Process Cost Systems Student Version

Describe process cost systems.

Process Cost System A process manufacturer produces products that are indistinguishable from each other using a continuous production process. The process system used by process manufacturers is called the process cost system. 1

Process cost systems are used to manufacture homogeneous products. Examples are: Tennis balls Motor oil Candy bars Soft drinks 1

Materials WIP – Mixing WIP – Packaging Cost Flows for a Process Manufacturer—Frozen Delight (a) Direct and indirect materials (a)The cost of materials are purchased and recorded in materials. Debit Materials and credit Accounts Payable when direct and indirect materials are purchased. (continued) 1 Exhibit 3

Materials WIP – Mixing DM WIP – Packaging DM (b) Direct MaterialsDMDM (a) Direct and indirect materials (b) The cost of direct materials used by the Mixing and Packaging department are recorded in the work in process account for each department. Cost Flows for a Process Manufacturer— Frozen Delight (continued) 1 Exhibit 3 (continued)

Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials (c) The cost of direct labor used by the Mixing and Packaging departments is recorded in process accounts for each department. DL (c) Direct Labor—Mixing DL DL 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials (d) The cost of factory overhead incurred for indirect materials and other factory overhead, such as depreciation, is recorded in the factory overhead accounts for each department. DL DL 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing IM (d) Indirect materials DL 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing (e) The factory overhead incurred in the Mixing and Packaging departments is applied to the work in process accounts for each department. DL 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing FOA FOA (e) Factory overhead applied—Mixing FOA (e) Factory overhead applied—Packaging FOA FOA FOA DL 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

FOA Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing FOA FOA DL FOA (f) The cost of units completed in the Mixing Department is transferred to the Packaging Department. 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing FOA FOA (f) Costs transferred in (to packaging) CTI (f) Costs trans- ferred out CTI DL FOA FOA 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

CTI Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing FOA FOA (f) Costs trans- ferred out DL FOA (g) The cost of units completed in the Packaging Department is transferred to Finished Goods. FOA 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

CTI Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing FOA FOA (f) Costs trans- ferred out DL FOA FOA Finished Goods CTI (i) Cost transferred in from WIP—Packaging CTI (i) Costs trans- ferred out 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

CTI Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing FOA FOA (f) Costs trans- ferred out DL FOA FOA Finished Goods CTI (i) Costs trans- ferred out (h) The cost of units sold is transferred to Cost of Goods Sold. 1 Cost Flows for a Process Manufacturer— Frozen Delight (continued) Exhibit 3 (continued)

CTI Materials WIP – Mixing DM WIP – Packaging DMDM (a) Direct and indirect materials DL Factory OH – Packaging IM (d) Factory overhead incurred Factory OH – Mixing FOA FOA (f) Costs trans- ferred out DL FOA FOA Finished Goods CTI (i) Costs trans- ferred out (j) Cost transferred to Cost of Goods Sold CGS Cost of Goods Sold CGS 1 Cost Flows for a Process Manufacturer— Frozen Delight (concluded) Exhibit 3

Prepare a cost of production report

Inventory in process, July 1, 5,000 gallons: Direct materials cost, 5,000 gallons$ 5,000 Conversion costs, 5,000 gallons, 70% completed 1,225 Total inventory in process, July 1$ 6,225 Direct materials cost for July, 60,000 gallons$66,000 Direct labor for July10,500 Factory overhead applied for July 7,275 83,775 Total production costs to account for$90,000 Goods transferred to Packaging in July (including units in process on July 1), 62,000 gallons? Inventory in process, July 31, 3,000 gallons, 25% complete as to conversion costs? Production Report—Mixing Department 2

Step 1: Determine the Units to Be Assigned Costs Total units (gallons) charged to production: In process July 15,000 gallons Received from materials storage60,000 gallons Total units accounted for by the Mixing Department65,000 gallons 2

Total Units to Be Assigned Costs A.Inventory in process, July 1, completed in July5,000 gal. B.Started and completed in July57,000 gal.* Transferred out to the Packaging Department in July62,000 gal. C.Inventory in process, July 31 3,000 gal. Total gallons to be assigned costs65,000 gal. *62,000 – 5,000 2

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 either materials or conversion (direct labor and factory overhead) costs. 2

Frozen Delight’s Equivalent Units Computation for Materials in July PercentEquivalent TotalMaterialsUnits for WholeAddedDirect Unitsin JulyMaterials Inventory in process, July 15,0000%0 Started and completed in July (62,000 – 5,000) 57,000100% 57,000 Transferred out to Packaging Dept.62,000—57,000 Inventory in process, July 31 3,000100% 3,000 Total gallons to be assigned cost65,00060,000 Important: Note the word “Added” 2

Percent TotalConversionEquivalent WholeCompletedUnits for Unitsin JulyConversion Inventory in process, July 1 (70% complete)5,00030%1,500 Started and completed in July (62,000 – 5,000) 57,000100% 57,000 Transferred out to Packaging Department in July62,000—58,500 Inventory in process, July 31 (25% complete) 3,00025% 750 Total gallons to be assigned cost65,00059,250 2

Cost per Equivalent Unit Direct Materials Cost per Equivalent Unit Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials = Conversion Cost per Equivalent Unit Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs = 2

Step 3:Determine the Cost per Equivalent Unit Inventory in process, July 101,500 Started and completed in July (62,000 – 5,000) 57,00057,000 Transferred out to Packaging Dept. in July57,00058,500 Inventory in process, July 31 3, Total gallons to be assigned costs60,00059,250 Direct MaterialsConversion Equivalent Units from Step 2 2

Conversion Cost per Equivalent Unit Conversion Cost per Equivalent Unit $0.30 per gallon = $17,775 conversion costs 59,250 gallons Direct Materials Cost per Equivalent Unit Direct Materials Cost per Equivalent Unit $66,000 direct materials costs 60,000 direct materials equivalent units $1.10 per gallon = 2

Inventory in process, July 1, balance $6,225 Equivalent units for completing the July 1 in-process inventory01,500 Equivalent unit cost× $1.10× $0.30 Cost of completed July 1 in- process inventory0$ Cost of July 1 in-process inventory transferred to Packaging Department$6,675 Direct Conver- MaterialssionTotal CostsCostsCosts Step 4:Allocate Costs to Units Transferred Out and Partially Completed Units 2

Units started and completed in July57,00057,000 Equivalent unit cost× $1.10× $0.30 Cost to complete the units started and completed in July$62,700$17,100$79,800 Direct MaterialsConversionTotal CostsCostsCosts Costs Associated With the Units Started and Completed 2

Equivalent units in ending inventory3, Equivalent unit cost× $1.10× $0.30 Cost to ending inventory$ 3,300$ 225$3,525 Direct MaterialsConversionTotal CostsCostsCosts Costs Associated With the Partially Completed Units in the Ending Inventory 2

Summary Inventory in process, July 1, completed in July5,000gallons$ 6,675 Started and completed in July57,000 79,800 Transferred out to the Packaging Department in July62,000gallons$86,475 Inventory in process, July 31 3,000 3,525 Total65,000gallons$90,000 Total GallonsCosts 2

Cost of Production Report for Frozen Delight’s Mixing Department—FIFO 2 Exhibit 7 Step 1Step 2

Cost of Production Report for Frozen Delight’s Mixing Department—FIFO (continued) 2 Exhibit 7 Step 3 Step 4

Journalize entries for transactions using a process cost system

Journal Entries for Frozen Delight a.Purchased materials, including milk, cream, sugar, packaging, and indirect materials on account, $88,000. 3

b.Milk, cream, and sugar were requisitioned by the Mixing Department, $66,000. Another $8,000 of packaging materials was requisitioned by the Packaging Department. Indirect materials for the Mixing and Packaging Department were $4,125 and $3,000, respectively. 3

c.Direct labor in the Mixing and Packaging departments was $10,500 and $12,000, respectively. 3

d.Equipment depreciation for the Mixing and Packaging departments was $3,350 and $1,000, respectively. 3

e.The factory overhead applied to Mixing and Packaging was $7,275 and $3,500, respectively. 3

f.The amount of costs transferred from the Mixing Department to the Packaging Department was $86,475 per the cost of production report in Exhibit 7. 3

g. The goods transferred out of the Packaging Department to Finished Goods according to the Packaging Department cost of production report was $106,000. 3

h. The cost of goods sold out of the finished goods inventory of $107,000. 3

Ending Inventories for Frozen Delight July 31 Materials$ 6,875 Work in Process—Mixing Dept.3,525 Work in Process—Packaging Department7,725 Finished Goods 4,000 Total inventories$22,125 3

Compare just-in-time processing with traditional manufacturing processing

JIT organizes manufacturing 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. 5