Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 20

Basic Cost Flow Model

Assume that the following events occurred at a division of Generic Electric for March of the current year.

1. Purchased $45 million in direct materials.

2. Incurred direct labor costs of $24 million.

3. Determined that manufacturing overhead was $40.5 million.

4. Transferred 80 percent of the materials purchased to work in process.

5. Completed work on 72 percent of the work in process. Costs are assigned equally across all work in process.

6. The inventory accounts have no beginning balances. All costs incurred were debited to the appropriate account and credited to Accounts Payable.

Required

Give the amounts for the following items in the Work-in-Process account:

a. Transfers-in (TI).

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b. Transfers-out (TO).

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c. Ending balance (EB).

Step 1 of 8

Cost accounting system

It is a system designed to report the cost of products and services. Material, labor and overhead costs are allocated to determine unit costs. Cost accounting system comprises of various types of formats, forms, procedures, reports and records. This can be maintained independently and can be part of formal accounting system also.

Cost accounting systems are used by both manufacturing and service firms to find the unit costing of their products or service. There are two types of cost accounting systems like job order costing system used for personalized products or services and process costing system used for large size of identical products. Some companies may use combination of job order costing and process costing system to fit its particular needs.

Basic cost flow model

Basic cost flow model is used as framework for recording the cost by all types of firms.

It is an inventory equation that is used to find out missing information: -

Basic cost flow model has four components like beginning balance, transfer in, transfer out and ending balance.