Power Notes Chapter 18 Process Cost Systems Learning Objectives C18 1. Comparing Job Order Costing and Process Costing 2. Physical Flows and Cost Flows for a Process Manufacturer 3. The First-In, First-Out (Fifo) Method 4. Bringing It All Together: The Cost of Production Report 5. Journal Entries for a Process Cost System 6. Using the Cost of Production Report for Decision Making 7. Just-in-Time Processing C18

Power Notes Chapter 18 Process Cost Systems Slide # Power Note Topics 3 15 30 33 35 Job Order and Process Cost Systems Process Cost Accounting: Steps 1, 2, 3, 4 Cost of Production Report Journal Entries for a Process Cost System Just-in-Time Processing Note: To select a topic, type the slide # and press Enter.

Job Order and Process Cost Systems Compared Job Order Cost System Direct materials Job Cost Sheets Dept. A and Dept. B Direct labor Factory overhead

Job Order and Process Cost Systems Compared Job Order Cost System Direct materials Job Cost Sheets Dept. A and Dept. B Direct labor Finished goods Factory overhead

Job Order and Process Cost Systems Compared Job Order Cost System Direct materials Job Cost Sheets Dept. A and Dept. B Direct labor Finished goods Factory overhead Process Cost System Direct materials Dept. B Dept. A

Job Order and Process Cost Systems Compared Job Order Cost System Direct materials Job Cost Sheets Dept. A and Dept. B Direct labor Finished goods Factory overhead Process Cost System Direct materials Dept. B Dept. A Direct labor Factory overhead Direct labor Factory overhead

Job Order and Process Cost Systems Compared Job Order Cost System Direct materials Job Cost Sheets Dept. A and Dept. B Direct labor Finished goods Factory overhead Process Cost System Direct materials Dept. B Finished goods Dept. A Direct labor Factory overhead Direct labor Factory overhead

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

Flow of Costs in a Process Cost System FOH – Melting WIP – Melting Finished Goods DM Actual costs incurred DL Cost of Goods Sold FOH – Casting WIP – Casting Actual costs incurred DL Direct materials used in production DM Direct labor used in production DL

Flow of Costs in a Process Cost System FOH – Melting WIP – Melting Finished Goods DM Actual costs incurred FOHA DL FOHA Cost of Goods Sold FOH – Casting WIP – Casting Actual costs incurred FOHA DL FOHA Factory overhead applied to work in process FOHA

Flow of Costs in a Process Cost System FOH – Melting WIP – Melting Finished Goods Actual costs incurred FOHA DM TRAN DL FOHA Cost of Goods Sold FOH – Casting WIP – Casting FOHA TRAN Actual costs incurred DL FOHA TRAN Cost of goods transferred to WIP – Casting

Flow of Costs in a Process Cost System FOH – Melting WIP – Melting Finished Goods Actual costs incurred FOHA DM TRAN COGM DL FOHA Cost of Goods Sold FOH – Casting WIP – Casting Actual costs incurred FOHA TRAN COGM DL FOHA Cost of goods manufactured and transferred to finished goods COGM

Flow of Costs in a Process Cost System FOH – Melting WIP – Melting Finished Goods Actual costs incurred FOHA DM TRAN COGM SOLD DL FOHA Cost of Goods Sold FOH – Casting WIP – Casting SOLD TRAN COGM Actual costs incurred FOHA DL FOHA Finished goods sold SOLD

Flow of Costs in a Process Cost System FOH – Melting WIP – Melting Finished Goods Actual costs incurred FOHA DM TRAN COGM SOLD DL FOHA Cost of Goods Sold FOH – Casting WIP – Casting SOLD TRAN COGM Actual costs incurred FOHA DL FOHA Summary of cost flows

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons Beginning Inventory 500 Tons

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

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons Beginning Inventory 500 Tons Started 1,000 Tons 1,500 Tons Units charged to production Responsibility

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons In a perpetual inventory system, outflows are recorded as they occur. Beginning Inventory 500 Tons Transferred 1,100 Tons Started 1,000 Tons In this example, what is the ending amount of tons? 1,500 Tons Units charged to production Responsibility

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons Beginning Inventory 500 Tons Transferred 1,100 Tons If the inventory level decreases during the period by 100 tons, are we completing more units than we are starting or starting more units than we are completing? Ending Inventory 400 Tons Started 1,000 Tons 1,500 Tons 1,500 Tons Units charged to production Responsibility

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons Beginning Inventory 500 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Started 1,000 Tons 1,500 Tons 1,500 Tons If a manager is charged with the responsibility of 1,500 tons, the accountability must also be for 1,500 tons. This accountability consists of two parts: units transferred out and remaining units. Units charged to production Units to be assigned costs Responsibility Accountability

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons 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 1,500 Tons 1,500 Tons How many units were started and completed? Units charged to production Units to be assigned costs Responsibility Accountability

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons Beginning Inventory 500 Tons Transferred 1,100 Tons 1 Beginning Inventory 500 Tons Ending Inventory 400 Tons + Started 1,000 Tons 2 Started & Completed 600 Tons 1,500 Tons 1,500 Tons Units started of 1,000 tons less ending inventory of 400 tons. Units charged to production Units to be assigned costs Responsibility Accountability

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons Beginning Inventory 500 Tons Transferred 1,100 Tons 1 Beginning Inventory 500 Tons Ending Inventory 400 Tons + Started 1,000 Tons 2 Started & Completed 600 Tons = 1,500 Tons 1,500 Tons Transferred Out 1,100 Tons Units charged to production Units to be assigned costs Responsibility Accountability

Step 1: Determine the Units to be Assigned Costs Work in Process – Tons Beginning Inventory 500 Tons Transferred 1,100 Tons 1 Beginning Inventory 500 Tons Ending Inventory 400 Tons + Started 1,000 Tons 2 Started & Completed 600 Tons = 1,500 Tons 1,500 Tons Transferred Out 1,100 Tons + Units charged to production Units to be assigned costs 3 Ending Inventory 400 Tons Responsibility Accountability

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

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 1,000 Total Percent Equivalent Units Converted Units Conversion Equivalent 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 850

Step 3: Determine the Cost per Equivalent Unit Work in Process – $$ Beginning Inventory $28,150 Direct Materials Equivalent Unit Cost Direct materials cost $50,000 Direct materials 1,000 equivalent units = $50.00 Materials $50,000 Conversion Costs $9,690 Conversion Equivalent Unit Cost Conversion cost $9,690 Conversion equiv. units 850 = $11.40 Total Costs $87,840 Costs Charged

Step 4: Allocate Costs to Appropriate Units Direct Conversion Total Materials Costs Costs Beginning Inventory: Beginning balance $28,150 Equivalent units 0 150 Equivalent unit cost x $50.00 x $11.40 $0 $1,710 1,710 $29,860 Started and Completed: Equivalent units 600 600 Equivalent unit cost x $50.00 x $11.40 Started and completed in July $30,000 $6,840 $36,840 Ending Inventory: Equivalent units 400 100 Cost of ending inventory $20,000 1,140 $21,140 = = =

Step 4: Allocate Costs to Appropriate Units Work in Process – $$ 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

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 costs: Inventory in process, July 1 500 0 150 Started and completed in July 600 600 600 Transferred to Casting Dept. 1,100 600 750 Inventory in process, July 31 400 400 100 Total units to be assigned cost 1,500 1,000 850 Step 1 Step 2

Cost of Production Report – Melting Department Equivalent Units Units and Unit Costs 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 costs: Inventory in process, July 1 500 0 150 Started and completed in July 600 600 600 Transferred to Casting Dept. 1,100 600 750 Inventory in process, July 31 400 400 100 Total units to be assigned cost 1,500 1,000 850 Unit costs: Total costs for July $50,000 $9,690 Cost per equivalent unit $ 50.00 $11.40 Step 3

Cost of Production Report – Melting Department Costs assigned 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 assigned: 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 Step 4

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

Journal Entries for a Process Cost System Transaction Journal Entry Debit Credit e. Factory overhead applied. f. Costs transferred to Casting Dept. g. Casting Dept. 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

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

Power Notes This is the last slide in Chapter 18. Chapter 18 Process Cost Systems This is the last slide in Chapter 18. Note: To see the topic slide, type 2 and press Enter.