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.

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:
See also  Kaizen in Public Management
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
  1. The cost of sales of previous orders is recorded.
  2. 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
See also  Basic cost manual

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