Process Cost Systems

CHAPTER REVIEW

Process Cost Systems

1.(L.O. 1) Process cost systems are used to apply costs to similar products that are mass produced in a continuous fashion, such as the production of ice cream, steel or soft drinks. In comparison, costs in a job order cost system are assigned to a specific job, such as the construction of a customized home, the making of a motion picture, or the manufacturing of a specialized machine.

2.Job order cost and process cost systems are similar in that (a) both use the same three manufacturing cost elements of direct materials, direct labor, and manufacturing overhead;
(b) both accumulate costs of raw materials by debiting Raw Materials Inventory, factory labor by debiting Factory Labor, and manufacturing overhead costs by debiting Manufacturing Overhead; and (c) both assign costs to the same accounts of Work in Process, Finished Goods Inventory, and Cost of Goods Sold.

3.The major differences between a job order cost system and a process cost system are as follows:

Job OrderProcess

Feature Cost System Cost System

Work in processOne for each jobOne for each process

accounts

Documents usedJob cost sheetsProduction cost reports

Determination of Each jobEach period

total manufacturing

costs

Unit-costCost of each jobTotal manufacturing costs

computations÷ Units produced÷ Equivalent units produced

for the jobduring the period

Process Cost Flow

4.(L.O.2) In the Tyler Company example in the text book, manufacturing consists of two processes: machining and assembly. In the Machining Department, the raw materials are shaped, honed, and drilled. In the Assembly Department, the parts are assembled and packaged.

5.Materials, labor, and manufacturing overhead can be added in both the Machining and Assembly Departments. When the Machining Department finishes its work, the cost of the partially completed units is transferred to the Assembly Department. In the Assembly Department, the goods are finished and the cost is then transferred to the finished goods inventory. Upon sale, the cost of the goods sold is removed from the finished goods inventory.

Assigning Manufacturing Costs

6.All raw materials issued for production are a materials cost to the producing department. Materials requisition slips may be used in a process cost system, but fewer requisitions are generally required than in a job order cost system, because the materials are used for processes rather than for specific jobs. In the case of the Tyler Company, the entry to record the materials used is:

Work in Process—Machining XXXX

Work in Process—Assembly XXXX

Raw Materials Inventory XXXX

7.Time tickets may be used in determining the cost of labor assignable to the production departments. The labor cost chargeable to a process can be obtained from the payroll register or departmental payroll summaries. All labor costs incurred within a producing department are a cost of processing the raw materials. In the case of the Tyler Company, the entry to assign the labor costs is:

Work in Process—Machining XXXX

Work in Process—Assembly XXXX

Factory Labor XXXX

8.The basis for allocating the overhead costs to the production departments in an objective and equitable manner is the activity that “drives” or causes the costs. A primary driver of overhead costs in continuous manufacturing operations is machine time used, not direct labor. Thus, machine hours are widely used in allocating manufacturing overhead costs. In the case of the Tyler Company, the entry to allocate overhead is:

Work in Process—Machining XXXX

Work in Process—Assembly XXXX

Manufacturing Overhead XXXX

9.At the end of the period, the following transfer entries are needed for the Tyler Company to transfer units to the Assembly department from the Machining department; to transfer from the Assembly department to Finished Goods; and, to transfer from Finished Goods to Cost of Goods Sold:

Work in Process—Assembly XXXX

Work in Process—Machining XXXX

Finished Goods Inventory XXXX

Work in Process—Assembly XXXX

Cost of Goods Sold XXXX

Finished Goods Inventory XXXX

Equivalent Units

10.(L.O.3) A major step in process cost accounting is the calculation of equivalent units. Equivalent units of production measure the work done during the period, expressed in fully completed units. This concept is used to determine the cost per unit of completed product.

11.The formula to compute equivalent units of production under the weighted-average method is as follows:

Units Completed and
Transferred Out / + / Equivalent Units of Ending Work in Process / = / Equivalent Units of
Production

12.The method of computing equivalent units here is referred to as the weighted-average method. It considers the degree of completion (weighting) of the units completed and transferred out and the units in ending work in process. A lesser used method, called the FIFO method, is discussed in the appendix to this chapter.

13.To illustrate the computation of equivalent units using the weighted-average method, assume that materials are entered at the beginning of the process, conversion costs include both labor and overhead costs, and the following information is provided for the Processing Department of Silva Company:

Percentage Complete

Physical UnitsMaterialsConversion Costs

Work in process, Beg.2,500100%80%

Started into production4,500

Total units7,000

Units transferred out6,000

Work in process, End.1,000 100%60%

Total units7,000

14.The two equivalent unit computations are as follows:

Equivalent Units

Conversion

Materials Costs

Units transferred out6,0006,000

Work in process, End

1,000 X 100%1,000

1,000 X 60% 600

Total equivalent units7,0006,600

Production Cost Report

15.(L.O.4) A production cost report is the key document used by management to understand the activities in a department because it shows the production quantity and cost data related to that department. In order to be ready to complete a production cost report, the company must perform four steps:

a.Compute the physical unit flow.

b.Compute the equivalent units of production.

c.Compute unit production costs.

d.Prepare a cost reconciliation schedule.

16.The computation of physical units involves:

a.adding the units started (or transferred) into production during the period to the units in process at the beginning of the period to determine the total units to be accounted for; and

b.accounting for these units by determining the output for the periodwhich consists of units transferred out during the period and units in process at the end of the period.

In the example above, the total units to be accounted for and the units accounted for are both equal to 7,000 units for the Silva Company.

17.In computing unit costs, production costs are expressed in terms of equivalent units of production. When equivalent units are different for materials and conversion costs, the formulas for computing unit costs are as follows:

Total Materials
Cost / ÷ / Equivalent Units
of Materials / = / Unit Materials
Cost
Total Conversion
Costs / ÷ / Equivalent Units
of Conversion Costs / = / Unit Conversion
Cost
Unit Materials
Cost / + / Unit Conversion
Cost / = / Total Manufacturing Cost per Unit

18.The cost reconciliation schedule shows that the total costs accounted for equal the total costs to be accounted for as follows:

Costs to be accounted for

Transferred out...... $XXXX

Work in process, End

Materials...... $XXXX

Conversion costs...... XXXX XXXX

Total costs...... $XXXX

19.Assume the Processing Department of Silva Company has the following additional cost information:

Work in process, Beg.

Direct materials: 100% complete...... $ 24,000

Conversion costs: 80% complete...... 19,620

Cost of work in process, Beg...... $ 43,620

Costs incurred during production

Direct materials...... $200,000

Conversion costs...... 150,000

Costs incurred...... $350,000

20.Silva Company’s Processing Department Production Cost Report at the end of the period is as follows:

Processing Department

Production Cost Report

For the Period Ended

Equivalent Units

PhysicalConversion

UnitsMaterials Costs

QUANTITIES

Units to be accounted for

Work in process, Beg.2,500

Started into production4,500

Total units7,000

Units accounted for

Transferred out6,0006,0006,000

Work in process, End.1,0001,000 600(1,000 X 60%)

Total units7,0007,0006,600

Conversion

Materials Costs Total

COSTS

Unit costs

Costs during the period(a)$224,000$169,620$393,620

Equivalent units(b) 7,000 6,600

Unit costs [(a) ÷ (b)]$32.00$25.70$57.70

Costs to be accounted for

Work in process, Beg.$ 43,620

Started into production 350,000

Total costs$393,620

Cost Reconciliation Schedule

Costs accounted for

Transferred out (6,000 X $57.70)$346,200

Work in process, End.

Materials (1,000 X $32.00)$32,000

Conversion costs (600 X $25.70) 15,420 47,420

Total costs$393,620

Operations Costing

21.Companies often use a combination of a process cost and a job order cost system, called operations costing. Operations costing is similar to process costing in that standardized methods are used to manufacture the product. At the same time, the product may have some customized, individual features that require the use of a job order cost system.

20 MINUTE QUIZ

Circle the correct answer.

True/False

1.Costs are assigned to each specific job in a process cost system.

TrueFalse

2.In a process cost system, total costs are determined at the end of a period of time, such as a month.

TrueFalse

3.In a process cost system, the unit cost is total manufacturing costs divided by the equivalent units produced during the period.

TrueFalse

4.The accumulation of the costs of materials, labor, and manufacturing overhead is the same in a process cost system as in a job order cost system.

TrueFalse

5.More materials requisitions are generally required in a process cost system than in a job order cost system.

TrueFalse

6.Equivalent units of production equals units completed and transferred out + units in
beginning work in process.

TrueFalse

7.Two equivalent unit computations are necessary—one for materials and the other for conversion costs.

TrueFalse

8.The first step in preparing a production cost report is to compute the equivalent units of production.

TrueFalse

9.The cost reconciliation schedule shows that the total costs accounted for equal the total costs to be accounted for.

TrueFalse

*10.Units in work in process at the beginning of the period are included in units “started and completed” under the FIFO method.

TrueFalse

Multiple Choice

1.Which of the following is not a step in preparing a production cost report?

a.Prepare a cost reconciliation schedule.

b.Compute equivalent units of production.

c.Compute the physical unit flow.

d.Assign costs to particular jobs.

2.A department has no beginning work in process, has started 80,000 units and completed 50,000 units. Its ending work in process is 30,000 units, 60% complete as to conversion costs and fully complete as to materials. Its equivalent units for conversion costs are

a.50,000.

b.80,000.

c.68,000.

d.44,000.

3.In process costing, the computation of unit production costs requires

a.the accumulation of material and conversion costs in work in process for each
department or process.

b.the computation of equivalent units for material and conversion costs.

c.both a and b.

d.neither a nor b.

4.Which of the following is not included in a production cost report?

a.Costs accounted for.

b.Entries to assign cost.

c.Units accounted for.

d.Units to be accounted for.

5.Unit costs for materials and conversion costs amount to $4 and $5 respectively. The ending work in process costs for 8,000 units (100% complete as to material and 70% complete as to conversion costs) amount to

a.$60,000.

b.$72,000.

c.$44,000.

d.$40,000.

ANSWERS TO QUIZ

True/False

1. False 6.False

2. True 7.True

3. True 8.False

4. True 9.True

5. False *10.False

Multiple Choice

1. d.

2. c.

3. c.

4. b.

5. a.

(For Instructor Use Only)17-1