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Process Cost System Example - Transactions

We will continue the Fabio’s chocolate example by recording the journal entries for the month of August for the mixing department, and posting the transactions to the ledger accounts (t-accounts).

Raw Materials

During the month of August, Fabio’s Chocolate purchased $55,000 worth of raw materials on account (entry 1). During August, direct materials totalling $62,500 (entry 2) were assigned to the mixing department. Fabio’s did not use any indirect materials in the mixing department during August. The entries are posted to the ledger accounts. The raw materials ledger account had a beginning inventory of $15,000 and work in process inventory for the mixing department had a beginning balance of $37,000. The journal entries and ledger accounts after the entries are posted are shown below:

Direct Labor

During the month of August, Fabio’s Chocolate incurred $58,000 in direct labor ( entry 3) for employees in the mixing department. The company will pay their employees in September. The company did not incur any indirect labor costs during the month in this department. The journal entries and ledger accounts after the entries are posted are shown below:

Actual Factory Overhead Costs

When we incur factory overhead costs (actual), we will debit the factory overhead account. In the mixing department, we had depreciation on equipment (we did not debit depreciation expense) and utilities payable (we did not debit utilities expense). When these costs are incurred in the manufacturing process, they are part of factory overhead and will become part of the cost of the product. We incurred $25,300 for depreciation and $11,082.

Applied (estimated or allocated) Factory Overhead Costs

We allocate factory overhead costs to work in process based on an estimate (predetermined overhead rate). Fabio’s used a percentage of direct labor hours to calculate factory overhead for the mixing department. It is very unlikely that the amount estimated (allocated) will equal the actual factory overhead costs incurred in a department. Fabio’s estimate of $36,382 matched the actual costs exactly (probably will never happen again).

The balance in the factory overhead ledger account at the end of the period is $0 because our estimate for factory overhead was equal to our actual factory overhead costs for the period. We would normally need to record an adjusting entry to make sure that the correct cost for factory overhead is applied to cost of goods sold when the product is sold. For Fabio’s Chocolate, the adjusting entry will not be necessary for the mixing department.

The debit balance is the work in process inventory account, $193,882 matches the total costs to account for that we calculated when we prepared the production cost report earlier in the lesson.

Costs transferred from mixing department to molding department.

We prepared the production cost report to calculate two dollar amounts:

• units of production transferred from the mixing department to the molding department, and
• units remaining in ending inventory

Below is the calculation for the amount transferred from the mixing department to the molding department.

We calculated that $175,780 was transferred from the mixing department to the molding department along with the 22,000 units completed during August. The following entry is recorded to transfer the cost into the work in process inventory for the molding department.

Below is the cost flows for the mixing department showing how the costs were calculated using the production cost report and how the dollar values appear in the ledger accounts for the work in process inventory accounts for the mixing and molding departments.