Accounting 102: Chapter 21The Nature of Process Cost SystemsUses of Process Cost Systems To apply costs to similar products that are mass produced ina continuous fashion. Examples include the production of cereal, paints, manufacturing steel, oil refining and soft drinks. A process cost accounting system is most appropriate when similar products are mass produced.Process Costing for Service Companies Service companies thato Provide specific, nonroutine services will probably benefit from using a job order cost system.o Perform routing, repetitive services will probably be better off with a process cost system.Similarities and Differences Between Job Order Cost and Process Cost SystemsJob Order Cost Process CostCosts assigned to each job Costs tracked through a series of connected manufacturing processes or departmentsProducts have unique characteristics Products are uniform or relatively homogenous and produced in a large volumeSimilarities Manufacturing cost elements Accumulation of the cost of materials, labor, and overhead Flow of costsDifferences Number of work in process accounts used Documents used to track costs Point at which costs are totaled Unit cost computationsProcess Cost FlowAssigning Manufacturing Costs Accumulation of materials, labor, and overhead costs is the same as in job order costingo Debit – Raw Materials Inventory for purchases of raw materialso Debit – Factory Labor for factory labor incurredo Debit – Manufacturing Overhead for overhead costs incurred Assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost systemMaterial Costs A process cost system requires fewer material requisition slips than a job order cost systemo Materials are used for processes and not specific jobso Requisitions are for larger quantities of materialso Journal entry to record last materials usedFactory Labor Costs Time tickets may be used in both systems All labor costs incurred within a production department are a cost of processing The journal entry to record factory labor costs:Manufacturing Overhead Costs Objective of assigning overhead is to allocate overhead to production departments on objective and equitable basis Use the activity that “drives” or causes the costs Primary driver is machine time used Journal entry to allocate overhead:TransfersTransfer to next departmentTransfer to finished goodsTransfer to record cost of goods soldThe Mixing Department’s output during the period consists of 20,000 units completed and transferred out, and 5,000 units in ending work in process 60% complete as to materials and conversion costs. Beginning inventory is 1,000 units, 40% complete as to materials and conversion costs. The equivalent units of production are 23,000. Production Cost ReportA production cost report is the  Key document used to understand activities Shows production quantity and cost date for each department Four Steps in preparation:o Step 1: compute physical unit flowo Step 2: compute equivalent units of productiono Step 3: compute unit production costso Step 4: prepare a cost reconciliation scheduleIn ABC Company, the Cutting Department had beginning work in process of 4,000 units, transferred out 10,000 units, and had an ending work in process of 2,000 units. How many units were started by Moyer during the month?8,00010,000 units – 4,000 units = 6,000 units + 2,000 units WIP 8,000Compute the Physical Unit Flow (STEP 1) Physical units – actual units to be accounted for during a period, irrespective of any work performed. Total units to be accounted for – units started (or transferred) into production during the period + units in production at beginning of period. Total units accounted for – units transferred out during period + units in process at end of period.Compute Equivalent Units of Production (STEP 2)Mixing Department Department adds materials at beginning of process and Incurs conversion costs uniformly during the processCompute Unit Production Costs (STEP 3)Compute total materials cost relate to Eggo WafflesCompute the total conversion costs related to Eggo WafflesWork in process, June 1Direct materials costs $ 50,000Cost added to production during JuneDirect material cost 400,000 Total material costs $450,000Work in process, June 1Conversion costs $ 35,000Costs added to production during JuneConversion costs 170,000 Total conversion costs $205,000Compute total manufacturing costs per