Page 3-2
Process CostingProcess Costing Process CostingProcess Costing
Managerial AccountingFifth Edition
Weygandt Kimmel Kieso
Page 3-3
study objectives
1. Understand who uses process cost systems.
2. Explain the similarities and differences between job
order cost and process cost systems.
3. Explain the flow of costs in a process cost system.
4. Make the journal entries to assign manufacturing
costs in a process cost system.
5. Compute equivalent units.
6. Explain the four steps necessary to prepare a
production cost report.
7. Prepare a production cost report.
Page 3-5
Use to apply costs to similar products that aremass-produced in a continuous fashion
Examples include the production ofCereal, Paint, and Soft Drinks
Illustration 3-1
SO 1 Understand who uses process cost systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Uses of Process Cost Systems
Page 3-6
Illustration 3-2
SO 1 Understand who uses process cost systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Process and Job Cost Comparison
Page 3-7
Which of the following items is not a characteristic of a process cost system:
a. Once production begins, it continues until the finished product emerges.
b. The focus is on continually producing homogenous products.
c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.
d. The products produced are heterogeneous in nature.
Review Question
SO 1 Understand who uses process cost systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Solution on notes page
a. Once production begins, it continues until the finished product emerges.
b. The focus is on continually producing homogenous products.
c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.
d. The products produced are heterogeneous in nature.
Page 3-8
Service companies that provide specific, nonroutine services will probably benefit from using a job order cost system.
Those that perform routine, repetitive services will probably be better off with a process cost system.
SO 1 Understand who uses process cost systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Process Costing for Service Companies
Page 3-9
SO 2 Explain the similarities and differences between job order cost and process cost
systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Similarities and Differences Between Job Order Cost and Process Cost Systems
Job Order Cost
Costs assigned to each job.
Products have unique characteristics.
Process Cost
Costs tracked through a series of connected manufacturing processes or departments.
Products are uniform or relatively homogeneous and produced in a large volume.
Page 3-10
Illustration 3-3
SO 2 Explain the similarities and differences between job order cost and process cost
systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Similarities and Differences
Page 3-11
SO 2 Explain the similarities and differences between job order cost and process cost
systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Similarities
1. The manufacturing cost elements.
2. The accumulation of the costs of materials, labor, and overhead.
3. The flow of costs.
1. The number of work in process accounts used.
2. Documents used to track costs.
3. The point at which costs are totaled.
4. Unit cost computations.
Differences
Page 3-12
Illustration 3-4
SO 2 Explain the similarities and differences between job order cost and process cost
systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Similarities and Differences
Page 3-13
a. Both a job order and a process cost system track the
same three manufacturing cost elements – direct materials, direct labor, and manufacturing overhead.
b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used.
c. Manufacturing costs are accumulated the same way in a job order and in a process cost system.
d. Manufacturing costs are assigned the same way in a job order and in a process cost system.
Indicate which of the following statements is not correct:
Review Question
SO 2 Explain the similarities and differences between job order cost and process cost
systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Solution on notes page
a. Both a job order and a process cost system track the
same three manufacturing cost elements – direct materials, direct labor, and manufacturing overhead.
b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used.
c. Manufacturing costs are accumulated the same way in a job order and in a process cost system.
d. Manufacturing costs are assigned the same way in a job order and in a process cost system.
Page 3-14
Indicate whether the following statements are true or false.
1. A law firm is likely to use process costing for
major lawsuits.
2. A manufacturer of paintballs is likely to use
process costing.
3. Both job order and process costing determine
total costs at the end of a period of time.
4. Process costing does not keep track of
manufacturing overhead.
False
True
False
Solution on notes page
SO 2 Explain the similarities and differences between job order cost and process cost
systems.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
False
Page 3-15
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Process Cost Flow
SO 3 Explain the flow of costs in a process cost system.
Illustration 3-5
Tyler Company manufactures automatic can openers that it sells to retail outlets. Manufacturing consists of two processes: machining and assembly. The Machining Department shapes, hones, and drills the raw materials. The Assembly Department assembles and packages the parts.
Page 3-16
Accumulation of materials, labor, and overhead costs is same as in job order costing.
Debit Raw Materials Inventory for purchases of raw materials.
Debit Factory Labor for factory labor incurred.
Debit Manufacturing Overhead for overhead cost incurred.
Assignment of the three manufacturing cost elements to Work in Process is different.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Assigning Manufacturing Costs
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Page 3-17
A process cost system requires fewer material requisition slips than a job order cost system.
Materials are used for processes and not specific jobs
Requisitions are for larger quantities of materials
Journal entry to record materials used:
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Material Costs
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Page 3-18
Time tickets may be used in both systems.
All labor costs incurred within a production department are a cost of processing.
The journal entry to record factory labor costs:
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Factory Labor Costs
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Page 3-19
Objective of assigning overhead. Allocate overhead to departments on an objective
and equitable basis.
Use the activity that “drives” or causes the costs.
Machine time used - primary driver.
Journal entry to allocate overhead:
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Manufacturing Overhead Costs
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Page 3-20
Monthly Entry to transfer goods to next department:
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
Transfer Costs
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Entry to transfer completed goods to Finished Goods:
Entry to record Cost of Goods sold at the time of sale:
Page 3-21
In making the journal entry to assign raw materials costs:
a. The debit is to Finished goods Inventory.
b. The debit is often to two or more work in process accounts.
c. The credit is generally to two or more work in process accounts.
d. The credit is to Finished Goods Inventory.
Review Question
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Solution on notes page
a. The debit is to Finished goods Inventory.
b. The debit is often to two or more work in process accounts.
c. The credit is generally to two or more work in process accounts.
d. The credit is to Finished Goods Inventory.
Page 3-22
K Christel Company manufactures ZEBO through two processes: blending and
bottling. In June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending $6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in the Blending Department to the Bottling Department. The Bottling Department transfers units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Page 3-23
Journalize the assignment of these costs to the two processes.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
To Record Materials Used:Work in Process—Blending 18,000
Work in Process—Bottling 4,000
Raw Materials Inventory 22,000
To Assign Factory Labor to Production:
Work in Process—Blending 12,000
Work in Process—Bottling 5,000
Factory Labor17,000
SO 4
Page 3-24
Journalize the assignment of these costs to the two processes.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
To Assign Overhead to Production:
Work in Process—Blending 6,000
Work in Process—Bottling 2,500
Manufacturing Overhead 8,500
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Page 3-25
Journalize the transfer of units as appropriate.
Nature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost SystemsNature of Process Cost Systems
To Record Transfer of Units to the Bottling Department:Work in Process—Bottling 19,000
Work in Process—Blending 19,000
To Record Transfer of Units to Finished Goods:
Finished Goods Inventory 11,000
Work in Process—Bottling 11,000
SO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Page 3-26 SO 5 Compute equivalents units.
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
Illustration: Suppose you have a work-study job in the office of your college’s president, and she asks you to compute the cost of instruction per full-time equivalent student at your college. The college’s vice president for finance provides the following information.
Costs:
Total cost of instruction $9,000,000
Student population:
Full-time students 900
Part-time students 1,000
Illustration 3-6
Page 3-27
Total cost of instruction $9,000,000
Number of full-time equivalent students / 1,500
$ 6,000
SO 5 Compute equivalents units.
Illustration 3-7
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
Illustration: Part-time students take 60% of the classes of a full-time student during the year. To compute the number of full-time equivalent students per year, you would make the following computation.
Cost of instruction per full-time equivalent student =
Page 3-28
Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process.
Most widely used method.
Beginning work in process not part of computation of equivalent units.
Illustration 3-8
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
Weighted-Average Method
SO 5 Compute equivalents units.
Page 3-29
Illustration: The output of K Christel Company’s
Packaging Department during the period consists of
10,000 units completed and transferred out, and
5,000 units in ending work in process which are 70%
completed.
Calculate the equivalent units of production.
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
SO 5 Compute equivalents units.
Weighted-Average Method
Completed units 10,000
Work in process equivalent units (5,000 x 70%) 3,500
13,500
Page 3-30
Illustration: Kellogg Company has produced Eggo®
Waffles since 1970. Three departments produce these
waffles: Mixing, Baking, and Freezing/Packaging. The
Mixing Department combines dry ingredients,
including flour, salt, and baking powder, with liquid
ingredients, including eggs and vegetable oil, to make
waffle batter.
Illustration 3-9 provides information related to the
Mixing Department at the end of June.
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
SO 5 Compute equivalents units.
Refinements on the Weighted-Average Method
Page 3-31
Illustration: Information related to the Mixing
Department at the end of June.Illustration 3-9
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
SO 5 Compute equivalents units.
Refinements on the Weighted-Average Method
Page 3-32
Conversion costs are labor costs plus overhead
costs.
Beginning work in process is not part of the
equivalent-units-of-production formula.
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
SO 5 Compute equivalents units.
Illustration 3-10
Page 3-33
Illustration 3-11
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
SO 5 Compute equivalents units.
Refined Equivalent Units of Production Formula
Page 3-34
The Mixing Department’s output during the period consists of 20,000 units completed and transferred out, and 5,000 units in ending work in process 60% complete as to materials and conversions costs. Beginning inventory is 1,000 units, 40% complete as to materials and conversion costs. The equivalent units of production are:
a. 22,600 b. 23,000
c. 24,000 d. 25,000
Review Question
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
SO 5 Compute equivalents units.Solution on notes page
a. 22,600 b. 23,000
c. 24,000 d. 25,000
Page 3-35 SO 5 Compute equivalents units.
The fabricating department has the following production and cost data for the current month.
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs. Compute the equivalent units of production for (a) materials and (b) conversion costs.
Page 3-36 SO 5 Compute equivalents units.
The fabricating department has the following production and cost data for the current month.
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out 15,000
Ending work in process units 10,000
25,000
Page 3-37 SO 5 Compute equivalents units.
The fabricating department has the following production and cost data for the current month.
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out 15,000
Equivalent unit in ending WIP (10,000 x 30%) 3,000
18,000
Page 3-38
Key document used to understand activities.
Prepared for each department and shows Production Quantity and Cost data.
Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
Production Cost Report
SO 6 Explain the four steps necessary to prepare a production cost report.
Page 3-39
Illustration 3-12
Equivalent UnitsEquivalent UnitsEquivalent UnitsEquivalent Units
Production Cost Report
SO 6 Explain the four steps necessary to prepare a production cost report.
Page 3-40
Illustration 3-13
SO 6
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Illustration: Assumed data for the Mixing
Department at Kellogg Company for the month of
June.
Page 3-41
Physical units - actual units to be accounted for during a period, regardless of work performed.
Total units to be accounted for - units started (or transferred) into production during the period + units in production at beginning of period.
Total units accounted for - units transferred out during period + units in production at end of period.
Compute the Physical Unit Flow (Step 1)
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
SO 6 Explain the four steps necessary to prepare a production cost report.
Page 3-42 SO 6 Explain the four steps necessary to prepare a production cost
report.
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Compute the Physical Unit Flow (Step 1)
Illustration 3-14
Page 3-43
Department
Adds materials at beginning of the process.
Incurs conversion costs uniformly during the process.
Illustration 3-15
SO 6 Explain the four steps necessary to prepare a production cost report.
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Compute Equivalent Units of Production (Step 2)
Page 3-44
Costs expressed in terms of equivalent units of production.
When equivalent units of production are different for materials and for conversion costs, three unit costs are computed:
1. Materials
2. Conversion
3. Total Manufacturing
SO 6 Explain the four steps necessary to prepare a production cost report.
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Compute Unit Production Costs (Step 3)
Page 3-45 SO 6
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Compute Unit Production Costs (Step 3)
Compute total materials cost related to Eggo® Waffles: Work in process, June 1
Direct materials costs $ 50,000
Cost added to production during June
Direct material cost 400,000
Total material costs $450,000
Illustration 3-17
Solution on notes page
Illustration 3-16
Page 3-46 SO 6
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Compute Unit Production Costs (Step 3)
Compute total conversion costs related to Eggo®
Waffles: Work in process, June 1
Conversion costs $ 35,000
Costs added to production during June
Conversion costs 170,000
Total conversion costs $205,000
Solution on notes page
Illustration 3-18
Illustration 3-19
Page 3-47 SO 6
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Compute Unit Production Costs (Step 3)
Compute total manufacturing costs per unit:
Solution on notes page
Illustration 3-20
Illustration 3-19
Page 3-48
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Prepare a Cost Reconciliation Schedule (Step 4)
Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as follows.
Costs to be accounted for
Work in process, June 1 $ 85,000
Started into production 570,000
Total costs $655,000
Illustration 3-21
SO 6 Explain the four steps necessary to prepare a production cost report.
Page 3-49
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Prepare a Cost Reconciliation Schedule (Step 4)
Illustration 3-22
Page 3-50
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Prepare the Production Cost Report
Illustration 3-23
SO 7
Page 3-51
Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is:
a. $45,000.
b. $55,000.
c. $75,000.
d. $100,000.
Review Question
SO 7 Prepare a production cost report.
Solution on notes page
a. $45,000.
b. $55,000.
c. $75,000.
d. $100,000.
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Page 3-52
In March, K Christel Manufacturing had the following unit production costs: materials $6
and conversion costs $9. On March 1, it had zero work in process. During March, K Christel transferred out 12,000 units. As of March 31, 800 units that were 25 percent complete as to conversion costs and 100 percent complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process.
Costs transferred out $180,000
Work in process, March 31
Materials (800 x $6) $4,800
Conversion costs (200 x $9) 1,800
Total costs $186,600
SO 7 Prepare a production cost report.
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Page 3-53
Companies often use a combination of a process
cost and a job order cost system.
Called operations costing, this hybrid system is
similar to process costing in its assumption that
standardized methods are used to manufacture
the product.
At the same time, the product may have some
customized, individual features that require the
use of a job order cost system.
Costing Systems – Final Comments
SO 7 Prepare a production cost report.
Comprehensive Example of Process Comprehensive Example of Process CostingCostingComprehensive Example of Process Comprehensive Example of Process CostingCosting
Page 3-54
Wal-Mart has 138 million weekly customers.
In 2006 Wal-Mart had annual sales of $312 billion and
net income of more than $11.2 billion.
There are about 5,300 Wal-Mart stores worldwide.
During a single recent year, it planned on adding 500
more stores, and it believes that the U.S. has room for
at least 4,000 more “supercenters.”
Page 3-55
During a recent year, 10,000 companies applied to be
new suppliers to Wal-Mart. Of those, some 200 (about
2%) were accepted.
Wal-Mart doesn’t like to account for more than 30% of
a supplier’s total business for fear that changing an
order can destroy the supplier.
As shown in the “About the Numbers” section in the
next column, Wal-Mart’s “kingdom” spreads across
many different countries. Recently, however, it sold all
of its stores in Germany because they could not meet
its desired profitability goals.
Page 3-56
Wal-Mart continues to grow across the world, but its
success varies across countries.
The following chart
shows total store
count in various
countries.
Source: Based on
data from Wal-Mart
2006 Annual Report,
p. 51.
Page 3-57
Suppose that you were Colin Roche, whose PenAgain pen was recently offered a 30-day trial period at 500 Wal-Mart stores. In order for the product to pass the trial, in one month Wal-Mart needs to sell 85% of the 48,000 pens that it ordered. If it does, it will then order pens for a much wider distribution at many more of its stores. If it doesn’t, the deal is off. The PenAgain company gets between $6.49 and $12 from other retailers for the PenAgain pen, but Wal-Mart is willing to pay only $3.76. Last year total sales of PenAgain were $2,000,000.
If you were Colin Roche, would you accept Wal-Mart’s offer?
Page 3-58
If you were Colin Roche, would you accept Wal-Mart’s offer?YES: Are you kidding? If only a tiny fraction of Wal-Mart customers buy a pen, the company’s sales will go through the roof. You have to take a shot at it.
NO: The risks are high on two counts. First, the company has to dramatically increase its operations in order to meet the production requirements. What will it do with this excess capacity if the deal falls through? Second, thecompany risks alienating the retailers that it currently supplies with pens. It could lose both Wal-Mart and its existing customers.
Page 3-59
..
SO8 Compute equivalent units using the FIFO method.
Equivalent Units Under FIFO
Equivalent units are the sum of the work performed
to:
1. Finish the units of beginning work in process
inventory.
2. Complete the units started into production
during the period (referred to as the units
started and completed).
3. Start, but only partially complete, the units in
ending work in process inventory.
FIFO Method
Page 3-60
..
SO8 Compute equivalent units using the FIFO method.
Equivalent Units Under FIFO
Illustration 3A-1 shows the physical flow of units for
the Assembly Department of Shutters Inc.Illustration 3A-1
FIFO Method
Page 3-61 SO8 Compute equivalent units using the FIFO
method.
FIFO Method
Equivalent Units Under FIFO
Illustration: Equivalent units for the Assembly
Department is computed as follows:Illustration 3A-2
Page 3-62 SO8
FIFO Method
Compute the Physical Unit Flow (Step 1)
Illustration 3A-3Unit and Cost
Data –
Mixing Departmen
t
Page 3-63
FIFO Method
Compute the Physical Unit Flow (Step 1)
Illustration 3A-4Physical Unit Flow
- Mixing Departmen
t
SO8 Compute equivalent units using the FIFO method.
Page 3-64
FIFO Method
Compute the Physical Unit Flow (Step 1)
Illustration 3A-5Physical Unit Flow (FIFO) - Mixing
Departmen
t
SO8 Compute equivalent units using the FIFO method.
The Mixing Department must account for 900,000 units. 700,000 units were transferred to the Baking Department and 200,000 units were still in process.
Page 3-65
FIFO Method
Compute Equivalent Units of Production (Step 2)Equivalent Units For Materials
SO8 Compute equivalent units using the FIFO method.
Kellogg adds materials at the beginning of the process. In addition, 100 percent of the materials costs has been incurred on the ending work in process.
Illustration 3A-6
Page 3-66
FIFO Method
Compute Equivalent Units of Production (Step 2)Equivalent Units For Conversion Costs
The Mixing Department required 30,000 equivalent units (30% 100,000 units) of conversion costs to complete the beginning inventory. In addition, the 200,000 units of ending work in process were 60 percent complete in terms of conversion costs.
Illustration 3A-7
SO8
Page 3-67
Under the FIFO method, the unit costs of production are based entirely on the production costs incurred during the month.
FIFO Method
Compute Unit Production Costs (Step 3)
Illustration 3A-8
SO8 Compute equivalent units using the FIFO method.
Page 3-68
Compute the unit materials cost, unit conversion costs, and total unit cost.
FIFO Method
Compute Unit Production Costs (Step 3)
Illustration 3A-9
SO8 Compute equivalent units using the FIFO method.
Solution on notes page
Page 3-69
Kellogg is now ready to determine the cost of goods transferred out of the Mixing Department to the Baking Department and the costs in ending work in process. The total costs charged to the Mixing Department in June are as follows.
FIFO Method
Prepare a Cost Reconciliation Schedule (Step 4)
Illustration 3A-10
SO8 Compute equivalent units using the FIFO method.
Page 3-70
Kellogg next prepares a cost reconciliation to assign these costs to (1) units transferred out to the Baking Department and (2) ending work in process.
FIFO Method
Prepare a Cost Reconciliation Schedule (Step 4)
SO8
Illustration 3A-11
Page 3-71
Internal document for management that shows
production quantity and cost data for a production
department.
Provides a basis for evaluating the productivity of a
department.
Managers can use the cost data to assess whether
unit costs and total costs are reasonable.
Top management can also judge whether current
performance is meeting planned objectives.
FIFO Method
Prepare the Production Cost Report
SO8 Compute equivalent units using the FIFO method.
Page 3-73 SO8 Compute equivalent units using the FIFO
method.
FIFO Method
FIFO and Weighted-Average
Weighted-average is simple to understand and
apply.
In cases where prices do not fluctuate
significantly, weighted-average will be very
similar to FIFO.
Conceptually, the FIFO method is superior
because it measures current performance using
only costs incurred in the current period.
FIFO method provides current cost information,
which the company can use to establish more
accurate pricing strategies for goods
manufactured and sold.
Page 3-74
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