Nature of a process cost systemMany businesses produce large quantities of a single product or similar products. Pepsi-Cola makes soft drinks, Exxon Mobil produces oil, and Kellogg Company produces breakfast cereals on a continuous basis over long periods. For these kinds of products, companies do not have separate jobs. Instead, production is an ongoing process. Show
Job costing and process costing have important similarities:
Job costing and process costing systems also have their significant differences:
A process cost system (process costing) accumulates costs incurred to produce a product according to the processes or departments a product goes through on its way to completion. Companies making paint, gasoline, steel, rubber, plastic, and similar products using process costing. In these types of operations, accountants must accumulate costs for each process or department involved in making the product. As an example, view this How’s It Made video. Can you imagine having to determine the cost of making just ONE lego when we can make 1.7 million legos per hour? Cost accountants have to do this. They will use process costing! Accountants compute the cost per unit by first accumulating costs for the entire period (usually a month) for each process or department. Second, they divide the accumulated costs by the number of units produced (tons, pounds, gallons, or feet) in that process or department. The next picture shows the cost flows in a process cost system that processes the products in a specified sequential order. That is, the production and processing of products begin in Department A. From Department A, products go to Department B. Department B inputs direct materials and further processes the products. Then Department B transfers the products to Finished Goods Inventory. There are two methods for using process costs: Weighted Average and FIFO (First In First Out). Each method uses equivalent units and cost per equivalent units but calculates them just a little differently. b b c a a d a c d The company should use process costing. Since there are many similar items, process costing is a better fit than job order costing.
What is the prime cost?
What is the conversion cost? Answer:The conversion cost is \(\$72,000\): the sum of direct labor, factory depreciation expense, and utility expense.
The expense recognition principle requires that expenses follow the revenue. Product costs are assigned to the product because they are associated with the revenue from the sale of the product. The cost is transferred from inventory to cost of goods sold when the item is sold. This matches the revenue from the sale with the cost of the item being sold. Period costs are expensed when incurred because they are not related to a specific product but are instead related to the time period in which revenue is earned.
b, d, c, a
Management uses the activity considered to be the cost driver and multiplies that rate by the activity for each specific job. The result is the amount of overhead applied to that specific job.
Expenses normally have a debit balance, and the manufacturing overhead account is debited when expenses are incurred to recognize the incurrence. When the expenses are allocated to the asset, the work in process inventory, the expense account manufacturing overhead is credited. This is in accordance with the expense recognition principle. The timing of the expense follows the revenue, and when the costs are allocated to inventory, they become a part of the product’s cost and are recognized when the asset is sold.
direct materials Exercise Set A
The company assigns overhead at \(\$1.25\) for each direct labor dollar spent. What is the total cost for each of the jobs?
Using the information provided,
What is the cost assigned to Job 5 at the end of the week?
Overhead is applied at \(1.25\) times the direct labor cost. Use the data on the cost sheets to perform these tasks:
Exercise Set B
The company assigns overhead at twice the direct labor cost. What is the total cost for each job?
Using the information provided,
Compute the actual and applied overhead using the company’s predetermined overhead rate of \(\$23.92\) per machine hour. Was the overhead overapplied or underapplied, and by how much?
What is the cost assigned to Job 7 at the end of the week?
Overhead is applied at \(1.75\) times the direct labor cost. Use the data on the cost sheets to perform these tasks:
Problem Set A
What are the balances in the work in process inventory, finished goods inventory, and cost of goods sold for January, February, and March?
Compute the cost of materials used in production, the cost of goods manufactured, and the cost of goods sold.
Compute the cost of goods manufactured, assuming that the overhead is allocated based on direct labor hours.
Create journal entries for the listed transactions. Problem Set B
What are the balances in the work in process inventory, finished goods inventory, and cost of goods sold for April, May, and June?
Compute the cost of materials used in production, the cost of goods manufactured, and the cost of goods sold.
Compute the cost of goods manufactured.
Journalize the listed transactions. Thought Provokers
Which document shows the cost of direct materials direct labor and overhead?Job cost sheets are the most important job costing document. They summarize all of the key information about the job and accumulate total direct materials costs, total direct labor costs and overhead costs applied to the job to determine the total costs for the job.
When manufacturing overhead is applied to a job what account is debited?The overhead account is debited for the actual overhead costs as incurred. The overhead account is credited for the overhead costs applied to production in the work-in-process account.
What are the 3 components of job order costing?Job order costing requires the assignment of direct materials, direct labor, and overhead to each production unit.
What are the primary cost accumulation accounts used in a job order costing system?A job order cost accounting system allocates costs to each job. The costs allocated are the three product costs we learned in Chapter 14: materials, direct labor, and factory overhead.
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