Process cost systems

Process Cost Systems COACHING CLASSES FOR PROFESSIONAL STUDENTS

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JOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
CONTACT:
0322-3385752
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN

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. Objectives 6. Use cost of production reports for decision making. 7. Contrast just-in-time processing with conventional manufacturing practices.

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

Process Cost System Direct materials Work in Process Account Work in Process Account DEPT. A DEPT. B Factory Overhead Direct Labor Factory Overhead Direct Labor to Finished Goods Comparing Job Order Costing and Process Costing

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 .
Both systems: Comparing Job Order Costing and Process Costing

Physical Flows for a Process Manufacturer Scrap Metal Materials Melting Department Casting Department

Molten metal transferred from Melting Casting Department Melting Department Physical Flows for a Process Manufacturer To finished goods

Materials WIP – Melting Factory OH – Melting DM Purchases of direct and indirect materials Direct materials used in production DM Finished Goods Cost of Goods Sold Factory OH – Casting WIP – Casting Cost Flows for a Process Manufacturer DM

Materials WIP – Melting DM DL DM Direct labor used in production DL Purchases of direct and indirect materials Finished Goods Cost of Goods Sold Factory OH – Casting Actual costs incurred WIP – Casting Factory OH – Melting Cost Flows for a Process Manufacturer

Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Indirect materials used in production IM Purchases of direct and indirect materials IM Factory OH – Casting Factory OH – Melting Cost Flows for a Process Manufacturer Actual costs incurred Actual costs incurred

Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Factory overhead applied FOA Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA Factory OH – Melting Cost Flows for a Process Manufacturer Actual costs incurred FOA

Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Cost transferred out/transferred in TO/TI Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA FOA TO Factory OH – Melting Cost Flows for a Process Manufacturer Actual costs incurred TI

Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA FOA TO TI DL Factory overhead applied FOA Direct labor used in production DL FOA Factory OH – Melting Cost Flows for a Process Manufacturer Actual costs incurred FOA

Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA FOA TO TI DL FOA FOA Cost transferred out/transferred in TO/TI TO Factory OH – Melting Cost Flows for a Process Manufacturer Actual costs incurred TI

Cost Flows for a Process Manufacturer Materials WIP – Melting Finished Goods WIP – Casting Cost of Goods Sold DM DL DM Purchases of direct and indirect materials IM Factory OH – Casting Actual costs incurred FOA FOA TO TI DL FOA FOA Cost of goods sold COGS TO TI COGS Factory OH – Melting Actual costs incurred COGS

The First-in, First-out (Fifo) Method

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 Beginning Inventory 500 Tons Work in Process – Melting Started 1,000 Tons

Beginning Inventory 500 Tons Work in Process – Melting 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

Beginning Inventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Step 1: Determine the Units to be Assigned Costs Beginning Inventory 500 Tons 1

Beginning Inventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Step 1: Determine the Units to be Assigned Costs Beginning Inventory 500 Tons 1 Started & Completed ? Tons + 2

Beginning Inventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Step 1: Determine the Units to be Assigned Costs Beginning Inventory 500 Tons 1 Started & Completed 600 Tons + 2

Beginning Inventory 500 Tons Work in Process – Melting Started 1,000 Tons Transferred 1,100 Tons Ending Inventory 400 Tons Beginning Inventory 500 Tons 1 = + Step 1: Determine the Units to be Assigned Costs Total tons to be assigned costs Started & Completed 600 Tons + 2 Transferred Out 1,100 Tons Ending Inventory 400 Tons 3 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

JOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
CONTACT:
0322-3385752
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN

Step 2: Calculate Equivalent Units of Production Materials Equivalent Units Total Percent Equivalent 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 500 EU of materials 500 tons beginning inventory 100% materials added in June JULY 1 JULY 31 1,000 Equivalent Units No materials equivalent units added to beginning inventory for July 600 EU of materials 600 tons started and completed 100% materials added in July 400 EU of materials 400 tons ending inventory 100% materials added in July Inventory in process, July 1 Note: Started and completed Inventory in process, July 31

Step 2: Calculate Equivalent Units of Production Conversion Equivalent 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 Total Percent Equivalent Units Added Units

350 EU 500 tons beginning inventory 70% completed for conversion in June JULY 1 600 EU 600 tons started and completed 100% completed for conversion in July JULY 31 100 EU 400 tons ending inventory 25% completed for conversion in July 850 Equivalent Units Step 2: Calculate Equivalent Units of Production 150 EU 300 EU 30% completed for conversion in July Inventory in process, July 1 Inventory in process, July 31 (75% to be completed for conversion in August)

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

Beginning Inventory $28,150 Work in Process – Melting Conversion Equivalent Unit Cost Direct Materials Equivalent Unit Cost $50,000 direct materials cost $9,690 conversion cost Step 3: Determine the Cost per Equivalent Unit Materials $50,000 Conversion Costs $9,690 $11.40 per EU of conversion = 1,000 direct materials equivalent units 850 conversion equivalent units $50.00 per EU of DM =

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 Direct Materials Conversion Total Costs Costs Costs Step 4: Allocate Costs to Transferred and Partially Completed Units

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 Direct Materials Conversion Total Costs Costs Costs Step 4: Allocate Costs to Transferred and Partially Completed Units

Beginning Inventory $28,150 Materials Costs $50,000 Started and Completed $36,840 Beginning Inventory $29,860 Work in Process – Melting Total Costs Charged $87,840 Ending Inventory $21,140 Conversion Costs $9,690 Total Costs Assigned $87,840 M 600 x 100% x $50.00 = $30,000 C 600 x 100% x $11.40 = 6,840 $36,840 M 400 x 100% x $50.00 = $20,000 C 400 x 25% x $11.40 = 1,140 $21,140 Beginning cost $28,150 M 500 x 0% x $50.00 = 0 C 500 x 30% x $11.40 = 1,710 $29,860 Total Costs Assigned $87,840 Costs Step 4: Allocate Costs to Transferred and Partially Completed Units

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.

Units 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 Whole Direct Units Materials Conversion Equivalent Units Cost of Production Report —Melting Department Step 1 Step 2

Costs Direct Materials Conversion Total Costs Costs Step 3 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 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 $87,840 Cost of Production Report —Melting Department Step 4

Materials 62,000
Accounts Payable 62,000
Work in Process–Melting 50,000
Factory Overhead–Melting 4,000
Factory Overhead–Casting 3,000
Materials 57,000
Work in Process–Casting 4,500
Wages Payable 9,500
Accumulated Depreciation 8,000
Journal Entries for a Process Cost System a. Materials purchased on account. b. Direct and indirect materials requisitioned. c. Direct labor used. d. Depreciation expenses. Transaction Journal Entry Debit Credit

e. Factory overhead applied. f. Costs transferred to Casting Department g. Casting Department transferred to Finished Goods h. Goods sold. Journal Entries for a Process Cost System Finished Goods 78,600 Work in Process–Casting 78,600 Cost of Goods Sold 73,700 Finished Goods 73,700 Transaction Journal Entry Debit Credit

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)

Upholstery Dept. Assembly Dept. Just-in-Time Processing (JIT) Cutting Dept. Wood Traditional Production Line Drilling Dept. Sanding Dept. Staining Dept. Varnishing Dept.

Just-in-Time Processing (JIT) Just-in-Time Production Line Wood Cutting drilling and sanding Staining and varnishing Upholstery and assembly Work Center One Work Center Two Work Center Three

ATTENTION COMMERCE STUDENTS
ACCOUNTING(FINANCIAL & COST) OF ICMAP STAGE 1,2,3,4 (CRASH CLASSES) CA..MODULE B,C,D PIPFA (FOUNDATION,INTERMEDIATE,FINAL) ACCA-F1,F2,F3 BBA,MBA B.COM(FRESH),M.COM MA-ECONOMICS..O/A LEVELS KHALID AZIZ….. 0322-3385752..kARACHI http://finance.groups.yahoo.com/group/cost-accountants

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Process cost systems

by Khalid Aziz on Nov 21, 2011

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Process cost systems — Presentation Transcript