5.5: Prepare Journal Entries for a Process Costing System

Calculating the costs associated with the various processes within a process costing system is only a part of the accounting process. Journal entries are used to record and report the financial information relating to the transactions. The example that follows illustrates how the journal entries reflect the process costing system by recording the flow of goods and costs through the process costing environment.

Purchased Materials for Multiple Departments

Each department within Rock City Percussion has a separate work in process inventory account. Raw materials totaling \(\$33,500\) were ordered prior to being requisitioned by each department: \(\$25,000\) for the shaping department and \(\$8,500\) for the packaging department. The July 1 journal entry to record the purchases on account is:

Figure \(\PageIndex{1}\): Rock City Percussion July journal entry

Direct Materials Requisitioned by the Shaping and Packaging Departments and Indirect Material Used

During July, the shaping department requisitioned \(\$10,179\) in direct material. Similar to job order costing, indirect material costs are accumulated in the manufacturing overhead account. The overhead costs are applied to each department based on a predetermined overhead rate. In the example, assume that there was an indirect material cost for water of \(\$400\) in July that will be recorded as manufacturing overhead. The journal entry to record the requisition and usage of direct materials and overhead is:

Figure \(\PageIndex{2}\): Rock City Percussion July journal entry to record the requisition and usage of direct materials and overhead

During July, the packaging department requisitioned \(\$2,000\) in direct material and overhead costs for indirect material totaled \(\$300\) for the month of July. The journal entry to record the requisition and usage of materials is:

Figure \(\PageIndex{3}\): Rock City Percussion July journal entry to record the requisition and usage of materials

Direct Labor Paid by All Production Departments

During July, the shaping department incurred \(\$15,000\) in direct labor costs and \(\$600\) in indirect labor. The journal entry to record the labor costs is:

Figure \(\PageIndex{4}\): Rock City Percussion July journal entry to record the labor cost

During July, the packaging department incurred \(\$13,000\) of direct labor costs and indirect labor of \(\$1,000\). The journal entry to record the labor costs is:

Figure \(\PageIndex{5}\): Rock City Percussion July journal entry to record the labor cost

Applied Manufacturing Overhead to All Production Departments

Manufacturing overhead includes indirect material, indirect labor, and other types of manufacturing overhead. It is difficult, if not impossible, to trace manufacturing overhead to a specific product, and yet, the total cost per unit needs to include overhead in order to make management decisions.

Overhead costs are accumulated in a manufacturing overhead account and applied to each department on the basis of a predetermined overhead rate. Properly allocating overhead to each department depends on finding an activity that provides a fair basis for the allocation. It needs to be an activity common to each department and influential in driving the cost of manufacturing overhead. In traditional costing systems, the most common activities used are machine hours, direct labor in dollars, or direct labor in hours. If the number of machine hours can be related to the manufacturing overhead, the overhead can be applied to each department based on the machine hours. The formula for overhead allocation is:

\[\text { Overhead Allocation }=\dfrac{\text { Estimated Overhead costs (\$) }}{\text { Expected Annual Activity (machine hours) }}\]

Rock City Percussion determined that machine hours is the appropriate base to use when allocating overhead. The estimated annual overhead cost is \(\$340,000\) per year. It was also estimated that the total machine hours will be \(34,000\) hours, so the allocation rate is computed as:

\[\dfrac{\text { Estimated Overhead } \operatorname{cost}(\$ 340,000)}{\text { Expected Annual Activity }(34,000)}=\$ 10 \text { per machine hour } \nonumber \]

The shaping department used \(700\) machine hours, and with an overhead application rate of \(\$10\) per direct labor hour, the journal entry to record the overhead allocation is:

Figure \(\PageIndex{6}\): Rock City Percussion July journal entry to record the overhead allocation (shaping dept.)

The finishing department used \(910\) machine hours, and with an overhead application rate of \(\$10\) per direct labor hour, the journal entry to record the overhead allocation is:

Figure \(\PageIndex{7}\): Rock City Percussion July journal entry to record the overhead allocation (finishing dept.)

Transferred Costs of Finished Goods from the Shaping Department to the Packaging Department

When the units are transferred from the shaping department to the packaging department, they are transferred at \(\$3.97\) per unit, as calculated previously. The amount transferred from the shaping department is the same amount listed on the production cost report in Figure 5.3.7. The journal entry is:

Figure \(\PageIndex{8}\): Rock City Percussion July journal entry to record weighted-average method of cost of goods transferred between departments

Transferred Goods from the Packaging Department to Finished Goods

The computation of inventory for the packaging department is shown in Figure \(\PageIndex{9}\).

Figure \(\PageIndex{9}\): Inventory Computation for Packaging Department. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The value of the inventory transferred to finished goods in the production cost report is the same as in the journal entry:

Figure \(\PageIndex{10}\): WIP inventory

Recording the Cost of Goods Sold Out of the Finished Goods Inventory

Each unit is a package of two drumsticks that cost \(\$8.40\) to make and sells for \(\$24.99\). There are two transactions when recording a sale. One entry is to transfer the inventory from finished goods inventory to cost of goods sold and is at the cost of the product. The second transaction is to record the sale at the sales price. The compound entry to record both transactions for the sale of \(500\) units on account is:

Figure \(\PageIndex{11}\): Recording of cost of goods sold out

LINK TO LEARNING

The importance of properly recording the production process is illustrated in this report on work in process inventory from InventoryOps.com.

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