Chapter 17

Process Cost Systems

Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
Copyright 2004 South-Western, a division
PowerPoint Presentation by Douglas Cloud of Thomson Learning. All rights reserved.
Professor Emeritus of Accounting
Pepperdine University Task Force Image Gallery clip art included in this
electronic presentation is used with the permission of
NVTech Inc.
 Objectives
1. Distinguish between job order costing
and process costing systems.
2. Explain and illustrate the physical flows
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
to Finished
Account
Goods

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

Direct to Finished
DEPT. A DEPT. B
materials Goods

Factory
Direct Factory
Direct
Overhead
Labor Overhead
Labor
 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 Casting
Department Department
Physical Flows for a Process 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 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 Transferred
In a perpetual
Inventory 1,100 Tons inventory system,
500 Tons
outflows are recorded
Started
1,000 Tons
as they occur.
Step 1: Determine the Units to be Assigned Costs
Work in Process Melting
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 Costs
Work in Process Melting
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 Costs
Work in Process Melting
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 Costs
Work in Process Melting
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 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

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

600 tons started and Inventory in

350 EU 150 completed
EU 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 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 ReportMelting 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 ReportMelting 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 ReportMelting 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 Entries for a Process Cost System
Transaction Journal Entry Debit Credit

a. Materials Materials 62,000

purchased on Accounts Payable 62,000
account.
b. Direct and indirect Work in ProcessMelting 50,000
materials Factory OverheadMelting 4,000
requisitioned. Factory OverheadCasting 3,000
Materials 57,000

c. Direct labor Work in ProcessMelting 5,000

used. Work in ProcessCasting 4,500
Wages Payable 9,500

Factory OverheadMelting 1,000

d. Depreciation
Factory OverheadCasting 7,000
expenses.
Accumulated Depreciation 8,000
 Journal Entries for a Process Cost System
Transaction Journal Entry Debit Credit

e. Factory overhead Work in ProcessMelting 4,690

applied. Work in ProcessCasting 9,640
Factory OverheadMelting 4,690
Factory OverheadCasting 9,640
f. Costs transferred to Work in ProcessCasting 66,700
Casting Work in ProcessMelting 66,700
Department

g. Casting Finished Goods 78,600

Department Work in ProcessCasting 78,600
transferred to
Finished Goods

h. Goods sold. 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.
Just-in-Time Processing (JIT)

Traditional Production Line

Cutting Drillin Sanding Staining

Dept. g Dept. Dept. Dept.

Assembly Upholstery Varnishing

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

Just-in-Time Production Line

Work Center One Work Center Two

Cutting drilling Staining and
and sanding varnishing

Work Center Three

Upholstery and
assembly