Managerial Accounting
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ACT500_Module03_PPT_Ch03.pptxChapter 3
Process Cost Systems
Accounting for Process Manufacturers (slide 1 of 2)
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Accounting for Process Manufacturers (slide 2 of 2)
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Examples of Process Cost and Job Order Companies
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Comparing Job Order and Process Cost Systems
Process and job order cost systems are different in several ways.
A process cost system accumulates (records) product costs in work in process accounts for each department. In contrast, a job order cost system accumulates (records) product costs by jobs, using job cost sheets.
In a job order cost system, the work in process at the end of the period is the sum of the job cost sheets for partially completed jobs. In a process cost system, the work in process at the end of the period is the sum of the costs remaining in each department account at the end of the period.
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Cost of Production Report (slide 1 of 3)
In a process cost system, the cost of units transferred out of each processing department must be determined along with the cost of any partially completed units remaining in the department. The report that summarizes these costs is a cost of production report.
The cost of production report summarizes the production and cost data for a department as follows:
The units the department is accountable for and the disposition of those units.
The product costs incurred by the department and the allocation of those costs between completed (transferred out) and partially completed units.
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Preparing a Cost of Production Report
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Determine units to be assigned costs
Compute equivalent units of production
Determine cost per equivalent unit
Allocate costs to units transferred out and to partially completed units
Cost of Production Report (slide 2 of 3)
Preparing a cost of production report requires making a cost flow assumption.
Like merchandise inventory, costs can be assumed to flow through the manufacturing process using the first-in, first-out (F I F O), last-in, first-out (L I F O), or average cost methods.
Because the first-in, first-out (F I F O) method is often the same as the physical flow of units, the FIFO method is used in this chapter.
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Cost of Production Report (slide 3 of 3)
By preparing a cost of production report, the cost of the gallons transferred to the Packaging Department in July and the ending work in process inventory in the Mixing Department are determined.
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Step 1: Determine the Units to Be Assigned Costs
The first step is to determine the units to be assigned costs.
A unit can be any measure of completed production, such as tons, gallons, pounds, barrels, or cases.
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Step 2: Compute Equivalent Units of Production (slide 1 of 5)
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Step 2: Compute Equivalent Units of Production (slide 3 of 5)
Equivalent units for materials and conversion costs are usually determined separately.
This is because materials and conversion costs normally enter production at different times and rates.
In contrast, direct labor and factory overhead normally enter production at the same time and rate.
For this reason, direct labor and factory overhead are combined as conversion costs in computing equivalent units.
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Step 2: Compute Equivalent Units of Production (slide 4 of 5)
To compute equivalent units for materials, it is necessary to know how materials are added during the manufacturing process.
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Step 2: Compute Equivalent Units of Production (slide 5 of 5)
To compute equivalent units for conversion costs, it is necessary to know how direct labor and factory overhead enter the manufacturing process.
Direct labor, utilities, and equipment depreciation are often incurred uniformly during processing.
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Step 3: Determine the Cost per Equivalent Unit (slide 1 of 4)
The cost per equivalent unit for direct materials and conversion costs is computed as follows:
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Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units
Product costs must be allocated to the units transferred out and the partially completed units on hand at the end of the period.
The product costs are allocated using the costs per equivalent unit for materials and conversion costs that were computed in Step 3.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Preparing the Cost of Production Report
A cost of production report is prepared for each processing department at periodic intervals.
The report summarizes the following production quantity and cost data:
The units for which the department is accountable and the disposition of those units.
The production costs incurred by the department and the allocation of those costs between completed (transferred out) and partially completed units.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Yield
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Total Direct Materials Cost for the Peri
od
Direct Materials Cost per Equivalent Uni
t =
Total Equivalent Units of Direct Materia
ls
Total Conversion Costs for the Period
Conversion Cost per Equivalent Un
it =
Total Equivalent Units of Conversion Cos
ts
Quantity of Material Output
Yield =
Quantity of Material Input
