Chapter 08 – Process Costing
8-11
Solution:
1.
Work-in-process inventory account
Beginning balance 1,000
Plus: Units started 5,000
Less: Units transferred out ?
Ending balance 400
1,000 + 5,000 = Units transferred out (?) + 400.
The number of units completed and transferred to the Packaging Department in July was
5,600 units.
According to the FIFO method, the beginning work-in-process inventory (1,000 units)
would be completed first. The rest, 4,600 completed units (= 5,600 units – 1,000 units),
came from the units started in July.
2. Since materials and conversion (labor and overhead) were added at different paces during
the production process, separate equivalent units have to be calculated, one for materials
and the other for conversion.
Equivalent Units
Physical units
Materials
Conversion
To complete beginning WIP inventory
1,000
0
600a
Units started and completed
4,600
4,600
Work in ending WIP inventory
400
400
120b
Current work
5,000
5,320
a 1,000 units × (1 – 40%).
b 400 units × 30%.
3. Under the FIFO method, current period costs are divided by the current equivalent units
of production in July to determine the cost per equivalent unit.
Total
costs
Materials
costs
Conversion
costs
Current costs
$191,372
$60,500
$130,872
Current equivalent units
5,000
5,320
Cost per equivalent unit
$12.10
$24.60
4.
Total
Materials
Conversion
Transferred out:
Costs from the beginning WIP inventory
$16,052
$8,500
$7,552
Current costs to complete beginning WIP inventory
14,760
0
14,760a
Chapter 08 – Process Costing
8-12
Total costs from beginning WIP inventory
$30,812
$8,500
$22,312
Current costs of units started and completed
168,820
55,660b
113,160c
Cost assigned
$199,632
$64,160
$135,472
Ending WIP inventory:
Cost assigned
7,792
$4,840d
$2,952e
Total costs assigned
$207,424
$69,000
$138,424
a $24.60 × 600 EU.
b $12.10 × 4,600 EU.
c $24.60 × 4,600 EU.
d $12.10 × 400 EU.
e $24.60 × 120 EU.
As a final check, the following T-account summarizes the flow of costs for the Mixing
Department for the month of July.
Work-in-process inventory account
16,052
191,372
199,632
7,792
======================
LO 8-6 Analyze the accounting choice between FIFO and weighted-
average costing.
♦ Weighted-average costing does not separate beginning inventory from current period activity.
Unit costs are a weighted average of the two, whereas FIFO costing bases unit costs on current
period activity only.
• The difference in the costs from the two methods is larger when either the number of
units in the beginning work-in-process inventory is large relative to the number of units
started during the period, or when price changes from period to period are large, or both.
• The FIFO method results in unit costs that better reflect current costs. For this reason,
FIFO costing generally offers greater decision-making benefits.
• Although either weighted-average or FIFO costing is acceptable, the weighted-average
method has been criticized for masking current period costs.
Chapter 08 – Process Costing
8-13
• Exhibit 8.15 provides a summary of the steps for assigning costs to units of production
using process costing and assuming either a weighted-average or FIFO cost flow.
♦ As the product passes from one department to another, its costs must follow.
• Prior department costs (or transferred-in costs) are the manufacturing costs of units
transferred out of one department and into a subsequent department in the manufacturing
process.
• Prior department costs are conceptually equivalent to raw materials costs added at the
beginning of the production process.
• Equivalent whole units are 100 percent complete in terms of prior department costs.
• Prior period costs might include prior department cost, but prior department costs will
never include prior period cost of the current department.
======================
Demonstration Problem 3
(Continued from Demonstration Problem 1)
Process Excellence (PE), Inc. has two production departments: Mixing and Packaging.
Mixing
Department
Packaging
Department
Warehouse
At the Packaging Department, all materials are added at the beginning of the process. Labor and
overhead (conversion resources) are added evenly throughout the process. The following
information pertains to the Packaging Department for the month of July.
Physical units
Transferred-in
Materials
Conversion
Beginning work-in–
process inventory
900 units
(60% complete)
$10,680
$3,888
$5,130
Units completed
6,000 units
Ending work-in–
process inventory
500 units
(50% complete)
Costs added in July
199,920a
42,912
54,245
a This is the cost of goods completed and transferred out of the Mixing Department in July using
the weighted-average method.
Chapter 08 – Process Costing
8-14
Required:
1. Determine the number of units started in July.
2. Compute the equivalent units using the weighted-average method.
3. Compute the cost per equivalent unit using the weighted-average method.
4. Compute the costs of goods transferred out and the ending work-in-process inventory
using the weighted-average method.
Solution:
1.
Work-in-process inventory account
Beginning balance 900
Plus: Units started ?
Less: Units transferred out 6,000
Ending balance 500
900 + Units started (?) = 6,000 + 500.
The number of units started in July at the Packaging Department was 5,600 units, which
matched the number of units completed and transferred out of the Mixing Department
during the same time period.
2. Since materials and conversion (labor and overhead) were added at different paces during
the production process, separate equivalent units have to be calculated, one for materials
and the other for conversion. Transferred-in is considered an input added at the beginning
of the production process at the Packaging Department.
Equivalent Units
Physical
units
Materials
Conversion
Units transferred out
6,000
6,000
6,000
Ending WIP inventorya
500
500
250
Total work
6,500
6,250
a 50% complete with respect to conversion.
3. Under the weighted-average method, the costs for current work and work in beginning
work-in-process inventory are combined. This total cost is then divided by the total
equivalent units of production for July.
Total
costs
Transferred-
in costs
Materials
costs
Conversion
costs
Beginning WIP inventory
$19,698
$10,680
$3,888
$5,130
Current costs
297,077
199,920
42,912
54,245
Total costs
$316,775
$210,600
$46,800
$59,375
Total equivalent units
6,500
6,500
6,250
Chapter 08 – Process Costing
8-15
Cost per equivalent unit
$32.40
$7.20
$9.50
4.
Total
Materials
Conversion
Transferred out:
Equivalent units
6,000
6,000
Cost per equivalent unit
$7.20
$9.50
Cost assigned
$294,600
$43,200
$57,000
Ending WIP inventory:
Equivalent units
500
250
Cost per equivalent unit
$7.20
$9.50
Cost assigned
22,175
$3,600
$2,375
Total costs assigned
$316,775
$46,800
$59,375
As a final check, the following T-account summarizes the flow of costs for the Packaging
Department for the month of July.
Work-in-process inventory account
19,698
297,077
294,600
22,175
======================
♦ An important question for performance evaluation is whether a department manager should be
held accountable for all costs charged to the department. The answer is usually no.
• A department and its people are usually evaluated on the basis of costs the department
added relative to its good output. A prior department’s costs are often excluded when
comparing actual department costs with a standard or budget.
• For inventory valuation purpose, on the other hand, assigning costs to units requires that
a prior department’s costs be included in the calculations of the current department’s
product cost.
LO 8-7 Know when to use process or job costing.
♦ In job costing, costs are collected for each unit produced. Process costing accumulates costs in
a department for an accounting period and then spreads them evenly, or on an average basis, over
all units produced during the period.
• Process costing assumes that all units produced are relatively uniform.
Chapter 08 – Process Costing
8-16
• Process costing does not maintain a record of the cost of each unit produced and
therefore has less detailed record-keeping.
• Process costing does not provide as much information as job costing.
• The choice of process versus job costing systems involves a comparison of the costs and
benefits of each system. The production process being utilized is also a major factor in
choosing a cost system.
• The difference between job costing and process costing is in the level of aggregation
and detail, not in the basic concepts.
LO 8-8 Compare and contrast operation costing with job costing and
process costing.
♦ Operation costing is a hybrid of job and process costing that is used in manufacturing goods
that have some common characteristics and some individual characteristics.
• An operation is a standardized method of making a product that is repeatedly
performed.
• The costs of resources that are applied to products in a roughly uniform way are
assigned to products using process costing methods.
• The costs of resources that are applied in a unique way to products are assigned to the
individual products as in job order costing.
• Operation costing is distinct from job and process costing in that for each work order or
batch passing through a particular operation, direct materials are different but conversion
costs are the same.
• In many companies, direct labor is such a small portion of the total product cost that the
accountants classify direct labor as part of manufacturing overhead.
• Exhibit 8.17 shows a comparison of the three product costing methods.
======================
Chapter 08 – Process Costing
8-17
Demonstration Problem 4
Operations Excellence (OE), Inc. has two production departments: Mixing and Packaging.
Mixing
Department
Packaging
Department
Warehouse
OE manufactures two products: Compound H and Compound L. Compound H is a high-end
product that requires more expensive materials than Compound L and is produced at smaller
volume. The two products go through the two production departments in essentially the same
conversion processes. There is no work-in-process inventory for either product.
OE uses an operation costing system that assigns materials cost to the specific product for which
the underlying materials are used and assigns conversion costs to all products evenly as each
product undergoes the same process in each production department.
The production and cost data are available for July.
Compound H
Compound L
2,500 units
4,800 units
Materials:
Mixing
$100,000
$120,000
Packaging
37,500
38,400
Total materials cost
$295,900
$137,500
$158,400
Conversion:
Mixing
Packaging
Total conversion cost
Required:
Determine the unit cost for Compound H and Compound L.
Solution:
For materials costs, the costing system at OE operates like a job order system. For conversion,
a process costing system is appropriate.
Compound H
Compound L
2,500 units
4,800 units
Materials: