Chapter 6 – Process Costing
6-1
CHAPTER 6: PROCESS COSTING
QUESTIONS
6-1 A company that should use a process costing system typically has homogenous
products, which pass through a series of similar processes or departments.
6-2 Process costing is likely used in industries such as chemicals, oil refining,
textiles, paints, flour, canneries, rubber, steel, glass, food processing, mining,
6-3 Differences between job and process costing: (1) accumulating costs by job
6-4 Equivalent units are the number of completed units that could have been
produced given the amount of work actually performed on both complete and
6-5 If direct materials are added at the beginning of the process rather than uniformly
throughout the process, we do not need to add any equivalent units of direct
6-6 A production cost report is a report, which summarizes the physical units and
equivalent units of a department, the costs incurred during the period, and costs
assigned to both finished goods and work-in-process inventories. The five key
6-7 The weighted-average method equivalent units include both the units placed into
production in the current period and the units from the prior period that are still in
production at the beginning of this period. FIFO method does not include the
6-8 The weighted–average method would be inappropriate when a firm’s beginning
and ending inventories or manufacturing costs per unit change dramatically from
Chapter 6 – Process Costing
6-2
6-9 The advantage of the weighted-average method is its simplicity.
6-10 From the standpoint of cost control, the FIFO method is superior to weighted-
average because the cost per equivalent unit under FIFO represents the cost for
6-11 Transferred-in costs are costs of work done in the prior department that are
6-12 Work-in-Process Inventory — Second Department $50,000
6-13 Under the FIFO method of handling units transferred out, beginning inventory
6-14 Under the weighted-average method, it makes no difference when a product is
started; all units completed in the same period or in the ending inventory of that
period are treated the same. In computing the equivalent units, this method looks
cost.
6-15 Process costing uses the same manufacturing accounts as job costing. Journal
entries are essentially the same as in job costing. However, instead of tracing
6-16 Backflush costing is a simple costing system that assigns materials and
conversion costs directly to finished goods inventory, by assuming there is little
6-17 Activity-based process costing is an extension of the basic process costing
model in which certain products require significantly more processing costs in
certain activities. Activity-based costing is used together with process costing to
Chapter 6 – Process Costing
6-3
BRIEF EXERCISES
6-18
Work-in–process inventory, 2/1 80,000
Units started 60,000
6-19
Units completed 83,000
Work-in-process inventory, 6/30 55,000
6-20
Units completed 7,300
Work-in-process inventory, 9/30 3,400
6-21
Work-in-process inventory, 11/1 45,000
Units started 57,000
6-22
Weighted Average
Materials: 47,000 = 44,000 + 1.0 x 3,000
Conversion: 45,500 = 44,000 + .5 x 3,000
FIFO
Chapter 6 – Process Costing
6-4
6-23
6-24 Ending WIP must be 2,500 units
6-25
6-26 The number of units transferred in must be 33,000 units
Units
Beginning WIP 5,000
Units started or Trans-in 20,000
Total to account for 25,000
Units Finished or Trans-out 22,000
Normal spoilage 400
Abnormal spoilage 100
Ending WIP 2,500
Total accounted for 25,000
Units
Beginning WIP 6,000
Units started or Trans-in 33,000
Total to account for 39,000
Units Finished or Trans-out 35,000
Normal spoilage 0
Abnormal spoilage 0
Ending WIP 4,000
Total accounted for 39,000
Chapter 6 – Process Costing
6-5
EXERCISES
6-27 Process Costing in Process Industries (10 min)
There are a number of possible answers here. Some examples are given
in the chapter, as well as exercises 4-29 and 4-30 from chapter 4. The
exercise is intended for class discussion. The goals is to have the
students able to identify process-oriented companies in industries such as
chemicals, food processing, beverages, etc. The instructor may choose
to follow up this short question with a more substantive one such as 6-29
which gets into the details of one type of process industry, sugar
manufacturing.
Chapter 6 – Process Costing
6-6
6-28 Equivalent Units; Weighted-Average Method (15 min)
1. Work-in-process inventory, 5/1 1,000
Units started 7,000
Total units to account for 8,000
2. Equivalent units — Weighted-Average Method
Materials:
Units completed 6,000
Work-in-process inventory, 5/31 2,000 x 30% = 600
Total equivalent units 6,600
3. Equivalent units — Weighted-Average Method
Materials:
Units completed 6,000
Work-in-process inventory, 5/31 2,000 x 40% = 800
Total equivalent units 6,800
4. Process costing is a good fit for the fish processing industry because
there is single or a small number of products that are processed through a
6-7
6-29 Process Costing in Sugar Manufacturing (20 min)
1. There are very likely to be transferred in costs in sugar
manufacturing, as there are a number of processes, each of which
could be a separate manufacturing department with its own process
cost report. There are seven steps in the manufacturing process so
there are possibly as many as seven departments, each with its own
much of its volume and weight before the final product (refined sugar)
is produced. The amount of loss, or yield, can be measured as part
of the process costing. The case of sugar manufacturing also
involves joint products (molasses and refined sugar); the costing
methods to measure the cost of joint products are explained in the
next chapter, Chapter 7.
2. As noted in the problem, the raw material for sugar production, sugar
cane, goes through periods of very volatile changes in price. This
means the cost of sugar can fluctuate greatly, and the production
costs may be given greater attention, especially in periods when
prices are low and sugar manufacturers compete on cost leadership
based methods that specifically target operating improvements.
These include activity-based management (chapter 5) the theory of
constraints (chapter 13), lean management and lean accounting
(chapter 17), total quality management (chapter 17), and the flexible
budget (chapters 14-16).
Chapter 6 – Process Costing
6-8
6-29 (continued –1)
3. As in most process industries, sustainability issues arise in the
manufacture of refined sugar. For example, the sugar company
produces a large amount of shredded cane as one of the outputs of
the milling process. The shredded cane is called “bagasse” and is
sustainability issue is to weigh the value of the sugar cane in the
production of refined sugar versus the value of the raw material in
producing fuel in a renewable and environmentally friendly manner.
4. As noted in the problem, the production and consumption of sugar
takes place world-wide, with many of the producing countries (India,
Cuba, Brazil, China, Thailand, and Mexico) somewhat different from
the consuming countries (E.U., U.K., U.S.A., Japan). In addition, the
Sweetener Users Association, an industry group representing sugar
users, has argued for increases in the U.S. quotas.
Source: Alexandra Wexler, “Sugar Runs Into Barriers,” The
Wall Street Journal, March 26, 2012, p C10; Alexandra Wexler,
“Sugar Users Want U.S. to Ease Import Quotas,” The Wall Street
Journal, April 2, 2012,p C11.
Chapter 6 – Process Costing
6-9
6-30 Equivalent Units; Weighted-Average Method (20 min)
Quantity Schedule
Input
Work-in-process inventory, 1/1 30,000
Units started 180,000
Total units to account for 210,000
Output
Units completed (=210,000 – 15,000) 195,000
Work in process inventory (12/31) 15,000
Conversion:
Units completed 195,000
Work-in-process inventory(12/31) 15,000 x 60% = 9,000
Chapter 6 – Process Costing
6-10
6-31 Equivalent Units; Weighted-Average and FIFO (25 min)
Equivalent Units – Weighted-Average Method
Direct Materials
Units completed 6,450,000
Work-in-process inventory(9/30), 2,400,000 x 40% = 960,000
Equivalent units 7,410,000
Conversion:
Units completed 6,450,000
Work-in-process inventory(9/30), 2,400,000 x 60% = 1,440,000
Units Materials
Conversion
Beginning WIP 4,000,000 50% 20%
Units started or Trans-in 4,850,000
Total to account for 8,850,000
Units Finished or Trans-out 6,450,000
Ending WIP 2,400,000 40% 60%
Total accounted for 8,850,000
EQUIVALENT UNITS: Weighted Average
Materials 7,410,000
Conversion 7,890,000
EQUIVALENT UNITS: FIFO
Materials 5,410,000
Conversion 7,090,000
Chapter 6 – Process Costing
6-11
Conversion:
Units completed 6,450,000
6-32 Equivalent Units; FIFO Method (25 min)
Units started or trans-in = 900 = 800+300-200
Weighted Average:
Units Materials
Conversion
Beginning WIP 200 100% 20%
Units started or Trans-in 900
Total to account for 1,100
Units Finished or Trans-out 800
Ending WIP 300 100% 40%
Total accounted for 1,100
EQUIVALENT UNITS: Weighted Average
Materials 1,100
Conversion 920
EQUIVALENT UNITS: FIFO
Materials 900
Conversion 880
6-33 Equivalent Units: Weighted-Average Unit Cost (20 min)
Physical Percentage
Units Completion Materials Conversion
Beginning WIP 100
Materials 50%
Conversion 50%
Units started 600
Total to account for 700
Units Finished 500 500 500
Ending WIP 200
Materials 50% 100
Conversion – 30% 60
Total accounted for 700 – –
Total Equivalent Units 600 560
DETERMINE TOTAL COSTS Total Materials Conversion
Beginning WIP 110,000$ 50,000$ 60,000$
Current Costs 1,190,000 550,000 640,000
TOTAL 1,300,000$ 600,000$ 700,000$
WTAVG Cost per EU 2,250$ 1,000$ 1,250$
Equivalent Units
Weighted Average
6-13
6-34 Equivalent Units; FIFO Unit Cost (25 min)
1.
Physical Percent
Units Complete Materials Conversion Materials Conversion
Beginning WIP 30,000
Materials 100% 30,000
Conversion 40% 12,000
Units started 70,000
Total to account for 100,000
Units Finished 70,000 70,000 70,000 70,000 70,000
Ending WIP 30,000
Materials 100% 30,000 30,000
Conversion –
80% 24,000 24,000
Total accounted for 100,000 – – – –
Total Equivalent Units 100,000 94,000 70,000 82,000
DETERMINE TOTAL COSTS Total Materials Conversion Materials Conversion
Beginning WIP 84,000$ 60,000$ 24,000$
Current Costs 420,000 120,000 300,000 120,000$ 300,000$
TOTAL 504,000$ 180,000$ 324,000$
WTAVG Cost per EU 5.2468$ 1.800$ 3.4468$
FIFO Cost per EU 5.3728$ 1.7143$ 3.6585$
Equivalent Units
Equivalent Units
Weighted Average
FIFO
Weighted Average:
Materials: $1.80
2. The differences between the cost per equivalent unit (FIFO vs weighted–
average) for materials and conversion are due to differences in the per unit
amounts in beginning WIP and current costs. These differences are
Chapter 6 – Process Costing
6-14
6-35 FIFO Method (25 min)
1. Equivalent units
Returns completed during March 1,500*
Returns in process, 3/31: 200 x 90% = 180
2. Cost per equivalent unit
$173,250 / 1,650 = $105
3. Cost of completed returns
From beginning inventory, 3/1: $2,500
Added to finish the beginning inventory:
4. Cost of returns in process on March 31
Chapter 6 – Process Costing
6-15
PROBLEMS
6-36 Weighted Average Method
1.
Materials
Conversion
Equivalent units
25,000
23,800
Cost per Equiv. Unit
$7.50
$6.95
Answers are shown in the process cost report below.
Equivalent Units
Physical Completion Direct Conversion
Units % Materials Costs
Beg. WIP Inventory: 0
DM 0%
Conversion Cost 0%
Units started during May 25,000
Units to Account For 25,000
Units completed 22,000 100% 22,000 22,000
Ending WIP Inventory: 3,000
DM 100% 3,000
Conversion cost 60% 1,800
Units Accounted For 25,000 ________ _______
Equivalent Units Produced 25,000 23,800
Cost Element
Materials Conversion Total
Total Manufacturing Cost (numerator of calculation):
Beginning WIP Inventory $0 $0
Manufacturing Costs Added in Current Month $187,500 $165,410
Total Cost $187,500 $165,410
Number of Equivalent Units Produced 25,000 23,800
Cost per Equivalent Unit $7.500 $6.9500 $14.45
Units Completed Units in Ending
and Transferred WIP
Out Inventory Total
Goods Completed and Transferred Out (22,000 x $14.45) $317,900 N/A $317,900
Units in Ending WIP Inventory:
Direct materials component (3,000 x $7.50) $22,500 $22,500
Conversion costs (1,800 x $6.95) $12,510 $12,510
TOTAL MANUFACTURING COSTS ACCOUNTED FOR $317,900 $35,010 $352,910
Beginning WIP Inventory $0
Manufacturing Costs Added during the month $352,910
TOTAL MANUFACTURING COSTS TO ACCOUNT FOR $352,910