FACD 24: FINANCIAL

MANAGEMENT 1

PROCESS COST ACCOUNTING

Lectured by
Silas Felix Qopu (Mr.)
Solomon Islands National University
 PROCESS COST ACCOUNTING
Study Objectives

Understand who uses process cost systems.

Explain the similarities and differences between
job order and process cost systems.
Explain the flow of costs in a process cost system.
Make the journal entries to assign manufacturing
costs in a process cost system.
Study Objectives: Continued
Compute equivalent units.
Explain the four steps necessary to prepare
a production cost report.
Prepare a production
cost report.
NATURE OF PROCESS
COST SYSTEMS
 USES OF PROCESS COST SYSTEMS
 Used to apply costs to similar products that are
mass produced in a continuous fashion.
 Examples include the production of cereal, paint,
and soft drinks.
USES OF PROCESS COST SYSTEMS
Comparison of Process Cost and Job Order Cost
 SIMILARITIES AND DIFFERENCES

In job order cost systems: In process cost systems:

 Costs are assigned to  Costs are tracked through

each job. a series of connected
manufacturing processes
or departments.
 The products have  The products are uniform
unique characteristics. or relatively homogeneous
and produced in a large
volume.
SIMILARITIES AND DIFFERENES
 SIMILARITIES BETWEEN SYSTEMS

Job order and process cost systems are similar in 3 ways:

 Same manufacturing cost elements
Direct Materials, Direct Labor, and Manufacturing Overhead.

 Similar accumulation of costs

Debit raw materials costs to Raw Material Inventory
Debit factory labor costs to Factory Labor
Debit manufacturing overhead costs Manufacturing Overhead.

 Same accounts for flow of costs

Work in Process, Finished Goods Inventory, and Cost of Goods Sold;
however,
the methods of assigning the costs differ significantly.
 DIFFERENCES BETWEEN SYSTEMS
Job order and process cost systems differ in 4 ways:
 PROCESS COST FLOW

Example – Tyler Company

 Manufacturing of automatic can openers

consists of two processes:
 Machining – raw materials are shaped, honed,
drilled
 Assembly – parts assembled and packaged

 Materials, labor, and manufacturing overhead

added in both departments.
PROCESS COST FLOW
ASSIGNMENT OF MANUFACTURING COSTS

 Accumulation of materials and labor costs is the

same as in job order costing.
 Debit Raw Materials Inventory for all purchases of
raw materials
 Debit Factory Labor for all factory labor incurred

 However, assignment of the three manufacturing

cost elements to Work in Process is different.
ASSIGNMENT OF MANUFACTURING COSTS

Materials Costs
 A process cost system requires fewer materials
requisitions than a job order cost system.
 Materials are used for processes not specific jobs.
 Requisitions are for larger quantities of materials.

 The entry to record the materials used:

ASSIGNMENT OF MANUFACTURING COSTS

Factory Labor Costs

 Time tickets used in both systems.
 All labor costs incurred within a production
department are a cost of processing.
 The entry to assign these costs:
ASSIGNMENT OF MANUFACTURING COSTS

Manufacturing Overhead Costs

 Objective of assigning overhead - allocate overhead
to departments on an objective and equitable basis.
 Use the activity that “drives” or causes the costs
 Machine time used - primary driver in continuous
manufacturing operations - widely used

 The entry to allocate overhead to the two processes:

ASSIGNMENT OF MANUFACTURING COSTS

Entries to Transfer Costs Through System

 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:

EQUIVALENT
UNITS
 EQUIVALENT UNITS

 A measure of the work done during the

period, expressed in fully completed units
 Used to determine the cost per unit of the
completed product
 EQUIVALENT UNITS

Compute the cost of instruction at XYZ College

per full-time equivalent student based on the
following information:
 Total cost of instruction is $9,000,000
 Student population consists of 900 full-time and
1,000 part-time students
 Part-time students take 60% of the classes of a full-
time student

Equivalent Units Full-time

Full-time
Students
+ of Part-time = Equivalent
Students Students

900 + (60% x 1,000) = 1,500

 EQUIVALENT UNITS
Example - Continued

Cost of instruction
per full-time equivalent student
equals
total cost of instruction
divided by
number of full-time equivalent students

$9,000,000 / 1,500 = $6,000

 EQUIVALENT UNITS

Product are costed using either

1.Process costing using the

weighted average method
2.Process costing using the FIFO
method
 Process costing using the
FIFO method
• It is assumed that the oldest inventory is
completed before new production
commences

• Step one: analyze the physical flow of units

– Identical to the weighted average method

• Step two: calculate the equivalent units

– Under FIFO, equivalent units in opening WIP arecontinued
subtracted from total equivalent units to give
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new units of production
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 Process costing using the
FIFO method
• Step three: calculate the unit costs
– Cost per equivalent unit is calculated for direct
material (or conversion cost) by dividing the
direct material cost incurred during the current
month only by the new equivalent units added
during the current month only.
• Step four: analyze total costs
– Assumes that the units in beginning inventory
are completed and transferred out first
– Cost of the beginning WIP are not mixed with
those incurred during current month
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PRODUCTION COST REPORT

 Key document used to understand activities

 Prepared for each department and shows:
 Production quantity
 Cost data

 Four preparation steps

 Compute physical unit flow
 Compute equivalent units of production
 Compute unit production costs
 Prepare a cost reconciliation schedule
FLOW OF COSTS IN PROCESS SYSTEM
Example – Production of Waffles
THE COST OF PRODUCTION REPORT

 An internal document for management

 Shows production quantity and cost data for a

department

 Presents results of the four steps in system

 Uses of Cost of Production Report:

 Basis for evaluating productivity of each department
 Helps assess reasonableness of unit costs and total
costs
 Aids in judging whether planned objectives are met
THE END

Thank You