Process-Costing Systems
description
Transcript of Process-Costing Systems
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Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
8Process-Costing
Systems
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Learning Objective 1
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Production environment Homogenous units Mass produced Automated Continuous flow
Process Costing
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Costing procedureCosts are recorded
for a department.Department costs are
assigned equally to units produced.
Production environment Homogenous units Mass produced Automated Continuous flow
Process Costing
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Learning Objective 2
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To determinebalance sheet
inventory
To evaluateproductionefficiency
To evaluateproducts
To helpset prices
How are unitcosts used?
Why Process Costing Is Useful
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DirectMaterials
Type of Product Cost
Dol
lar A
mou
nt
DirectLabor
ManufacturingOverhead
Direct labor costsare usually smallin comparison to
other productcosts in process
cost systems.(high level of automation)
Process Costing – The Cost Inputs
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So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.
DirectMaterials
Type of Product Cost
Dol
lar A
mou
nt ConversionDirect labor costsare usually smallin comparison to
other productcosts in process
cost systems.(high level of automation)
Process Costing – Conversion Costs
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Job costing Costs accumulated by the
job. Work in process has a job
cost record for each job. Many unique, high cost
jobs. Jobs built to customer
order.
Process costing Costs accumulated by
department or process. Work in process has a
production report for each batch of products.
A few identical, low cost products.
Units continuously produced for inventory in automated process.
Comparing Job Costingand Process Costing
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Work in process contains individual
jobs in a job cost system.
Direct Materials
FinishedGoods
Cost of GoodsSold
Direct Labor
ManufacturingOverhead
Jobs
Comparing Job Costingand Process Costing
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FinishedGoods
Cost of GoodsSold
Products
Work in process contains homogenous products in a process
cost system.
Direct Labor& Overhead
(Conversion)
Direct Materials
Comparing Job Costingand Process Costing
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Same objective: determine the cost of products
Same Inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
Same objective: determine the cost of products
Same Inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
Comparing Job Costingand Process Costing
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Learning Objective 3
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Same objective: determine the cost of products
Same Inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
No beginning or endingWork in Process Inventory
Common when a company issuccessful at just-in-time production
Department With No Beginning or Ending WIP Inventory
Cost perunit = Manufacturing costs for a period
Units produced for the period
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Spirit Beverages produces a sport drink. During October, the Blending Department had the following manufacturing costs:
Spirit started and completed 8,000 four-bottle packages during October. Spirit had no beginning work in process inventory.
Compute the manufacturing unit costs for October.
Direct materials $16,000Conversion costs 5,600 Total costs to be assigned $21,600
Department With No Beginning or Ending WIP Inventory
Direct materials $16,000 ÷ 8,000 units = 2.00$ Conversion costs 5,600 ÷ 8,000 units = 0.70$ Mfg. cost per completed unit $21,600 ÷ 8,000 units = 2.70$
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Department With Ending WIP Inventory
Same objective: determine the cost of products
Same Inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
No beginning Work in Process Inventory
Ending Work in Process Inventory consistsof incomplete units at the end of the period.
We must now deal with the conceptof equivalent units.
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Same objective: determine the cost of products
Same Inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
Equivalent units is a concept expressing partially complete units as a smaller number
of fully complete units.
Cost perequivalent
unit
= Manufacturing costs for a periodEquivalent units for the period
We must now deal with the conceptof equivalent units.
Department With Ending WIP Inventory
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+ =So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
Two one-half filled cups areequivalent to one full cup.
Equivalent Units Example
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Let’s look at the five-step process for assigning costs to units produced, followed
by an example using the five steps.
Assigning Costs to Products
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Summarize the flow of physical units (number of units completed and number of units remaining in process).
Compute the number of equivalent units produced. Summarize the total costs to be accounted for
(costs in beginning work in process inventory and the costs incurred in the current period).
Compute costs per equivalent unit. Assign unit costs from to units completed and to
units in ending work-in-process inventory.
Assigning Costs to Products –The Five-step Process
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Spirit incurred the following manufacturing costs in October (same data as before):
Spirit started 8,000 units and completed 6,000 units in October. Spirit had no beginning work in process inventory. All direct
materials had been added to each unit still in process, but only 20 percent of conversion costs had been incurred for the 2,000
units still in process.Complete the five-step process to assign
costs to units produced in October.
Direct materials $16,000Conversion costs 5,600 Total costs to be assigned $21,600
Department With Ending WIP Inventory
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Department With Ending WIP Inventory – Equivalent Units
Step 1 Step 2Physical Equivalent Units
Flow of Units in October Units Material ConversionUnits to account for Beginning work in process inventory 0 Units started this period 8,000 Total units to account for 8,000
Units accounted for Completed and transferred out 6,000 ? ? Ending work in process inventory 2,000 ? ? Total units accounted for 8,000 ? ?
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Step 1 Step 2Physical Equivalent Units
Flow of Units in October Units Material ConversionUnits to account for Beginning work in process inventory 0 Units started this period 8,000 Total units to account for 8,000
Units accounted for Completed and transferred out 6,000 6,000 6,000 Ending work in process inventory 2,000 ? ? Total units accounted for 8,000 ? ?
Units completed and transferred are 100%complete for both material and conversion.
Department With Ending WIP Inventory – Equivalent Units
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Step 1 Step 2Physical Equivalent Units
Flow of Units in October Units Material ConversionUnits to account for Beginning work in process inventory 0 Units started this period 8,000 Total units to account for 8,000
Units accounted for Completed and transferred out 6,000 6,000 6,000 Ending work in process inventory 2,000 2,000 ? Total units accounted for 8,000 8,000 ?
All material had been added to units remaining in process.
Department With Ending WIP Inventory – Equivalent Units
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Step 1 Step 2Physical Equivalent Units
Flow of Units in October Units Material ConversionUnits to account for Beginning work in process inventory 0 Units started this period 8,000 Total units to account for 8,000
Units accounted for Completed and transferred out 6,000 6,000 6,000 Ending work in process inventory 2,000 2,000 400 Total units accounted for 8,000 8,000 6,400
20% of 2,000 units
Department With Ending WIP Inventory – Equivalent Units
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Department With Ending WIP Inventory – Assigning Costs
Flow of Costs in October Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory $ 0 $ 0 $ 0 Current period costs 16,000 5,600 21,600 Total costs to account for 16,000$ 5,600$ 21,600$
Equivalent Units 8,000 6,400 Costs per equivalent unit (Step 4) ? ? ?
Costs accounted for (Step 5) Costs transferred ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
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Flow of Costs in October Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory $ 0 $ 0 $ 0 Current period costs 16,000 5,600 21,600 Total costs to account for 16,000$ 5,600$ 21,600$
Equivalent Units 8,000 6,400 Costs per equivalent unit (Step 4) 2.00$ 0.875$ 2.875$
Costs accounted for (Step 5) Costs transferred ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
$16,000 ÷ 8,000 equivalent units
$5,600 ÷ 6,400 equivalent units
Department With Ending WIP Inventory – Assigning Costs
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Flow of Costs in October Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory $ 0 $ 0 $ 0 Current period costs 16,000 5,600 21,600 Total costs to account for 16,000$ 5,600$ 21,600$
Equivalent Units 8,000 6,400 Costs per equivalent unit (Step 4) 2.00$ 0.875$ 2.875$
Costs accounted for (Step 5) Costs transferred 12,000$ 5,250$ 17,250$ Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
6,000 equivalent units @ $2.00
6,000 equivalent units @ $0.875
Department With Ending WIP Inventory – Assigning Costs
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Flow of Costs in October Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory $ 0 $ 0 $ 0 Current period costs 16,000 5,600 21,600 Total costs to account for 16,000$ 5,600$ 21,600$
Equivalent Units 8,000 6,400 Costs per equivalent unit (Step 4) 2.00$ 0.875$ 2.875$
Costs accounted for (Step 5) Costs transferred 12,000$ 5,250$ 17,250$ Cost of ending work in process inventory 4,000 350 4,350 Total costs accounted for 16,000$ 5,600$ 21,600$
2,000 equivalent units @ $2.00
400 equivalent units @ $0.875
Department With Ending WIP Inventory – Assigning Costs
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Learning Objective 4
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Primary question to be answered:Which units were completed first
during the period?(How you answer this question will affect the Total EU for the period.)
Department with Beginning & Ending WIP Inventory
When there is Beginning WIP, the determination of equivalent units
becomes somewhat more complicated.
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Weighted Average vs. FIFO
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
FIFOCosts are accounted for by layer. Cost per EU for this period is computed separately from the Cost per EU
for last period.
Department with Beginning & Ending WIP Inventory
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Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
Weighted-Average is the most
commonly used
method.
Weighted Average vs. FIFO
Department with Beginning & Ending WIP Inventory
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Let’s revisit Spirit in Decemberwhere we have a beginning
inventory from the previous month.
Assigning Costs UsingWeighted-Average Costing
The weighted average method . . . Makes no distinction between work done in the prior period
and work done in the current period. Blends together units and costs in beginning inventory with
units and costs in the current period.
The FIFO method is covered in Appendix A.
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Spirit had the following cost andunit data for December:
Complete the five-step process to assign costs to unitscompleted and to units left in process for December.
Percentage Complete Total CostsUnits Materials Conversion Materials Conversion
Beginning WIP inventory 2,000 40% 80% 2,000$ 1,000$ Costs incurred in Dec. 20,000 7,000 Units Started in Dec. 12,000 Units completed 10,000 100% 100%Ending WIP inventory 4,000 25% 60%
Beginning and Ending InventoryWeighted-Average Costing
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First let’s look at a flow chart showing the blending of units in beginning work in process inventory with units started
during the month.
Beginning and Ending InventoryWeighted-Average Costing
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Beginning Inventory2,000 units
12,000 unitsstarted
EndingInventory
4,000 units
14,000 units 10,000 unitscompleted
Now let’s examine the five-step process.
Beginning and Ending InventoryWeighted-Average Costing
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Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material ConversionUnits to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 ? ? Ending work in process inventory 4,000 ? ? Total units accounted for 14,000 ? ?
Beginning and Ending InventoryWeighted-Average Costing
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Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material ConversionUnits to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 10,000 10,000 Ending work in process inventory 4,000 ? ? Total units accounted for 14,000 ? ?
Units completed and transferred are 100%complete for both material and conversion.
Beginning and Ending InventoryWeighted-Average Costing
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Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material ConversionUnits to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 10,000 10,000 Ending work in process inventory 4,000 1,000 2,400 Total units accounted for 14,000 11,000 12,400
25% of 4,000 units 60% of 4,000 units
Beginning and Ending InventoryWeighted-Average Costing
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Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 11,000 12,400 Costs per equivalent unit (Step 4) ? ? ?
Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
Beginning and Ending InventoryWeighted-Average Costing
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Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 11,000 12,400 Costs per equivalent unit (Step 4) 2.00$ 0.6452$ 2.6452$
Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
$22,000 ÷ 11,000 equivalent units
$8,000 ÷ 12,400 equivalent units
Beginning and Ending InventoryWeighted-Average Costing
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Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 11,000 12,400 Costs per equivalent unit (Step 4) 2.00$ 0.6452$ 2.6452$
Costs accounted for (Step 5) Costs assigned to units transferred 20,000$ 6,452$ 26,452$ Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
10,000 equivalent units @ $2.00
10,000 equivalent units @ $0.6452
Beginning and Ending InventoryWeighted-Average Costing
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Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 11,000 12,400 Costs per equivalent unit (Step 4) 2.00$ 0.6452$ 2.6452$
Costs accounted for (Step 5) Costs assigned to units transferred 20,000$ 6,452$ 26,452$ Cost of ending work in process inventory 2,000 1,548 3,548 Total costs accounted for 22,000$ 8,000$ 30,000$
1,000 equivalent units @ $2.00
2,400 equivalent units @ $0.6452
Beginning and Ending InventoryWeighted-Average Costing
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Learning Objective 5
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Costs Transferred infrom Prior Departments Multiple departments in a process result in units and
costs that are transferred from a prior department to the current department.
These transferred-in costs are treated exactly like a direct material that is added at the beginning of a production process.
Let’s revisit Spirit. with the addition of transferred-in units and costs. We will use the December information and the weighted-average method.
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Complete the five-step process for Spirit to assign costs tounits completed and to units left in process for December.
Costs Transferred infrom Prior Departments
Percentage CompleteFlow of units in December Units Materials Conversion Trans-inBeginning WIP inventory 2,000 40% 80% 100%Transferred-in during Dec. 12,000 Units completed 10,000 100% 100% 100%Ending WIP inventory 4,000 25% 60% 100%
Total CostsFlow of costs in December Units Materials Conversion Trans-inCosts incurred in Dec. 20,000$ 7,000$ 52,000$ Beginning WIP inventory 2,000 2,000 1,000 5,000 Transferred-in during Dec. 12,000 Units completed 10,000 Ending WIP inventory 4,000
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Costs Transferred infrom Prior Departments
Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material Conversion Trans-inUnits to account for Beginning WIP inventory 2,000 Units transferred in during Dec. 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 ? ? ? Ending WIP inventory 4,000 ? ? ? Total units accounted for 14,000 ? ? ?
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Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material Conversion Trans-inUnits to account for Beginning WIP inventory 2,000 Units transferred in during Dec. 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 10,000 10,000 10,000 Ending WIP inventory 4,000 ? ? ? Total units accounted for 14,000 ? ? ?
Costs Transferred infrom Prior Departments
100% complete for material,conversion, and transferred-in units.
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Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material Conversion Trans-inUnits to account for Beginning WIP inventory 2,000 Units transferred in during Dec. 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 10,000 10,000 10,000 Ending WIP inventory 4,000 1,000 2,400 4,000 Total units accounted for 14,000 11,000 12,400 14,000
Costs Transferred infrom Prior Departments
25% of 4,000 units 60% of 4,000 units
Transferred-in units are 100% complete
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Costs Transferred infrom Prior Departments
Flow of Costs in December Material Conversion Trans-in TotalCosts to account for (Step 3) Costs in beginning WIP inventory 2,000$ 1,000$ 5,000$ 8,000$ Current period costs 20,000 7,000 52,000 79,000 Total costs to account for 22,000$ 8,000$ 57,000$ 87,000$
Equivalent units 11,000 12,400 14,000 Costs per equivalent unit (Step 4) ? ? ? ?
Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? ? Cost of ending WIP inventory ? ? ? ? Total costs accounted for ? ? ? ?
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Flow of Costs in December Material Conversion Trans-in TotalCosts to account for (Step 3) Costs in beginning WIP inventory 2,000$ 1,000$ 5,000$ 8,000$ Current period costs 20,000 7,000 52,000 79,000 Total costs to account for 22,000$ 8,000$ 57,000$ 87,000$
Equivalent units 11,000 12,400 14,000 Costs per equivalent unit (Step 4) 2.00$ 0.6452$ 4.0714$ 6.7166$
Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? ? Cost of ending WIP inventory ? ? ? ? Total costs accounted for ? ? ? ?
$22,000 ÷ 11,000 equivalent units
Costs Transferred infrom Prior Departments
$8,000 ÷ 12,400 equivalent units
$57,000 ÷ 14,000 equivalent units
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Flow of Costs in December Material Conversion Trans-in TotalCosts to account for (Step 3) Costs in beginning WIP inventory 2,000$ 1,000$ 5,000$ 8,000$ Current period costs 20,000 7,000 52,000 79,000 Total costs to account for 22,000$ 8,000$ 57,000$ 87,000$
Equivalent units 11,000 12,400 14,000 Costs per equivalent unit (Step 4) 2.00$ 0.6452$ 4.0714$ 6.7166$
Costs accounted for (Step 5) Costs assigned to units transferred 20,000$ 6,452$ 40,714$ 67,166$ Cost of ending WIP inventory ? ? ? ? Total costs accounted for ? ? ? ?
10,000 equivalent units @ $2.00
10,000 equivalent units @ $0.6452
Costs Transferred infrom Prior Departments
10,000 equivalent units @ $4.0714
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Flow of Costs in December Material Conversion Trans-in TotalCosts to account for (Step 3) Costs in beginning WIP inventory 2,000$ 1,000$ 5,000$ 8,000$ Current period costs 20,000 7,000 52,000 79,000 Total costs to account for 22,000$ 8,000$ 57,000$ 87,000$
Equivalent units 11,000 12,400 14,000 Costs per equivalent unit (Step 4) 2.00$ 0.6452$ 4.0714$ 6.7166$
Costs accounted for (Step 5) Costs assigned to units transferred 20,000$ 6,452$ 40,714$ 67,166$ Cost of ending WIP inventory 2,000 1,548 16,286 19,834 Total costs accounted for 22,000$ 8,000$ 57,000$ 87,000$
1,000 equivalent units @ $2.00
Costs Transferred infrom Prior Departments
2,400 equivalent units @ $0.6452
4,000 equivalent units @ $4.0714
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Learning Objective 6
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Accounting for Spoilage CostsSpoilage represents the amount of resources that go
into the process, but DO NOT result in finished product.
Managers face key problems related to spoilage:
1. Identifying whether it exists.
2. Determining whether it can be eliminated.
3. Deciding whether eliminating it is worthwhile.
4. Determining the cost of spoilage.
The 5-step approach discussed earlier canbe modified by including spoilage
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Accounting for Spoilage Costs
Abnormal spoilage is the result of unusual operating problems.Abnormal spoilage is in addition to normal spoilage,
and is recorded as a loss of the period.
Normal spoilage occurs as a part of the regular operationsof an efficient process.
We will illustrate the spoilage using the December data forSpirit Beverages, but without the transferred-in costs.
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Accounting for Spoilage Costs
Percentage Complete Total CostsUnits Materials Conversion Materials Conversion
Beginning WIP inventory 2,000 40% 80% 2,000$ 1,000$ Costs incurred in Dec. 20,000 7,000 Units Started in Dec. 12,000 Units completed 10,000 100% 100%Spoiled units 500 20% 50%Ending WIP inventory 3,500 25% 60%
Spoilage is found at an inspection when 20% of the materialhas been added and the conversion is 50% complete.
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Beginning Inventory2,000 units
12,000 unitsstarted
Spoilage
500 units
14,000 units 10,000 unitscompleted
Accounting for Spoilage Costs
Complete the five-step process to assign costs to unitscompleted and to units left in process for December.
EndingInventory
3,500 units
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Accounting for Spoilage Costs
Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material ConversionUnits to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 ? ? Spoiled units 500 ? ? Ending work in process inventory 3,500 ? ? Total units accounted for 14,000 ? ?
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Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material ConversionUnits to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 10,000 10,000 Spoiled units 500 ? ? Ending work in process inventory 3,500 ? ? Total units accounted for 14,000 ? ?
Accounting for Spoilage Costs
Units completed and transferred are 100%complete for both material and conversion.
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Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material ConversionUnits to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 10,000 10,000 Spoiled units 500 100 250 Ending work in process inventory 3,500 ? ? Total units accounted for 14,000 ? ?
Accounting for Spoilage Costs
20% of 500 units 50% of 500 units
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Step 1 Step 2Physical Equivalent Units
Flow of Units in December Units Material ConversionUnits to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000
Units accounted for Completed and transferred out 10,000 10,000 10,000 Spoiled units 500 100 250 Ending work in process inventory 3,500 875 2,100 Total units accounted for 14,000 10,975 12,350
25% of 3,500 units 60% of 3,500 units
Accounting for Spoilage Costs
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Accounting for Spoilage Costs
Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 10,975 12,350 Costs per equivalent unit (Step 4) ? ? ?
Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? Spoiled units ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
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Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 10,975 12,350 Costs per equivalent unit (Step 4) 2.0046$ 0.6478$ 2.6523$
Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? Spoiled units ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
$22,000 ÷ 10,975 equivalent units$8,000 ÷ 12,350 equivalent units
Accounting for Spoilage Costs
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Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 10,975 12,350 Costs per equivalent unit (Step 4) 2.0046$ 0.6478$ 2.6523$
Costs accounted for (Step 5) Costs assigned to units transferred 20,046$ 6,478$ 26,524$ Spoiled units ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
10,000 equivalent units @ $2.004610,000 equivalent units @ $0.6478
Accounting for Spoilage Costs
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Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 10,975 12,350 Costs per equivalent unit (Step 4) 2.0046$ 0.6478$ 2.6523$
Costs accounted for (Step 5) Costs assigned to units transferred 20,046$ 6,478$ 26,524$ Spoiled units 200 162 362 Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ?
100 equivalent units @ $2.0046250 equivalent units @ $0.6478
Accounting for Spoilage Costs
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Flow of Costs in December Material Conversion TotalCosts to account for (Step 3) Costs in beginning work in process inventory 2,000$ 1,000$ 3,000$ Current period costs 20,000 7,000 27,000 Total costs to account for 22,000$ 8,000$ 30,000$
Equivalent units 10,975 12,350 Costs per equivalent unit (Step 4) 2.0046$ 0.6478$ 2.6523$
Costs accounted for (Step 5) Costs assigned to units transferred 20,046$ 6,478$ 26,524$ Spoiled units 200 162 362 Cost of ending work in process inventory 1,754 1,360 3,114 Total costs accounted for 22,000$ 8,000$ 30,000$
875 equivalent units @ $2.00462,100 equivalent units @ $0.6478
Accounting for Spoilage Costs
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Let’s conclude our discussion of process costing by
examining the cost flows in a two- department process, A and B. We will use T-accounts and
start with materials.
Process Cost Flows
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•Other Overhead
Factory Overhead
WIP Dept. A•Direct
Materials
•Direct Materials
WIP Dept. B
•Purchases •DirectMaterials
Materials Inventory
Process Cost Flows
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•Other Overhead
Factory Overhead
•Indirect Materials
WIP Dept. A•Direct
Materials
•Direct Materials
WIP Dept. B
•Indirect Materials
•PurchasesMaterials Inventory
•DirectMaterials
Process Cost Flows
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Next let’s add labor and manufacturing overhead
to the process cost flows. Are you with me?
Process Cost Flows
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•Other Overhead
Factory Overhead
Wages Payable
•IndirectLabor
WIP Dept. A•Direct
Materials
•Direct Materials
WIP Dept. B
•Indirect Labor
•Indirect Materials
Process Cost Flows
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•Other Overhead
Factory Overhead•OverheadApplied to
Work inProcess
Wages Payable
•DirectLabor
•IndirectLabor
WIP Dept. A•Direct
Materials•Conversion
•Direct Materials
•Conversion
WIP Dept. B
•Indirect Labor
•Indirect Materials
Process Cost Flows
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Next let’s transfer work from Department A to
Department B. Are you ready?
Process Cost Flows
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•Transferred to Dept. B
•Transferred from Dept. A
WIP Dept. A•Direct
Materials•Conversion
•Direct Materials
•Conversion
WIP Dept. B
Process Cost Flows
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Now let’s complete the goods in Department B and
sell them. Still with me?
Process Cost Flows
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Finished Goods•Cost of Goods
Mfd.
•Cost of Goods
Mfd.
Cost of Goods Sold
WIP Dept. B•Direct
Materials•Conversion•Transferred from Dept. A
Process Cost Flows
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Finished Goods
•Cost of GoodsSold
•Cost of Goods
Mfd.
•Cost of GoodsSold
•Cost of Goods
Mfd.
Cost of Goods Sold
WIP Dept. B•Direct
Materials•Conversion•Transferred from Dept. A
Process Cost Flows
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Learning Objective 7
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Cost Assignment to Products Using FIFO
The weighted-average inventory method mixes previous period costs with those of the present period.
FIFO assumes that units in the beginning inventory were completed.
Count production in this period only when calculating equivalent units.
This allows managers to identify and manage current period costs.
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Learning Objective 8
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Comparing Weighted-Average and FIFO Costing Methods
Using FIFO to isolate current period costs is useful when the beginning inventory balance is very large.
Otherwise, the smaller the beginning inventory balance, the closer the unit cost results under both methods.
Though either method is acceptable for external reporting, separating the costs with FIFO is preferable.
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Learning Objective 9
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Operation Costing A hybrid of job-order and process
costing. Applied to production activities:
with repetitive operations (so conversion costs do not change).
when different materials may be used (so materials costs could change).
Examples: Fabrics used in shirt manufacturing Engines used in similar cycle bodies
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End of Chapter 8