[MUSIC]
I'm Larry Wolther.
This is principlesofaccounting.com, Chapter 20,
in which we are considering Process Costing and Activity-Based Costing.
This is the final module on process costing, and in this module, we're
going to carry forward information that we revealed in the previous two modules.
And look at assigning total cost to completed units, and units in process.
So this is actually the final step in building up the cost of production report.
And so let's look at our cost allocation.
And, again, this is dependent upon recalling
amounts from the previous module.
If you have your textbook in front of you, you might follow along
to see how the information is being carried forward as we go.
Remember that we had 650,000 units deemed to
be complete in the melting department during the month.
And we had calculated a cost per equivalent unit of $12.35.
So this looks fairly complicated, but really, it's not.
650,000 units at an average cost of $12.35.
We're going to assign out $8,270,500 in cost.
That $8,000,000, we're transferring into the next department.
Similarly, for our work in process,
we had material cost of $9.00 per equivalent unit.
And we had $125,000 equivalent units of direct materials and
processes at the end of the month.
And $3.35 was our conversion cost per equivalent unit.
And we had 100,000 equivalent units there.
And so we have 1,460,000 as ending work in process.
It's important to note that our transferred out 8,027,500 plus
our ending work in process, 1,460,000, that is the total cost allocation
of 9,487,500 that we determined that we needed to account for.
That was the total cost that was injected into
the work in process account during the month.
And very simply, 1,460,000 remains in that account,
while 8,027,500's been transferred on out.
Now, the preceeding schedules are combined into a single cost of production report.
The comprehensive example doesn't display well on the screen.
It's a fairly large report.
But if you'll look in your textbook,
it's a combination of all of the components we've looked at previously.
The unit reconciliation, the calculation of the equivalent in units,
the calculation of the equivalent cost per unit.
And then the assignment of our cost to the final output, that is work in process, and
transferred on to the next department.
Now, we would need to prepare a similar report for each department,
that is, each department, each month, would have a cost of production report.
And those reports are used for inventory control,
efficiency study, incentive pay plans.
But they can also serve as the point of entry into our general ledger
to determine that amounts are going into the general ledger correctly,
very much like a subsidiary ledger account from that respect.
And so let's look at how those general entries work.
Here we're seeing that work in process is being debited for 7,365,000.
That is the amount from the previous module, the cost incurred for
the month, broken down between material, labor, and overhead components.
And then the 8,027,500 was completed, we're debiting work in process,
the next department skim/alloy is what's being debited.
And we're crediting work in process in the melting department.
Remember from the first module how we showed costs flowing from
each department to the next department, well, here's the journal entry to do that.
In the textbooks, I show journal entries for each of the departments,
showing the complete transfer of costs from department to department.
Let's look at a T-account analysis of what's going on in each department.
Here in the melting department we had a beginning balance of 2,122,500.
We had additional cost in June of 7,365,000.
Our total costs were 9,487,500,
of which 8,027,500 was credited or flowed to the skim/alloy department.
Left us an earning balance of 1,460,000.
Going to the skim/alloy department, we had a beginning balance of 3,500,000.
We incurred additional costs of 5 million, but we also have to pick up the 8,027,500
that's being transferred from the preceding department.
And then 14,505,000 was transferred on to the mold/extrude department.
And here's a T-account for
the mold/extrude department, beginning balance, June costs, and
the amount transferred in from the preceding department.
Finally, $20,000,000 was transferred on to finished goods.
That's the cost assigned to the ultimately completed production
that moves into finished goods awaiting sale to our customers.
It's possible to do a fairly comprehensive schedule, this is illustrated in the book.
It looks like a lot of information but very simply we've got rows for
each of the departments, melting, skim/alloy and mold/extrude.
We can see the first column,
that in total there was $7,622,000 in beginning work in process accounts.
We have the cost actually incurred within each department during the month for
the $7,365,000 in the melting department.
And $5,000,000 and $7,000,000 for the two departments, so
additional costs incurred were $19,365,000.
We have the costs that were transferred out,
a total of $20,000,000 went into the very finished goods inventory.
But what was transferred out of melting became transferred into skim/alloy.
What was transferred out of skim/alloy became transferred into mold/extrude.
And then finally, the transfer out to finished goods.
So that's a logical $20 million amount.
And then we have the final column, which is the ending balance work in process for
each of the departments.
So, it's very important not to lose sight of the trees from the forest, so to speak.
All of this needs to be very logical in terms of how much we had to start with,
7,622,000, what we incurred 19,365,000, what we finished, 20 million.
And so we had a slight decrease in our total work in
process between all of the departments to come up with the 6,987,500.
So spend some time adding down and across that schedule, fit and cross fit that
schedule and satisfy yourself about the cost flow and that it's logical.
Make sure you understand not only how to prepare a cost of production report but
how that data's being used to further the accounting
process within the general ledger.
[MUSIC]