Cost of Production Report - Blending Department (1st Department):

earning Objective:

1. Prepare a cost of production report of first department in a process costing system.
2. How equivalent units are calculated in a process costing system?
3. How the lost units are treated in the cost of production report of first department?
4. 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.