Managerial Accounting
Chapter 18
Process Cost Systems
I) Introduction
A) Objectives of a cost accounting system include:
1. Better control of manufacturing costs
2. Determination of unit costs.
a. Calculation of unit costs enable management to focus on costs and
production yields.
B) Process Cost Accounting
1. Applicable in the manufacture of homogenous products -- continuous
production. Output of one unit is virtually identical to any other
unit.
2. Costs are accumulated by department or process (the focus is on the
series of processes used to complete the production of the
product.)
a. Each department is responsible for completing a particular step in
the manufacturing process.
II) Accounting for costs in a process cost system
A) A separate work-in-process account is used for each department or
process.
B) Focus is on how much manufacturing costs were accumulated during a
particular time period in a department.
C) Cost of Production Report is used in a process cost accounting system
to summarize flow of cost.
1. Each department will prepare its own process cost summary report.
D) Each department has so many physical “units” to account for.
1. Account for
Beg. W-I-P
Units started
2. Accounted for as
Still being worked on, or
Finished and transferred on
E) Each department has so much cost to account for
1. Cost to account for
Cost of Beginning W-I-P
+ Cost of Production this period (i.e. DM, DL, FO)
= Total costs to account for
2. Costs are accounted for as follows:
Cost of goods finished and transferred
+Cost of goods in Ending W-I-P
= Total costs to account for
F) Computation of unit production costs involves the determination of
equivalent units of production (EUP)
1. EUP is a measure of the number of units that would have been fully
completed by all effort during a period.
2. May be a different EUP computation for materials vs. conversion costs
a. Involves these three steps
Materials
Work to finish Beg W-I-P
Units started and finished
Work on Units in End W-I-P _________
EUP
=========
Conversion
__________
==========
3. Book uses FIFO cost flow assumption in computing EUP
G) Computation of cost per equivalent unit
1. Materials unit production costs =
Total Materials Cost
---------------------------Materials EUP
2. Unit conversion cost =
Total conversion costs (DL + FO)
---------------------------------------------Conversion EUP
3. Total manufacturing unit costs =
Materials unit cost + Conversion unit cost
H) Costs assigned to units
1. Cost to units transferred out =
Beginning W-I-P (costs accumulated last period)
+ Costs to finish beg. W-I-P (materials)
+ Costs to finish beg. W-I-P (conversion)
+ Costs of units started and finished this period
2. Cost to units in Ending W-I-P =
Materials cost (material EUP in ending W-I-P
* Materials unit cost)
+ Conversion cost (conversion EUP in ending W-I-P
* Conversion unit cost)
--------------------------------------------------------------------Total cost in Ending W-I-P
I) In a multi-department manufacturing setting, the cost of goods transferred
in from a prior department must also be accounted for.
III) Typical journal entries in a process cost system.
A) Acquisition of raw materials
Materials Inventory
Accounts Payable
B) Requisition of materials
W-I-P:Dept A
XX
W-I-P:Dept B
XX
Factory Overhead-Dept A
Factory Overhead-Dept B
Materials Inventory
XX
XX
XX
XX
XX
1) Note EACH department (process) has its own W-I-P accounts
2) Indirect materials are charged to factory overhead in each department
C) Labor Costs
W-I-P:Dept A
XX
W-I-P:Dept B
XX
Factory Overhead-Dept A
Factory Overhead-Dept B
Factory Payroll
XX
XX
XX
1) Indirect labor is debited to “Factory Overhead” while direct labor is
reflected in the departmental W-I-P accounts.
D) Other Factory Overhead Costs
Factory Overhead-Dept A
XX
Factory Overhead-Dept B
XX
Cash
Accumulated Depreciation XX
XX
E) Application of factory overhead to production using a predetermined
overhead rate.
W-I-P:Dept A
XX
W-I-P:Dept B
XX
Factory Overhead-Dept A
XX
Factory Overhead-Dept B
XX
1) Any under or over applied factory overhead should be closed out.
F) Transfers of units and related costs.
1) To another department:
W-I-P:Dept B
W-I-P:Dept A
2) To finished goods:
Finished Goods Inventory
W-I-P:Dept B
XX
XX
XX
XX
3) To cost of goods sold:
Cost of Goods Sold
XX
Finished Goods Inventory
XX