Cost of Production Report - Blending Department (1st Department):
Learning Objective:
- Prepare a cost of production report of
first department in a process costing system.
- How equivalent units are calculated in a
process costing system?
- How the lost units are treated in the
cost of production report of first department?
The cost of production report of the
Blending Department, the originating department of The Clonex Corporation,
is shown below. It illustrates the detailed computations needed to complete
a cost of production report.
The Clonex Corporation
Blending Department (1st Dept.)
Cost of Production Report
For the Month of January, 19
|
Quantity Schedule: |
|
|
|
Units started in process |
|
50,000
====== |
|
Units transferred to next
department |
45,000 |
|
|
Units still in process
(all materials - 1/2 labor and
FOH) |
4,000 |
|
|
Units lost in process |
1,000
------- |
50,000
====== |
|
Cost Charged To the Department: |
Total
Cost |
unit
Cost |
|
Cost added by the department: |
|
Materials |
$24,500 |
$0.50 |
|
Labor |
29,140 |
0.62 |
|
Factory Overhead (FOH) |
28,200
------- |
0.60
----- |
|
Total cost to be accounted for |
$81,840 |
$1.72 |
| |
====== |
==== |
|
Cost Accounted for as Follows: |
|
|
|
Transferred to next department
(45,000 × $1.72) |
|
$77,400 |
|
Work in process - ending
inventory: |
|
|
|
Materials
(4,000 × $0.50) |
$2,000 |
|
|
Labor
(4,000 × 1/2 × $0.60) |
1,240 |
|
|
Factory Overhead
(4,000 × 1/2 × $0.60) |
1,200
------ |
4,440
------ |
|
Total cost accounted for |
|
$81,840 |
|
|
===== |
Additional Computations
Equivalent Production:
Materials = 45,000 + 4,000 =
49,000 units
Labor and factory overhead = 45,000 + 4,000 / 2 = 47,000 units
Unit Costs:
Materials = $24,500 / 49,000 =
$0.50 per unit
Labor = $29,140 / 47,000 = $0.62 per unit
Factory overhead = $28,200 / 47,000 = 0.60 per unit Explanation:
The quantity schedule of the
cost report shows that Blending Department put 50,000 units in process,
with units reported in terms of finished product. Finished units could
be stated in pounds, feet, gallons, barrels, etc. If materials issued to
a department are stated in pounds and finished product is reported in
gallons, units in the quantity schedule will be in terms of the finished
product, gallons. A product conversion table would be used to determine
the number of units for which the department is accountable. The
quantity schedule of the Blending Department's report shows that of the
50,000 units for which the department was responsible, 45,000 units were
transferred to the next department (Testing
Department - second department), 4,000 units are still in
process, and 1,000 units were lost in processing. Equivalent
Production:
Costs charged to a department come from
an analysis of materials used, payroll distribution sheets, and
department expense analysis sheets. The Blending Department's unit cost
amounts to $1.72 ( $0.50 for materials, $0.62 for labor, and $0.60 for
factory overhead). Calculations of
individual unit costs requires an analysis of the ending work in process
to determine its stage of completion. This analysis is usually made by a
supervisor or is the result of using predetermined formula. Materials,
labor, and factory overhead have been used on the 4,000 units in the
process but not in an amount sufficient for completion. To assign costs
equitably to in process inventory and transferred units, units still in
process must be restated in terms of completed units, which is 4,000
units for materials cost but less than 4,000 for labor and overhead
costs. The figure for partially completed units in process is added to
units actually completed in order to arrive at the equivalent production
figure for the period. This equivalent production figure represents the
number of units for which sufficient materials, labor, and overhead were
issued or used during a period. Materials, labor and overhead costs are
divided by the appropriate equivalent production figure to compute unit
costs by elements. Should a cost element be at a different stage of
completion with respect to units in process, then a separate equivalent
production figure must be computed.
In many manufacturing processes, all
materials are issued at the start of production. Unless stated
otherwise, the illustrations in this discussion assume such a procedure.
Therefore, the 4,000 units still in process have all the materials
needed for their completion but not all labor and factory overhead
(FOH). Only 50% of the labor and factory overhead needed to complete the
units has been used. In terms of equivalent production, labor and
factory overhead in process are sufficient to complete 2,000 units.
Units Costs:
Departmental cost of production reports
indicate the cost of units as they leave department. These individual
departmental units costs are accumulated into a completed unit cost for
the period. The report for the Blending Department shows a materials
cost of $24,500, labor cost of $29,140, and factory overhead of $28,200.
The materials cost of $24,500 is sufficient to complete 49,000 units
(the 45,000 units transferred out of the department as well as the work
in process for which enough materials are in process to complete 4,000
units). The unit materials cost is, therefore, $0.50 ($24,500 / 49,000).
A similar computation determines the number of units actually and
potentially completed with the labor cost of $29,140 and the factory
overhead of $28,200. The 2,000 equivalent units in process are added to
the 45,000 units completed and transferred to obtain a total equivalent
production figure of 47,000 units for both labor and factory overhead
(FOH). When the equivalent production figure of 47,000 units is divided
into the monthly labor cost of $29,140, a unit cost for labor of $0.62
($29,140 / 47,000) is computed. The unit cost for factory overhead is
$0.60 ($28,200 / 47,000). The unit cost added by the department is
$1.72, which is the sum of the materials, labor, and overhead unit costs
- $0.50, $0.62, and $0.60. This departmental unit cost figure cannot be
determined by dividing the total departmental cost of $81,840 by a
single equivalent production figure, because no such figure exists;
units in process are at different stages of completion as to materials,
labor and factory overhead. Disposition of Departmental Costs:
In the departmental cost report, the
section titled "Cost Charged to the Department" shows a total
departmental cost of $81,840. The section titled "Cost Accounted for as
Follows" show the disposition of this cost. The 45,000 units transferred
to the next department have a cost of $77,000 (45,000 × $1.72). The
balance of the cost to be accounted for, $4,440 ($81,840 - $77,400), is
the cost of work in process. The
inventory figure must be broken down into its component parts:
materials, labor, and factory overhead. These individual costs are
easily determined. The cost of materials in process is obtained by
multiplying total units in process by the materials unit cost (4,000 ×
$0.50 = $2,000). The costs of labor and overhead in process is
sufficient to complete only 50 percent or 2,000 of the units in process.
Therefore, the cost of labor in process is $1,240 (2,000 × $0.62) and
factory overhead in process is $1,200 (2,000 × $0.60). Lost
Units:
Continuous processing leads to the
possibility of waste, seepage, shrinkage, and other factors which cause
loss or spoilage of production units. Management is interested not only
in the quantities reported as completed production, units in process,
and lost units but also in a comparison of planned and actual results.
In verifying reported figures, the accountant must reconcile quantities
put into process with quantities reported as completed and lost. One
method of making such reconciliation is to establish the process yield,
i.e., the finished production that should result from processing various
materials. This yield is computed as follows:
Percent Yield = (Weight of finished product / weight of materials
charged) × 100 The yield
figure is useful to management for controlling materials consumption and
ties in closely with a firm's quality control procedures. Various yields
are established as normal. Yields below normal are measures of
inefficiencies and are some times used to compute lost units. Frequently
quality control data are used to compute production costs, since the use
of incorrect quantities would result in incorrect unit costs.
Units Lost in the First Department:
Lost units reduce the number of units
over which total cost can be spread, causing an increase in unit costs.
The 1,000 units lost in the Blending Department increase the units costs
of materials, labor, and factory overhead. Had these units not been
lost, the equivalent production figure would be 50,000 units for
materials and 48,000 for labor and factory overhead. The unit cost for
materials would be $0.49 instead of $0.50; labor, $0.607 instead of
0.62; and factory overhead, $0.588 instead of $0.60. In the first
department, the only effect of losing units is an increase in the unit
cost of the remaining good units. In this situation, the loss is assumed
to apply to all good units and to be within normal tolerance limits.
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