1. Module 6: Process Cost Systems ACG 2071 Created by M. Mari Fall 2007-1

2. Process Cost Is the mass production of products in a continuous flow of steps Products pass through a series of sequential processes Each process is identified a separate production, department, workstation, or work center. With the exception of the first process or department, each receives the output from the prior department as a partially processed product. Depending on the nature of the process, a company applies direct labor, overhead, and additional direct materials to move the product toward completion

3. Process Cost Accounting Assigns direct materials, direct labor, and overhead to specific processes. Costs are allocated by department rather than jobs Manufacturing costs are allocated to products based on units of production Manufacturing costs are accumulated and transferred by department The total costs associated with each process are then divided by the number of units passing through that process to determine the cost per equivalent units for that process

4. Cost Flows Materials Raw Mixing Bottling Packing

5. First –In, First Out Method Assume that the product moves in order throughout the production process Determine units to be assigned costs Units in beginning work in process Units started and completed during period Units in ending work in process

6. FIFO Method Calculate Equivalent Units of Production Process manufacturers often have some partially processed materials remaining at the end of the period EUP Number of units that could have been completed within a given accounting period

7. Example 1 A company processes their production in two departments. Beginning inventory was 500 units that were 70% completed, 1,100 units transferred out to the next department and ending inventory consisted of 400 units 25% completed.

8. Example 1 Actual Units%EUP Beg. Inv.50030%150 Started & Completed Transferred in 1,100 Units in Beg. Inv - 500 600 100%600 Ending Inv.40025%100 Total850

9. Example 3 A company process their production in two departments. The beginning inventory was 4,000 units 50% completed, transferred into the department 5,000 units and an ending inventory of 2,000 units 40% completed.

10. Example 3 Actual Units%EUP Beg. Inventory4,00050%2,000 Started & Completed Transferred in 5,000 Ending inventory 2,000 3,000 100%3,000 Ending Inventory 2,00040%800 Total5,800

11. Determine cost per equivalent unit actual Material cost = based on actual units transferred into the department Assume at beginning of the period Conversion costs Direct labor + Factory overhead Based on EUP Based on EUP

12. Example 4 Using the production units given in Example 1, assume that direct material costs are $50,000. Factory overhead is $3,000 and direct labor is $6,690. Work in process account has a balance of $28,150 at the beginning of the month which is from this month’s beginning inventory. Complete the chart

13. Example 1 Actual Units%EUP Beg. Inv.50030%150 Started & Completed Transferred in 1,100 Units in Beg. Inv - 500 600 100%600 Ending Inv.40025%100 Total850

14. Example 4 Direct materials per actual unit Actual units are the units that are added this period. They are the units started and completed and the units in ending inventory. Ending inventory 400 units Started and Completed 600 Total actual units 1,000 Direct materials per actual units = Direct material costs Actual units = $50,000 1,000 units = $50 per actual unit placed into production this period. Started and completed units = 600 X $50 = $30,000 Ending inventory units = 400 X $50 = $20,000

15. Example 4 Actual Units %EUPMaterialConversion Costs Total Beg. Inv.50030150 Started & Completed 600100600600X $50 = $30,000 End. Inv.40025100400 x $50 = $20,000 850

16. Example contd Conversion costs = Direct labor + Factory overhead $6,690 + $3,000 = $9,690 Are divided by Total EUP Conversion costs per EUP = Total conversion costs Total EUP $6,690 850 = $11.40 per EUP

17. Example 4 Actual%EUPMtrlConversion Costs Total Beg. Inv.50030150$11.40 X 150 = $1,710 Started & Completed 600100600$30,000$11.40 x 600= $6,840 End. Inv.40025100$20,000$11.40 x 100 = $1,140 850$9,690

18. Example Contd Prior month’s beginning inventory costs Must be accounted for Included in the column for materials $28,150 as stated in example.

19. Example 4 Actual Units %EUPMaterialConversion Costs Total Beg. Inv.50030150$28,150$1,710$29,860 Started & Complete d 600100600$30,000$6,840$36,840 End. Inv.40025100$20,000$1,140$21,140 850$6,690

20. Questions What is the total cost of units completed this period? How many actual units are in ending inventory this period? How many actual units are in next month’s beginning inventory?

21. Questions What is conversion costs per unit? What is the amount of work done on this month’s beginning inventory? What is the amount of work to be done next month on beginning inventory?

22. Blank chart Actual%EUPMtrlCCTotal Beg inv S & C End Inv