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Process Process CostingCosting
CHAPTERCHAPTER
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1. Describe the basic characteristics and cost flows associated with process manufacturing.
2. Define equivalent units and explain their role in process costing. Explain the differences between the weighted average method and the FIFO method of accounting for process cost.
3. Prepare a departmental production report using the weighted average method.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
ContinuedContinuedContinuedContinued
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4. Explain how process costing is affected by nonuniform application of manufacturing inputs and the existence of multiple processing departments.
5. Appendix: Complete a departmental production report using the FIFO method.
ObjectivesObjectivesObjectivesObjectives
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Finished Finished GoodsGoods
EncapsulatingEncapsulating
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
PickingPicking
Sequential Processing
BottlingBottling
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Finished Goods
Process 2Process 2
Parallel Processing (hard disk drives for personal computers)
Process 1Process 1
Process 4Process 4Process 3Process 3
Production and assembly of
write-head and disk drive
Production and assembly of
write-head and disk drive
Testing of write-head and
disk drive
Testing of write-head and
disk drive
Production of circuit board
Production of circuit board
Testing of circuit board
Testing of circuit board
Assembly
6 -6
Bottling Dept.Bottling Dept.Work in ProcessWork in Process
Transferred-in from Encapsulating
Materials:BottlesBottling
laborApplied OH
Encapsulating Dept.Encapsulating Dept.Work in ProcessWork in Process
Transferred-in from Picking
Materials:CapsulesEncapsulating laborApplied OH
Flow of Manufacturing Costs Through the Accounts of a Process-Costing Firm (Healthblend)
Flow of Manufacturing Costs Through the Accounts of a Process-Costing Firm (Healthblend)
Picking Picking DepartmentDepartment
Work in ProcessWork in Process
Materials:HerbsVitaminsMinerals
Picking laborApplied OH
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The mixture is transferred from picking to Encapsulating.
The mixture is transferred from picking to Encapsulating.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
Work in Process (Encapsulating) 2 200 00
Work in Process (Picking) 2 200 00
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
Healthblend decides to produce 2,000 bottles of multivitamins.
The Picking Department costs are: Direct materials $1,700Direct labor 50Applied overhead 450
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The cost is transferred from Encapsulating to Bottling.
The cost is transferred from Encapsulating to Bottling.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
Work in Process (Bottling) 3 760 00
Work in Process (Encapsulating) 3 760 00
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
The Encapsulating Department costs are:
Direct materials $1,000Direct labor 60Applied overhead 500
$2,200 + $1,000 $2,200 + $1,000 + $60 + $500 + $60 + $500
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The cost is transferred to the finished goods warehouse.
The cost is transferred to the finished goods warehouse.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
Finished Goods 5 460 00
Work in Process (Bottling) 5 460 00
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
The Bottling Department costs are:
Direct materials $800Direct labor 300Applied overhead 600
$3,760 + $800 + $3,760 + $800 + $300 + $600$300 + $600
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In process cost, costs are summarized by department
for a period of time in a production report.
In process cost, costs are summarized by department
for a period of time in a production report.
A production report provides information about the physical units processed
in a department and the manufacturing costs.
A production report provides information about the physical units processed
in a department and the manufacturing costs.
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Equivalent Units of ProductionEquivalent Units of ProductionEquivalent Units of ProductionEquivalent Units of Production
Equivalent units of output are the complete units that could have been produced given the total amount of
manufacturing effort expended for the period under consideration.
Equivalent units of output are the complete units that could have been produced given the total amount of
manufacturing effort expended for the period under consideration.
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Equivalent Units of ProductionEquivalent Units of ProductionEquivalent Units of ProductionEquivalent Units of Production
Units in beginning work in process ---
Units completed 1,000
Units in ending work in process (25% complete) 600
Total manufacturing cost $11,500
Department A
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Equivalent Units of ProductionEquivalent Units of ProductionEquivalent Units of ProductionEquivalent Units of Production
Concept:
100 units completed = 100 equivalent units
200 units, 50% completed = 100 equivalent units
=
ContinuedContinuedContinuedContinued
=
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Equivalent Units of ProductionEquivalent Units of ProductionEquivalent Units of ProductionEquivalent Units of ProductionExample:
1,000 units completed, 600 units, 25% complete
1000 units completed = 1,000 equivalent units
600 units, EWIP, 25% completed = 150 equivalent units= 150 equivalent units
Total = 1,150 equivalent units
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Preparing a Production ReportPreparing a Production Report
1. Physical units flow analysis
2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation of inventories (goods transferred out and ending work in process)
5. Cost reconciliation
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Weighted Average MethodWeighted Average MethodWeighted Average MethodWeighted Average Method
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
Production:Units in process, July 1, 75% complete
20,000Units completed and transferred out
50,000Units in process, July 31, 25% complete
10,000Costs:
Work in process, July 1
$ 3,525Cost added during July
10,125
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Weighted Average MethodWeighted Average MethodWeighted Average MethodWeighted Average Method
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
BWIP Cost July Cost
$3,525 $10,125
$13,650
Total Manufacturing Cost
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Weighted Average MethodWeighted Average MethodWeighted Average MethodWeighted Average Method
Output for July60,000 Total Physical Units BWIP
Becomes 52,500 Equivalent Units
20,000
30,000
+Units Started and Completed
EWIP, 25% Complete+
2,500
52,500
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Weighted Average MethodWeighted Average MethodWeighted Average MethodWeighted Average Method
Cost Assignment:
Cost/Unit = $13.750 ÷ 52,500 + $0.26
Transferred Out ($0.26 x 50,000) $13,000
EWIP ($0.26 x 2,500) 650
Total Cost Assigned $13,650
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Step 1: Physical Flow ScheduleStep 1: Physical Flow ScheduleStep 1: Physical Flow ScheduleStep 1: Physical Flow Schedule
Units to account for:
Units in beginning work in process (75% complete)
20,000
Units started during the period
40,000
Total units to account for
60,000
Units accounted for:
Unit completed and transferred out:
Started and completed 30,000
From beginning work in process 20,00050,000
Units in ending work in process (25%
complete)10,000
Total units accounted for60,000
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Step 2: Calculation of Equivalent UnitsStep 2: Calculation of Equivalent UnitsStep 2: Calculation of Equivalent UnitsStep 2: Calculation of Equivalent Units
Units completed50,000
Add: Units in ending work in process x Fractioncomplete (10,000 x 25%)
2,500
Equivalent units of output52,500
Weighted Average Method
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
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Step 3: Computation of Unit CostStep 3: Computation of Unit CostStep 3: Computation of Unit CostStep 3: Computation of Unit Cost
$13,650 52,500
=
$0.26 per equivalent unit
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Step 4: Valuation of InventoriesStep 4: Valuation of InventoriesStep 4: Valuation of InventoriesStep 4: Valuation of Inventories
Cost of goods transferred to the encapsulatingdepartment:
50,000 equivalent units x $0.26 $13,000
Ending inventory:
2,500 equivalent units x $0.26 650
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
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Step 5: Cost ReconciliationStep 5: Cost ReconciliationStep 5: Cost ReconciliationStep 5: Cost Reconciliation
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
Goods transferred out $13,000
Goods in ending work in process 650
Total costs accounted for $13,650
The manufacturing
costs to account for are also $13,650.
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Production Report
6 -26 Healthblend CompanyPicking Department
Production Report for July 2004
UNIT INFORMATIONUNIT INFORMATION
Physical FlowUnits to account for: Units accounted for:
Units in beginning Units completed50,000work in process 20,000 Units in ending
Units started 40,000 work in process10,000Total units to Total unitsaccount for 60,000 accounted for60,000
Equivalent UnitsUnits completed 50,000Units in ending work in process 2,500Total equivalent units 52,500
ContinuedContinuedContinuedContinued
WeighteWeighted d
averageaverage
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COST INFORMATIONCOST INFORMATION Costs to account for:
Beginning work
in process $ 3,525
Incurred during
period 10,125
Total cost to
account for $13,650
ContinuedContinuedContinuedContinued
Cost per equivalent unit $ 0.26
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Transferred Transferred Ending Ending
Out Out WIP TotalWIP Total
Costs accounted for:
Goods transferred out ($0.26 x
50,000) $13,000 ---$13,000
Goods in ending work in
process ($0.26 x 2,500) --- $650 650
Total cost accounted for $13,000 $650$13,650
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Nonuniform Application of Manufacturing
Inputs
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
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Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
Materials, 100% Materials, 100% complete; complete;
conversion cost, conversion cost, 50% complete50% complete
100% complete as to 100% complete as to both materials and both materials and
conversion costconversion cost
60,000 equivalent units of material and conversion cost transferred out
Equivalent UnitsPicking Department
Beginning WIP inventory
10,000 units
Started and completed
50,000 units
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September
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
Equivalent UnitsPicking Department
Materials, 100% complete; conversion cost, Materials, 100% complete; conversion cost, 40% complete40% complete
60,000 60,000
Ending WIP inventory
20,000 units
Conversion
Materials Costs
Beginning WIP inventory
10,000 units
Started and completed
50,000 units
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September
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
Equivalent UnitsPicking Department
60,000 60,000
Ending WIP inventory
20,000 units
20,000 8,000
Conversion
Materials Costs
Beginning WIP inventory
10,000 units
Started and completed
50,000 units
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SeptemberSeptember
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
Equivalent UnitsPicking Department
Beginning WIP inventory
10,000 units
60,000 60,000Started and completed
50,000 units
Ending WIP inventory
20,000 units
20,000 8,000
80,000 68,000Equivalent units
Conversion
Materials Costs
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Materials $1,600Conversion cost $200
September
Healthblend Nutritional
Supplements
Healthblend Nutritional
Supplements
Beginning WIP inventory
10,000 units
Started and completed
50,000 units
Ending WIP inventory
20,000 units
August October
Materials $12,000Conversion cost $3,200
Materials $13,600
EU 80,000
= Cost per EU $0.22
Conver. Cost $3,400
EU 68,000
= Cost per EU $0.05
6 -35 Healthblend CompanyPicking Department
Production Report for September 2004
UNIT INFORMATIONUNIT INFORMATION
Physical FlowUnits to be accounted for: Units accounted for:
Units in beginning Units completed60,000work in process 10,000 Units in ending
Units started 70,000 work in process20,000Total units to Total unitsaccount for 80,000 accounted for80,000
ContinuedContinuedContinuedContinued
WeighteWeighted d
averageaverage
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Equivalent UnitsEquivalent Units
Materials Conversion Materials Conversion CostCost
Units completed 60,000 60,000
Units in ending work in
process 20,000 8,000
Total equivalent units 80,000 68,000
ContinuedContinuedContinuedContinued
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COST COST INFORMATIONINFORMATION
ConversionConversion
MaterialsMaterials Cost Cost TotalTotal
Costs to account for:
Beginning work in process $ 1,600 $ 200$ 1,800
Incurred during the period 12,000 3,200 15,200
Total costs to account for $13,600 $3,400 $17,000
Cost per equivalent unit $ 0.17 $ 0.05 $ 0.22
ContinuedContinuedContinuedContinued
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Transferred Transferred Ending Ending
Out Out WIP TotalWIP Total
Costs accounted for:
Goods transferred out ($0.22 x
60,000) $13,200 ---$13,200
Goods in ending work in
process:
Materials ($0.17 x 20,000) --- $3,4003,400
Conversion ($0.05 x 8,000) --- 400 400
Total cost accounted for $13,200 $3,800$17,000
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Multiple DepartmentsMultiple Departments
Units to account for:Units in beginning work in process 15,000Units transferred in during September 60,000
Total units to account for 75,000Units accounted for:
Units completed and transferred out:Started and completed 55,000From beginning work in process 15,000
Units in ending work in process 5,000Total units accounted for 75,000
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Multiple DepartmentsMultiple DepartmentsTransferred in:
Units completed 70,000Add: Units in ending work in
process X Fraction complete(5,000 x 100%) 5,000
Equivalent units of output 75,000
Unit cost (transferred-in category) = ($13,200 ÷ $3,000/75,000)
= $16,200/75,000
= $0.216
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Production Report—Fifo Costing
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FIFO MethodFIFO MethodFIFO MethodFIFO Method
BWIP Cost
$3,525
July Cost
BWIP Units
$10,125
Current- Period Units
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FIFO MethodFIFO MethodFIFO MethodFIFO Method
Output for July60,000 Total Physical Units BWIP
Become 37,500 Equivalent Units
30,000
+Units Started and Completed
EWIP, 25% complete+
2,50037,500
5,000
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FIFO MethodFIFO MethodFIFO MethodFIFO Method
Cost Assignment:Unit Cost = $10,125 ÷ 37,500 = $0.27
Transferred Out:From beginning work in process $ 3,525
Complete BWIP ($0.27 x 5,000) 1,350
Started and Completed in July($0.27 x 30,000) 8,100
EWIP ($0.27 x 2,500) 675
Total Cost Assigned $13,640
6 -45 Healthblend CompanyPicking Department
Production Report for July 2004
UNIT INFORMATIONUNIT INFORMATION
ContinuedContinuedContinuedContinued
Units accounted for:
Units in beginning work in process 20,000
Units started during the period 40,000Total units to account for 60,000
FIFOFIFO
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PhysicalPhysical EquivalentEquivalentFlowFlow UnitsUnits
Units accounted for:
Units started and completed 30,000 30,000
Units completed from beginning work
in process 20,000 5,000
Units in ending work in process 10,000 2,500
Total units accounted for 60,000 37,500
ContinuedContinuedContinuedContinued
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COST INFORMATIONCOST INFORMATION Costs to account for:
Beginning work
in process $ 3,525
Incurred during
period 10,125
Total cost to
account for $13,650
ContinuedContinuedContinuedContinued
Cost per equivalent unit $ 0.27
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Transferred Transferred Ending Ending Out Out WIP TotalWIP Total
Costs accounted for:
Units in beginning work in process:
From prior period $ 3,525 ---$ 3,525
From current period
($0.27 x 5,000) 1,350 ---1,350
Units started and completed
($0.27 x 30,000) 8,100 ---8,100
Goods in ending work in process
($0.27 x 2,500) --- $675 675
Total cost accounted for $12,975 $675$13,650
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The EndThe EndThe EndThe End
Chapter SixChapter Six
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