Transcript Module 6: Process Cost Systems ACG 2071 Created by M. Mari

Module 6: Process Cost Systems
ACG 2071
Created by M. Mari
Fall 2007-1
Process Cost
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Is the mass production of products in a continuous flow of
steps
Products pass through a series of sequential processes
Each process is identified a separate production,
department, workstation, or work center.
With the exception of the first process or department,
each receives the output from the prior department as a
partially processed product.
Depending on the nature of the process, a company
applies direct labor, overhead, and additional direct
materials to move the product toward completion
Process Cost Accounting
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Assigns direct materials, direct labor, and overhead to
specific processes.
Costs are allocated by department rather than jobs
Manufacturing costs are allocated to products based
on units of production
Manufacturing costs are accumulated and transferred
by department
The total costs associated with each process are then
divided by the number of units passing through that
process to determine the cost per equivalent units for
that process
Cost Flows
Materials
Raw
Mixing
Bottling
Packing
First –In, First Out Method
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Assume that the product moves in order
throughout the production process
Determine units to be assigned costs
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Units in beginning work in process
Units started and completed during period
Units in ending work in process
FIFO Method
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Calculate Equivalent Units of Production
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Process manufacturers often have some
partially processed materials remaining at
the end of the period
EUP
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Number of units that could have been
completed within a given accounting period
Example 1
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A company processes their production
in two departments. Beginning
inventory was 500 units that were 70%
completed, 1,100 units transferred out
to the next department and ending
inventory consisted of 400 units 25%
completed.
Example 1
Actual Units
Beg. Inv.
Started &
Completed
500
Transferred in
1,100
Units in Beg. Inv - 500
%
EUP
30%
150
100%
600
25%
100
600
Ending Inv.
Total
400
850
Example 3
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A company process their production in
two departments. The beginning
inventory was 4,000 units 50%
completed, transferred into the
department 5,000 units and an
ending inventory of 2,000 units 40%
completed.
Example 3
Actual Units
Beg. Inventory
Started &
Completed
Ending
Inventory
Total
%
EUP
4,000
50%
2,000
Transferred in
5,000
Ending inventory 2,000
3,000
100%
3,000
2,000
40%
800
5,800
Determine cost per equivalent
unit
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Material cost = based on actual units
transferred into the department
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Assume at beginning of the period
Conversion costs
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Direct labor + Factory overhead
Based on EUP
Example 4
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Using the production units given in
Example 1, assume that direct material
costs are $50,000. Factory overhead is
$3,000 and direct labor is $6,690. Work
in process account has a balance of
$28,150 at the beginning of the month
which is from this month’s beginning
inventory. Complete the chart
Example 1
Actual Units
Beg. Inv.
Started &
Completed
500
Transferred in
1,100
Units in Beg. Inv - 500
%
EUP
30%
150
100%
600
25%
100
600
Ending Inv.
Total
400
850
Example 4
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Direct materials per actual unit
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Actual units are the units that are added this period.
They are the units started and completed and the units in ending inventory.
Ending inventory
Started and Completed
Total actual units
Direct materials per actual units =
400 units
600
1,000
Direct material costs
Actual units
= $50,000
1,000 units
= $50 per actual unit placed into production this period.
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Started and completed units = 600 X $50 = $30,000
Ending inventory units = 400 X $50 = $20,000
Example 4
Actual
Units
%
EUP
Material
Beg. Inv.
500
30
150
Started &
Completed
600
100
600
600X $50 =
$30,000
End. Inv.
400
25
100
400 x $50 =
$20,000
850
Conversion
Costs
Total
Example contd
Conversion costs =
Direct labor + Factory overhead
$6,690 + $3,000
= $9,690
Are divided by Total EUP
Conversion costs per EUP =
Total conversion costs
Total EUP
$6,690
850
= $11.40 per EUP
Example 4
Actual
%
EUP
Beg. Inv.
500
30
150
Started &
Completed
600
100
600
$30,000
$11.40 x 600=
$6,840
End. Inv.
400
25
100
$20,000
$11.40 x 100 =
$1,140
850
Mtrl
Conversion
Costs
$11.40 X 150 =
$1,710
$9,690
Total
Example Contd
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Prior month’s beginning inventory costs
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Must be accounted for
Included in the column for materials
$28,150 as stated in example.
Example 4
Actual
Units
Beg. Inv.
500
%
EUP
Material
Conversion
Costs
Total
30
150
$28,150
$1,710
$29,860
Started & 600
Complete
d
100
600
$30,000
$6,840
$36,840
End. Inv.
25
100
$20,000
$1,140
$21,140
400
850
$6,690
Questions
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What is the total cost of units
completed this period?
How many actual units are in ending
inventory this period?
How many actual units are in next
month’s beginning inventory?
Questions
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What is conversion costs per unit?
What is the amount of work done on
this month’s beginning inventory?
What is the amount of work to be done
next month on beginning inventory?
Blank chart
Actual
Beg inv
S&C
End
Inv
%
EUP
Mtrl
CC
Total