Process Cost System

1
Process Cost System

• A cost accounting system that accumulates
• costs by department in a manufacturing
• facility
• Typically uses large machines to process a flow
  of raw materials into a finished state

2
Similarities

• Both accumulate product costs (DM, DL, FOH) and
  allocate these costs to the units produced
• Both maintain perpetual inventory accounts (with
  subsidiary ledgers) for Materials,
  Work-in-Process, Finished Goods
• Both provide cost data to management for
  planning, directing, improving, controlling, and
  decision making

3
Differences

• Process cost systems accumulate and reports costs
  by department, not by job
• Material costs are typically a larger portion of
  the costs (up to 70)
• Process cost systems can have one or several
  departments

4
Physical and Cost Flows of Product

• Journal entries are basically the same
• Physical flow of product, from department to
• department then to Finished Goods, is relatively
  easy to measure
• Cost flow (allocating costs between completed and
  partially completed units) is more difficult part

5
Cost Flow Assumptions

• Determining the cost split between
  Work-in-Process and Finished Goods requires that
  a cost flow assumption be made (like with
  Merchandise Inventory)
• FIFO Method first units entering the
• production process are the first to be
• completed (same as physical flow of units)

6
FIFO Method (1)

• Four steps in the FIFO method
• Determine the units to be assigned costs (tons,
  gallons barrels, pounds, etc.)
• Calculate equivalent units of production.
• Determine the cost per equivalent unit.
• Allocate costs to transferred and partially
• completed units.

7
FIFO Method (2)

• Assumptions made by book
• All materials used in the department are
• added at the beginning of the process
• Conversion costs are incurred evenly throughout
  the process

8
Step 1

• Determine units to be assigned costs (units in
  production during a month, whether or not
  completed)
• There are three categories of units to be
  assigned costs
• Units in beginning WIP Inventory
• Units started and completed during the period
• Units in ending WIP Inventory

9
Step 2

• EUP the number of units that could have been
  completed within a month
• EUP are calculated separately for Direct
  Materials and Conversion Costs
• Why?
• They are often introduced at different times or
  at different rates in the production process
• Direct labor and Factory Overhead are combined
  because they are often incurred at the same time
  and rate

10
Step 3

• 
  Direct Material Costs
• Cost per EU-Materials --------------------
  -----------
• 
  Direct Material EUP
• Total
  Conversion Costs
• Cost per EU-Conversion ----------------------
  ----------
• 
  Conversion EUP

11
Step 4
12
Cost of Production Report

• Normally prepared monthly for each processing
  department
• Summarizes the four steps
• Used by management to analyze and control costs

13
Just-in-Time Processing

• Philosophy that focuses on reducing time and
  cost, and eliminating poor quality
• Reorganizes traditional process
• Combines processing functions into Work Centers
• Cross-trains workers
• Increases efficiency of operations (eliminates
  waste and simplifies the production process)
• Emphasizes continuous improvement in the
  manufacturing process and improvement of product
  quality