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PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 4System Design:
Process Costing
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Both systems assign material, labor andoverhead costs to products and they provide a
mechanism for computing unit product cost. Both systems use the same manufacturing
accounts, including Manufacturing Overhead,
Raw Materials, Work in Process, and FinishedGoods.
The flow of costs through the manufacturingaccounts is basically the same in both systems.
Similarities Between Job-Order
and Process Costing
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Process costing is used when a single product isproduced on a continuing basis or for a longperiod of time. Job-order costing is used whenmany different jobs are worked on each period.
Process costing systems accumulate costs bydepartment. Job-order costing systems
accumulate costs by individual jobs.
Process costing systems compute unit costs bydepartment. Job-order costing systems compute
unit costs by job on the job cost sheet.
Differences Between Job-Order
and Process Costing
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Process costing is used for products that are:
a. Different and produced continuously.b. Similar and produced continuously.
c. Individual units produced to customer
specifications.d. Purchased from vendors.
Quick Check
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Process costing is used for products that are:
a. Different and produced continuously.b. Similar and produced continuously.
c. Individual units produced to customer
specifications.d. Purchased from vendors.
Quick Check
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Processing DepartmentsAny location in an organization where materials,
labor, or overhead are added to the product.
The activities performed in a processing
department areperformed uniformlyon allunits of production. Furthermore, the output
of a processing department must behomogeneous.
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FinishedGoods
Cost ofGoodsSold
Work inProcess
DirectMaterials
Direct Labor
ManufacturingOverhead
Flow of Materials, Labor, and
Overhead Costs
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FinishedGoods
Cost ofGoodsSold
Direct Labor
ManufacturingOverhead
Jobs
Costs are traced andapplied to individualjobs in a job-order
cost system.
DirectMaterials
Flow of Materials, Labor, and
Overhead Costs
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FinishedGoods
Cost ofGoodsSold
Direct Labor
ManufacturingOverhead
ProcessingDepartment
Costs are traced andapplied to departments
in a process costsystem.
DirectMaterials
Flow of Materials, Labor, and
Overhead Costs
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For purposes of thisexample, assume there are
two processing departments Departments A and B.
We will use T-accounts andjournal entries.
T-Account and Journal Entry
Views of Process Cost Flows
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Raw Materials
Work in Process
Department B
Work in ProcessDepartment A
DirectMaterials
DirectMaterials
DirectMaterials
The Flow of Raw Materials
(in T-Account form)
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GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of di rect m aterial.
The Flow of Raw Materials
(in journal entry form)
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Work in Process
Department B
Work in ProcessDepartment ASalaries and
Wages Payable
DirectMaterials
DirectMaterials
DirectLabor
Direct
Labor DirectLabor
The Flow of Labor Costs
(in T-Account form)
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GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record di rect labo r co sts.
The Flow of Labor Costs
(in journal entry form)
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Work in Process
Department B
Work in ProcessDepartment A
ManufacturingOverhead
OverheadApplied to
Work inProcess
AppliedOverhead
AppliedOverhead
DirectLabor
DirectMaterials
DirectLabor
DirectMaterials
ActualOverhead
The Flow of Manufacturing Overhead Costs(in T-Account form)
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GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit CreditWork in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To appl y overh ead to d epartm ents.
The Flow of Manufacturing Overhead Costs(in journal entry form)
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Work in ProcessDepartment B
Work in ProcessDepartment A
DirectMaterialsDirectLabor
AppliedOverhead
Direct
MaterialsDirectLabor
AppliedOverhead
Transferredto Dept. B
Transferredfrom Dept. A
Partially Completed Units Transferred(in T-Account form)
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GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit CreditWork in Process - Department B XXXXX
Work in Process - Department A XXXXX
To recor d the transfer o f goo ds from
Departm ent A to Departm ent B.
Partially Completed Units Transferred(in journal entry form)
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Finished GoodsWork in Process
Department B
Cost ofGoods
Manufactured
Direct
MaterialsDirectLabor
AppliedOverhead
Transferredfrom Dept. A
Cost ofGoods
Manufactured
Transfer of Cost of Completed Units(in T-Account form)
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GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit CreditFinished Goods XXXXX
Work in Process - Department B XXXXX
To record the com p le ti on o f good s
and th ei r t ransfer from Departm ent B
to f in ished go od s inventory .
Transfer of Cost of Completed Units(in journal entry form)
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Finished Goods
Cost of Goods Sold
Work in ProcessDepartment B
Cost of
GoodsManufactured
Direct
MaterialsDirectLabor
AppliedOverhead
Transferredfrom Dept. A
Cost ofGoodsSold
Cost of
GoodsSold
Cost of
GoodsManufactured
Cost of Finished Goods Sold
(in T-Account form)
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GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit CreditCost of Goods Sold XXXXX
Finished Goods XXXXX
To record co st of goo ds so ld .
Cost of Finished Goods Sold
(in journal entry form)
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Equivalent Units of Production
Equivalent units are the product of the numberof partially completed units and the percentage
of completion of those units.
We need to calculate equivalent units because adepartment usually has some partially completed
units in its beginning and ending inventory.
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Two half completed products areequ ivalent toone completed product.
So, 10,000 units 70% completeare equivalent to7,000 complete units.
+ = 1
Equivalent Units The Basic Idea
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For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process that are 30 percent
complete. How many equivalent units ofproduction did Jones have for the period?
a. 10,000
b. 11,500c. 13,500
d. 15,000
Quick Check
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For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process that are 30 percent
complete. How many equivalent units ofproduction did Jones have for the period?
a. 10,000
b. 11,500c. 13,500
d. 15,000
10,000 units + (5,000 units 0.30)
= 11,500 equivalent units
Quick Check
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Calculating Equivalent Units
Equivalent units can be calculated twoways:
The First-In, First-Out MethodFIFOis covered in the appendix available on the web.
The Weighted-Average MethodThismethod will be covered in the main portion ofthe chapter.
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Learning Objective 2
Compute the equivalentunits of production using theweighted-average method.
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The weighted-average method . . .
Makes no distinction between work done inprior or current periods.
Blends together units and costs from priorand current periods.
Characteristics of the Weighted
Average Method
The equivalent units of production for adepartment are the number of units transferredto the next department (or Finished Goods) plusthe equivalent units in the departments ending
Work in Process inventory.
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Direct labor costsmay be small
in comparison to
other productcosts in processcosting systems.
DirectMaterials
Type of Product Cost
DollarAmo
unt
DirectLabor
Conversion
Treatment of Direct Labor
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Type of Product Cost
DollarAmo
unt Conversion
Direct labor and manufacturing overhead may becombined into one product cost called convers ion.
DirectMaterials
Treatment of Direct Labor
Direct labor costsmay be small
in comparison to
other productcosts in processcosting systems.
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Smith Company reported the following activity inthe Assembly Department for the month of June:
Percent Completed
Units Materials Conversion
Work in Process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400
of Department A during June
Work in Process, June 30 900 60% 30%
Weighted-AverageAn Example
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The first step in calculating the equivalent units is to identifythe units completed and transferred out of Assembly
Department in June (5,400 units)
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Weighted-AverageAn Example
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The second step is to identify the equivalent unitsofproduction in ending work in processwith respect to
materialsfor the month (540 units) and adding this to the5,400 units from step one.
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in Process, June 30:
900 units 60% 540
Equivalent units of Production in
the Department during June 5,940
Weighted-AverageAn Example
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Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in Process, June 30:
900 units 60% 540
900 units 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
The third step is to identify the equivalent unitsof production inending Work in Processwith respect to conversion for the
month (270 units) and adding this to the 5,400 units from stepone.
Weighted-AverageAn Example
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Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in Process, June 30:
900 units 60% 540
900 units 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
Equivalent units of production alwaysequals:Units completed and transferred
+ Equivalent units remaining in Work in Process
Weighted-AverageAn Example
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EndingWork in Process900 Units
60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
Materials
5,400 Units Completed540 Equivalent Units 900 60%
5,940 Equivalent units
of production
BeginningWork in Process
300 Units40% Complete
Weighted-AverageAn Example
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6,000 Units Started
5,400 Units Completed270 Equivalent Units
900 30%
5,670 Equivalent units
of production
BeginningWork in Process
300 Units20%Complete
EndingWork in Process900 Units
30%Complete
Conversion
5,100 Units Startedand Completed
Weighted-AverageAn Example
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Learning Objective 3
Compute the cost per equivalentunit using the weighted-averagemethod.
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Beginning Work in Process Inventory: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete
Compute and Apply Costs
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The formula for computing the cost perequivalent unit is:
Cost perequivalent
unit=
Cost of beginning
Work in Process
inventoryCost added during
the period
Equivalent units of production
+
Compute and Apply Costs
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Here is a schedule with the cost and equivalentunit information.
TotalCost Materials Conversion
Cost to be accounted for:
Work in Process, June 1 10,039$ 6,119$ 3,920$
Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
Compute and Apply Costs
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TotalCost Materials Conversion
Cost to be accounted for:
Work in Process, June 1 10,039$ 6,119$ 3,920$
Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
Cost per equivalent unit 21.00$ 15.00$
Here is a schedule with the cost and equivalentunit information.
$124,740 5,940 units = $21.00 $85,050 5,670 units = $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00
Compute and Apply Costs
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Learning Objective 4
Assign costs to units using theweighted-average method.
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of Units
Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of Units
Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit 21.00$ 15.00$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of Units
Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit 21.00$ 15.00$Cost of units transferred out 113,400$ 81,000$ 194,400$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Learning Objective 5
Prepare a costreconciliation report.
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Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751Total cost to be accounted for 209,790$
Assembly Department
Cost Reconciliation
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Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751Total cost to be accounted for 209,790$
Cost accounted for as follows:
Cost of ending Work in Process Inventory 15,390$Cost of units transferred out 194,400
Total cost accounted for 209,790$
Assembly Department
Cost Reconciliation
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PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Appendix 4AFIFO Method
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FIFO vs. Weighted-Average Method
The FIFO method (generally consideredmore accurate that the weighted-average
method) differs from the weighted-averagemethod in two ways:
1. The computation of equivalent units.2. The way in which the costs of beginning
inventory are treated.
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Learning Objective 6
Compute the equivalentunits of production usingthe FIFO method.
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Equivalent Units FIFO Method
Lets revisit the Smith Company example. Here is information
concerning the Assembly Department for the month ofJune.
Percent CompletedUnits Materials Conversion
Work in Process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400
of Department A during June
Work in Process, June 30 900 60% 30%
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Equivalent Units FIFO Method
Step 1: Determine equivalent units needed to completebeginning Work in Process inventory.
Materials ConversionTo complete beginning Work in Process:
Materials: 300 units (100% - 40%) 180
Conversion: 300 units (100% - 20%) 240
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Equivalent Units FIFO Method
Step 2: Determine units started and completedduringthe period.
Materials ConversionTo complete beginning Work in Process:
Materials: 300 units (100% - 40%) 180
Conversion: 300 units (100% - 20%) 240
Units started and completed during June 5,100 5,100
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Equivalent Units FIFO Method
Step 3: Add the equivalent units in ending Work inProcess inventory.
Materials ConversionTo complete beginning Work in Process:
Materials: 300 units (100% - 40%) 180
Conversion: 300 units (100% - 20%) 240
Units started and completed during June 5,100 5,100Ending Work in Process:
Materials: 900 units 60% complete 540
Conversion: 900 units 30% complete 270
Equivalent units of production 5,820 5,610
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BeginningWork in Process
300 Units40% Complete
Ending
Work in Process900 Units
60% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
Materials
5,100 Units Completed540 Equivalent Units
900 60%
5,820 Equivalent units
of production
180 Equivalent Units300 60%
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BeginningWork in Process
300 Units20% Complete
Ending
Work in Process900 Units
30% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
Conversion
5,100 Units Completed270 Equivalent Units
900 30%
5,610 Equivalent units
of production
240 Equivalent Units300 80%
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Equivalent Units: Weighted-
Average vs. FIFO
Materials Conversion
Equivalent units - weighted-average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units 40% 120300 units 20% 60
Equivalent units - FIFO method 5,820 5,610
As shown below, the equivalent units in beginning inventory aresubtracted from the equivalent units of production per theweighted-average method to obtain the equivalent units of
production under the FIFO method.
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Learning Objective 7
Compute the cost per equivalentunit using the FIFO method.
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Beginning Work in Process: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in June:
Materials cost $ 118,621Conversion cost $ 81,130
Ending Work in Process: 900 unitsMaterials: 60% completeConversion: 30% complete
Cost per Equivalent Unit - FIFO
Lets revisit the Smith Company Assembly Departmentfor the month of June to prepare our production report.
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Cost per Equivalent Unit - FIFO
The formula for computing the cost perequivalent unit under FIFO method is:
Cost perequivalent
unit=
Cost added during the period
Equivalent units of production
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Cost per Equivalent Unit - FIFO
Total
Cost Materials Conversion
Cost added in June 199,751$ 118,621$ 81,130$Equivalent units 5,820 5,610
Cost per equivalent unit 20.3816$ 14.4617$
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$118,600 5,820 $81,130 5,610
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Learning Objective 8
Assign costs to unitsusing the FIFO method.
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Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Assembly Department
Cost of Ending WIP Inventory
Applying Costs - FIFO
Step 1: Record the equivalent units of production in endingWorkin Process inventory.
900 units 60% 900 units 30%
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Applying Costs - FIFO
Step 2: Record the cost per equivalent unit.
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 20.3816$ 14.4617$
Assembly Department
Cost of Ending WIP Inventory
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Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 20.3816$ 14.4617$
Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$
Assembly Department
Cost of Ending WIP Inventory
Applying Costs - FIFO
Step 3: Compute the cost of ending Work in Process inventory.
540 $20.3816 270 14.4617
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Cost of Units Transferred Out
Step 1: Record the cost in beginningWork in Process inventory.
Materials Conversion Total
Cost of Units Transferred Out:Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$
Assembly Department
Cost of Units Transferred Out in June
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Cost of Units Transferred Out
Step 2: Compute the cost to complete the units in beginningWork in Process inventory.
Materials Conversion Total
Cost of Units Transferred Out:Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit 20.3816$ 14.4617$
Cost to complete beginning WIP 3,668$ 3,471$ 7,139
Assembly Department
Cost of Units Transferred Out in June
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Cost of Units Transferred Out
Step 3: Compute the cost of units started and completedthisperiod.
Materials Conversion Total
Cost of Units Transferred Out:Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit 20.3816$ 14.4617$
Cost to complete beginning WIP 3,668$ 3,471$ 7,139
Cost of units started and completed:Units started and completed 5,100 5,100
Cost per equivalent unit 20.3816$ 14.4617$
Cost of units started and completed 103,946$ 73,755$ 177,701
Assembly Department
Cost of Units Transferred Out in June
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Cost of Units Transferred Out
Step 4: Compute the total cost ofunits transferred out.
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit 20.3816$ 14.4617$
Cost to complete beginning WIP 3,668$ 3,471$ 7,139
Cost of units started and completed:Units started and completed 5,100 5,100
Cost per equivalent unit 20.3816$ 14.4617$
Cost of units started and completed 103,946$ 73,755$ 177,701
Cost of Units Transferred Out 194,879$
Assembly Department
Cost of Units Transferred Out in June
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Learning Objective 9
Prepare a costreconciliation report
using the FIFO method.
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Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751Total cost to be accounted for 209,790$
Assembly Department
Cost Reconciliation for June
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Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751Total cost to be accounted for 209,790$
Cost accounted for as follows:
Cost of ending Work in Process Inventory 14,911$
Cost of units transferred out 194,879Total cost accounted for 209,790$
Assembly Department
Cost Reconciliation for June
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A Comparison of Costing Methods
In a lean production environment, FIFO andweighted-average methods yield similar
unit costs.
When considering cost control, FIFO issuperior to weighted-average because it
does not mix costs of the current period withcosts of the prior period.
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End of Chapter 4
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