Accounting Chapter 6 Homework The Weighted Average Costing Method Treats Beginning

CHAPTER 6

PROCESS COSTING

Process costing exposes students to a different method of collecting costs for products. The material in

this chapter is generally difficult for students because of the amount of detail.

LEARNING OBJECTIVES

After studying Chapter 6, students should be able to:

1. Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost

of production report.

2. Describe process costing for settings without work-in-process inventories.

3. Describe process costing for settings with ending work-in-process inventories.

4. Prepare a departmental production report using the FIFO method.

5. Prepare a departmental production report using the weighted average method.

6. Prepare a departmental production report with transferred-in goods and changes in output measures.

7. Describe the basic features of operation costing.

8. Explain how spoilage is treated in a process-costing system.

KEY TOPICS

The following major topics are covered in this chapter (related learning objectives are listed for each

topic):

1. Basic Operational and Cost Concepts (LO 1)

2. Process Costing with No Work-In-Process Inventories (LO 2)

3. Process Costing with Ending Work-In-Process Inventories (LO 3)

4. FIFO Costing Method (LO 4)

5. Weighted Average Costing Method (LO 5)

6. Treatment of Transferred-In Goods (LO 6)

7. Operation Costing (LO 7)

8. Appendix: Spoiled Units (LO 8)

I. BASIC OPERATIONAL AND COST CONCEPTS

At this point, it is usually helpful to compare and contrast process costing with job-order costing. The

focus of this chapter will be on the process costing environment.

Comparison of Job-Order and Process Costing

Job-Order Costing

Process Costing

1. Wide variety of distinct products

1. Homogeneous products

2. Cost accumulated by job

2. Cost accumulated by process or department

3. Unit cost computed by dividing total job

costs by units produced on that job

3. Unit cost computed by dividing process costs

of the period by units produced in that period

There are two key differences between the cost flows for a process-costing system and a job-order costing

system. First, costs are accumulated by job in a job-order costing system, whereas costs are accumulated

in processing departments or by process in a process-costing system. Second, job-order costing uses a

single work-in–process account, while process costing uses as many work-in-process accounts as there are

production processes. Exhibit 6.2 (p. 256) compares the two cost accumulation methods.

Basic characteristics of the process costing manufacturing environment include:

1. Homogeneous units pass through a series of similar processes.

2. Each unit in each process receives a similar dose of manufacturing costs.

3. Manufacturing costs are accumulated for a process for a given period of time.

4. There is a work-in-process account for each process.

5. Manufacturing cost flows and the associated journal entries are generally similar to job-order

costing.

6. The departmental production report is the key document for tracking manufacturing activity and

costs.

7. Unit costs are computed by dividing the departmental costs of the period by the output of the

period.

Exhibit 6.1 on page 256 provides a basic example of cost flows in a process-costing environment.

II. PROCESS COSTING WITH NO WORK-IN-PROCESS INVENTORIES

Teaching hint: The best starting point is to begin a discussion of process costing in a setting where there

are no work-in–process inventories. Such a situation exists in many service organizations. The following

illustration is in Cornerstone 6.2 on page 260:

Warin Wecare specializes in 3D pregnancy sonograms. During the month of April, Warin had the

following cost and output information:

Direct materials

$4,000

Direct labor

$8,000

Overhead

$16,000

Number of sonograms

400

Unit cost = Costs of the period/Output of the period

= $28,000/400

= $70 per sonogram

III. PROCESS COSTING WITH ENDING WORK-IN–PROCESS INVENTORIES

There are five steps associated with determining the cost of production in a process-costing environment:

1. Analysis of the flow of physical units

2. Calculation of the period’s output (equivalent units)

3. Computation of unit cost

4. Valuation of inventories (goods transferred out and ending work in process)

5. Cost reconciliation

Completion of these steps provides the input necessary to complete the cost of production report for each

process.

A. Equivalent Units as Output Measures

Process costing requires the calculation of equivalent units whenever production is not complete from one

period to the next. Equivalent units of output are the complete units that could have been produced given

the total amount of productive effort expended for the period under consideration. The calculation of

equivalent units is a subjective assessment. Managers “eyeball” the ending inventory and estimate the

percentage of completion. Cornerstone 6.3 (p. 263) illustrates the physical flow analysis and equivalent

units.

B. Nonuniform Application of Productive Inputs

Assuming a uniform application of conversion costs to production is not unreasonable. However, prime

costs are generally not applied in the same proportion in all processes. Often, direct materials are added at

the beginning or at the end of a production process. Beginning on page 267, Cornerstone 6.6 illustrates

the calculation of equivalent units assuming a nonuniform application of prime costs.

At this point, it is useful to begin to explain the differences between the FIFO and weighted average

costing approaches in basic terms (e.g., FIFO excludes work performed in a prior period, whereas

weighted average does not).

Teaching hint: It is probably worth noting that the FIFO and the weighted average methods provide the

same results when there is no beginning inventory.

IV. FIFO COSTING METHOD

One approach for preparing a departmental production report is the FIFO method. Under the FIFO

costing method, the equivalent units and manufacturing costs in beginning work in process are excluded

from the current-period unit cost calculation. Thus, the FIFO method recognizes that the work and costs

carried over from the prior period legitimately belong to that period.

The text provides an example of the FIFO method including a physical flow analysis and the calculation

of equivalent units in Cornerstone 6.7 (p. 270); the computation of unit cost, the valuation of inventories,

and cost reconciliation in Cornerstone 6.8 (p. 272); and some of the corresponding journal entries.

Teaching hint: When the students are using the FIFO method, they should ask the following question

when calculating equivalent units: “What is the percent of effort provided during the period on the units

worked on during that period?” Here, the emphasis is on the work performed during the period. Exercise

6.17 can be used to demonstrate FIFO.

V. WEIGHTED AVERAGE COSTING METHOD

The second approach for preparing a departmental production report is the weighted average method.

This method does not track prior-period output and costs separately from current-period output and costs.

The weighted average costing method treats beginning inventory costs and output as if they belong to the

current period. Prior-period output and manufacturing costs are merged with current-period output and

manufacturing costs. This is accomplished by the way in which equivalent units are calculated.

The text provides an example of the weighted average method including a physical flow analysis and the

calculation of equivalent units in Cornerstone 6.9 (p. 275); the computation of unit cost, the valuation of

inventories, and cost reconciliation in Cornerstone 6.10 (p. 277); and some of the corresponding journal

entries.

Teaching hint: When the students are using the weighted average method, they should ask the following

question when calculating equivalent units: “What is the percent of effort provided as of the end of the

period on the units worked on during that period?” This way, they know they are including some work

performed last period in their calculations. Exercise 6.20 demonstrates the weighted average concept.

VI. TREATMENT OF TRANSFERRED-IN GOODS

In process manufacturing, some departments invariably receive partially completed goods from prior

departments. We refer to these items as transferred-in goods. Costs assigned to units in prior departments

must be reassigned to units in the department in which the work is being performed. Problems 6.36 and

6.37 can be used to discuss transferred-in examples for the weighted average method and FIFO method,

respectively.

VII. OPERATION COSTING

Operation costing is a blend of job-order and process costing procedures applied to batches of

homogeneous products. This costing system uses job-order procedures to assign direct materials costs to

batches and process procedures to assign conversion costs. Work orders are used to collect production

costs for each batch.

Teaching hint: Problem 6.405 can be used to discuss operation costing further.

VIII. APPENDIX: SPOILED UNITS

Spoilage is generally classified as normal and abnormal spoilage. Normal spoilage is embedded in the

total cost of the good units, while abnormal spoilage is generally written off during the period as a quality

cost. Use the example in the text to further illustrate spoilage in a process-costing system.

IX. INFORMATION ABOUT EXERCISES, PROBLEMS, AND CASES

Exercises and problems are described on the following pages according to coverage of content, learning

objective(s), and level of difficulty. The time required to solve the problems is roughly proportional to the

level of difficulty.

In general, basic exercises/problems are fairly simple and straightforward. The text material is relatively

brief; only one or two concepts are covered. Basic exercises and problems should take about 15 to 20

minutes each.

Moderate exercises/problems may take longer and involve more concepts. These problems may have a

“twist” and require more thought. Moderate exercises and problems may take 20 to 40 minutes each.

Challenging problems are more comprehensive and may cover more concepts. The text material is

relatively longer and may include some ambiguity. Challenging problems may take 60 to 90 minutes

each.

Cornerstone

Exercise (CS)/

Exercise/

Problem/Case

Topic

Learning

Objective

Degree of

Difficulty

CS 6.1

Cost Flows

LO 1

Basic

CS 6.2

Unit Cost, No Work-In-Process Inventories

LO 2

Basic

CS 6.3

Physical Flow and Equivalent Units with EWIP

LO 3

Basic

CS 6.4

Cost Information

LO 3

Basic

CS 6.5

Production Report

LO 3

Basic

CS 6.6

Nonuniform Inputs

LO 3

Basic

CS 6.7

Unit Information with BWIP, FIFO Method

LO 4

Basic

CS 6.8

Cost Information and FIFO

LO 4

Basic

CS 6.9

Unit Information with BWIP, Weighted Average

Method

LO 5

Basic

CS 6.10

Cost Information and the Weighted Average Method

LO 5

Basic

6.11

Journal Entries

LO 1, 2

Basic

6.12

Process Costing, Service Organization

LO 2

Basic

6.13

JIT Manufacturing and Process Costing

LO 1, 2

Basic

6.14

Physical Flow, Equivalent Units, Unit Costs, No

Beginning WIP Inventory, Activity-Based Costing

LO 2, 3

Moderate

6.15

Production Report, No Beginning Inventory

LO 1, 3

Basic

6.16

Weighted Average Method, FIFO Method, Physical

Flow, Equivalent Units

LO 3, 4, 5

Basic

6.17

FIFO Method, Valuation of Goods Transferred Out and

Ending Work in Process

LO 4

Basic

6.18

Equivalent Units—Weighted Average Method

LO 5

Basic

6.19

Equivalent Units, FIFO Method

LO 4

Basic

6.20

Weighted Average Method, Unit Cost, Valuation of

Goods Transferred Out and Ending Work in Process

LO 5

Moderate

6.21

FIFO Method, Unit Cost, Valuation of Goods

Transferred Out and Ending Work in Process

LO 4

Moderate

6.22

Weighted Average Method, Equivalent Units, Unit

Cost, Multiple Departments

LO 5, 6

Moderate

6.23

FIFO Method, Equivalent Units, Unit Cost, Multiple

Departments

LO 4, 6

Moderate

6.24

Journal Entries, Cost of Ending Inventories

LO 1, 3

Moderate

6.25

Operation Costing: Bread Manufacturing

LO 7

Moderate

6.26

CPA-Type Exercise

LO3

Basic

6.27

CPA-Type Exercise

LO3

Basic

Cornerstone

Exercise (CS)/

Exercise/

Problem/Case

Topic

Learning

Objective

Degree of

Difficulty

6.28

CPA-Type Exercise

LO1

Basic

6.29

CPA-Type Exercise

LO4

Basic

6.30

CPA-Type Exercise

LO3

Basic

6.31

Weighted Average Method, Physical Flow, Equivalent

Units, Unit Costs, Cost Assignment, ABC

LO 3, 5

Moderate

6.32

FIFO Method, Physical Flow, Equivalent Units, Unit

Costs, Cost Assignment

LO 3, 4

Moderate

6.33

Weighted Average Method, Single Department

Analysis, Uniform Costs

LO 5

Moderate

6.34

FIFO Method, Single Department Analysis, One Cost