September 13, 2023

What type of industries are best suited for process cost systems?

Module 03 Discussion

Cost Systems

What type of industries are best suited for process cost systems? Discuss how the process cost system is tracked and recorded for one of the following types of business:

(a) TV assembler,

(b) building contractor,

(d) paper manufacturer,

(e) custom jewelry manufacturer?

In the business type you selected, what is the most important purpose of the cost of production report and how can it improve operations in that business type?

Directions:

Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate, APA style.

Your initial post should address all components of the question with a 600-word limit.

Reply to at least two discussion posts with comments that further and advance the discussion topic.

Reading Required:

Schwartz, J. (2019). Solid information helps address controllable costs. World Oil, 240(1), 25.

Vercio, A. (2018). Process costing: The most important subject in the management accountant’s curriculum. Journal of Corporate Accounting & Finance (Wiley), 29(2), 141–150. https://doi.org/10.1002/jcaf.22334

Requirements: 600 word

Chapter 3Process Cost Systems

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives(slide 1 of 2)•Obj. 1: Describe process cost systems.•Obj. 2: Prepare a cost of production report.•Obj. 3: Journalize entries for transactions using a process cost system.•Obj. 4: Describe and illustrate the analysis of unit cost changes between periods.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives(slide 2 of 2)•Obj. 5: Describe and illustrate the use of a cost of production report in evaluating a company’s performance.•Obj App: Describe and illustrate the weighted average method of preparing a cost of production report.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Comparing Job Order and Process Cost Systems•Process and job order cost systems are different in several ways.oA process cost system accumulates (records) product costs in work in process accounts for each department. In contrast, a job order cost system accumulates (records) product costs by jobs, using job cost sheets.oIn a job order cost system, the work in process at the end of the period is the sum of the job cost sheets for partially completed jobs. In a process cost system, the work in process at the end of the period is the sum of the costs remaining in each department account at the end of the period.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of Production Report(slide 1 of 4)•In a process cost system, the cost of units transferred out of each processing department must be determined along with the cost of any partially completed units remaining in the department. The report that summarizes these costs is a cost of production report. oThe cost of production report summarizes the production and cost data for a department as follows:▪The units the department is accountable for and the disposition of those units.▪The product costs incurred by the department and the allocation of those costs between completed (transferred out) and partially completed units.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Preparing a Cost of Production ReportDetermine units to be assigned costsCompute equivalent units of productionDetermine cost per equivalent unitAllocate costs to units transferred out and to partially completed units

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of Production Report(slide 2 of 4)•Preparing a cost of production report requires making a cost flow assumption.•Like merchandise inventory, costs can be assumed to flow through the manufacturing process using the first-in, first-out (F I F O), last-in, first-out (L I F O), or average cost methods.oBecause the first-in, first-out (F I F O) method is often the same as the physical flow of units, the FIFO method is used in this chapter.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of Production Report(slide 3 of 4)•A cost of production report for the Mixing Department of Frozen Delight for July is prepared.SpecificsAmount ($)Inventory in process, July 1, 5,000 gallons:Direct materials cost, for 5,000 gallons5,000Conversion costs, for 5,000 gallons, 70% completed1,225Total inventory process, July 16,225Direct materials cost for July, 60,000 gallons66,000Direct labor cost for July10,000Factory overhead applied for July7,275Total production cost to account for 90,000Gallons transferred to Packaging in July (includes units in process on July 1), 62,000 gallons?Inventory in process, July 31, 3,000 gallons, 25% conversion costs?

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of Production Report(slide 4 of 4)•By preparing a cost of production report, the cost of the gallons transferred to the Packaging Department in July and the ending work in process inventory in the Mixing Department are determined.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 1: Determine the Units to Be Assigned Costs (slide 1 of 4)•The first step is to determine the units to be assigned costs.oA unit can be any measure of completed production, such as tons, gallons, pounds, barrels, or cases.▪For Frozen Delight, a unit is a gallon of ice cream.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 1: Determine the Units to Be Assigned Costs (slide 2 of 4)•The Mixing Department is accountable for 65,000 gallons of direct materials during July, computed as follows:Total Units (Gallons) Charged to ProductionQuantity in GallonsIn process, July 1 5,000Received from materials storage60,000Total units accounted for 65,000

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 1: Determine the Units to Be Assigned Costs (slide 3 of 4)•For July, the following three groups of units (gallons) are assigned costs:oGroup 1: Units (gallons) in beginning work in process inventory on July 1.oGroup 2: Units (gallons) started and completed during July.oGroup 3: Units (gallons) in ending work in process inventory on July 31.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 1: Determine the Units to Be Assigned Costs (slide 4 of 4)•The total units (gallons) to be assigned costs for July are summarized as follows:GroupParticularsQuantity in GallonsGroup 1Inventory in process, July 1, completed in July5,000Group 2Started and completed in July57,000Transferred out to the Packaging Department in July62,000Group 3Inventory in process, July 313,000Total units (gallons) to be assigned costs65,000The total gallons to be assigned costs equal the total gallons accounted for by the Mixing Department.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 2: Compute Equivalent Units of Production (slide 2 of 5)•Assume that a 1,000-gallon batch (vat) of ice cream at Frozen Delight is only 40% complete in the mixing process on May 31. oThus, the batch is only 40% complete as to conversion costs such as power. ▪In this case, the whole units and equivalent units of production are as follows:Type of CostWhole Units in GallonsEquivalent Units in GallonsMaterial Costs1,0001,000Conversion Costs1,000 400 gallons (1000 × 40%)

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 2: Compute Equivalent Units of Production (slide 3 of 5)•Equivalent units for materials and conversion costs are usually determined separately.oThis is because materials and conversion costs normally enter production at different times and rates.▪In contrast, direct labor and factory overhead normally enter production at the same time and rate. ▪For this reason, direct labor and factory overhead are combined as conversion costs in computing equivalent units.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 2: Compute Equivalent Units of Production (slide 4 of 5)•To compute equivalent units for materials, it is necessary to know how materials are added during the manufacturing process.oIn the case of Frozen Delight, all the materials are added at the beginning of the mixing process.GroupSpecificsWhole UnitsPercent Materials Added in JulyUnits for Direct MaterialsGroup 1Inventory in process, July 15,0000%0Group 2Started and completed in July (62,000 − 5,000)57,000100%57,000Transferred out to Packaging Department in July62,00057,000Group 3Inventory in process, July 313,000100%3,000Total gallons to be assigned costs65,00060,000

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 2: Compute Equivalent Units of Production (slide 5 of 5)•To compute equivalent units for conversion costs, it is necessary to know how direct labor and factory overhead enter the manufacturing process.oDirect labor, utilities, and equipment depreciation are often incurred uniformly during processing. Hence, it is assumed that Frozen Delight incurs conversion costs evenly throughout its manufacturing process. GroupSpecificsWhole UnitsPercent Conversion Completed in JulyEquivalent Units for ConversionGroup 1Inventory in process, July 1 (70% completed)5,00030%1,500Group 2Started and completed in July (62,000 − 5,000)57,000100%57,000Transferred out to Packaging Department in July62,00058,500Group 3Inventory in process, July 31 (25% completed)3,00025%750Total gallons to be assigned costs65,00059,250

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Check Up Corner 17-1 Equivalent Exits•The Bottling Department of Rocky Springs Beverage Company had 2,000 liters in the beginning work in process (30% complete). During the month, 28,500 liters were started and 29,000 liters were completed. The ending work in process inventory was 1,500 liters (60% complete). Materials are added at the beginning of the process, while conversion costs are added evenly throughout the process.a.How many units were started and completed during the month?b.What are the total equivalent units for:1.Direct materials2.Conversion costs

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Check Up Corner 17-1 Equivalent Exits Solution (slide 1 of 3)a.The units started and completed can be computed as follows:Alternative OneUnitsCompleted (transferred out) 29,000Inventory in process (beginning) (2,000)Started and completed 27,000Alternative TwoUnitsStarted (during month) 28,500Inventory in process (beginning) (1,500)Started and completed 27,000

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 3: Determine the Cost per Equivalent Unit(slide 2 of 4)•The July direct materials and conversion cost equivalent units for Frozen Delight’s Mixing Department from Step 2 are as follows:Equivalent UnitsGroupSpecificsDirect MaterialsConversionGroup 1Inventory in process, July 101,500Group 2Started and completed in July (62,000 − 5,000)57,00057,000Transferred out to Packaging Department in July57,00058,500Group 3Inventory in process, July 313000750Total gallons to be assigned costs60,00059,250

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 3: Determine the Cost per Equivalent Unit(slide 3 of 4)•The direct materials and conversion costs incurred by Frozen Delight in July are as follows:Direct Materials$66,000Conversion costsDirect labor$10,500Factory overhead$7,275$17,775Total product costs incurred in July$83,775

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units (slide 1 of 8)•Product costs must be allocated to the units transferred out and the partially completed units on hand at the end of the period.oThe product costs are allocated using the costs per equivalent unit for materials and conversion costs that were computed in Step 3.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units (slide 2 of 8)•The total production costs to be assigned for Frozen Delight in July are $90,000, computed as follows:SpecificsCost ($)Inventory in process, July 1, 5,000 gallons:Direct materials cost, for 5,000 gallons5,000Conversion costs, for 5,000 gallons, 70% completed1,225Total inventory in process, July 16,225Direct materials cost for July, 60,000 gallons66,000Direct labor cost for July10,500Factory overhead applied for July7,275Costs incurred in July83,775Total production costs to account for 90,000

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units (slide 3 of 8)•The units to be assigned these costs follow. The costs to be assigned these units are indicated by question marks.GroupSpecificsWhole Units (Gallons) Total Cost ($)Group 1Inventory in process, July 1, completed in July5,000?Group 2Started and completed in July57,000?Transferred out to the Packaging Department in July62,000?Group 3Inventory in process, July 313,000?Total65,00090,000

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units (slide 4 of 8)•The 5,000 gallons of inventory in process on July 1 (Group 1) were completed and transferred out to the Packaging Department in July. The cost of these units is determined as follows:SpecificsDirect Materials Costs ($)Conversion Costs ($)Total Costs ($)Inventory in process, July 1 balance 0 06,225Equivalent units for completing the July 1 in-process inventory 0 1,500Cost per equivalent unit × 1.10 × 0.30Cost of July 1 in-process inventory 0 450450Cost of July 1 in-process inventory transferred to the Packaging Department6,675

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units (slide 5 of 8)•The 57,000 units started and completed in July (Group 2) incurred all (100%) of their direct materials and conversion costs in July. oThus, the cost of the 57,000 gallons started and completed is computed by multiplying 57,000 gallons by the costs per equivalent unit for materials and conversion costs as follows:SpecificsDirect Materials CostConversion CostsTotal CostsUnits started and completed in July 57,000 gallons 57,000 gallonsCost per equivalent unit × $1.10 × $0.30Cost of the units started and completed in July $62,700 $17,100$79,800

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units (slide 6 of 8)•The total cost transferred to the Packaging Department in July is the sum of the beginning inventory cost and the costs of the units started and completed in July, computed as follows:GroupSpecificsAmount ($)Group 1 Cost of July 1 in-process inventory6,675Group 2Cost of the units started and completed in July79,800Total costs transferred to the packaging department in July86,475

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units (slide 7 of 8)•The 3,000 gallons in process on July 31 (Group 3) incurred all their direct materials costs and 25% of their conversion costs in July. The cost of these partially completed units is computed as follows:SpecificsDirect Materials CostsConversion CostsTotal CostsEquivalent units in ending inventory 3,000 gallons 750 gallonsCost per equivalent unit × $1.10 × $0.30Cost of 31 July in-process inventory $3,300 $225$3,525

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units (slide 8 of 8)•To summarize, the total manufacturing costs for Frozen Delight in July were assigned as follows:GroupSpecificsWhole Units (Gallons)Total Cost ($)Group 1Inventory in process, July 1, completed in July5,0006,675Group 2Started and completed in July57,00079,800Transferred out to the Packaging Department in July62,00086,475Group 3Inventory in process, July 313,0003,525Total65,00090,000

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Preparing the Cost of Production Report•A cost of production report is prepared for each processing department at periodic intervals. •The report summarizes the following production quantity and cost data:oThe units for which the department is accountable and the disposition of those units.oThe production costs incurred by the department and the allocation of those costs between completed (transferred out) and partially completed units.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of Production Report for Frozen Delight’s Mixing Department—F I F O

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Check Up Corner Cost per Equivalent Unit Solution (slide 1 of 2)a. 1.2.Costs per equivalent unit are used to allocate the direct materials and conversion costs to the completed and partially completed units in part b.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Check Up Corner Cost per Equivalent Unit Solution (slide 2 of 2)b. SpecificsDirectMaterials Costs ($)ConversionCosts($)TotalCosts($)Inventory in process, beginning of period1,860To complete inventory in process, beginningof period 0 $420a420Started and completed during the period 21,600b 8,100c 29,700Transferred out of Bottling (completed) 31,980Inventory in process, end of period 1,200d 270e1,470Total costs assigned by the Bottling Department33,450Completed and transferred out of production31,980Inventory in process, ending1,470No materials cost is added during the current period for beginning inventory.a1,400 units × $0.30 = $420b27,000 units × $0.80 = $21,600c27,000 units × $0.30 = $8,100d1,500 units × $0.80 = $1,200e900 units × $0.30 = $270

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Journal Entries for a Process Cost System(slide 1 of 6)•The journal entries for Frozen Delight’s July transactions are shown on the next four slides.oTo simplify, the entries are shown in summary form, even though many of the transactions would be recorded daily.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Journal Entries for a Process Cost System(slide 2 of 6)a.Purchased materials, including milk, cream, sugar, packaging, and indirect materials on account, $88,000.b.The Mixing Department requisitioned milk, cream, and sugar, $66,000. This is the total amount from the original July data. Packaging materials of $8,000 were requisitioned by the Packaging Department. Indirect materials for the Mixing and Packaging departments were $4,125 and $3,000, respectively.Materials$88,000Accounts Payable$88,000Work in Process—Mixing$66,000Work in Process—Packaging$8,000Factory Overhead—Mixing$4,125Factory Overhead—Packaging$3,000Materials$81,125

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Journal Entries for a Process Cost System(slide 3 of 6)c.Incurred direct labor in the Mixing and Packaging departments of $10,500 and $12,000, respectively.d.Recognized equipment depreciation for the Mixing and Packaging departments of $3,350 and $1,000, respectively.Work in Process—Mixing$10,500Work in Process—Packaging$12,000Wages Payable$22,500Factory Overhead—Mixing$3,350Factory Overhead—Packaging$1,000Wages Payable$4,350

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Journal Entries for a Process Cost System(slide 4 of 6)e.Applied factory overhead to Mixing and Packaging departments of $7,275 and $3,500, respectively.f.Transferred costs of $86,475 from the Mixing Department to the Packaging Department per the cost of production report.Work in Process—Mixing$7,275Work in Process—Packaging$3,500Factory Overhead—Mixing$7,725Factory Overhead—Packaging$3,500Work in Process—Packaging$86,475Work in Process—Mixing$86,475

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Journal Entries for a Process Cost System(slide 5 of 6)g.Transferred goods of $106,000 out of the Packaging Department to Finished Goods according to the Packaging Department cost of production report.h.Recorded the cost of goods sold out of the finished goods inventory of $107,000.Finished Goods—Ice Cream$106,000Work in Process—Packaging$106,000Cost of Goods Sold$107,000Finished Goods—Ice Cream$107,000

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Journal Entries for a Process Cost System(slide 6 of 6)•The ending inventories for Frozen Delight are reported on the July 31 balance sheet as follows:SpecificsAmount ($)Materials 6,875Work in process–Mixing Department 3,525(Determined from the cost of production report)Work in process–Packaging Department 7,725Finished Goods 4,000Total inventories 22,125

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Check Up Corner Process Costing Journal Entries•The cost of materials transferred into the Botling Department of Rocky Springs Beverage Company is $22,800, including $20,000 from the Blending Department and $2,800 from the materials storeroom. The conversion costs for the period in the Botling Department are $8,900 m$3,900 factory overhead applied and $5,000 direct labor). The total cost transferred to Finished Goods during the period is $31,080. The Botling Department had a beginning work in process inventory of $1,860.a.Journalize:1.The cost of transferred-in materials2.The conversion costs3.The costs transferred outb.Determine the balance of Work in Process—Botling at the end of the period. •Note: The costs transferred out of the Botling Department and the cost of the Botling Department’s ending inventory are computed in Check Up Corner 19-2.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Cost of Production Report for Decision Making—Frozen Delight (slide 1 of 3)•Frozen Delight’s cost of production report for the Mixing Department shows that beginning inventory is $6,225 (see slide 40). The July 1 inventory in process of $6,225 consists of the following costs:SpecificsAmount ($)Direct materials cost, 5,000 gallons5,000Conversion costs, 5,000 gallons, 70% completed1,225Total inventory in process, July 16,225

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Cost of Production Report for Decision Making—Frozen Delight (slide 2 of 3)•Using the preceding data, the June costs per equivalent unit of materials and conversion costs can be determined as follows:

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Cost of Production Report for Decision Making—Frozen Delight (slide 3 of 3)•In July, the cost per equivalent unit of materials increased by $0.10 per gallon, while the cost per equivalent unit for conversion costs decreased by $0.05 per gallon, computed as follows:SpecificsJuly ($)*June ($)Increase(Decrease) ($)Cost per equivalent unit for direct materials1.101.000.10Cost per equivalent unit for conversion costs0.300.35(0.05)*From Exhibit 8

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Cost of Production Report for Decision Making—Holland Beverage Company (slide 1 of 2)•A cost of production report may be prepared showing more cost categories beyond just direct materials and conversion costs.•To illustrate, the Blending Department of Holland Beverage Company prepared cost of production reports for April and May showing multiple cost categories, as follows:

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the Cost of Production Report for Decision Making—Holland Beverage Company (slide 2 of 2)•The May results indicate that total unit costs have increased from $0.50 to $0.53, or 6% in May. •To determine the possible causes for this increase, the cost of production report is restated in per-unit terms by dividing the costs by the number of units completed, as follows:

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Yield(slide 2 of 2)•Assume that 1,000 pounds of sugar enter the Packaging Department, and 980 pounds of sugar were packed. oThe yield is computed as follows:

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix: Determining Cost Using the Average Cost Method (slide 1 of 2)•Assume that S&W Ice Cream Company (S&W) mixes direct materials (milk, cream, sugar) in refrigerated vats and has two manufacturing departments, Mixing and Packaging. oThe manufacturing data for the Mixing Department for July are as follows:SpecificsAmount ($)Inventory in process, July 1, 5,000 gallons (70% completed)6,200 Direct materials cost incurred in July, 60,000 gallons66,000Direct labor cost in July10,500Factory overhead applied in July6,405Total production costs to account for89,105

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix: Determining Cost Using the Average Cost Method (slide 2 of 2)•Under the average cost method, all production costs (materials and conversion costs) are combined together for determining equivalent units and cost per equivalent unit.Specifics Amount (To be determined by preparing a cost of production report)Cost of goods transferred to Packaging in July (includes units in process on July 1), 62,000 gallons?Cost of work in process inventory, July 31, 3,000 gallons, 25% completed as to conversion costs?

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix: Step 1: Determine the Units to Be Assigned Costs (slide 1 of 3)•The first step is to determine the units to be assigned costs.oA unit can be any measure of completed production, such as tons, gallons, pounds, barrels, or cases.▪For S&W, a unit is a gallon of ice cream.•S&W’s Mixing Department had 65,000 gallons of direct materials to account for during July, as shown here:SpecificsTotal Gallons to Account forInventory in process, July 1 5,000 gallonsReceived from materials storeroom60,000 gallonsTotal units to account for by the Packaging Department 65,000 gallons

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix: Step 1: Determine the Units to Be Assigned Costs (slide 3 of 3)•The total units (gallons) to be assigned costs for S&W can be summarized as follows:GroupSpecificsNumber of GallonsGroup 1Units transferred out to the Packaging Department in July62,000Group 2 Inventory in process, July 31 3,000Total gallons to be assigned costs65,000 (Total gallons to be assigned costs equal the total units to account for)

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix: Step 2: Compute Equivalent Units of Production (slide 1 of 2)•S&W has 3,000 gallons of whole units in the work in process inventory for the Mixing Department on July 31. Because these units are 25% complete, the number of equivalent units in process in the Mixing Department on July 31 is 750 gallons (3,000 gallons × 25%). Because the units transferred to the Packaging Department have been completed, the whole units (62,000 gallons) transferred are the same as the equivalent units transferred.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix: Step 2: Compute Equivalent Units of Production (slide 2 of 2)•The total equivalent units of production for the Mixing Department are determined by adding the equivalent units in the ending work in process inventory to the units transferred and completed during the period, computed as follows:SpecificsNumber of GallonsEquivalent units completed and transferred to the Packaging Department during July62,000Equivalent units in ending work in process, July 31750Total equivalent units62,750

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix: Step 3: Determine the Cost per Equivalent Unit•Because materials and conversion costs are combined under the average cost method, the cost per equivalent unit is determined by dividing the total production costs by the total equivalent units of production as follows:

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix: Step 4: Allocate Costs to Transferred Out and Partially Completed Units•The cost of transferred and partially completed units is determined by multiplying the cost per equivalent unit times the equivalent units of production. For S&W’s Mixing Department, these costs are determined as follows:GroupSpecificsAmount ($)Group 1Transferred out to the Packaging Department (62,000 gallons × $1.42)88,040Group 2Inventory in process, July 31 (3,000 gallons × 25% × $1.42)1,065Total production costs 89,105

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of Production Report for S&W’s Mixing Department—Weighted Average Method

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What type of industries are best suited for process cost systems?

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