Process Cost System

Chapter M2

Process Cost Used by business that produce

large amounts of the same product Work in process accounts exist for

each process or department Costs are transferred from work in

process account to the next work in process as products are processed from one department to another

First –In, First Out Method Assume that the product moves in

order throughout the production process

Determine units to be assigned costs Units in beginning work in process Units started and completed during

period Units in ending work in process

FIFO Method Calculate Equivalent Units of

Production Process manufacturers often have

some partially processed materials remaining at the end of the period

EUP Number of units that could have been

completed within a given accounting period

Example 1 A company processes their

production in two departments. Beg inventory was 500 units 70% completed, 1,100 units transferred out to the next department and ending inventory of 400 units 25% completed

Example 1

Actual Units % EUP

Beg Inv 500 30% 150

Started 1100-500 = 600

100% 600

Ending Inv 400 25% 100

Total 850

Example 2

Actual Units % EUP

Beg Inv 1000 60% 600

Started 2500-1000=1500

100% 1500

Ending Inv 900 60% 540

Total 2640

Example 3 A company process their

production in two departments. The beginning inventory was 4,000 units 50% completed, transferred into the department 5,000 units and an ending inventory of 2,000 units 40% completed.

Example 3

Actual Units % EUP

Beg Inv 4000 50% 2000

Started 5000-2000=3000

100% 3000

Ending Inv 2000 40% 800

Total 5800

Determine cost per equivalent unit Material cost = based on actual

units transferred into the department

Conversion costs Direct labor + Factory overhead Based on EUP

Example 4 Using the information in Example 1 Calculate the costs for the period Materials transferred in $50,000 Direct labor $6,690 Factory overhead $3,000 Beg WIP $28150

Example 4 Direct materials per actual unit $50,000/1000 = $50 per unit 1000 units = S&C + End Inv

Conversion costs = DL + FO Conversion costs = 6690 + 3000 =

9690 CC per EUP = 9690/850 = $11.40

Example 4Actual % EUP Mtrl CC Total

Beg inv

500 30 150 Beg inv28150

11.40 X 150 = 1710

29860

S & C 600 100 600 600X50 = 30,000

11.40 x 600= 6840

36840

End Inv

400 25 100 400 x 50 = 20,000

11.40 x 100 = 1140

21140

850 9690

Example 5 Example 2 Materials transferred in $30,600 Direct labor 19800 Factory overhead 9240 Beg WIP $35,000

Example 5Actual % EUP Mtrl CC Total

Beg inv

1000 60 600 Beg inv3500

11 x 600 =6600

10100

S & C 1500 100 1500 1500x12.75 = 19125

11 x 1500 = 16500

35625

End Inv

900 60 540 900 x 12.75 = 11475

11x 540 = 5940

17415

2640 29040

Example 6Actual % EUP Mtrl CC Total

Beg inv

4000 50 2000 Beg inv25000

8.5 x2000 = 17000

42000

S & C 3000 100 3000 3000 * 15 = 45000

8.5 x 3000 = 25500

70500

End Inv

2000 40 800 2000 x 15 = 30000

8.5 x 800 = 6800

36800

5800 49300

Questions What is the total cost of units

completed this period? How many actual units are in

ending inventory this period? How many actual units are in next

month’s beginning inventory?

Questions What is conversion costs per unit? What is the amount of work done

on this month’s beginning inventory?

What is the amount of work to be done next month on beginning inventory?

Homework Ex 2-6, ex2-7, ex 2-8, ex2-9