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Chapter 17
Process Cost Systems
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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Objectives
1. DistinguishAfter
between
job
order
costing
studying this
and process
costing
chapter,
yousystems.
should
2. Explain and illustrate
the physical flows
be able to:
and cost flows for a process
manufacturer.
3. Calculate and interpret the accounting
for completed and partially completed
units under the fifo method.
4. Prepare a cost of production report.
Objectives
5. Prepare journal entries for transactions
of a process manufacturer.
6. Use cost of production reports for
decision making.
7. Contrast just-in-time processing with
conventional manufacturing practices.
Comparing Job Order
Costing and Process Costing
Job Order Cost System
Work in Process
Account
Factory
Direct
overhead
labor
Direct
materials
Job Cost
Sheets
Dept. A and
Dept. B
to Finished
Goods
Comparing Job Order
Costing and Process Costing
Process Cost System
Work in Process
Account
Direct
materials
Work in Process
Account
DEPT. A
DEPT. B
Factory
Direct
Overhead
Labor
Factory
Direct
Overhead
Labor
to Finished
Goods
Comparing Job Order
Costing 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.
Physical Flows for a Process Manufacturer
Scrap
Metal
Materials
Melting
Department
Casting
Department
Physical Flows for a Process Manufacturer
Molten
metal
transferred
from
Melting
Melting
Department
Casting
Department
To finished goods
Cost Flows for a Process Manufacturer
Materials
Purchases of DM
direct and
indirect
materials
Factory OH – Melting
WIP – Melting
WIP – Casting
DM
Factory OH – Casting
Finished Goods
Cost of Goods Sold
DM
Direct materials used in production
Cost Flows for a Process Manufacturer
Materials
Purchases of DM
direct and
indirect
materials
Factory OH – Melting
WIP – Melting
DM
DL
Factory OH – Casting
Actual
costs
incurred
DL
WIP – Casting
Direct labor used in production
Finished Goods
Cost of Goods Sold
Cost Flows for a Process Manufacturer
Materials
Purchases of DM
direct and
IM
indirect
materials
WIP – Melting
DM
DL
Factory OH – Melting
Factory OH – Casting
Actual
costs
incurred
Actual
costs
incurred
IM
WIP – Casting
Finished Goods
Cost of Goods Sold
Indirect materials used in production
Cost Flows for a Process Manufacturer
Materials
Purchases of DM
direct and
IM
indirect
materials
Factory OH – Melting
Actual
costs
incurred
FOA
FOA
WIP – Melting
WIP – Casting
DM
DL
FOA
Factory OH – Casting
Actual
costs
incurred
Factory overhead applied
Finished Goods
Cost of Goods Sold
Cost Flows for a Process Manufacturer
Materials
Purchases of DM
direct and
IM
indirect
materials
Factory OH – Melting
Actual
costs
incurred
TO/TI
FOA
WIP – Melting
DM
TO
WIP – Casting
TI
DL
FOA
Factory OH – Casting
Actual
costs
incurred
Finished Goods
Cost of Goods Sold
Cost transferred out/transferred in
Cost Flows for a Process Manufacturer
Materials
Purchases of DM
direct and
IM
indirect
materials
Factory OH – Melting
Actual
costs
incurred
DL
FOA
FOA
WIP – Melting
DM
TO
WIP – Casting
TI
DL
DL
FOA
FOA
Factory OH – Casting
Actual
costs
incurred
Finished Goods
FOA
Direct labor used in production
Factory overhead applied
Cost of Goods Sold
Cost Flows for a Process Manufacturer
Materials
Purchases of DM
direct and
IM
indirect
materials
Factory OH – Melting
Actual
costs
incurred
TO/TI
FOA
WIP – Melting
DM
WIP – Casting
TO
TI
DL
DL
FOA
FOA
Factory OH – Casting
Actual
costs
incurred
TO
Finished Goods
FOA
TI
Cost of Goods Sold
Cost transferred out/transferred in
Cost Flows for a Process Manufacturer
Materials
Purchases of DM
direct and
IM
indirect
materials
Factory OH – Melting
Actual
costs
incurred
FOA
WIP – Melting
DM
TO
WIP – Casting
TI
DL
DL
FOA
FOA
Factory OH – Casting
Actual
costs
incurred
FOA
Finished Goods
TI
Cost of goods sold
COGS
Cost of Goods Sold
COGS
COGS
TO
Melting Department of McDermott Steel Inc.
Inventory in process, July 1, 500 tons:
Direct materials cost, 500 tons
Conversion costs, 500 tons, 70% completed
Total inventory in process, July 1
Direct materials cost for July, 1,000 tons
Conversion costs for July
Goods transferred to Casting in July, 1,100 tons
Inventory in process, July 31, 400 tons, 25%
complete as to conversion costs
$24,550
3,600
$28,150
50,000
9,690
?
?
Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Started
1,000 Tons
Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Started
1,000 Tons
Transferred
1,100 Tons
In a perpetual
inventory system,
outflows are recorded
as they occur.
Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Started
1,000 Tons
Transferred
1,100 Tons
Ending
Inventory
400 Tons
1 Beginning Inventory 500 Tons
Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Started
1,000 Tons
Transferred
1,100 Tons
Ending
Inventory
400 Tons
1 Beginning Inventory 500 Tons
+
2 Started & Completed ? Tons
Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Started
1,000 Tons
Transferred
1,100 Tons
Ending
Inventory
400 Tons
1 Beginning Inventory 500 Tons
+
2 Started & Completed 600 Tons
Step 1: Determine the Units to be Assigned Costs
Work in Process – Melting
Beginning
Inventory
500 Tons
Started
1,000 Tons
Transferred
1,100 Tons
Ending
Inventory
400 Tons
1 Beginning Inventory 500 Tons
+
2 Started & Completed 600 Tons
=
Transferred Out
1,100 Tons
+
3 Ending Inventory
Total tons to be
assigned costs
400 Tons
=
Total units
1,500 Tons
The equivalent units of
production are the number of
units that could have been
completed within a given
accounting period.
Step 2: Calculate
equivalent
units of
production
Step 2: Calculate Equivalent Units of Production
Materials Equivalent Units
Inventory in process, July 1
Started and completed in July
Transferred out to Casting Dept.
Inventory in process, July 31
Total tons to be assigned cost
Total Percent Equivalent
Units Added
Units
500
600
1,100
400
1,500
0%
100%
100%
0
600
600
400
1,000
Step 2: Calculate Equivalent Units of Production
1,000 Equivalent Units
JULY 1
500 tons beginning inventory
EU of
materials
100% materials added in June
500
No materials
equivalent units
Inventory
in
added
to beginning
process, July
1
inventory
for July
JULY 31
Note: Started
and completed
600 tons started and completed
EU of
materials
100% materials added in July
400 tons ending inventory
600
Inventory in
process, July 31
EU of
materials
100% materials added in July
400
Step 2: Calculate Equivalent Units of Production
Conversion Equivalent Units
Inventory in process, July 1
Started and completed in July
Transferred out to Casting Dept.
Inventory in process, July 31
Total tons to be assigned cost
Total Percent Equivalent
Units Added
Units
500
600
1,100
400
1,500
30%
100%
25%
150
600
750
100
850
Step 2: Calculate Equivalent Units of Production
JULY 1
850 Equivalent Units
JULY 31
500 tons beginning inventory
350 EU
150
EU
70% completed for
30%
conversion in June completed
for
conversion
Inventory in
in July
process, July 1
600 tons started and
completed
600 EU
Inventory in
process, July
31 (75% to be
completed for
conversion in
August)
100% completed for
conversion in July 400 tons ending inventory
100
25% completed for
EU
conversion in July
300 EU
Step 3: Determine the Cost per Equivalent Unit
Equivalent Units
Direct Materials
Inventory in process, July 1
Started and completed in July
(1,100 – 500)
Transferred out to Casting Dept.
in July
Inventory in process, July 31
Total tons to be assigned cost
Conversion
0
150
600
600
600
400
1,000
750
100
850
Step 3: Determine the Cost per Equivalent Unit
Work in Process – Melting
Beginning
Inventory
$28,150
Materials
$50,000
Conversion
Costs
Direct Materials Equivalent Unit Cost
$50,000 direct materials cost
1,000 direct materials equivalent units
=
$50.00
per EU of
DM
Conversion Equivalent Unit Cost
$9,690
$9,690 conversion cost
850 conversion equivalent units
=
$11.40
per EU
of conversion
Step 4: Allocate Costs to Transferred and
Partially Completed Units
Direct Materials Conversion Total
Costs
Costs
Costs
Inventory in process, July 1
beginning balance
Equivalent units for completing
the July in-process inventory
Equivalent unit cost
Cost of completed July 1 inprocess inventory
Cost of July 1 in-process
inventory transferred to
Casting Department
$28,150
0
x $50.00
150
x $11.40
$0
$1,710
1,710
$29,860
Step 4: Allocate Costs to Transferred and
Partially Completed Units
Direct Materials Conversion Total
Costs
Costs
Costs
Units started and completed
in July
Equivalent unit cost
Cost to complete the units
started and completed in
July
600
x $50.00
600
x $11.40
$ 30,000
$ 6,840 $36,840
Step 4: Allocate Costs to Transferred and
Partially Completed Units
Direct Materials Conversion Total
Costs
Costs
Costs
Equivalent units in ending
inventory
Equivalent unit cost
Cost of ending inventory
400
x $50.00
$ 20,000
100
x $11.40
$ 1,140 $21,140
Step 4: Allocate Costs to Transferred and
Partially Completed Units
Costs
Work in Process – Melting
Beginning cost
M 500 x
0% x
C 500 x 30% x
$28,150
$50.00 =
0
$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
C 600 x 100% x
$50.00 = $30,000
$11.40 =
6,840
$36,840
Conversion
Costs
$9,690
Ending
Inventory
$21,140
M 400 x 100% x
C 400 x 25% x
$50.00 = $20,000
$11.40 =
1,140
$21,140
Total Costs
Charged
$87,840
Total Costs
Assigned
$87,840
Total Costs Assigned
$87,840
A cost of production report is
prepared for each processing
department at periodical intervals.
Cost of Production Report
The cost of production report provides the
following production quantity and cost data:
 The units for which the department
is accountable and the deposition of
those units.
 The production costs incurred by the
department and the allocation of
those costs between completed and
partially completed units.
A cost of production report
also is used to control costs.
Cost of Production Report—Melting Department
Units
Units charged to production:
Inventory in process, July 1
Received from materials
Total units accounted for
Units to be assigned cost:
Inventory in process, July 1
(70% complete)
Started and completed in July
Transferred to Casting Dept.
Inventory in process, July 31
(25% complete)
Total units to be assigned cost
Whole
Units
Equivalent Units
Direct
Materials Conversion
500
1,000
1,500
500
600
1,100
400
1,500
Step 1
0
600
600
150
600
750
400
100
1,000
850
Step 2
Cost of Production Report—Melting Department
Costs
Unit costs:
Total costs for July in
Melting Department
Total equivalent units
(from Slide 43)
Cost per equivalent unit
Costs
Direct Materials Conversion
$50,000
$9,690
÷ 1,000
$ 50.00
÷ 850
$11.40
Step 3
Total Costs
Cost of Production Report—Melting Department
Costs
Costs charged to production:
Inventory in process, July 1
Cost incurred in July
Total costs accounted for
Costs allocated to completed and
partially completed units
Inventory in process, July 1
To complete inventory of July 1
Started and completed in July
Transferred to Casting Dept.
Inventory in process, July 31
Total costs assigned
Direct Conversion Total
Materials
Costs
Costs
$28,150
59,690
$87,840
$
0
30,000
$1,710
6,840
$20,000
$1,140
Step 4
$28,150
1,710
36,840
$66,700
21,140
$87,840
Journal Entries for a Process Cost System
Transaction
Journal Entry
Debit
a. Materials
purchased on
account.
Materials
Accounts Payable
62,000
b. Direct and indirect
materials
requisitioned.
Work in Process–Melting
Factory Overhead–Melting
Factory Overhead–Casting
Materials
50,000
4,000
3,000
c. Direct labor
used.
Work in Process–Melting
Work in Process–Casting
Wages Payable
5,000
4,500
Factory Overhead–Melting
Factory Overhead–Casting
Accumulated Depreciation
1,000
7,000
d. Depreciation
expenses.
Credit
62,000
57,000
9,500
8,000
Journal Entries for a Process Cost System
Transaction
e. Factory overhead
applied.
Journal Entry
Work in Process–Melting
Work in Process–Casting
Factory Overhead–Melting
Factory Overhead–Casting
Debit
Credit
4,690
9,640
4,690
9,640
f. Costs transferred to
Casting
Department
Work in Process–Casting
Work in Process–Melting
66,700
g. Casting
Department
transferred to
Finished Goods
Finished Goods
Work in Process–Casting
78,600
h. Goods sold.
Cost of Goods Sold
Finished Goods
73,700
66,700
78,600
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.
Just-in-Time Processing (JIT)
Traditional Production Line
Cutting
Dept.
Drillin
g Dept.
Assembly
Dept.
Sanding
Dept.
Upholstery
Dept.
Staining
Dept.
Varnishing
Dept.
Just-in-Time Processing (JIT)
Just-in-Time Production Line
Work Center One
Cutting drilling
and sanding
Work Center Two
Staining and
varnishing
Work Center Three
Upholstery and
assembly
Chapter 17
The End