Cost Systems

Cost Systems

What type of industries are best suited for process cost systems? Discuss how the process cost system is tracked and recorded for one of the following types of business: (a) TV assembler, (b) building contractor, (c) automobile repair shop, (d) paper manufacturer, (e) custom jewelry manufacturer? In the business type you selected, what is the most important purpose of the cost of production report and how can it improve operations in that business type? (see attached for reference)

Chapter 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.
o 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.
o 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.
o 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
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
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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.
o 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.
o 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.
o 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.
o
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:
Direct Materials Cost per Equivalent Unit =
Conversion Cost per Equivalent Unit =
Total Direct Materials Cost for the Period
Total Equivalent Units of Direct Materials
Total Conversion Costs for the Period
Total Equivalent Units of Conversion Costs
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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.
o The product costs are allocated using the costs per
equivalent unit for materials and conversion costs that
were computed in Step 3.
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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:
o The units for which the department is accountable
and the disposition of those units.
o The production costs incurred by the department and
the allocation of those costs between completed
(transferred out) and partially completed units.
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Yield
Quantity of Material Output
Yield =
Quantity of Material Input
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