Cost Center-wise Cost Accumulation Process under ERP

This is the MOM for the Payroll Costing Workshop held on 13-05-2013. Please add if anything is missing. Attendees: Payroll Team, HR Team, Agro, KPMG, IT Team

1. Payroll cost to be done for both Regular and Non-Regular Employees. For Non- Regular employees the disbursement will be through Accounts Payable module.


2. In the event of Payroll module not going live with the rest of the Financial modules which looks imminent, a strategy to be discussed to generate the Payroll accounting entries for the Regular employees so that Product costing and other dependent areas are not effected. This is to be discussed in the next meeting.


3. Payroll team, representatives from HR team along with KPMG team to prepare a Prototype of the Payroll Accounting for employees in a future meeting.


4. Payroll cost for Direct labor to be booked in a cost center (Direct Labour).


5. Payroll cost for Direct Labor - Night to be done on the basis of the Night shift allowances and Night time hours. This information will be provided to Payroll department on timely basis especially at month end closing.


6. The Direct Labor - Night would be casual labour as told by the Head of Manufacturing.


7. Costing team to confirm from Manufacturing if Overhead cost for labour also has to be segregated in similar fashion as Night Labour and confirm the same as soon as possible. The same will be reflected in the relevant masters then.

Cost of Production Report under FIFO Method of Process Costing

Cost of Production Report — FIFO Method. Jersey-Schell, Inc. uses three departments to produce a hair spray. The Finishing Department is the third and last step before the product is transferred to storage vats for bottling or wholesale distribution.

All materials needed to give the hair spray its final composition are added at the beginning of the process in the Finishing Department. Any lost units occur only at this point.

The company uses the FIFO method in its cost system. The following data for the Finishing Department for October have been made available:
Production data:
In process, October 1                                 10,000 gals.
(Labor and factory overhead, 3/4complete)
Transferred in from preceding department    40,000 gals.
Finished and transferred to storage               35,000 gals.
In process, October 31                                10,000 gals.

Additional data:
Inventory work in process — October 1:
Cost from preceding department                $ 38,000
Cost from this department:
Materials                                                       21,500
Labor                                                            39,000
Factory overhead                                           42,000
Total inventory work in process, October 1 $140,500
Transferred in during October                      $140,000

Cost added in this department:
Materials                                                       $ 70,000
Labor                                                             162,500
Factory overhead                                            130,000
Total cost added                                           $362,500
Total cost to be accounted for                       $643,000

Required: A cost of production report for October.

Partially completed batch problems in process costing

Computation of Equivalent Production. The Production Control Department of Renata Manufacturing Plant that operates a process cost system sent the following production data for one of the 4 production departments to the Cost Department:

Product received from preceding department: 100,000 KGs
Product finished and sent to subsequent department: 71,840 KGs
Product finished and remaining in current department: 4,160 KGs
Product unfinished in current department: 24,000 KGs

In this department additional material is added to the work received from the preceding department. Three distinctly different types of materials are used at three separate stages of production in this department:

Material X is added at the start of the process.
Material Y is added when the process is 1/4 completed.
Material Z is added when the process is 3/4 completed.

Labor and factory overhead are incurred at a uniform rate throughout the manufacturing process in this department.

Examination of the unfinished work discloses that: 1/4 was 7/8 completed; 1/2 was 1/2 completed; 1/4 was 1/6 completed.

There was no beginning work in process inventory.

Required: (1) The equivalent production figures for each of the materials.
(2) The equivalent production figures for labor and factory overhead.

Theoretical Problems of Process Costing

1. State the possible effects on a department's unit costs when materials are added to work in process.
2. When materials added to work in process cause an increase in units, an adjustment must be made to unit costs. This adjustment is computed in a manner comparable to the lost unit calculation. Explain.
3. How is opening work in process accounted for using average costing?
4. Units completed and on hand in a processing department are included in the department's work in process. Why?

5. Why do firms use the first-in, first-out method of computing unit costs?
6. How is opening work in process accounted for when fifo costing is used?Why must the completion stage of opening work in process be known?
7. How are equivalent production figures computed when fifo costing is used? 

8. A certain factory transferred out 8,800 completed units during its second period of operation. The period was begun with 400 units 75% completed and ended with 800 units 50% completed. What was the equivalent production for the period? Assume the fifo costing method is used.
9. In another factory, the equivalent production (using the fifo costing method) was 7,000 units during a period which saw 500 units 60% complete on hand at the start and 600 units 75% complete at the end of the period. How many units were completed ?
10. What are some of the disadvantages of the FIFO costing method?
11. Enumerate several of the basic difficulties frequently encountered in a process cost system.
12. Express an opinion as to the usefulness of data derived from a process cost system for the control of costs.
13. Select the answer which best completes the following statement. During 19B, Marconi Company had total manufacturing costs of $180,000. The business completed 14,000 units of product, of which 4,000 units were half completed in 19A, and started production on an additional 6,000 units that were half completed at the end of 19B. For 19B the production cost per unit was (a) $18; (b) $16.36; (c) $12; or (d) $9.

Per unit cost calculation under Process costing with Quantity Schedule

Quantity Schedule. A spinning mill had the following inventories, measured in kilograms (kg.):
                               Opening           Final
Raw materials          400,000 kg.   500,000 kg.
Work in process      100,000 kg.   150,000 kg.
Finished goods        100,000 kg.   110,000 kg.
Additional data
:
Raw materials purchased 1,600,000 kg.
Finished goods sold 1,240,000 kg.
Losses occur uniformly during the manufacturing process.

Required: A quantity schedule for raw materials, work in process, and finished goods.

Cost of Production Report; No Inventories; Three Departments. The Haddonfield Company manufactures a rayon product which is processed in three departments known respectively as: Spinning, Twisting, and Winding. There were no inventories of unfinished work at either the beginning or end of October, and 15,000 units of product were finished during October.

Materials used during the month cost $7,200, of which 5/6 were used in the Spinning Department and the remainder in the Winding Department. Wages amounted to $16,800; and an analysis of the payroll shows the amount applicable to each department to be: Spinning, $9,000; Twisting, $4,200; and Winding, $3,600.

Factory overhead incurred directly by each department and general factory overhead apportioned to each department were:

                                                          Spinning   Twisting   Winding
Factory overhead incurred by dept... . $3,200   $2,250     $3,100
General factory overhead apportioned 2,800     4,200       2,900

Required: A cost statement showing the cost per unit in each department and at the end of each stage of production.

Professional Issues and questions in Process Costing

In a process cost system, physical inventories of work in process must be taken at the end of each accounting period. Ordinarily, each department head is responsible for his own inventory, and the methods he uses to determine such data are crude by comparison with procedures used for determining year-end physical inventory. It is not unusual for a department head to estimate rather than count his inventory in process. Consequently, his figures are bound to have errors. Is this good practice or should more accurate methods, such as having inventory teams determine inventories, be used?

Professional Issues: What is the justification of spreading the cost of lost units over remaining good units? Should the cost of these units ever be charged to overhead? Will the answer be different if units are lost 

(a) at the beginning of operations,
(b) during operations, (c) at the end of operations, or (d) in the originating department?

Professional Issues:  Select the answer which best completes the following statement. The type of spoilage that should not affect the recorded cost of inventories is 

(a) abnormal spoilage, 

(b) normal spoilage, 

(c) seasonal spoilage, or 

(d) standard spoilage.

Factory Ledger Journal Entries for Sullivan Corporation

 The following transactions were completed by The Sullivan Corporation, which maintains both a factory ledger and a general ledger
(a) Materials purchased and received at the factory $13,500

(b) Requisitions received and filled in the storeroom:
For direct materials $12,300
For manufacturing supplies 4,000 $16,300

(c) Paid the factory payroll for the week, as follows:
Direct labor $10,000
Indirect labor 3,200
Superintendence 1,000 $14,200

(A factory payroll book is maintained at the factory. At the end of each week the factory payroll is reported to and paid by the general office. Provision for employees' FICA tax in the amount of $639 and 10% income tax is made on the general office books. The only payroll entry on the factory books is one distributing the payroll to the appropriate accounts and crediting General Ledger. The employer's factory payroll taxes are treated as factory overhead. The state unemployment insurance rate is 1 .8%, the federal unemployment insurance rate is .5% and the employer's FICA tax is $639.)

(d) Direct materials returned to the storeroom, $800.

(e) A transfer voucher from the general office showed the following expenses to be recorded:
Insurance on factory building and equipment (prepaid account on general books) $250
Heat, light, and power 325
Taxes on factory building 75
Depreciation of machinery 240
Depreciation of factory building 100 $990

(f) Factory overhead is applied to production at the rate of 125% of direct labor cost.

(g) Work completed during the week, $28,000.

(h) Goods costing $32,500 to produce were sold for $42,000.

Required: Journal entries to record the above transactions on the general office books and on the factory books. Use only one work in process account. All inventory accounts and Factory Overhead are a part of the factory ledger; liability accounts, Sales, and Cost of Goods Sold are a part of the general ledger.

Factory Ledger Accounting Entries

Factory Ledger Entries. The Henderson Company uses a general ledger and a factory ledger. The following transactions took place:

Nov. 2. Purchased raw materials for the factory, $20,000. Terms 1 /lO, n/60.

4. Requisitions of $4,000 of direct materials and $2,000 of indirect materials were filled from the stockroom.

8. Factory payroll of $2,000 for the week was made up at the home office; $1,730 in cash was sent to the factory. FICA tax was $90, and income tax was $180 ($1,880 direct labor; $120 factory repair).

14. Depreciation of $200 for factory equipment was recorded. (Assets and accumulated depreciation accounts are kept on the general office books.)

14. A job was completed in the factory with $960 direct labor and $450 of materials being previously charged to the job. Factory overhead is to be applied at an overhead rate of 66%% of direct labor.

Nov. 15. Miscellaneous factory overhead amounting to $800 was paid by the home office and transferred to the factory.

16. The job completed on the 14th was shipped to Sully Marx on instructions from the home office. Customer was billed for $2,300.

Required: Journal entries on the factory books and the general office books.

Some important questions on Accounting Information System (AIS)

1 How may a cost system be defined ?
2. A principal point in connection with the creation of a cost system is a knowledge of the company's plant, machinery, methods, layout, and flow of work. With this knowledge the accountant possesses the essential background information to develop the necessary cost procedures. Explain how the accountant would use this information.
3. A chart of accounts, accompanied by adequate instructions, is a great aid to better accounting, costing, and controlling. Explain.
4. The journal voucher control system is said to be one of the most effective means of internal control when designed to fit a specific enterprise and properly administered.
(a) Explain how the voucher can be a means of internal control.
(b) How does a voucher serve as a connecting link between general accounting and cost accounting?

5. If a factory is located in one city or state and the general office in another,it is desirable to separate a portion of the records.
(a) Name four control accounts and the subsidiary ledgers that would likely be kept at the factory.
(b) How are ledgers kept in balance between the factory and the general office?
(c) What entry would be made on the factory books when goods are shipped directly to a customer? Assume inventory records are maintained at the factory.
(d) What entry would be made on the home office books for transaction (c) 

(e) A factory sends goods it has produced to another branch factory. What entry would be made on the producing factory's books?
6. (a) Where a portion of the accounting is done at the factory and a factory ledger is maintained, what accounts are most likely to be in the factory ledger ?
(b) What is the principal reason for maintaining accounts at the factory?
7. (a) What are the four major activities provided by a digital computer?
(b) A computer system may collect and analyze business data in different ways for different levels of management. Discuss.
8. What advantages does the electronic data processing system offer for cost accounting record keeping ?

Conceptual questions on costs and expenditures

1. Enumerate the various classifications of costs.
2. Conversion cost is equal to the total of (a) direct labor and raw materials; (b) direct labor and factory overhead ; (c) indirect labor and factory overhead ; or (d) factory overhead and raw materials. Select the answer which correctly completes the statement.

3. Which of the following is the best example of a variable cost? (a) property taxes; (b) the corporate president's salary; (c) the controller's salary; (d) interest charges; or (e) material in a unit of product?

4. The statement has often been made that an actual product cost in the sense of absolute authenticity and verifiability does not exist. Why? 

5. The division of costs between inventory charges and profit and loss charges is not uniform throughout industries.
(a) Name two broad classifications of costs that find different treatments.
(b) Give reasons for the existence of these differences.

6. Expenditures may be divided into two general categories — (1) capital expenditures and (2) revenue expenditures.
(a) Distinguish between these two categories of expenditures and between their treatments in the accounts.
(b) Discuss the impact on both present and future balance sheets and income statements of improperly distinguishing between capital and revenue expenditures.
(c) What criteria do firms generally use in establishing a policy for classifying expenditures under these two general categories? Discuss.

Industrial Engineering problems of Income Statement

2. Income Statement; Profit Percentage. The Industrial Engineering Inc. a Manufacturing Company submits the following information on December 31, 20xx

Sales for the year: $314,000

Inventories at the beginning of the year:
Work in process :               $4,600
Finished goods:                   $5,900
Purchases of materials for the year: $140,000

Materials inventory:
Beginning of the year:                    $3,800
End of the year:                             $4,300
Direct labor:                                $67,350
Factory overhead : one half of the labor cost
Inventories at the end of the year:
Work in process:                       $6,200
Finished goods:                         $9,270
Other expenses for the year:
Marketing expenses :                     $23,115
Administrative expenses :              $ 1 7,650


Required: (1) Prepare an income statement for the year ended December 31, 20xx
(2) The percentage of net income to sales, before income taxes.

What is and How to prepare Statement of Cost of Goods Sold?

PROBLEMS on  Statement of Cost of Goods Sold

Statement of Cost of Goods Sold. The records of the Renata Manufacturing Company for the six months ended June 30, 19B provided the following data:

Inventories                                         Dec, 31, 19A                       June 30, 19B

Raw materials                                     $117,000                              $41,600

Factory supplies                                 320                                         560

Work in process                                 30,400                                   51,380

Finished goods                                   113,500                                 121,300

Other Data:

Direct labor                                         $101,000

Depreciation — machinery                  $ 3,800

Indirect labor                                      6,900

Depreciation— factory building           1,1 00

Power and light                                  3,200

Tool expenses                                    1,645

Heat                                                  1,750

Factory supplies purchased                3,100

Fire insurance      600      Raw materials purchased     314,000

Superintendence 11,200 Compensation insurance       1,900

Required: A statement of cost of goods manufactured and sold for the six months with a separate schedule for factory overhead and a calculation of the over- or under applied factory overhead. The company applies factory overhead based on 35% of direct labor cost.

Impact of Opening Work In Process Inventory under Process Costing System Cost Of Production Report

OPENING WORK IN PROCESS INVENTORIES

The cost of production reports illustrated list closing work in process inventories. These inventories become opening inventories of the next period.

Several methods are used in accounting for these opening inventory costs. In this discussion, two methods are illustrated:

1. Average costing. Opening inventory costs are added to the costs of the new period.

2. First-in, first-out costing. Opening inventory costs are kept separate and the new costs necessary to complete the work in process inventory are computed.

Average Costing. When opening work in process inventory costs are merged with costs of the new period, the problem is essentially one of securing representative average unit costs. Ordinarily, the averaging process is quite simple.

The February cost reports of the three departments reviewed in the previous chapter are used to illustrate the treatment of opening work in process inventory and to show the relationship of costs from one period to the next. Closing inventories in January departmental cost reports become opening work in process inventories for the month of February.