PROCESS COST

SYSTEMS APPLE M.
SERRANO
MPA
OBJECTIVES

• Describe process cost systems

• Prepare a cost of production report
• Journalize entries for transactions using a process cost systems
• Describe and illustrate the use of cost of production reports for decision making.
• Compare just-in-time processing with traditional manufacturing processing.
PROCESS COST SYSTEMS

• The cost accounting system used by process manufacturers

• records product costs for each manufacturing department or process
Comparing Job Order and Process Cost
Systems
COMPARING JOB ORDER AND
PROCESS COST SYSTEMS
COMPARING JOB ORDER AND PROCESS COST SYSTEMS
COMPARING JOB ORDER AND PROCESS
COST SYSTEMS
 TERMS TO REMEMBER

Raw materials - include any materials that go into the final product.

Work-in-Process - consists of units of production that are only partially complete

and will require further work before they are ready for sale to customers.

Finished Goods - consist of completed units of product that have not been sold to
customers

Cost of Goods Sold - refers to the direct costs of producing the goods sold by a company.
This amount includes the cost of the materials and labor directly used to create the good. It
excludes indirect expenses, such as distribution costs and sales force costs. Cost of goods
sold is also referred to as "cost of sales."
UNDERSTANDING THE COSTS IN PRODUCT COSTS
Product Cost are the costs directly incurred from the manufacturing process

The three basic categories of product costs are detailed below:

Direct Materials Costs - costs of raw materials or parts that go directly into producing
products.

Direct Labor Costs - the wages, benefits, and insurance that are paid to employees who are
directly involved in manufacturing and producing the goods

Manufacturing Overhead Costs -include direct factory-related costs that are incurred when
producing a product, such as the cost of machinery and the cost to operate the machinery.
Manufacturing overhead costs also include some indirect costs, such as the
following:

Indirect materials: 
• Indirect materials are materials that are used in the production process but that are not
directly traceable to the product.

Indirect labor: 
• Indirect labor is the labor of those who are not directly involved in the production of the
products.
THE FLOW OF
MATERIALS, LABOR AND OVERHEAD COSTS
COST FLOWS FOR A PROCESS MANUFACTURER
COST OF PRODUCTION REPORT
summarizes the production and cost data for a department as follows:

1. The units the department is accountable for and the disposition of those
units.

2. The product costs incurred by the department and the allocation of those
costs between completed (transferred out) and partially completed units.
 A COST OF PRODUCTION REPORT IS PREPARED USING THE
FOLLOWING FOUR STEPS:

STEP 1 STEP 2 STEP 3 STEP 4

Determine Compute Determine the Allocate costs to
the units to equivalent cost per units transferred
be assigned units of equivalent out and partially
costs. production unit. completed units.
• First-In, First-Out (FIFO) method assumes that the oldest unit of inventory is the sold first.

• Last-In, First-Out (LIFO) method assumes that the last unit to arrive in inventory or

more recent is expensed or sold first. 

• Average Cost method  assigns a cost to inventory items based on the total cost of goods
purchased or produced in a period divided by the total number of items purchased or
produced.
COST OF PRODUCTION REPORT
EXAMPLE: FOR THE MIXING DEPARTMENT OF FROZEN DELIGHT FOR JULY
2014 (USING FIFO METHOD)
STEP 1
DETERMINE THE UNITS TO BE ASSIGNED COSTS
Grou
p1
Grou
p2

Group
3

Transferred out to the Packaging

Department --------------------------------- 62,000
gallons
Less: Inventory in process, July 1 ----- 5,000
-----------------------------------------------------------
Started and Completed in July 57,000
gallons
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 materials or
conversion (direct labor and factory overhead) costs.
MATERIALS - EQUIVALENT UNITS OF PRODUCTION

TO COMPUTE EQUIVALENT UNITS FOR MATERIALS, IT IS NECESSARY TO KNOW HOW MATERIALS ARE ADDED DURING THE MANUFACTURING
PROCESS
 CONVERSION - EQUIVALENT UNITS OF
PRODUCTION
• To compute equivalent units for conversion costs, it is necessary to know how direct
labor and factory overhead enter the manufacturing process

• Direct labor, utilities, and equipment depreciation are often incurred uniformly
during processing. For this reason, it is assumed that Frozen Delight incurs
conversion costs evenly throughout its manufacturing process.
CONVERSION EQUIVALENT UNIT
 STEP 3
DETERMINE THE COST PER EQUIVALENT UNIT.

FORMULA:
COST OF PRODUCTION REPORT
EXAMPLE: FOR THE MIXING DEPARTMENT OF FROZEN DELIGHT FOR JULY 2010
 COMPUTATION:

Direct Materials Conversion

Total Costs for the Period 66,000 17,775

Divided by: Total Equivalent 60,000 gallons 59,250 gallons

Units

Cost per Equivalent Unit 1.10 per gallon 0.30 per gallon
 STEP 4
ALLOCATE COSTS TO UNITS TRANSFERRED
OUT AND PARTIALLY COMPLETED UNITS.
• Product costs must be allocated to the units transferred out and the partially completed units on
hand at the end of the period.

• The product costs are allocated using the costs per equivalent unit for materials and conversion
costs that were computed in Step 3.
THE UNITS TO BE ASSIGNED THESE COSTS ARE SHOWN
BELOW. THE COSTS TO BE ASSIGNED THESE UNITS ARE
INDICATED BY QUESTION MARKS (?).
Therefore,
TO SUMMARIZE, THE TOTAL MANUFACTURING COSTS FOR
FROZEN DELIGHT IN JULY WERE ASSIGNED AS SHOWN BELOW.
 PREPARING THE COST OF PRODUCTION REPORT

A cost of production report is prepared for each processing department at periodic

intervals. The report summarizes the following production quantity and cost data:
1. The units for which the department is accountable and the disposition of those units.

2. The production costs incurred by the department and the allocation of those costs
between completed (transferred out) and partially completed units.
 JOURNAL ENTRIES FOR A PROCESS COST
SYSTEM
For Mixing
• As a basis for illustration, the July transactions for Frozen Delight are
used.
For Mixing
THE ENDING INVENTORIES FOR FROZEN DELIGHT ARE
REPORTED ON THE JULY 31 BALANCE SHEET AS FOLLOWS:

6,875
 THE ENDING INVENTORIES FOR FROZEN DELIGHT ARE
REPORTED ON THE JULY 31 BALANCE SHEET AS FOLLOWS:

3,525
THE ENDING INVENTORIES FOR FROZEN DELIGHT ARE
REPORTED ON THE JULY 31 BALANCE SHEET AS FOLLOWS:

7,725
THE ENDING INVENTORIES FOR FROZEN DELIGHT ARE
REPORTED ON THE JULY 31 BALANCE SHEET AS FOLLOWS:

4,000
 USING THE COST OF PRODUCTION REPORT FOR
DECISION MAKING
• The cost of production report is often used by managers for decisions involving the
control and improvement of operations.

Example: Frozen Delight

The cost per equivalent unit for June can be determined from the beginning inventory. The
Frozen Delight data indicate that the July 1 inventory in process of $6,225 consists of the following
costs:
USING THE COST OF PRODUCTION REPORT FOR
DECISION MAKING
 JULY Direct Materials Conversion

Total Costs for the Period 66,000 17,775

Divided by: Total Equivalent 60,000 gallons 59,250 gallons

Units

Cost per Equivalent Unit 1.10 per gallon 0.30 per gallon

JUNE Direct Materials Conversion

Total Costs for the Period 5,000 1,225

Divided by: Total Equivalent 5,000 gallons 3,500 gallons

Units (5,000 gallons x 70%)

Cost per Equivalent Unit 1.00 per gallon 0.35 per gallon
 YIELD - REFERS TO THE PERCENTAGE OF NON-DEFECTIVE ITEMS OF ALL
PRODUCED ITEMS, AND IS USUALLY INDICATED BY THE RATIO OF THE NUMBER
OF NON-DEFECTIVE ITEMS AGAINST THE NUMBER OF MANUFACTURED ITEMS.

In addition to unit costs, managers of process manufacturers are also concerned about
yield.
The yield is computed as follows:
JUST-IN-TIME PROCESSING (JIT)
• Inventory strategy where materials are only
ordered and received as they are needed in
the production process. The goal of this
method is to reduce cost by saving money
on overhead inventory expenses. This
allows the company to save on storing
inventory and reduce waste.
TRADITIONAL MANUFACTURING
• Refers to manufacturing principles
focused on producing a certain set
number of products each period and
holding a reserve in case of unexpected
demand or shortages. It requires longer
production time and an increase in
material waste and labor cost.
EXAMPLE:
A TRADITIONAL MANUFACTURING PROCESS FOR A FURNITURE
MANUFACTURER IS SHOWN: