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Module 3: Process costing

Required reading

Chapter 4, pages 129-152 Reading 3-1: "Comparing the weighted-average and the FIFO methods of costing"

Reading 3-2: "Spoilage"

Overview

Module 3 helps you gain a perspective of process cost flows by working through a detailed example of process costing. Thmodule explains the weighted-average and FIFO methods of accounting for cost flows and shows you how they arevaluated in the context of the production report. Module 3 also describes how to deal with shrinkage, spoilage, and lostnits in a process costing system. It looks briefly at innovations in costing systems in the ever-changing businessnvironment.

he Computer illustration in Topic 3.8 shows how to use a spreadsheet program to prepare a production report and costeconciliation based on both methods described in the module.

Assignment reminder

ssignment 1 (see Module 5) is due at the end of week 5 (see Course Schedule). It is a good idea to look at it now toamiliarize yourself with the requirements as you work through Modules 3-5.

Topic outline and learning objectives

3.1 Comparison of job-order and process costing Identify the major similarities and differencesbetween job-order and process costing. (Level 2)

3.2 A perspective of process cost flows Prepare journal entries to record the flow ofmaterials, labour, and overhead through a procescosting system. (Level 1)

3.3 Equivalent units of production Explain and compute the equivalent units ofproduction for both the weighted-average methodand the FIFO method. (Level 1)

3.4 Production report Weighted average method Prepare a production report using the weighted-average method. (Level 1)

3.5 Production report FIFO method Prepare a production report using the FIFO methoand compare production reports prepared under tweighted-average method and FIFO. (Level 1)

3.6 Shrinkage, spoilage, and lost units Compute the cost of lost units or shrinkage. (Leve1)

3.7 Operation costing State the conditions under which operation costinis useful to management, and explain the impact a flexible manufacturing system on job-order andprocess costing. (Level 2)

3.8 Computer illustration 3.8-1: Production report Weighted-average method and FIFOmethod

Design a worksheet that calculates and prepares production report and cost reconciliation for bothweighted-average and FIFO methods, and compathe two methods. (Level 1)

Module summary

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Management Accounting 1 Reading 3-1 1

READING 3-1

Comparing the weighted-average and the FIFO

methods of costingAs you study the weighted-average and FIFO methods of costing, it is important to keep inmind the purpose of the production report. In the Double Diamond Skis example (textpages 152-171), the business owners request to the controller was based on her need for costinformation. The production report is a way of determining how much of the costs ofproduction are charged to the finished goods inventory (or to the inventory transferred out)and how much of the costs belong to the work in process inventory. So although the examplesand most of the work you do seem to be directed towards determining the equivalent units ofproduction, this is really only an intermediate step. By itself, equivalent units of production is

just one part of the picture; it is when you apply costs toward those units and allocate totalproduction costs among the inventories that you have meaningful information.

Compare Exhibit 4-10 on page 159 of the text with Exhibit 4-13 on page 169. Notice that thetotal units (5,200) and the total cost ($734,675) are the same. Notice also that the units transferredto the next departmentare equal. What differs is where the costs of the opening inventory are charUsing the weighted-average method, these costs are added to the current months costs and theunit cost is an average of the total of these costs. Thus, part of last months costs affect the value omonths ending inventory. The FIFO method avoids this by saying, in effect, that the firstunits transferred out are those that were begun in a previous period, and that the endinginventory is made up only of the current months costs. In the case of Double Diamond Skis,the unit cost is lower when the cost of the opening inventory is excluded from the calculation- $149.00 per unit using the weight average method, compared to $148.50 per unit using theFIFO method.

Look at Exhibits 4-10 and 4-13 again. Compare the cost accounted for as transferred to nextdepartment and cost accounted for as work in process. The difference in the two methodsresults in $65 less being charged to work in process when the weighted-average method isused than when the FIFO method is used. The $65 is part of the costs transferred to the nextdepartment. Thus, the total costs to be accounted for are the same, but the allocation of costsbetween work in process inventory and the amount transferred to the next department differs.

In this appendix, you will look at the production reports for a fictional company inwhich purchased material prices are stable some months and rise dramatically in othermonths. Example A3.1 will contrast and compare the effect of stable and changing prices onthe cost allocations that result, using the weighted-average and the FIFO methods. It will also

demonstrate that a change in the work in process percent complete does not result in adifferent cost allocation using the weighted-average than the FIFO method. To simplify theexample, conversion costs and conversion percent complete will remain unchanged.


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2 Reading 3-1 Management Accounting 1

EXAMPLE A3.1

Papier Mch Arts, Inc. produces piatas and sells them to party-supply stores. The moldingdepartment produces the forms by applying papier mch in a series of stages. Eachapplication of papier mch requires the same amount of material. Conversion time is less inthe later applications because the form becomes set and is easier to work with as successivelayers of papier mch are applied. From the molding department, the piatas are transferredto the painting department. Prices have been steady for several years and the productionreport for the molding department has been straightforward. However, a dramatic priceincrease in the material used in the molding department has focused managements attentionon this critical process. As Papier Mchs accountant, you want to be sure that costs areallocated correctly between the work in process inventory and the inventory transferred to thepainting department. The production reports for Papier Mch Arts Inc. for the months ofMarch, April, May, and August follow as Exhibits A3-1 through A3-4. Notice that for eachmonth, a production report is prepared using both the weighted-average and the FIFOmethods. These reports will be compared to illustrate what effect, if any, changing prices andchanges in the percent complete have on the allocation of costs.

Exhibit A3-1 is the production report for March. Material costs are $10 per unit, and

conversion costs are $2 per unit. At the beginning of March, there were 10 units in process inthe molding department 30% complete as to materials, and 50% complete as to conversioncosts. The cost of the work in process is $40. Per unit material costs and conversion costs areunchanged during the month. Costs added during the month are $240. At the end of March,there is no change in the number of units in process or the percent complete; 20 units havebeen completed and transferred out, and 10 remain in process. You will notice that both theweighted-average method and the FIFO method result in the same cost allocation $40 ofthe total costs remain with the work in process inventory, and $240 of the costs aretransferred out to the painting department. Review Exhibit A3-1 to see how the reports differand how they are the same. File MA1M3P2 (the four sheets are reproduced as Exhibits A3-1to A3-4) contains the production data and production reports for Papier Mch Arts, Inc.Once you are satisfied that you understand how this worksheet functions, turn to Exhibit 3-2,the April production report.

In April, the molding department again completed 20 units and 10 remain in process at theend of the month. The units in process are more complete than those in the opening inventory 85% complete as to material, and 90% complete as to conversion costs. Notice that onceagain, the allocation of costs between work in process inventory and costs transferred out arethe same using the FIFO method as they are using the weighted-average method. This isbecause the costs, which determine the allocation, are unchanged. The change in percentagecomplete does not result in a different cost allocation. This would be the case as long as theper-unit costs remain the same, even if the number of units changed.


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EXHIBIT A3-1

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A B C D E F G H I J

MA1: PRODUCTION REPORT: Weighted-average method compared to FIFO methodCGA-CANADA No change in prices, or usage

No change in percent completeExhibit A3-1

DATA TABLE Material cost per unit: opening $10.00Percent complete purchases $10.00

Units Materials Conversion Conversion cost per unit: $2.00Work in process, March 1 10 30% 50%Started into production 20Completed and transferred out 20Work in process, ending 10 30% 50%

COSTSWork in process, beginning $30 $10

ost a e ur ng arc $200 $40

WEIGHTED-AVERAGE METHOD FIFO METHOD

QUANTITY SCHEDULE QUANTITY SCHEDULEUnits to be accounted for: Units Units to be accounted for: Units

Units in process, beginning 10 Units in process, beginning 10Units started into production 20 Units started into production 20Total units to account for 30 Total units to account for 30

Units accounted for: Units accounted for:Units transferred out 20 Units from beginning inventory 10Units in process, ending 10 Units started and completed in March 10

Units in process, ending 10Total units accounted for 30 Total units accounted for 30

PAPIER MACHE ARTS, INC. PAPIER MACHE ARTS, INC.

Molding Department Production Report Molding Department Production Report(Weighted-Average Method) (FIFO Method)For the month of March 2001 For the month of March 2001

Quantity Schedule and Equivalent Units Quantity Schedule and Equivalent Units

Equivalent units: Materials Conversion Total Equivalent units: Materials Conversion TotalW-I-P beginning 7 5

Completed 20 20 Started and completed 10 10W-I-P ending 3 5 W-I-P ending 3 5

Equiv. units of production 23 25 Equiv. units of production 20 20

Total and Unit Costs Total and Unit CostsCosts: Costs:

W-I-P beginning $30 $10 $40Current 200 40 240 Current $200 $40 $240Total cost $230 $50 $280 Total cost $200 $40 $240

Weighted-average unit cost 10.0000 2.0000 12.0000 Unit cost 10.0000 2.0000 12.0000

Cost reconciliation: Cost reconciliation:

Materials ConversionUnits Cost Equ.Units Equ.Units Cost

Cost to be accounted for: Cost to be accounted for:W-I-P beginning 10 $40 W-I-P beginning 7 5 $40Cost added in period 20 240 Added in period 13 15 240

Total cost to account for 30 $280 Total to account for 20 20 $280

Cost accounted for: Cost accounted for:Transferred out 20 $240 Units from beg. inventoryW-I-P ending 10 Work in process, March 1 $40Materials cost $30 Cost to complete 7 5 80Conversion cost 10 Total cost 120Total cost in W-I-P 40 Units started and completed 10 10 120

Total cost accounted for 30 $280 Total cost transfered $240

Work in process, endingMaterials cost 3 $30Conversion cost 5 10

Total cost in W-I-P 40Total cost accounted for 20 20 $280


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EXHIBIT A3-2


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Now turn to Exhibit A3-3, the May production report. The companys suppliers announced aprice increase that was effective May 1. As Papier Mch Arts, Inc. uses a just-in-timesystem, all the materials consumed in May were purchased at the higher price. Material costsdoubled from $10 per unit to $20 per unit. The units in process at the end of the month wereat the same stage of completion as those in process at the beginning of the month 85%complete as to materials and 90% complete as to conversion costs. In this case, the weighted-average method results in a different allocation between costs transferred out and work inprocess than does the FIFO method. As the percent complete has not changed, you canconclude that this is due to the change in costs.

Now follow this difference through the worksheet. Look at the different cost allocation thatresults from the two methods $25 more was charged to work in process using the FIFOcost allocation than was charged using the weighted-average cost allocation. You can see howthe $25 difference is arrived at by analyzing the components of work in process and of thecosts transferred out. The difference is all in the material costs; both methods charge the sameamount of conversion costs to work in process because the conversion costs have notchanged. Using FIFO, the material work in process inventory consists of 10 units that are85% complete using materials that cost $20 per unit, or $170. Using the weighted-averagemethod, material costs include both the costs in opening inventory and costs added during themonth, averaged over the equivalent units produced in the month. Using the weighted-

average method, the material work in process inventory consists of 10 units that are 85%complete using materials that cost an average of $17.0175 per unit, or $145. Thus, the $25difference can be accounted for and the two methods reconciled.

One more change will further illustrate that it is costs, not the degree of completion, thataffect the allocation of costs between work in process and costs transferred out.

Papier Mch Arts, Inc. shuts down the plant for the last two weeks of June for staff to taketheir annual vacation. All work in the molding department is completed and transferred to thepainting department prior to the shutdown. Thus, there is no work in process inventory at theend of June or the beginning of July; so for the month of June, both the weighted-average andthe FIFO methods transfer all costs to the painting department. During the June shutdown, theprice of materials returned to $10 per unit and stayed at that level throughout July. However,

as other producers return to work, Papier Mch Arts, Inc.s supplier introduces a priceincrease that is effective as of August 1, and the price returns to $20 per unit. Now look atExhibit A3-4, the August production report, and examine the impact of a change in price aswell as a change in the percent complete of the units in progress.


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6Reading 3-1 Management Accounting 1

EXHIBIT A3-3


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EXHIBIT A3-4


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Look at the different cost allocation that results from the two methods $21 more wascharged to work in process using the FIFO cost allocation than was charged using theweighted-average cost allocation. You can see how the $21 difference is arrived at byanalyzing the components of work in process and of the costs transferred out. As will bedemonstrated, the difference is all in the material costs; both methods charge the sameamount of conversion costs to work in process because the per-unit conversion costs have notchanged. Using FIFO, the material work in process inventory consists of 10 units that are70% complete using materials that cost $20 per unit, or $140. Using the weighted-averagemethod, material costs include both the costs in opening inventory and costs added during themonth, averaged over the equivalent units produced in the month. Using the weighted-average method, the material work in process inventory consists of 10 units that are 70%complete using materials that cost an average of $17.0370 per unit, or $119.

To help you understand the reports, following is a summary of the key events in each month:

In March, the percent complete is the same at the end of the month as it was at the beginningof the month. Prices remain stable. The cost allocation is the same using the FIFO and theweighted-average method.

In April, the percent complete is greater at the end of the month than it was at the beginningof the month. Prices remain stable. The cost allocation is the same using the FIFO and the

weighted-average method.In May, the percent complete is the same at the end of the month as it was at the beginning of

the month. Prices doubled at the beginning of the month. The FIFO method of costallocation charges less to Costs transferred out and more to Work in process than doesthe the weighted-average method of cost allocation.

In August, the percent complete is lower at the end of the month than it was at the beginningof the month. Prices doubled at the beginning of the month. The FIFO method of costallocation charges less to Costs transferred out and more to Work in process than doesthe the weighted-average method of cost allocation.

Although these examples have illustrated the effects using material cost changes and haveignored the effect of any change in conversion costs, a change in conversion costs would have

the same effect as a change in material costs. You may wish to copy file MA1M3P2 and trysome other changes on your own to see the effect that changes have on the cost allocations.

EXAMPLE A3.2

Turn now to Exercises E4-8 and E4-9 on pages 173 and 174 of the textbook. The overheadwill be ignored in these exercises to provide one more illustration of the difference between theweighted-average and the FIFO methods of allocating costs of work in process to inventory.The FIFO method allocates $300 more to work in process inventory than does the weighted-average method.

Exhibit A3-5 contains the production reports for this example. By following the exhibit, also youcan see how the difference of $300 is arrived at. $300 [(1.2000 1.1909) 60% complete 50,00work in process units] is in the material costs. Comparing the production reports again demonstratthat it is the change in costs that results in different cost allocations when the FIFO method is usedcompared to the weighted-average method.


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Management Accounting 1 Reading 3-19

EXHIBIT A3-5

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A B C D E F G H I

Exhibit A3-5

DATA TABLE

Percent complete

Units Materials Conversion, 80,000 80% 75%

Started into production 760,000

Completed and transferred out 790,000

Work in process, ending 50,000 60% 20%COSTS

Work in process beginning $68,600 $30,000 $907,200 $370,000

WEIGHTED-AVERAGE METHOD FIFO METHOD

QUANTITY SCHEDULE QUANTITY SCHEDULE

Units to be accounted for: Units Units to be accounted for: Units

Units in process, beginning 80,000 Units in process, beginning 80,000

Units started into production 760,000 Units started into production 760,000

Total units to account for 840,000 Total units to account for 840,000

Units accounted for: Units accounted for:

Units transferred out 790,000 Units from beginning inventory 80,000

Units in process, ending 50,000 Units started and completed in May 710,000

Units in process, ending 50,000

Total units accounted for 840,000 Total units accounted for 840,000

KALOX, INC. KALOX, INC

Department One Production Report Department One Production Report

(Weighted-Average Method) (FIFO Method)

For the month of May 2001 For the month of May 2001

Quantity Schedule and Equivalent Units Quantity Schedule and Equivalent Units

Equivalent units: Materials Conversion Total Equivalent units: Materials Conversion

W-I-P beginning 16,000 20,000

Completed 790,000 790,000 Started and completed 710,000 710,000

W-I-P ending 30,000 10,000 W-I-P ending 30,000 10,000

Equiv. units of production 820,000 800,000 Equiv. units of production 756,000 740,000

Total and Unit Costs Total and Unit Costs

Costs: Costs:

W-I-P beginning $68,600 $30,000 $98,600

Current 907,200 370,000 1,277,200 Current $907,200 $370,000 $

Total cost $975,800 $400,000 $1,375,800 Total cost $907,200 $370,000 $

Weighted-average unit cost 1.1900 0.5000 1.6900 Unit cost 1.2000 0.5000

Cost reconciliation: Cost reconciliation:

Materials Conversion

Units Cost Equ.Units Equ.Units Cost

Cost to be accounted for: Cost to be accounted for:

W-I-P beginning 80,000 $98,600 W-I-P beginning 16,000 20,000 $98,600

Cost added in period 760,000 1,277,200 Added in period 740,000 720,000 1,277,200

Total cost to account for 840,000 $1,375,800 Total to account for 756,000 740,000 $1,375,800

Cost accounted for: Cost accounted for:

Transferred out 790,000 $1,335,100 Units from beg. inventory

W-I-P ending 50,000 Work in process, May 1 $98,600

Materials cost $35,700 Cost to complete 16,000 20,000 29,200Conversion cost 5,000 Total cost 127,800

Total cost in W-I-P 40,700 Units started and completed 710,000 710,000 1,207,000

Total cost accounted for 840,000 $1,375,800 Total cost transfered $1,334,800

Work in process, ending

Materials cost 30,000 $36,000

Conversion cost 10,000 5,000

Total cost in W-I-P 41,000

Total cost accounted for 756,000 740,000 $1,375,800


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Charles T. Horngren, George Foster, Srikant M. Datar, and Howard D. Teall, Cost Accounting A Managerial Emphasis,

First Canadian Edition (Scarborough, Ontario: Prentice-Hall Canada, Inc., 1997), pages 644-652. Reproduced with thepermission of Pearson Education Canada, Don Mills, Ontario.

READING 3-2

SPOILAGE


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6Reading 3-2 Management Accounting 1


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3.1 Comparison of job-order and process costing

Learning objective

Identify the major similarities and differences between job-order and process costing. (Level 2)

EVEL 2

ob-order and process costing are not mutually exclusive. In terms of an entire production operation, both approaches toroduct costing are possible depending on the nature of various parts of the manufacturing operation. It may appear that rder costing is easier than process costing. In reality, the reverse is true because the supporting requirements for processosting (for example, there is no need to trace material and labour to the product) make process costing easier to apply.

eview Exhibit 4-1, which lists the differences between job-order and process costing.

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3.2 A perspective of process cost flows

Learning objective

Prepare journal entries to record the flow of materials, labour, and overhead through a process costing system. (L1)

EVEL 1

department can be viewed as one stage of completion in the production process. The use of a department as a costingbject simplifies process costing. From an accounting perspective, a department is an organizational unit, which is easier teal with than the units produced

tudy the flow description in Exhibit 4-3 carefully. Notice the yellow line flowing from Department A to Department B. Thisustrates the transferred-in costs from Department A to Department B. Transferred-in costs are direct materials plusonversion costs that have been allocated to the units produced in Department A and that are now flowing into theepartment B manufacturing process.

ransferred-in costs = DM + CC incurred in the previous department.

C = D L + MOH, as introduced in Topic 1.6.

herefore, Transferred-in costs = DM + D L + MOH.

eview the journal entries on pages 134-135 associated with material costs, labour costs, and overhead costs. Predetermiverhead rates may not be needed but can be used if production or costs fluctuate. If necessary, review predeterminedverhead.

Activity 3 .2-1 Comparison of job-order and process costing

Work through this activity to reinforce your understanding of the similarities and differences between job and processosting, and to review the elements of WIP.


http://lms.cga-canada.org/includedmedia/job_order/job_order.htmhttp://lms.cga-canada.org/includedmedia/job_order/job_order.htm


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3.3 Equivalent units of production

Learning objective

Explain and compute the equivalent units of production for both the weighted-average method and the FIFO meth(Level 1)

EVEL 1

he concept of equivalent units is very important. It can also be used to determine production quantity for job costing whroduction is partially completed.

otice the following fundamental inventory relationship:

eginning inventory + Transferred in = Transferred out + Ending inventory

his equation is not needed for simple problems, but it is necessary for situations where shrinkages, evaporation, or otherosses occur. The data for Double Diamond at the bottom of page 136 illustrates the analysis.

Units" refers to the number of items that were finished.

Units to account for" and "units accounted for" will be equal unless units are lost. Any difference between the two totalsepresents the "lost units" that are accounted for in later illustrations.

nits "transferred out" determine the costs moved from Work in process in the various departments to either the Work inrocess for the next step in the process or to Finished goods inventory.

Work in process, end" is used to calculate the costs of Work in process for the department.

ppendix 4A describes the Equivalent units of production calculation when using the FIFO method.




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3.4 Production report Weighted-average method

Learning objective

Prepare a production report using the weighted-average method. (Level 1)

EVEL 1

xhibit 4-8 presents a production report using weighted-average costing. The costs of the beginning work in process areroken down and added to the cost of raw materials used, direct labour used, and factory overhead applied during theeriod. These totals are used as the numerator in the unit cost calculation.

When there are multiple production departments, transferred-in costs require separate treatment in the production rep

he easiest way to approach transferred-in costs is to view them as a direct material cost of the department receiving theansfer. These costs are combined with that department's own materials, labour, and overhead costs, producing a total uost, which in turn is transferred out to another production department or to Finished goods.




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3.5 Production report FIFO method

Learning objective

Prepare a production report using the FIFO method, and compare production reports prepared under the weightedaverage method and FIFO. (Level 1)

EVEL 1

sing FIFO, the equivalent units are calculated differently because the equivalent work done on the opening work in proceast period is excluded from the computation. In Exhibit 4-9, page 149, the resulting equivalent units of production of 4,85or materials and 4,840 for conversion give the measure of work done for each cost category in the current period. Theumerator for the unit cost calculation is therefore the cost added during the current period for materials and conversion.he opening work in process costs are ignored for the unit cost calculation.

herefore, the costs accounted for calculation is different under FIFO because beginning work in process costs are notaken into consideration when allocating current period costs using equivalent units. Instead the beginning work in procesosts are included in the current period costs only and not spread over both goods completed in the current period andnding inventory.

roduction report comparison Weighted-average and FIFO methods

he major difference between the two methods is that weighted-average mixes the manufacturing costs of beginningnventory with the current periods production costs to calculate the equivalent unit cost. In fact, these costs were incurrehe previous period. Fluctuations in price of materials or conversion between periods would result in the variation in cost fhe previous period being carried through to future periods. When using the FIFO method, all costs in beginning inventoryncurred in the previous period are realized only in the current period because these units are considered to be finished firefore the new units are started. In a JIT environment, there is very little difference between the two methodologies becahe variation is due to the costing of ending and beginning inventories.

he text on pages 151-152 provides a discussion of the differences between weighted-average and FIFO. Reading 3-1 andppendix 4A of the textbook also provide a more detailed comparison of the two methods.




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3.6 Shrinkage, spoilage, and lost units

Learning objective

Compute the cost of lost units or shrinkage. (Level 1)

EVEL 1

hrinkage and lost units are briefly discussed in Supplement 4C of the textbook. In many industries, the loss of units is annavoidable aspect of manufacturing operations. Consequently, shrinkage and lost units are necessary components in thetudy of process costing. Management also needs to know what has been lost in order to control the production process.

Machine breakdowns, operator errors, or accidents can result in units being lost. Evaporations or machine tolerances canesult in fewer good units being finished than were started.

arefully study Reading 3-2 , which explains and illustrates alternative ways of dealing with spoilage and lost units.

ote: Standard costing methods are mentioned on page 4 of Reading 3-2. This material is not examinable in this coursnd the detailed discussion has therefore been removed from the reading.




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3.7 Operation costing

Learning objective

State the conditions under which operation costing is useful to management, and explain the impact of a flexiblemanufacturing system on job-order and process costing. (Level 2)

EVEL 2

ob-order costing is a costing system used for products that are made to the customer's specifications. Process costing issed for products that are identical. Some products may have part of their operations costed using the job-order costingystem and other parts costed using the process costing system. This mixed accounting system is called operation costihe cost of the product is the total of some costs applied on an average or FIFO basis plus other costs accumulatedpecifically for that product.

or example, consider the cost of a pizza. All crusts have the same per-unit cost for the dough and the labour. The cost ofne layer of cheese may be added to the basic cost. These costs may be tracked by a process costing system. The cost ofhe toppings is recorded by a job-cost system because the topping cost depends on the type of pizza prepared.

n the previous two modules and this module, you learned about manufacturing innovations (JIT, FMS) that are makingperations more efficient. Flexible manufacturing systems streamline operations so that costs become more generalizedather than specific to each job. When costs are generalized, process costing may be used. Therefore, FMS not onlytreamlines the physical process but leads to efficiency in the accounting process.

Chapter summary

his topic marks the end of the textbook coverage of process costing. To ensure you understand this material and theorresponding terminology, read the summary on page 143 and work through the review problems on pages 143-147.




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3.8 Computer illustration 3.8-1: Production report Weighted-averagmethod and FIFO method

Learning objective

Design a worksheet that calculates and prepares a production report and cost reconciliation for both weighted-

average and FIFO methods, and compare the two methods. (Level 1)

EVEL 1

hapter 4 of the textbook explains the preparation of a production report using the weighted-average method and the FIFmethod in detail. Reconciliation of costs charged to production under FIFO is also explained well in Appendix 4A. Thisomputer illustration contrasts the two methods and demonstrates how you can use a spreadsheet program to prepare aroduction report and cost reconciliation for both methods.

Material provided

File MA1M3P1 which containsr a prebuilt worksheet M3P1, which you will complete, andr a completed solution worksheet M3P1S, to which you can compare your work.

Description

roblems P4-19 and P4-20 on pages 162-163 in your textbook require you to prepare a production report for the mixingepartment for the month of June 20X5 using the weighted-average method and the FIFO method, respectively.

equired

omplete the worksheet M3P1 by entering the required formulas.

rocedure

rst familiarize yourself with the information in Exhibit 4-8 and the illustrations on pages 150-151. Note how the variousosts are calculated and recorded. Then perform the following steps.

1. Open the file MA1M3P1 and click the sheet tab M3P1.

2. Study the layout of the worksheet. Cells A6 to E14 contain the data table with the information provided in Problem19 (page 162-163).

Move to cell B12 and observe the formula displayed:

=IF (C8+C9C10+C11, "******ERROR IN DATA TABLE******, "COSTS")

This formula can be analyzed as follows: if beginning WIP (C8) plus units started into production (C9) do not equa() units completed and transferred out (C10) plus ending WIP (C11), then the error message

******ERROR IN DATA TABLE******

is displayed in B12. If C8+C9=C10+C11, then B12 displays the label COSTS. (You can test this by entering 60,000C8. The error message should appear.) The purpose of this formula is to reduce the chance of data entry errors thwill carry down through the production report.

3. Display rows 16 to 29. Notice the way the worksheet is set up. Columns A to C contain the quantity schedule for tweighted-average method. Columns F to I contain the quantity schedule for the FIFO method.


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4. Display rows 24 to 29. Observe the difference in presentation of the units accounted for between the weighted-average method and the FIFO method. The FIFO method separates the units in beginning inventory from the unitsstarted and completed in the current month while the weighted-average method does not.

5. Move down rows 30 to 70, which contain a partially completed production report for both methods of calculating ucosts. The production report for the weighted-average method appears in columns A to E. The production report fthe FIFO method appears in columns F to J. Notice that some cells show a value of 0. These cells contain formulasthat have been pre-entered to save you time. When you have completed the equivalent unit calculations, these cewill show the correct values.

6. Enter in cells B39 to C40 the required formulas to calculate the equivalent units of production under the weighted-average method.

7. Enter in cells G38 to H40 the required formulas to calculate the equivalent units of production under the FIFOmethod. Note the difference in presentation from the weighted-average method. As discussed in the textbook, whcalculating equivalent units under the FIFO method, the amount of work to be completed on the units of beginninginventory must be shown. Then the number of units started and completed is shown, followed by the amount of wcompleted on units in process at the end.

8. Enter in row 48 the required formulas to calculate the unit cost of production under both methods.

9. Complete the worksheet by entering the necessary formulas in the following cells.

10. After you have completed the worksheet, save a copy.

11. Print a copy of your sheet.

12. Next, click the M3P1S tab for the solution. Compare the solution with your printout from step 11. If you do not hathe same results, go to step 13.

13. Print a copy of the formulas of your worksheet, and compare them with the formulas of the solution worksheet.Correct any errors.

Conclusion

he only difference between the weighted-average method and the FIFO method is the treatment of the beginning inventhe FIFO method separates the transferred units into units from the beginning inventory and units started and completeduring the current period. The FIFO method is therefore more complex than the weighted-average method; however, it mccurately reflects the production costs incurred during the current period.

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Module 3 summary

rocess costing applies mainly to homogeneous products or services produced on a continuous basis.

opic 3.1 explains that the accumulation of costs by department rather than by job distinguishes process costing from jobrder costing.

opic 3.2 tracks the flow of costs in the process costing system.

opic 3.3 introduces the concept of equivalent units, which must be determined in order to compute unit costs in a givenepartment.

wo methods are usually used to prepare a production report that summarizes the activity and costs that have taken placedepartment: weighted average and FIFO. Topics 3.4 and 3.5 (respectively) deal with the application of these methods.

ecause of the nature of manufacturing operations, shrinkage, spoilage (normal and abnormal), and lost units cannot bevoided. Topic 3.7 explores how to account for and dispose of their costs.

opic 3.8 introduces operation costing, a hybrid cost system that combines accounting treatment borrowed partly from jo

rder and partly from process costing. This topic also discusses the impact of the flexible manufacturing system.

nally, Topic 3.9 concludes the module with the production report and cost reconciliation under the weighted-average andIFO methods. The computer illustration helps you understand both the mechanics of how costs are allocated and each

methods effect on costing.

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Weighted Avrg

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