The cost system for production orders accumulates costs independently for each product or batch, tracking from the beginning of the order to the end of the product, each order will record direct labor, materials used, and indirect charges, providing the organization control of production costs.
Table of Contents
Example of cost system for production orders
The Cia. Manufacturer de Plásticos SA produces toys through the Production Order Cost System, based on absorbing historical costs. It has several production departments to manufacture toys. The operations of a cost period are as follows:
At the beginning of January 2001, the initial balances are shown in the following Trial Balance :
| Account | Balances | |
| Debtor | Creditor | |
| Banks | 700,000.00 | |
| raw material warehouse | 250,000.00 | |
| Production in process | 150,000.00 | |
| Machinery and equipment | 1,200,000.00 | |
| depress. Accum. of maq. and team | 300,000.00 | |
| Suppliers | 450,000.00 | |
| Social capital | 1,500,000.00 | |
| Utilities to be applied | 50,000.00 | |
| sums | 2,300,000.00 | 2,300,000.00 |
- The analysis of the warehouse of raw materials and products in the process is as follows:
| raw material warehouse | |||
| plastic raw materials | 10,000kg | At $20.00 each | $200,000.00 |
| metallic raw materials | 5,000kg. | At $10.00 each | $50,000.00 |
| Total | $250,000.00 |
| Production in process | (manufacturing stage order) | ||
| Order 210 Electric Trains | |||
| direct raw material | 100,000.00 | ||
| direct labor | 20,000.00 | ||
| indirect manufacturing charges | 30,000.00 | ||
| Total | 150,000.00 |
- $550,000.00 of raw materials are purchased from local suppliers as follows:
| raw material warehouse | |||
| plastic raw materials | 20,000kg | At $20.00 each | $400,000.00 |
| metallic raw materials | 15,000kg. | At $10.00 each | $150,000.00 |
| Total | $550,000.00 |
- Defective metal raw materials are returned per 2000 kg. At $10.00 = $20,000.00
- In the period, direct raw materials are consumed according to concentrations of output vouchers as follows:
| Order 210 | electric trains | |||
| metallic raw materials | 3000kg | at $10.00 | $30,000.00 | 30,000.00 |
| Order 211 | dolls | |||
| Matt. Plastic premiums | 15000kg | at $20.00 | $300,000.00 | |
| Matt. metallic raw | 4000kg | at $10.00 | $40,000.00 | 340,000.00 |
| Order 212 | parlor games | |||
| Matt. Plastic premiums | 10000kg | at $20.00 | $200,000.00 | |
| Matt. metallic raw | 8000kg | at $10.00 | $80,000.00 | 280,000.00 |
| Total mat. direct premium consumed | 650,000.00 |
- The month’s payroll for paid labor amounts to the amount of $250,000.00.
- The application of direct labor according to reports of concentration of time worked is as follows:
| Order | HRS ADDR | FEE X HR | Total | |
| 210 Electric trains | 5000 | 6 | 30000 | |
| 211 Dolls | 15000 | 6 | 90000 | |
| 212 parlor game | 10000 | 6 | 60000 | |
| Totals | 30000hrs | $180,000.00 |
- According to the same concentration of time worked, the wages for indirect labor import the amount of $70,000.00
- Predetermined indirect charges are applied using a predetermined fee that is generally paid based on direct labor hours with the formula:
Default charges quota = charges in. Defaults / total hrs. From MOD.
Default Overhead Fee = 225,000 / 30,000hrs =7.50
| Order | hrs. MOD | Share of c.ind. pred | Default CI |
| 210 | 5000 | 7.50 | $37500.00 |
| 211 | 15000 | 7.50 | 112,500.00 |
| 212 | 10000 | 7.50 | 75,000.00 |
| 30000hrs | $225,000.00 |
- The indirect charges for manufacturing expenses caused and paid during the cost period are $150,000.00
- The depreciation of machinery and equipment at 10% per year amounts to $10,000.00 per month.
- Production orders 210 and 211 were completed during the month.
- The finished toys of orders 210 and 211 are sold as follows:
| Order | ||
| 210 | electric trains | 375,000.00 |
| 211 | dolls | 800,000.00 |
| 1,175,000.00 |
- The cost of sales of previous orders is recorded.
- The distribution costs of the period amount to $260,000.00
| distribution costs | 150,000.00 |
| Administration costs | 100,000.00 |
| financing costs | 10,000.00 |
- Records are made for the following provisions:
| supplies for ISR | 38750 |
| supplies for Part. Of workers in utilities | 6250 |
| 45000 |
Required: Journal entries to reflect cost period activities.
Financial Statements: Production Costs and Income Statement.
| Seat | Concept | Partial | Has to | To have |
| TO | Banks | 700,000.00 | ||
| raw material warehouse | 250,000.00 | |||
| plastic PM | 200,000.00 | |||
| metal MP | 50,000.00 | |||
| Production in process | 150,000.00 | |||
| order 210 | 150,000.00 | |||
| Machinery and equipment | 1,200,000.00 | |||
| Depreciation of machinery and equipment | 300,000.00 | |||
| Suppliers | 450,000.00 | |||
| Social capital | 1,500,000.00 | |||
| Utilities to be applied | 50,000.00 | |||
| = | Record of opening balances | |||
| 1 | raw material warehouse | 550,000.00 | ||
| plastic PM | 400,000.00 | |||
| metal MP | 150,000.00 | |||
| Suppliers | 550,000.00 | |||
| = | Mat purchase record Cousin | |||
| 2 | Suppliers | 20,000.00 | ||
| raw material warehouse | 20,000.00 | |||
| metal MP | 20,000.00 | |||
| = | Registration of return of mat. defective premium | |||
| 3 | Production in process | 650,000.00 | ||
| order 210 | 30,000.00 | |||
| order 211 | 340,000.00 | |||
| order 212 | 40,000.00 | |||
| raw material warehouse | 650,000.00 | |||
| metal MP | 150,000.00 | |||
| plastic PM | 500,000.00 | |||
| = | Record of MP Consumed | |||
| 4 | MO | 250,000.00 | ||
| Banks | 250,000.00 | |||
| = | Registration of MO payroll | |||
| 5 | Production in process | 180,000.00 | ||
| Order 210 | 30,000.00 | |||
| Order 211 | 90,000.00 | |||
| Order 212 | 60,000.00 | |||
| MO | 180,000.00 | |||
| = | Payroll registration | |||
| 6 | IC | 70,000.00 | ||
| MO | 70,000.00 | |||
| = | MOI record | |||
| 7 | Production in process | 225,000.00 | ||
| order 210 | 37,500.00 | |||
| order 211 | 112,500.00 | |||
| order 212 | 75,000.00 | |||
| CI applied | 225,000.00 | |||
| = | Default CI record | |||
| 8 | IC | 150,000.00 | ||
| Banks | 150,000.00 | |||
| = | IC record | |||
| 9 | IC | 10,000.00 | ||
| Dept. of maq and equipment | 10,000.00 | |||
| = | depreciation record | |||
| 10 | Finished goods warehouse | 790,000.00 | ||
| 10 | Production in process | 790,000.00 | ||
| order 210 | 247,500.00 | |||
| order 211 | 542,500.00 | |||
| = | ||||
| registration of orders 210 and 211 completed | ||||
| eleven | sales | 1,175,000.00 | ||
| VAT payable | 176,250.00 | |||
| banks | 1,351,250.00 | |||
| = | Sales | |||
| 12 | Sales cost | 790,000.00 | ||
| Finished goods warehouse | 790,000.00 | |||
| = | cost of sales record | |||
| 13 | distribution cost | 150,000.00 | ||
| administration cost | 100,000.00 | |||
| financing cost | 10,000.00 | |||
| banks | 260,000.00 | |||
| = | cost record | |||
| 14 | distribution costs | 45,000.00 | ||
| provis. for ISR | 38,750.00 | |||
| provis. for the part. of the jobs in profits | 6,250.00 | |||
| = | Register of provisions for the month | |||
| fifteen | IQ low or over absorbed | 230,000.00 | ||
| IC | 230,000.00 | |||
| = | Low or over-absorbed IQ record | |||
| 16 | CI applied | 225,000.00 | ||
| IQ low or over absorbed | 225,000.00 | |||
| = | Low or over-absorbed IQ record | |||
| 17 | Sales cost | 5,000.00 | ||
| IQ low or over absorbed | 5,000.00 | |||
| = | Low or over-absorbed IQ record | |||
| EQUAL SUMS. | 3,225,000.00 | 8,101,250.00 | 8,101,250.00 | |
Inc. Manufacturer of Plastics SA de CV
Statement of production and sales costs
For the period from January 1 to 31, 2001
| Initial work-in-process inventory | 150,000.00 | |||
| Further | Direct raw materials consumed: | |||
| Inv. initial raw materials | 250,000.00 | |||
| Further | Net purchases of raw materials | 530,000.00 | ||
| Partial | 780,000.00 | |||
| Less | Inv. end of raw materials | 130,000.00 | 650,000.00 | |
| Further | Direct labor employed | 180,000.00 | ||
| Further | IC incurred: | |||
| CI applied | 225,000.00 | |||
| IQ low or over absorbed | 5,000.00 | 230,000.00 | ||
| Production cost incurred in the period | 1,060,000.00 | |||
| Total production cost | 1,210,000.00 | |||
| Less
| Inv. end of production in progress | 415,000.00 | ||
| = | Cost of finished production | 795,000.00 | ||
| Further | Inv. finished production initial | 0 | ||
| = | Cost of finished production available | 795,000.00 | ||
| Less | Inv. end of finished production | 0 | ||
| = | PRODUCTION COST SOLD IN THE PERIOD | 795,000.00 |
Inc. Manufacturer of Plastics SA
Income statement for the period from January 1 to 31, 2001.
| Net sales | 1,175,000.00 | ||
| Less | Sales cost | 795,000.00 | |
| = | Gross profit | 380,000.00 | |
| Less | Distribution Cost | 195,000.00 | |
| Administration cost | 100,000.00 | ||
| financing cost | 10,000.00 | ||
| Net profit for the period | 75,000.00 |
