View
816
Download
0
Category
Tags:
Preview:
Citation preview
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
11th EditionChapter 4
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Chapter Four
Systems Design:Process Costing
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Similarities Between Job-Order and Process Costing
• Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost.
• Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.
• The flow of costs through the manufacturing accounts is basically the same in both systems.
• Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost.
• Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.
• The flow of costs through the manufacturing accounts is basically the same in both systems.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Differences Between Job-Order and Process Costing
• Process costing is used when a single product is produced on Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order a continuing basis or for a long period of time. Job-order costing is used when many different jobs are worked on each costing is used when many different jobs are worked on each period.period.
• Process costing systems accumulate costs by department. Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual Job-order costing systems accumulated costs by individual jobs.jobs.
• Process costing systems use department production reports to Process costing systems use department production reports to accumulate costs. Job-order costing systems use job cost accumulate costs. Job-order costing systems use job cost sheets to accumulate costs.sheets to accumulate costs.
• Process costing systems compute unit costs by department. Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job.Job-order costing systems compute unit costs by job.
• Process costing is used when a single product is produced on Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order a continuing basis or for a long period of time. Job-order costing is used when many different jobs are worked on each costing is used when many different jobs are worked on each period.period.
• Process costing systems accumulate costs by department. Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual Job-order costing systems accumulated costs by individual jobs.jobs.
• Process costing systems use department production reports to Process costing systems use department production reports to accumulate costs. Job-order costing systems use job cost accumulate costs. Job-order costing systems use job cost sheets to accumulate costs.sheets to accumulate costs.
• Process costing systems compute unit costs by department. Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job.Job-order costing systems compute unit costs by job.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Quick Check
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Quick Check
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
What is a Processing Department?
Any location in an organization where materials, labor or overhead are added to the product.
The activities performed in a processingThe activities performed in a processingdepartment are department are performed uniformlyperformed uniformly on all on all
units of production. Furthermore, the output ofunits of production. Furthermore, the output ofa processing department must bea processing department must be
homogeneoushomogeneous..
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Sequential vs. Parallel Processing
Sequential processing means that unitsSequential processing means that unitsflow in a sequence from oneflow in a sequence from one
department to another.department to another.
Sequential processing means that unitsSequential processing means that unitsflow in a sequence from oneflow in a sequence from one
department to another.department to another.
Parallel processing is used whenParallel processing is used whenafter a point, some units go throughafter a point, some units go throughdifferent processing departments different processing departments
than others. For example, athan others. For example, apetroleum refinery separates crudepetroleum refinery separates crude
oil into products like gasoline, jetoil into products like gasoline, jetfuel, and heating oil.fuel, and heating oil.
Parallel processing is used whenParallel processing is used whenafter a point, some units go throughafter a point, some units go throughdifferent processing departments different processing departments
than others. For example, athan others. For example, apetroleum refinery separates crudepetroleum refinery separates crude
oil into products like gasoline, jetoil into products like gasoline, jetfuel, and heating oil.fuel, and heating oil.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Comparing Job-Orderand Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Work inProcess
Direct Materials
Direct Materials
Direct LaborDirect Labor
ManufacturingOverhead
ManufacturingOverhead
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Comparing Job-Orderand Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
ManufacturingOverhead
ManufacturingOverhead
JobsJobs
Costs are traced andapplied to individualjobs in a job-order
cost system.
Costs are traced andapplied to individualjobs in a job-order
cost system.Direct
Materials
Direct Materials
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Comparing Job-Orderand Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
ManufacturingOverhead
ManufacturingOverhead
ProcessingDepartmentProcessingDepartment
Costs are traced and applied to departments
in a process cost system.
Costs are traced and applied to departments
in a process cost system.
Direct Materials
Direct Materials
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
T-Account and Journal Entry Views of Cost Flows
For purposes of this example, assume there are two
processing departments – Departments A and B.
We will use T-accounts and journal entries.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Raw Materials
Process Cost Flows(in T-account form)
Work in Process Department B
Work in Process Department A
•DirectMaterials
•Direct Materials
•Direct Materials
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Cost Flows(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Cost Flows(in T-account form)
Work in Process Department B
Work in Process Department A Wages Payable
•Direct Materials
•Direct Materials
•Direct Labor
•Direct Labor •Direct
Labor
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Cost Flows(in T-account form)
Work in Process Department B
Work in Process Department A
Manufacturing Overhead
•OverheadApplied to
Work inProcess
•AppliedOverhead
•AppliedOverhead
•Direct Labor
•Direct Materials
•Direct Labor
•Direct Materials
•Actual Overhead
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing(In journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Cost Flows(in T-account form)
Work in Process Department B
Work in ProcessDepartment A
•Direct Materials
•Direct Labor
•AppliedOverhead
•Direct Materials
•Direct Labor
•AppliedOverhead
Transferred to Dept. B
•Transferred from Dept. A
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Finished Goods
Process Cost Flows(in T-account form)
Work in Process Department B
•Cost of Goods
Manufactured
•Direct Materials
•Direct Labor
•AppliedOverhead
•Transferred from Dept. A
•Cost of Goods
Manufactured
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Finished Goods
Cost of Goods Sold
Process Cost Flows(in journal entry form)
Work in Process Department B
•Cost of Goods
Manufactured
•Direct Materials
•Direct Labor
•AppliedOverhead
•Transferred from Dept. A
•Cost of GoodsSold
•Cost of GoodsSold
•Cost of Goods
Manufactured
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units of Production
Equivalent units are the product of the number of partially completed units and the percentage
completion of those units.
We need to calculate equivalent units because a department usually has some partially completed units
in its beginning and ending inventory.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – The Basic Idea
Two half completed products are equivalent to one completed product.
Two half completed products are equivalent to one completed product.
So, 10,000 units 70% completeare equivalent to 7,000 complete units.
So, 10,000 units 70% completeare equivalent to 7,000 complete units.
+ = 1
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units × 0.30) = 11,500 equivalent units
Quick Check
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Calculating Equivalent Units
Equivalent units can be calculated two Equivalent units can be calculated two ways:ways:
The First-In, First-Out Method – The First-In, First-Out Method – FIFO is FIFO is covered in the appendix to this chapter.covered in the appendix to this chapter.
The Weighted-Average Method – The Weighted-Average Method – This This method will be covered in the main portion of the method will be covered in the main portion of the chapter.chapter.
Equivalent units can be calculated two Equivalent units can be calculated two ways:ways:
The First-In, First-Out Method – The First-In, First-Out Method – FIFO is FIFO is covered in the appendix to this chapter.covered in the appendix to this chapter.
The Weighted-Average Method – The Weighted-Average Method – This This method will be covered in the main portion of the method will be covered in the main portion of the chapter.chapter.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units of ProductionWeighted-Average Method
Cost perequivalent
unit
=Costs for the period
Equivalent units of productionfor the period
The weighted-average method . . .
•Makes no distinction between work done in prior or current periods.
•Blends together units and costs from prior and current periods.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing and Direct Labor
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
DirectMaterials
Type of Product Cost
Do
llar
Am
ou
nt
DirectLabor
Conversion
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing and Direct Labor
Type of Product Cost
Do
llar
Am
ou
nt Conversion
Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may becombined into one product cost called combined into one product cost called conversionconversion..Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may be
combined into one product cost called combined into one product cost called conversionconversion..
DirectMaterials Direct labor costs
may be smallin comparison to
other productcosts in process
cost systems.
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Weighted-Average Example
Smith Company reported the following activity in Department A for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400 of Department A during June
Work in process, June 30 900 60% 30%
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The first step in calculating the equivalent units is to identify the units completed and transferred
out of Department A in June (5,400 units)
Weighted-Average Example
Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The second step is to identify the equivalent units of production in ending work in process with respect to
materials for the month (540 units) and add this to the 5,400 units from step one.
Weighted-Average Example
Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
Equivalent units of Production in Department A during June 5,940
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Weighted-Average Example
Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in Department A during June 5,940 5,670
The third step is to identify the equivalent units of production in ending work in process with respect to
conversion for the month (270 units) and add this to the 5,400 units from step one.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in Department A during June 5,940 5,670
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Weighted-Average Example
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
Weighted-Average Example
MaterialsMaterials
5,400 Units Completed 540 Equivalent Units 900 × 60%
5,940 Equivalent units of production
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
270 Equivalent Units 900 × 30%
5,670 Equivalent units of production
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
Weighted-Average Example
ConversionConversion
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Production Report – Weighted-Average
A computation ofA computation ofcost per equivalent unit. cost per equivalent unit.
A computation ofA computation ofcost per equivalent unit. cost per equivalent unit.
Section 1
Section 2
Section 3
Production Report A quantity schedule A quantity schedule showing the flow of units showing the flow of units and the computation of and the computation of
equivalent units.equivalent units.
A quantity schedule A quantity schedule showing the flow of units showing the flow of units and the computation of and the computation of
equivalent units.equivalent units.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Production Report
Cost Reconciliation section shows the reconciliation of all cost flows into and out of the department during the period.
Cost Reconciliation section shows the reconciliation of all cost flows into and out of the department during the period.
Section 1
Section 2
Section 3
Production Report
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Assume that Double Diamond Skis uses the weighted-average method of process costing to determine unit costs in it Shaping and Milling Department.
Assume that Double Diamond Skis uses the weighted-average method of process costing to determine unit costs in it Shaping and Milling Department.
Production Report Example
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600Conversion: 30% complete 5,575
Production started during May 5,000 unitsProduction completed during May 4,800
units
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Work in process, May 31 400 unitsMaterials: 40% completeConversion: 25% complete
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600Conversion: 30% complete 5,575
Production started during May 5,000 unitsProduction completed during May 4,800
units
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Work in process, May 31 400 unitsMaterials: 40% completeConversion: 25% complete
Production Report Example
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Step1: Prepare Quantity Schedule with Equivalent Units.
Production Report Example
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent unitsMaterials Conversion
Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Production Report Example
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent unitsMaterials Conversion
Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160
5,200 4,960
Step1: Prepare Quantity Schedule with Equivalent Units.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Production Report Example
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent unitsMaterials Conversion
Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100
5,200 4,960 4,900
Step1: Prepare Quantity Schedule with Equivalent Units.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Step 2: Calculating the Costs Per Equivalent Unit
To calculate the cost per equivalent unit for the period:
Cost perequivalent
unit
=Costs for the period
Equivalent units of productionfor the period
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Step 2: Compute the cost per equivalent unit.
Production Report Example
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.25$
Production Report Example
Step 2: Compute the cost per equivalent unit.
$378,200 ÷ 4,960 units = $76.25
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.25$ 72.75$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00
Production Report Example
$356,475 ÷ 4,900 units = $72.75$356,475 ÷ 4,900 units = $72.75
Step 2: Compute the cost per equivalent unit.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Step 3: Prepare a Cost Reconciliation
Production Report Example
Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100
Total work in process, May 31
Total cost accounted for
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100
Total work in process, May 31
Total cost accounted for
4,800 units @ $149.00
Production Report Example
Step 3: Prepare a Cost Reconciliation
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 12,200 160 Conversion 7,275 100
Total work in process, May 31 19,475
Total cost accounted for 734,675$
Production Report Example
160 units @ $76.25
Step 3: Prepare a Cost Reconciliation
All costs accounted for
100 units @ $72.75
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Operation Costing
Operation costing is a Operation costing is a hybrid hybrid of job-order of job-order and process costing because it and process costing because it
possesses attributes of both approaches.possesses attributes of both approaches.
Operation costing is a Operation costing is a hybrid hybrid of job-order of job-order and process costing because it and process costing because it
possesses attributes of both approaches.possesses attributes of both approaches.
Conversion costsassigned to batches
as in process costing.
Conversion costsassigned to batches
as in process costing.
Material Costs chargedto batches as in
job-order costing.
Material Costs chargedto batches as in
job-order costing.
Job-orderCosting
ProcessCosting
Operation Costing(Products produced in batches)
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
FIFO Method
Appendix 4A
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more accurate that the weighted-average method) differs from the weighted-average method in two ways:
1.1. The computation of equivalent units.The computation of equivalent units.
2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated in the cost inventory are treated in the cost reconciliation report.reconciliation report.
1.1. The computation of equivalent units.The computation of equivalent units.
2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated in the cost inventory are treated in the cost reconciliation report.reconciliation report.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Assume the following activity is reported in Department A for the month
of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400 of Department A during June
Work in process, June 30 900 60% 30%
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – FIFO Method
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400 of Department A during June
Work in process, June 30 900 60% 30%
Step 1Step 1: Determine the number of units completed and transferred out of Department A in June.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – FIFO Method
Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in Department A during June 5,940 5,670
Step 2Step 2: Add the equivalent units of production in ending work in process inventory (540 units for material and 270
units for conversion) to the units completed and transferred our during June.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – FIFO Method
Materials Conversion
Equivalent units or Production in Department A during June 5,940 5,670
Equivalent units in beginning inventory
300 units × 40% 120
300 units × 20% 60
Equivalent units of Production in Department A during June 5,820 5,610
Step 3Step 3: Subtract the equivalent units in beginning work in process inventory (120 units for materials and 60 units for conversion) from the
sum of the units completed and transferred out and the equivalent units in ending work in process inventory.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
BeginningWork in Process
300 Units40% Complete
EndingEndingWork in ProcessWork in Process
900 Units900 Units60% Complete60% Complete
6,000 Units Started
5,400 Units Startedand Completed
Equivalent Units – FIFO Method
MaterialsMaterials
Material Units completed and transferred out 5,400 Equivalent units in ending WIP inventory 540 Equivalent units in beginning WIP inventory (120)
Equivalent units of production 5,820
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
6,000 Units Started
5,400 Units Startedand Completed
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
Equivalent Units – FIFO Method
ConversionConversion
Conversion Units completed and transferred out 5,400 Equivalent units in ending WIP inventory 270 Equivalent units in beginning WIP inventory (60)
Equivalent units of production 5,610
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units: Weighted Average vs. FIFO
Materials ConversionEquivalent units - weighted average method 5,940 5,670Less equivalent units in beginning inventory: 300 units × 40% 120 300 units × 20% 60 Equivalent units - FIFO method 5,820 5,610
As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of production under
the FIFO method.
As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of production under
the FIFO method.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Let’s revisit the Double Diamond Skis Shaping and Milling Department for the Month of May to prepare our production report.
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600Conversion: 30% complete 5,575
$15, 175
Production started during May 5,000 unitsProduction completed during May 4,800 units
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Work in process, May 31 400 unitsMaterials: 40% completeConversion: 25% complete
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600Conversion: 30% complete 5,575
$15, 175
Production started during May 5,000 unitsProduction completed during May 4,800 units
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Work in process, May 31 400 unitsMaterials: 40% completeConversion: 25% complete
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Step 1Step 1: Prepare the quantity schedule and compute equivalent units.
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Step 2Step 2: Calculate the equivalent units of material and conversion that were transferred from beginning work in process to the next
department.
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840
Step 3Step 3: Determine the number of units started and completed during the period.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840
Step 4Step 4: Calculate the equivalent units of material and conversion that are in ending work in process inventory.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840
Step 5Step 5: Calculate the total equivalent units for materials and conversion.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost per Equivalent Unit
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 368,600$ 350,900$
Equivalent units 4,960 4,900
Cost per equivalent unit 74.31$ 71.61$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00
Notice that the costs of beginning work in process inventory of $15,175, is notnot broken down by materials and conversion components
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost per Equivalent Unit
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 368,600$ 350,900$
Equivalent units 4,850 4,900
Cost per equivalent unit 76.00$ 71.61$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00
We divide the costs added in the Shipping and Milling Department by the number of equivalent unit for materials.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost per Equivalent Unit
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 368,600$ 350,900$
Equivalent units 4,850 4,840
Cost per equivalent unit 76.00$ 72.50$ Total cost per equivalent unit = $76.00 + $72.50 = $148.50
We follow the same procedure for conversion and add the two equivalent unit costs to get the total cost per equivalent unit.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost Reconciliation
Total Equivalent UnitsCost Materials Conversion
Work in process, May 1: 15,175$ Materials (90 × $76.00) 6,840 90 Conversion (140 × $72.50) 10,150 140 Total 32,165
Started and completed in May 683,100 4,600 4,600
Work in process, May 31: Materials (160 × $76.00) 12,160 160 Conversion (100 × $72.50) 7,250 100 Total 19,410 Total cost accounted for 734,675$
Step 1Step 1: Calculate the total cost from beginning inventory transferred to the next department.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost Reconciliation
Total Equivalent UnitsCost Materials Conversion
Work in process, May 1: 15,175$ Materials (90 × $76.00) 6,840 90 Conversion (140 × $72.50) 10,150 140 Total 32,165
Started and completed in May 683,100 4,600 4,600
Work in process, May 31: Materials (160 × $76.00) 12,160 160 Conversion (100 × $72.50) 7,250 100 Total 19,410 Total cost accounted for 734,675$
4,600 units × $148.50
Step 2Step 2: Calculate the cost of units started and completed during the period.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Total Equivalent UnitsCost Materials Conversion
Work in process, May 1: 15,175$ Materials (90 × $76.00) 6,840 90 Conversion (140 × $72.50) 10,150 140 Total 32,165
Started and completed in May 683,100 4,600 4,600
Work in process, May 31: Materials (160 × $76.00) 12,160 160 Conversion (100 × $72.50) 7,250 100 Total 19,410 Total cost accounted for 734,675$
Cost Reconciliation
All costs accounted for
Step 3Step 3: Calculate the costs in ending working in process inventory and the sum of the cost accounted for.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
End of Chapter 4
Recommended