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2. The first step is to determine the equivalent
units needed to complete beginning work in
3. The second step is to add the units started
and completed during the period (5,100
units for materials and conversion).
4. The third step is to add the equivalent units
in ending work in process inventory (540
calculation of equivalent units with respect
to conversion is as follows.
C. Comparing equivalent units of production under the
weighted-average and FIFO methods
1. The equivalent units of material produced
per the weighted-average method (5,940
units) minus the equivalent units of material
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in beginning inventory (120 units) equals
the equivalent units of production per the
FIFO method (5,820 units).
Helpful Hint: The only difference in the equivalent unit
calculations between the weighted-average and FIFO
methods is that the equivalent units in beginning
inventory are included in the weighted-average method.
D. Cost per equivalent unit − FIFO method
Learning Objective 7: Compute the cost per equivalent
unit using the FIFO method.
i. Recall the following facts with respect to Smith
Company’s Assembly Department.
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E. Applying Costs—FIFO Method
Learning Objective 8: Assign costs to units using the
FIFO method.
i. Computing the cost of ending work in process
inventory.
1. The first step is to record the equivalent
units of production in ending work in
process inventory (540 units for materials
and 270 units for conversion).
ii. Computing the cost of units transferred out
1. The first component of the computation is
to record the cost in beginning work in
process inventory ($6,119 for materials,
$3,920 for conversion, and $10,039 in
total)
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materials and 240 units for
conversion).
3. The third component of the computation is
to compute the cost of units started and
completed this period.
a. The first step is to record the units
started and completed this period
(5,100 units for materials and
conversion).
4. The final computation is to compute the
total cost of units transferred out ($194,880).
Learning Objective 9: Prepare a cost reconciliation
report using the FIFO method.
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iii. Reconciling costs
1. Computing the costs to be accounted for:
a. The first step is to record the cost of
beginning work in process as shown
2. Computing the costs accounted for:
a. The first step is to record the cost of
ending work in process inventory
3. Notice the two totals agree indicating that all
costs have been accounted for.
iv. A comparison of costing methods
1. In most situations, the weighted-average and
FIFO methods will produce very similar unit
costs, particularly in a lean production
environment.
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the treatment of units in beginning inventory and the
costs of beginning inventory. In essence, the weighted–
average approach simply combines the units in
VII. Appendix 4B: Service Department Allocations (slide 82
is the title slide)
A. Key definitions/concepts
i. Operating departments carry out the central
purpose of the organization. Examples of operating
departments include:
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ii. Service departments do not directly engage in
operating activities. They provide services or
assistance to the operating departments. Examples
of service departments include:
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82
iii. The overhead costs of operating departments
frequently include allocations of costs from service
departments. To the extent service department costs
are classified as production costs, they should be
included in unit product costs and thus must be
allocated to operating departments in a process
costing system.
B. Methods of allocation
Learning Objective 10: Allocate service department
costs to operating departments using the direct method.
i. Direct method: a definition
1. The direct method is the simplest of the
three cost allocation methods because it
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ii. Direct method: an example
1. Assume that a company has two service
as shown.
2. How much of the Cafeteria and Custodial
costs should be allocated to each
operating department?
3. The Machining Department would be
allocated $144,000 of the Cafeteria
Department’s costs as shown. Notice:
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4. The Assembly Department would be
allocated $216,000 of the Cafeteria
Department’s costs as shown. Notice:
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5. The Machining Department would be
allocated $30,000 of the Custodial
Department’s costs as shown. Notice:
a. The allocation base is square feet
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a. The sum of the costs assigned to
Assembly ($60,000) and Machining
($30,000) is equal to the total costs
assigned from the Custodial
Department ($90,000).
Helpful Hint: What to include in the allocation base
under the direct method often confuses students. For
Learning Objective 11: Allocate service department
costs to operating departments using the step-down
method.
iii. Step-down method: a definition
1. The step-down method provides for
allocation of a service department’s costs to
other service departments, as well as to
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2. There are three key points to understand
regarding the step-down method:
a. In both the direct and step-down
methods, any amount of the
allocation base attributable to the
iv. Step-down method: an example
1. Assume the same facts that were used for
the direct method example.
2. How much of the Cafeteria and Custodial
costs should be allocated to each
operating department?
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4. The Machining Department would be
costs of $360,000.
6. The Custodial Department will allocate
$150,000 in total costs. This amount
includes the department’s own costs of
$90,000 plus the amount allocated from the
Cafeteria Department of $60,000.
8. The Assembly Department would be
allocated $100,000 of the Custodial
Department’s costs as shown. Notice:
a. The sum of the costs assigned to
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Helpful Hint: What to include in the allocation base
under the step-down method often confuses students.
Never include in the allocation base the service
department whose cost is being allocated; once a
service department’s cost has been allocated, pretend
the department does not exist anymore. In other words,
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v. Reciprocal method: a definition
1. The reciprocal method gives full
recognition to interdepartmental services.
2. Reciprocal allocation requires the use of
simultaneous linear equations and is
beyond the scope our book.
Helpful Hint: Students may object to the inaccuracies of
the step-down method. This gives an opportunity to
explain the reciprocal method. Ask students what would
happen if every service department’s costs were
allocated to all of the service departments (including
Quick Check – direct and step-down methods
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