Problem 20 1a Production Cost Flow And Measurement Journal

Problem 20 1a Production Cost Flow And Measurement Journal Entries L

Identify the core assignment question: Calculate the cost of products transferred from production to finished goods and the cost of goods sold based on provided inventory and production data; prepare journal entries for various manufacturing transactions including raw materials purchase, usage, payroll costs, overhead application, transfer to finished goods, and sales.

Paper For Above instruction

The problem presented requires a comprehensive understanding of process costing, journal entries, and cost calculations in manufacturing. This paper thoroughly addresses each component, illustrating how a company accounts for costs throughout a production period, from raw materials acquisition to final sales.

Introduction

Process costing is an essential accounting method used by manufacturing companies that produce large volumes of homogeneous products. It involves accumulating costs, such as raw materials, labor, and overhead, and assigning these costs uniformly to units produced during a specific period. Edison Company’s scenario exemplifies this process, requiring calculation of production costs and recording the necessary journal entries. Proper understanding of process costing mechanics and journalizations ensures accurate financial reporting and cost management.

Calculation of Costs in Process Costing

The first step involves calculating the cost of goods transferred from work in process to finished goods, which includes summing the costs incurred during the period and adjusting for beginning inventory. The second step is determining the cost of goods sold, calculated based on the inventory levels and costs assigned to units transferred out. These calculations rely on the accurate allocation of costs using predetermined overhead rates and equivalent units of production.

1. Computing the Cost of Products Transferred to Finished Goods

The cost transferred out in a process costing environment can be calculated using the formula:

Cost of Goods Transferred = Beginning Inventory + Costs Incurred - Ending Inventory

Given the data: beginning raw materials inventory of $60,000, ending raw materials at $41,000, beginning work in process inventory at $449,500, and ending inventory at $610,001. Additional costs such as raw materials purchased, factory payroll, labor, overhead, and materials used are provided, from which the total costs incurred are calculated.

Raw materials purchased = $250,000. Materials used (direct) = $200,500; indirect materials = $50,000. Factory payroll costs = $1,850,300, comprising direct labor = $1,060,300 and indirect labor costs = $790,000. Overhead is applied at 115% of direct labor, resulting in applied overhead of approximately $1,219,345 (since 115% of $1,060,300).

Total manufacturing costs for May include materials used, direct labor, and overhead, which combine to produce the total product costs. The cost of goods transferred to finished goods is derived from these accumulated costs.

2. Computing the Cost of Goods Sold (COGS)

The calculation considers the beginning inventory of finished goods and the costs transferred to the finished goods during May. It also considers the ending finished goods inventory. This creates the basis for determining COGS, essential for calculating gross profit.

3. Journal Entries for Manufacturing Activities

Accurate journal entries reflect the flow of costs and inventory changes:

  • Raw materials purchase: Dr Raw Materials Inventory, Cr Accounts Payable
  • Direct materials used: Dr Work in Process, Cr Raw Materials Inventory
  • Indirect materials used: Dr Manufacturing Overhead, Cr Raw Materials Inventory
  • Payroll costs: Dr Work in Process (direct labor), Dr Manufacturing Overhead (indirect labor), Cr Cash
  • Overhead applied: Dr Work in Process, Cr Manufacturing Overhead
  • Goods transferred to finished goods: Dr Finished Goods Inventory, Cr Work in Process
  • Sale of finished goods: Dr Accounts Receivable, Cr Sales; Dr Cost of Goods Sold, Cr Finished Goods Inventory

Each journal entry supports the flow of costs through inventory accounts, matching expenses to periods and providing essential data for financial statements.

Conclusion

Thorough understanding and accurate application of process costing principles and journal entries allow companies like Edison to effectively track costs, assess profitability, and ensure compliance with accounting standards. These calculations and entries provide essential insights into operational efficiency and cost management, forming the backbone of managerial and financial reporting.

References

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