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Chapter 19

Process Cost Systems


Accounting, 21st Edition
Warren Reeve Fess

© Copyright 2004 South-Western, a division


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Professor Emeritus of Accounting
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Objectives
Objectives
1. Distinguish between job order costing and
After
After studying
studying this
this
process costing systems.
chapter, you should
2. Explain and illustrate theshould
chapter, you physical flows and
be able to:
cost flows for a processto:
be able 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
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
Comparing Job
Job Order
Order
Costing
Costing and
and Process
Process Costing
Costing
Job Order Cost System
Work in Process
to
to Finished
Finished
Account
Goods
Goods

Job Cost
Factory
Direct
Direct
Factory overhead
Direct
Direct labor
materials
overhead
labor
materials Sheets
Dept. A and
Dept. B
Comparing
Comparing Job
Job Order
Order
Costing
Costing and
and Process
Process Costing
Costing
Process Cost System
Work in Process Work in Process
Account Account

Direct to
to Finished
Finished
DEPT. A DEPT. B
materials Goods
Goods

Factory
Direct Factory
Direct
Overhead
Labor Overhead
Labor
Comparing
Comparing Job
Job Order
Order
Costing
Costing and
and Process
Process Costing
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
Physical Flows
Flows for
for aa Process
Process Manufacturer
Manufacturer

Scrap
Metal
Materials
Melting Casting
Department Department
Physical
Physical Flows
Flows for
for aa Process
Process Manufacturer
Manufacturer
Molten
metal
transferred
from
Melting

Melting Casting
Department Department

To finished goods
Cost Flows for a Process Manufacturer
Materials WIP – Melting WIP – Casting
Purchases of DM DM
direct and
indirect
materials

Factory OH – Melting Factory OH – Casting Finished Goods

Cost of Goods Sold

DM Direct materials used in production


Cost Flows for a Process Manufacturer
Materials WIP – Melting WIP – Casting
Purchases of DM DM
direct and
indirect DL
materials

Factory OH – Melting Factory OH – Casting Finished Goods

Actual
costs
incurred
Cost of Goods Sold

DL Direct labor used in production


Cost Flows for a Process Manufacturer
Materials WIP – Melting WIP – Casting
Purchases of DM DM
direct and
indirect IM DL
materials

Factory OH – Melting Factory OH – Casting Finished Goods

Actual Actual
costs costs
incurred incurred
Cost of Goods Sold

IM Indirect materials used in production


Cost Flows for a Process Manufacturer
Materials WIP – Melting WIP – Casting
Purchases of DM DM
direct and
indirect IM DL
materials
FOA

Factory OH – Melting Factory OH – Casting Finished Goods

Actual FOA Actual


costs costs
incurred incurred
Cost of Goods Sold

FOA Factory overhead applied


Cost Flows for a Process Manufacturer
Materials WIP – Melting WIP – Casting
Purchases of DM DM TO TI
direct and
indirect IM DL
materials
FOA

Factory OH – Melting Factory OH – Casting Finished Goods

Actual FOA Actual


costs costs
incurred incurred
Cost of Goods Sold

TO/TI Cost transferred out/transferred in


Cost Flows for a Process Manufacturer
Materials WIP – Melting WIP – Casting
Purchases of DM DM TO TI
direct and
indirect IM DL DL
materials
FOA FOA

Factory OH – Melting Factory OH – Casting Finished Goods

Actual FOA Actual FOA


costs costs
incurred incurred
Cost of Goods Sold

DL Direct labor used in production


FOA Factory overhead applied
Cost Flows for a Process Manufacturer
Materials WIP – Melting WIP – Casting
Purchases of DM DM TO TI TO
direct and
indirect IM DL DL
materials
FOA FOA

Factory OH – Melting Factory OH – Casting Finished Goods

Actual FOA Actual FOA TI


costs costs
incurred incurred
Cost of Goods Sold

TO/TI Cost transferred out/transferred in


Cost Flows for a Process Manufacturer
Materials WIP – Melting WIP – Casting
Purchases of DM DM TO TI TO
direct and
indirect IM DL DL
materials
FOA FOA

Factory OH – Melting Factory OH – Casting Finished Goods

Actual FOA Actual FOA TI COGS


costs costs
incurred incurred
Cost of Goods Sold
COGS

COGS Cost of goods sold


Melting Department of McDermott Steel Inc.
Inventory in process, July 1, 500 tons:
Direct materials cost, 500 tons $24,550
Conversion costs, 500 tons, 70% completed 3,600
Total inventory in process, July 1 $28,150
Direct materials cost for July, 1,000 tons 50,000
Conversion costs for July 9,690
Goods transferred to Casting in July, 1,100 tons ?
Inventory in process, July 31, 400 tons, 25%
complete as to conversion costs ?
Step 1: Determine the Units to be Assigned
Work in Process – Melting
Costs
Beginning
Inventory
500 Tons
Started
1,000 Tons
Step 1: Determine the Units to be Assigned
Work in Process – Melting
Costs
Beginning Transferred
In
In aa perpetual
perpetual
Inventory 1,100 Tons inventory
inventory system,
system,
500 Tons
outflows
outflows are are recorded
recorded
Started
1,000 Tons
as
as they
they occur.
occur.
Step 1: Determine the Units to be Assigned
Work in Process – Melting
Costs
Beginning Transferred
Inventory 1,100 Tons
500 Tons
Ending 1 Beginning Inventory 500 Tons
Started Inventory
1,000 Tons 400 Tons
Step 1: Determine the Units to be Assigned
Work in Process – Melting
Costs
Beginning Transferred
Inventory 1,100 Tons
500 Tons
Ending 1 Beginning Inventory 500 Tons
Started Inventory +
1,000 Tons 400 Tons
2 Started & Completed ? Tons
Step 1: Determine the Units to be Assigned
Work in Process – Melting
Costs
Beginning Transferred
Inventory 1,100 Tons
500 Tons
Ending 1 Beginning Inventory 500 Tons
Started Inventory +
1,000 Tons 400 Tons
2 Started & Completed 600 Tons
Step 1: Determine the Units to be Assigned
Work in Process – Melting
Costs
Beginning Transferred
Inventory 1,100 Tons
500 Tons
Ending 1 Beginning Inventory 500 Tons
Started Inventory +
1,000 Tons 400 Tons
2 Started & Completed 600 Tons
=
Transferred Out 1,100 Tons
+
3 Ending Inventory 400 Tons
=
Total tons to be Total units 1,500 Tons
assigned costs
The
The equivalent
equivalent units
units of
of
production
production areare the
the number
number ofof
units
units that
that could
could have
have been
been
completed
completed within
within aa given
given
accounting
accounting period.
period.

Step 2: Calculate
equivalent
units of
production
Step 2: Calculate Equivalent Units of Production

Total Percent Equivalent


Materials Equivalent Units Units Added 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 1,500 1,000
Step 2: Calculate Equivalent Units of Production
1,000 Equivalent Units
JULY 1 JULY 31
Note: Started
500 tons beginning inventory and completed

EU of
500 materials
600 tons started and completed

100% materials added in June


No materials EU of
equivalent units 600 materials
Inventory
added in
to beginning 100% materials added in July
process, July
inventory 1
for July 400 tons ending inventory

Inventory in
EU of
process, July 31 400 materials
100% materials added in July
Step 2: Calculate Equivalent Units of Production

Conversion Equivalent Units Total Percent Equivalent


Units Added 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 1,500 850
Step 2: Calculate Equivalent Units of Production

850 Equivalent Units


JULY 1 JULY 31

500 tons beginning inventory

150 600 tons started and Inventory in


350 EU EU
completed process, July
70% completed for 30% 31 (75% to be
conversion in June completed completed for
600 EU conversion in
for
conversion 100% completed for August)
Inventory in in July conversion in July 400 tons ending inventory
process, July 1

25% completed for


100 300 EU
EU
conversion in July
Step 3: Determine the Cost per Equivalent Unit
Equivalent Units
Direct Materials Conversion
Inventory in process, July 1 0 150
Started and completed in July
(1,100 – 500) 600 600
Transferred out to Casting Dept.
in July 600 750
Inventory in process, July 31 400 100
Total tons to be assigned cost 1,000 850
Step 3: Determine the Cost per Equivalent Unit
Work in Process – Melting
Beginning
Inventory Direct Materials Equivalent Unit Cost
$28,150
$50,000 direct materials cost $50.00
Materials
1,000 direct materials equivalent units
= per EU of
$50,000
DM
Conversion
Costs Conversion Equivalent Unit Cost
$9,690
$11.40
$9,690 conversion cost
= per EU
850 conversion equivalent units of con-
version
Step 4: Allocate Costs to Transferred and
Partially Completed Units
Direct Materials Conversion Total
Costs Costs Costs
Inventory in process, July 1
beginning balance $28,150
Equivalent units for completing
the July in-process inventory 0 150
Equivalent unit cost x $50.00 x $11.40
Cost of completed July 1 in-
process inventory $0 $1,710 1,710
Cost of July 1 in-process
inventory transferred to
Casting Department $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 600 600
Equivalent unit cost x$50.00 x$11.40
Cost to complete the units
started and completed in
July $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 400 100
Equivalent unit cost x$50.00 x$11.40
Cost of ending inventory $20,000 $ 1,140 $21,140
Step 4: Allocate Costs to Transferred and
Partially Completed Units
Work in Process – Melting Costs
Beginning cost $28,150
Beginning Beginning M 500 x 0% x $50.00 = 0
Inventory Inventory C 500 x 30% x $11.40 = 1,710
$28,150 $29,860 $29,860
Materials Started and M 600 x 100% x $50.00 = $30,000
Costs Completed C 600 x 100% x $11.40 = 6,840
$50,000 $36,840 $36,840
Conversion Ending M 400 x 100% x $50.00 = $20,000
Costs Inventory C 400 x 25% x $11.40 = 1,140
$9,690 $21,140 $21,140

Total Costs Total Costs


Charged Assigned
$87,840 $87,840 Total Costs Assigned $87,840
A
A cost
cost of
of production
production report
report isis
prepared
prepared for
for each
each processing
processing
department
department atat periodical
periodical intervals.
intervals.
Cost
Cost of
of Production
Production Report
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.
AA cost
cost of of production
production report
report
also
also isis used
used to
to control
control costs.
costs.
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 cost:
Inventory in process, July 1
(70% complete) 500 0 150
Started and completed in July 600 600 600
Transferred to Casting Dept. 1,100 600 750
Inventory in process, July 31
(25% complete) 400 400 100
Total units to be assigned cost 1,500 1,000 850
Step 1 Step 2
Cost of Production Report—Melting Department
Costs
Costs
Direct Materials Conversion Total Costs

Unit costs:
Total costs for July in
Melting Department $50,000 $9,690
Total equivalent units
(from Slide 43) ÷ 1,000 ÷ 850
Cost per equivalent unit $ 50.00 $11.40

Step 3
Cost of Production Report—Melting Department

Costs 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 allocated to completed and
partially completed units
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 Step 4 $87,840
Journal
Journal Entries
Entries for
for aa Process
Process Cost
Cost System
System
Transaction Journal Entry Debit Credit

a. Materials Materials 62,000


purchased on Accounts Payable 62,000
account.
b. Direct and indirect Work in Process–Melting 50,000
materials Factory Overhead–Melting 4,000
requisitioned. Factory Overhead–Casting 3,000
Materials 57,000

c. Direct labor Work in Process–Melting 5,000


used. Work in Process–Casting 4,500
Wages Payable 9,500

d. Depreciation Factory Overhead–Melting 1,000


expenses. Factory Overhead–Casting 7,000
Accumulated Depreciation 8,000
Journal
Journal Entries
Entries for
for aa Process
Process Cost
Cost System
System
Transaction Journal Entry Debit Credit

e. Factory overhead Work in Process–Melting 4,690


applied. Work in Process–Casting 9,640
Factory Overhead–Melting 4,690
Factory Overhead–Casting 9,640

Work in Process–Casting 66,700


f. Costs transferred to Work in Process–Melting 66,700
Casting
Department

g. Casting Finished Goods 78,600


Work in Process–Casting 78,600
Department
transferred to
Finished Goods
Cost of Goods Sold 73,700
h. Goods sold. Finished Goods 73,700
Just-in-Time
Just-in-Time Processing
Processing (JIT)
(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
Just-in-Time Processing
Processing (JIT)
(JIT)
Traditional
Traditional Production
Production Line
Line

Cutting Drillin Sanding Staining


Dept. g Dept. Dept. Dept.

Assembly Upholstery Varnishing


Dept. Dept. Dept.
Just-in-Time
Just-in-Time Processing
Processing (JIT)
(JIT)
Just-in-Time
Just-in-Time Production
Production Line
Line

Work Center One Work Center Two


Cutting drilling Staining and
and sanding varnishing

Work Center Three


Upholstery and
assembly
Chapter 19

The
The End
End