CHAPTER 21

Uses of Process Cost Systems

 Companies use process cost systems to apply costs to similar products that are
mass-produced in a continuous fashion.
 Example: The production of Cereal, Paint, Manufacturing Steel, Oil, Refining, and Soft Drinks.

Similarities and Differences between Job Order Cost and Process Cost Systems.
 Similarities
- Manufacturing cost elements
- Accumulation of the cost of materials, labor, and overhead
- Flow of costs
 Differences
Job order cost Process cost
Products have Products are uniform or
unique/heterogeneous relatively homogeneous and
characteristics produced in a large volume
Costs assigned to each job Costs are tracked through a
series of connected
manufacturing processes or
departments.
WIP accounts One WIP account Multiple WIP accounts

Document used Job cost sheets Production cost reports

Determination of total Each job Each period

manufacturing costs
Unit-cost computations Cost of each job/Units produced Total manufacturing
for the job costs/Equivalent units produced
during the period
Review

Which of the following items is not a characteristic of a process cost system:

a. Once production begins, it continues until the finished product emerges.

b. The focus is on continually producing homogenous products.
c. When the finished product emerges, all units have precisely the same amount of materials,
labor, and overhead.
d. The products produced are heterogeneous in nature.

Indicate which of the following statement is not correct:

a. Both a job order and a process cost system track the same three manufacturing cost elements –
direct materials, direct labor, and manufacturing overhead.
b. In a job order cost system, only one work in process account is used, whereas, in a process cost
system, multiple work in process accounts are used.
c. Manufacturing costs are accumulated the same way in a job order and in a process cost system.
d. Manufacturing costs are assigned the same way in a job order and in a process cost system.

Assigning Manufacturing Costs—Journal Entries

1. Accumulation of materials, labor, and overhead costs is the same as in job order costing.
 Debit raw materials inventory for purchases of raw materials.
 Debit factory labor for factory labor incurred.
 Debit manufacturing overhead for the overhead cost incurred.
 2. Assignment of the three manufacturing cost elements to work in process in a process cost
system is different from a job order cost system.

 Direct materials

A process cost system requires fewer material requisition slips than a job order cost system.

 Materials are used for processes and not specific jobs.

 Requisitions are for larger quantities of materials.

 Direct labor
 Time tickets may be used in both systems.

 Manufacturing overhead

3. Transfer
 Monthly entry to transfer goods to next department:

 Entry to transfer completed goods to Finished Goods:

 Entry to record Cost of Goods sold at the time of sale:

Review

In making the journal entry to assign raw material costs:

a. The debit is to Finished Goods Inventory

b. The debit is often to two or more WIP accounts
c. The credit is generally to two or more WIP accounts
d. The credit is to Finished Goods Inventory
Ruth Company manufactures ZEBO through two processes: blending and bottling. In
June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs
were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending
$6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in
the Blending Department to the Bottling Department. The Bottling Department transfers
units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these
costs to the two processes and the transfer of units as appropriate.

Equivalent units
Weighted-Average Method

 Consider the degree of completion (weighting) of units completed and transferred out and the
ending work in process.
 Most widely used method
 Beginning work in process not part of the computation of equivalent units (không quan tâm
phần trăm/ số lượng Direct Materials, Conversion costs trong WIP Beginning, chỉ chú ý WIP
Ending)
Note: Conversion costs = Direct labor + MOH.
Example: The output of Kori Company’s Packaging Department during the period consists of
10,000 units completed and transferred out, and 5,000 units in ending work in process which are
70% completed.
Calculate the equivalent units of production.
Completed units 10,000

WIP equivalent units 3,500 (5,000 x 70%)

Eus 13,500 units

Example: Kellogg Company has produced Eggo® Waffles since 1970. Three departments
produce these waffles: Mixing, Baking, and Freezing/Packaging. The Mixing Department
combines dry ingredients, including flour, salt, and baking powder, with liquid ingredients,
including eggs and vegetable oil, to make waffle batter.
The illustration below provides information related to the Mixing Department at the end of June

Example: The Fabricating Department for Outdoor Essentials has the following production
and cost data for the current month.
Materials are entered at the beginning of the process. The ending work in process units are 30%
complete as to conversion costs. Compute the equivalent units of production for (a) materials and
(b) conversion costs.
Answer
Transferred out:
 Materials: 15,000 units
 CC = 15,000 units
WIP Ending:
 Materials = 10,000 * 100% = 10,000 units
 CC = 10,000 * 30% = 3,000 units
 a) EUs of materials = TO + EB = 15,000 + 10,000 = 25,000 units
 b) EUs of CC = TO + EB = 15,000 + 3,000 = 18,000 units
Production cost report
In order to complete a production cost report, the company must perform four steps, which as a
whole make up the process cost system.
1. Compute the physical unit flow.
2. Compute the equivalent units of production.
3. Compute unit production costs.
4. Prepare a cost reconciliation schedule.
The illustration below shows assumed data for the Mixing Department at Kellogg Company for
the month of June. We will use this information to complete a production cost report for the
Mixing Department
 Compute the Physical Unit Flow (Step 1)
Follow: Beginning balance + Transferred in = Transferred out + Ending Balance

 Compute the Equivalent Units of Production (Step 2)

Eus = TO + EB
  Compute Unit Production Costs (Step 3)
The computation of total materials cost

The computation of unit materials cost.

The computation of total conversion costs

The computation of unit conversion cost

Total manufacturing cost per unit

 Prepare a Cost Reconciliation Schedule (Step 4)

Review

Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there
are 2,500 units in ending work in process, 40% complete as to conversion costs, and fully
complete as to materials cost, the total cost assignable to the ending work in process
inventory is:
(a) $45,000. (c) $75,000.
(b) $55,000. (d) $100,000.

Answer:
WIP Ending:
Material = 2,500 units
CC = 2,500 * 40% = 1,000 units
 TC = DM + CC = 2,500 x 10 + 1,000 x 30 = $55,000
In March, Rodayo Manufacturing had the following unit production costs: materials $6
and conversion costs $9. On March 1, it had no work in process. During March, Rodayo
transferred out 12,000 units. As of March 31, 800 units that were 25% complete as to
conversion costs and 100% complete as to materials were in ending the work in process.
Assign the costs to the units transferred out and in process
a. $180,000
b. $185,000
c. $186,600
d. $189,000

Note: Đọc kỹ đề hỏi tìm Total Transfer out ($180,000) hay Total WIP Ending ($6,600)
hay Total TO & Total WIP Ending ($180,000 + $6,600).