Accounting 102 Chapter 21 Uses of Process Cost Systems The Nature 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 that o Provide specific nonroutine services will probably benefit from using a job order cost o Perform routing repetitive services will probably be better off with a process cost system system Similarities and Differences Between Job Order Cost and Process Cost Systems Job Order Cost Costs assigned to each job Products have unique characteristics Process Cost Costs tracked through a series of connected manufacturing processes or departments Products are uniform or relatively homogenous and produced in a large volume Similarities Manufacturing cost elements Accumulation of the cost of materials labor and overhead Flow of costs Differences Number of work in process accounts used Documents used to track costs Point at which costs are totaled Unit cost computations Process Cost Flow Assigning Manufacturing Costs Accumulation of materials labor and overhead costs is the same as in job order costing o Debit Raw Materials Inventory for purchases of raw materials o Debit Factory Labor for factory labor incurred o 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 system Material Costs A process cost system requires fewer material requisition slips than a job order cost system o Materials are used for processes and not specific jobs o Requisitions are for larger quantities of materials o Journal entry to record last materials used Factory 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 Objective of assigning overhead is to allocate overhead to production departments on objective Manufacturing Overhead Costs and equitable basis Use the activity that drives or causes the costs Primary driver is machine time used Journal entry to allocate overhead Transfers Transfer to next department Transfer to finished goods Transfer to record cost of goods sold In 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 8 000 10 000 units 4 000 units 6 000 units 2 000 units WIP 8 000 The 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 A production cost report is the Production Cost Report 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 flow o Step 2 compute equivalent units of production o Step 3 compute unit production costs o Step 4 prepare a cost reconciliation schedule Compute the Physical Unit Flow STEP 1 Physical units actual units to be accounted for during a period irrespective of any work 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 performed period Compute Equivalent Units of Production STEP 2 Mixing Department Department adds materials at beginning of process and Incurs conversion costs uniformly during the process Compute Unit Production Costs STEP 3 Compute total materials cost relate to Eggo Waffles Work in process June 1 Direct materials costs Cost added to production during June Direct material cost Total material costs 50 000 400 000 450 000 Compute the total conversion costs related to Eggo Waffles Work in process June 1 Conversion costs 35 000 Costs added to production during June Conversion costs Total conversion costs 170 000 205 000 Compute total manufacturing costs per unit