | ! FruisHto Gus: Materials Labor Factory ‘overhead Worn i Process — Steins Drsantats T 4 Labor Factory overhead Worx in Process — ___GnnowG DePasrMent Labor Factory overhead PROCEDURES FOR MATERIALS, LABOR, AND FACTORY OVERHEAD COSTS : In process costing, materials, labor, and fa it actory overhead c ao cumulated in the usual accounts, using normal Gan Sena eeeris Costs are then analyzed by departments or processes and charged to depart- ments by appropriate journal entries. The details involved in process costing cmaeTER E PROCESS COSTING: COST OF PRODUCTION REPORT . usually fewer than those in job order costing, where ‘ accumulation of costs y orders can become unwieldy. In job order costing, materials requisitions are used to charge jobs fc materials used. If requisitions are used in process costing, dewils ae considerably reduced because materials are charged to departments rather than to jobs, and the number of departments using materials is usually less hon the number of jobs a firm might handle at a given time. Frequently mate- naisare issued only to the process-originating department; subsequent depart- ments add labor and taciory overhead. If materials are needed in a depart- ment other than the first, they are charged to that department performing the specific operation For materials control purposes, materials need not always be priced indi- vidvally on requisition forms. The cost of materials used can be determined at the end of the production period through inventory difference procedures, \c.. adding purchases to beginning inventory and then deducting ending in- ventory. Or consumption reports which state the cost of materials or quantity of materials put into process by various departments can be used. Costs or quantities charged to departments by consumption reports may be based on formulas or prorations. Formulas specify the type and quantity of materials reguited in the various products and ae applied to finished production in order to calculate the materials consumed. Chemical and pharmaceutical in- dustries use such procedures, particularly when more than one product is manufactured by a department. Frequently the cost of materials used by a department must be prorated to different products on various estimated hoses, This proration is described in Chapter 8 as joint costing For any of the materials: cost computation methods discussed, a typical journal entry charging direct manufacturing materials used during a period is: Work in Process — Blending Department cicaieee Materials . The source of the cost figures for the above entry as well as the entries for labor and factory overhead is the cost of production report which is discussed beginning on page 123. 24,500 Labor costs are identified by and charged to departments in process cost- ing, thus eliminating the detailed clerical work of accumulating labor costs by i0bs. Daily time tickets or weekly time clock cards are used instead of job time tickets. Summary labor charges are made to departments through an entry which distributes the direct manufacturing payroll: Work in Process — Blending Department . 29,140 Work in Process — Testing Departinent ...... 37,310 Work in Process — Terminal Department... 32400 Payroll 98,850 Materials Costs Labor Costs 122 Factory Overhead Costs RATION SYSTEM; ACCUMULATION PROCEDURES PART 2 INFO 1 ocess costing as Well as in job order cost. S) overhead subsidiary ledger for We be accumulated in the factory overhead Sub st a fo Pro je act 7 is consist : eee service departments. one eerie reporting. Quire. I © ind responsibility ments for responsibility accounting # eg and recommend the use of pre. phasiz The factory overhead aiecee erhead to jobs and products, How. tes for chal r determined overhead rates for ¢! cost procedures, actual overhead rather eer sis roses a mb act caning. Toe pace aa aieareronaeion ‘remains comparatively sable ren a to period, since fac.ory overhead will then remain about eal ae one month to the next, The use of actual overhead can also be justi ea en factory overhead is not an important part of total cost. However, Pre ‘etermined overhead rates for producing departments should be used if: cost 1 Factory overhead incurred in pr 1. Production is not stable 2. Factory overhead, especially fixed overhead. is a significant cost, Fluctuations in production can lead to the unequal incurrence of actual factory overhead from month to month. In such cases, factory overhead should be applied to production using predetermined rates, so that units pro- duced receive proper charges for factory overhead, Similarly, if factory over= head — especially fixed factory overhead — is significant, it is desirable to allocate factory overhead on the basis of normal or uniform production using predetermined rates. Indeed, the use of predetermined rates is highly recom. mended for improving cost control and facilitating cost analysis. Prior to charging factory overhead to departments via their respective work in process accounts, expenses must be accumulated in a factory over- head control account. As expenses are incurred, the entry is: Factory Overhead Control Accounts Payables Accumulated Depreciation — Machinery Prepaid Insurance. ce Materials .. Payroll. xX : lysis sheets are totaled. These totals, Service department costs. factory a S, represent factory overhead for each department. By debiting the actual cost incurred or bY using the predetermined rates multiplied by the respective actual activity base (e.g., direct labor hours) for each producing department . S 7 the entry charginé these expenses to work in process is as follows: PROCESS COSTING: COST OF PRODUOHEN REPORT quarter 6 13 cuin Prxess — Blending Department on Se iimoa Testing Departmen 24.200 = Wore Prices — Terminal Department. iste verhead Control factory Overbead vo.non THE COST OF PRODUCTION REPORT A departmental cost of production report shows all costs chargeable to a department It is not only the source for summary journal entries at the end of tre moath but also a most convenient vehicle for presenting and disposing of sets accumulated during the month. 4 cost of production report shows (1) total and unit costs transferred to it from a preceding department; (2) materials, labor, and factory overhead added by the department; (3) unit costs added by the department; (4) total and » costs accumulated to the end of operations in the department: (5) the cost it beginning and ending work in process inventories; and (6) cost trans- fea succeeding department or to a finished goods storeroom. lis customary to divide the cost section of the report into two parts: one showing costs for which the department is accountable, including departmen- ul and cumulative total and unit costs, the other showing the disposition of these costs, A quantity schedule showing the total number of units for which department is accountable and the disposition made of these units is also part of each department's cost of production report. Information in this schedule, adjusted for equivalent production, is used to determine the unit cess added by a department, the costing of the ending work in process inven- tory. and the cost to be transferred out of the department A cost of production report determines periodic total and unit costs. However, a report that would merely summarize the total costs of materials, labor, and factory overhead and show only the unit cost for the period would ‘tet be satisfactory for controlling costs. Total figures mean very little; cost sontrol requires detailed data. Therefore, in most instances, the total cost is troken down by cost elements for each department head responsible for the ©s!s incurred. Furthermore, detailed departmental figures are necded be- se of the various completion stages of the work in process inventories. , Ether in the cost of production report itself or in the supporting sched- ~ “*. each item of material used by a department is listed; every labor opera- fon is shown separately; factory overhead components are noted individu- Yanda unit cost is derived for each item. To condense the illustrated cost abduction reports, only total materials, labor, and factory overhead “eed to deparments are considered; and unit costs are computed only for “Cost element rather than for each item in te Teports of The Clonex Corporation, which manufactures one product " Producing departments (Blending, Testing, and Terminal), are used to ilustrg ; trate the details involved in the preparation of cost of production reports. ee EM; ACCUMULATION PROCEDURES PART 2 cast INFORMATION SYST artment, the originating It illustrates the de- rt rt of the Blending Dep Bete is shown below gst of production repo Une cost a prant oney Corponttion, Jete a co Blending Department department of The Ch tailed computations necded fo comp The Clones Corporation Blending Department Cost of Production Report For the Month of January, 19 Quantity Schatule Dyits starteg in proves Units starteg in p Soon Units transterred to next department Units

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