31 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.

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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:


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:


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:


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:


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:


Transferred Goods from the Packaging Department to Finished Goods

The computation of inventory for the packaging department is shown in (Figure).


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:


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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Key Concepts and Summary

Traditional journal entries show the purchase of material and the incurring of overhead costs.Each department records the transfer of material from the storeroom into production, its direct labor costs, the application of overhead, and the transfer of goods to the next department or finished goods.The value of the inventory transferred to the next department or to finished goods equals the amount listed as transferred on the production cost report.