Management Accounting - Hansen Mowen CH06

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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


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

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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


Supplements


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.



Work in Process (Bottling) 3 760 00

Work in Process (Encapsulating) 3 760 00


Supplements


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.



Finished Goods 5 460 00

Work in Process (Bottling) 5 460 00


Supplements


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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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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Concept:

100 units completed = 100 equivalent units

200 units, 50% completed = 100 equivalent units

=


=

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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


Supplements


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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Supplements


Supplements

BWIP Cost July Cost

$3,525 $10,125

$13,650

Total Manufacturing Cost

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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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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


Supplements


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


Supplements


Supplements

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Step 5: Cost ReconciliationStep 5: Cost ReconciliationStep 5: Cost ReconciliationStep 5: Cost Reconciliation


Supplements


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


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


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


Supplements


Supplements

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Supplements


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


Supplements


Supplements


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


10,000 units


50,000 units

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September


Supplements


Supplements


60,000 60,000


20,000 units

20,000 8,000

Conversion

Materials Costs


10,000 units


50,000 units

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SeptemberSeptember


Supplements


Supplements



10,000 units

60,000 60,000Started and completed

50,000 units


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


Supplements


Supplements


10,000 units


50,000 units


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


Production Report for September 2004


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


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


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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


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Transferred Transferred Ending Ending

Out Out WIP TotalWIP Total


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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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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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


Production Report for July 2004




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 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


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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


Cost per equivalent unit $ 0.27

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Transferred Transferred Ending Ending Out Out WIP TotalWIP Total


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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Management Accounting - Hansen Mowen CH06