Ch 06 Process Costing

Process Costing

ProcessCosting

Job-orderCosting

Many units of a single, homogeneous product flow evenly through a continuous production process.

One unit of product is indistinguishable from any other unit of product.

Each unit of product is assigned an average cost.

Many units of a single, homogeneous product flow evenly through a continuous production process.

One unit of product is indistinguishable from any other unit of product.

Each unit of product is assigned an average cost.

Types of Costing Systems Used to Determine Product Costs

Chapter 5

Equivalent Units of Production –Weighted Average Method

The weighted average method . . .

Makes no distinction between work done in prior and current period.

Blends together units and costs from prior period and current period.

Production Report

A computation ofcost per equivalent unit.

A computation ofcost per equivalent unit.

Section 1

Section 2

Section 3

Production Report A quantity schedule showing the flow of units and the computation of

equivalent units.

A quantity schedule showing the flow of units and the computation of

equivalent units.

A reconciliation of cost flows for the period,including:

Total cost for units completed andtransferred from theprocessing department.

Total cost for partiallycompleted units remaining in work inprocess.

A reconciliation of cost flows for the period,including:

Total cost for units completed andtransferred from theprocessing department.

Total cost for partiallycompleted units remaining in work inprocess.

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% complete.Conversion 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% complete.Conversion 25% complete.

Production Report Example

Section 1: Quantity Schedule with Equivalent Units


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




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





Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Labor 25% Complete 160 100

5,200 4,960 4,900


Section 2: Compute cost per equivalent unit


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



Total cost 734,675$ 378,200$ 356,475$


Cost per equivalent unit 76.25$



$378,200 ÷ 4,960 units = $76.25



Total cost 734,675$ 378,200$ 356,475$


Cost per equivalent unit 76.25$ 72.75$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00


$356,475 ÷ 4,900 units = $72.75


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


Section 3: Cost Reconciliation

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$

160 units @ $76.25


Section 3: Cost Reconciliation

All costs accounted for

100 units @ $72.75

How would the unit cost measures change if the

department uses Fifo rather than weighted average

costing?

Production Report -FIFO Section 1: Quantity Schedule with Equivalent Units

Units accounted for: Equivalent Units:

Transfers: Units Material LOH

From beg. Invent. 200u 90u 140u

From new starts 4600u 4600u 4600u

Ending inventory 400u 160u 100u

Current work done 4850u 4840u


Cost to be accounted for:

Costs added in the Shipping and Milling Department 719,500 368,600 350,900

Total cost 719,500$ 368,600$ 350,900$


Cost per equivalent unit 76.00$ 72.50$ Total cost per equivalent unit = $76.25 + $72.75 = $149.0076.00+72.50 148.500$

Production Report -FIFOCompute current period cost per equivalent unit

Cost Reconciliation -FIFO

Units accounted for: Costs:


From beg. Invent. 200u

From new starts 4600u

Ending inventory 400u

Total costs

Accounted for:




From beg. Invent. 200u $ 16,4401 $ 15,7252

From new starts 4600u


Total costs

Accounted for:

1 $9600 + 90eu x $76.00 =2 $ 5575 + 140eu x $72.50 =

$ 16,440

$ 15,725




From beg. Invent. 200u $ 16,4401 $ 15,7252

From new starts 4600u $349,6003 $333,5004


Total costs

Accounted for:

1 $9600 + 90eu x $76.00 =2 $ 5575 + 140eu x $72.50 =3 4,600eu x $76.00 =4 4,600eu x $72.50 =

$ 16,440

$ 15,725

$ 349,600

$ 333,500




From beg. Invent. 200u $ 16,4401 $ 15,7252

From new starts 4600u $349,6003 $333,5004

Ending inventory 400u $ 12,1605 $ 7,2506

Total costs

Accounted for:

$ 378,200+ = $734,675

$356,475

1 $9600 + 90eu x $76.00 =2 $ 5575 + 140eu x $72.50 =3 4,600eu x $76.00 =4 4,600eu x $72.50 =5 160eu x $76.00 =6 100eu x $72.50 =

$ 16,440

$ 15,725

$ 349,600

$ 333,500

$ 12,160

$ 7,250

Fifo differs from weighted average :

Current period unit costs are based on current work done, and current costs charged to the process.


Current work does not include production from the previous period, in the beginning inventory.


Transfers out are costed as two separate lots: one from the beginning inventory, and one from current starts.


The ending inventory is priced at current period costs (not as a weighted average of current and prior period costs).

Wtd. Avg. FIFO Diff.

Costs transferred to next dept. $715,200 $715,265 ($65)

Costs in ending inventory $ 19,475 $ 19,410 +$65

Total costs accounted for $734,675 $734,675 -0-

Unit costs: Materials LOH Total

Weighted average unit costs $ 76.25 $72.75 $149.00

Current period production costs $ 76.00 $72.50 $148.50

Previous period production costs $ 87.27 $ 92.92 $180.19

Comparisons of Weighted Average and FIFO methods

Spoilage in a Process CostingSystem

Terminology

Spoilage refers to unacceptable unitsdiscarded or sold for reduced prices.

Normal Spoilage

Normal spoilage is spoilage that is an inherentresult of the particular production process and

arises even under efficient operating conditions.

Abnormal Spoilage

Abnormal spoilage is spoilage that should notarise under efficient operating conditions.

Companies record the units of abnormalspoilage and keep a separate Loss from

Abnormal Spoilage account.

Accounting for spoilage inprocess costing using the

weighted-average method.

Weighted-Average: Spoilage

The following example is for the month ofNovember and relates to Big Mountain, Inc.

Direct materials are introduced at the beginningof the production cycle.

Conversion costs are added evenly during the cycle.


Normally the spoiled units are 2% of the unspoiled output.

Assume that Big Mountain, Inc., had 1,000 unitsin the beginning work in process inventory,

100% complete for materials ($9,700), and 60%complete for conversion ($10,000).

During the month, an additional 35,000 units were put into production.


Ending work in process inventory was 4,000 units(100% materials and 20% conversion).

Costs added during the month were $87,500 formaterials and $72,000 for conversion.

What are the costs assigned to the units completed,spoiled, and in ending work in process inventory?

During the month 31,000 units were completed and transferred out to the next department.

Physical Units (Step 1)

Work in process, beginning (November 1)100% material, 60% conversion costs 1,000Started during November: 35,000

36,000

Good units completed and transferred out: 31,000Work in process, ending inventory:100% material 20% conversion costs 4,000

35,000

Physical Units

What is the number of spoiled units?

36,000 – 35,000 = 1,000

What is the normal spoilage?

31,000 × 2% = 620

What is the abnormal spoilage?

1,000 – 620 = 380

Compute EquivalentUnits

Materials ConversionCompleted and transferred 31,000 31,000Normal spoilage 620 620Abnormal spoilage 380 380Ending inventory 4,000 800Equivalent units 36,000 32,800

100%100% 20%20%

Compute EquivalentUnit Costs

Materials Conversion Beginning inventory $ 9,700 $10,000 Current costs 87,500 72,000 Total $97,200 $82,000 Equivalent units 36,000 32,800 Cost per unit $2.70 $2.50

Summarize Total Costs

Work in process beginning inventory:Materials $ 9,700Conversion 10,000Total beginning inventory $ 19,700

+ Current costs:Materials $87,500Conversion 72,000

= Costs to account for $179,200

Assign Total Costs

Good units completed and transferred out(31,000 units):Costs before adding normal spoilage:31,000 × ($2.70 + $2.50) $161,200Normal spoilage: 620 × ($2.70 + $2.50) 3,224Total $164,424

Assign Total Costs (cont’d)

Abnormal spoilage: 380 × ($2.70 + $2.50) $ 1,976Work in process, ending (4,000 units):Direct materials (4,000 × $2.70) $10,800Conversion (800 × $2.50) 2,000Total $12,800

Cost Reconciliation

Costs of units completed and transferred out (including normal spoilage) $164,424Cost of abnormal spoilage 1,976Costs in ending inventory 12,800Total costs accounted for $179,200

The $1,976 cost of abnormal spoilageis assigned to the Loss fromAbnormal Spoilage account.

Journal entries for process costing with normal and abnormal spoilage

Return to the beginning of the Big Mountain Company example, and write out all journal entries to reflect the cost

flows in the above example. For simplicity, assume that the firm has only one

processing department (implying that transfers out are finished goods).

End of Process Costing Discussion

Handout 6 (a):

Process costing: FIFO

and Wtd. Average

Papermill Products Co. provides the following information for a recent month’s production

activity in its Bleaching Department. Materials are added at the beginning of the bleaching

process, and conversion costs are added evenly throughout the bleaching process. The

beginning work in process was 100% complete with respect to material costs, and was 80%

complete with respect to conversion costs. The ending work in process is 100% complete

with respect to material costs, and is 50% complete with respect to conversion costs.

Physical Units

Material Costs

Conversion Costs

Total Costs

Work in process, beginning 5,000u $ 6,000 $ 4,200 $ 10,200 New starts during this month 85,000u $39,000 $48,000 $ 87,000 Total to account for 90,000u $ 97,200 Transfers to the next department 84,000u Work in process, ending 6,000u

Physical Units

Material Costs

Conversion Costs

Total Costs


Required: Assume the company uses weighted average process costing, and determine the following amounts:

(a) Equivalent units of production for materials and for conversion costs

Physical Units

Material Costs

Conversion Costs

Total Costs



(a) Equivalent units of production for materials and for conversion costs

Measurement of equivalent units (EU) for weighted average costing: Units Materials EU Conversion EU Units transferred out 84,000 84,000 84,000 Units in ending inventory (.5) 6,000 6,000 3,000 Total 90,000 90,000 87,000

(b) Current materials and conversion costs per unit

Costs per equivalent unit Materials Conversion Charges (current and beg.invent.) $45,000 $52,200 Equivalent units (see above) 90,000 87,000 Cost per EU $0.50 $0.60

Physical Units

Material Costs

Conversion Costs

Total Costs


(c)Total (material plus conversion) costs assigned to the ending work in process inventory Material 6,000 EU @ $0.50 = $3,000 Conversion (.5) 3,000 EU @ $0.60 = $1,800 Total $4,800

(d) Total costs transferred to the next department 84,000 units @ ($0.50 + 0.60) = $92,400

(e) Provide journal entries to reflect the above activities.

Dr. Work in process- material $39,000 Cr. Raw materials

$39,000

Dr. Work in process- conversion (LOH) $48,000 Cr. Payroll suspense; Applied OH

$48,000

Dr. Finished goods (or WIP/ subs. dept.) $92,400 Cr. Work in process/ Bleaching dept. $92,400

Assume instead that the company uses FIFO process costing, and determine the following amounts:

(f) Equivalent units of production for materials and for conversion costs

Measurement of equivalent units (EU) for FIFO costing: units Materials EU Conversion EU Units transferred out From beginning inventory (.8) 5,000 --- 1,000 New starts and completes 79,000 79,000 79,000 Units in ending inventory (.5) 6,000 6,000 3,000 Total 90,000 85,000 83,000

Physical Units

Material Costs

Conversion Costs

Total Costs


(g) Current materials and conversion costs per unit

Costs per equivalent unit Materials Conversion Charges (current only) $39,000 $48,000 Equivalent units (see above) 85,000 83,000 Cost per EU $0.4588 $0.5783 Total unit cost in the current period: $ 1.0371

(h) Total (material plus conversion) costs assigned to the ending work in process inventory Material 6,000 EU @ $0.4588 = $2,753 Conversion (.5) 3,000 EU @ $0.5783 = $1.735 Total $4,488 (i) Total costs transferred to the next department

Costs transferred out: From beginning inventory $10,200 + (1,000 EU)($.5783) = $10,778 New starts and completes (79,000EU)($1.0371) = $81,931 Total = $92,709 Note: $92,709 + 4.488 = $97,197. Differs from $97,200 due to $3. rounding error.

(j) Unit cost for materials and for conversion in the previous period, based on information regarding the costs assigned to the beginning inventory

The beginning inventory includes $6,000 of materials cost for 5,000 equivalent units, or $1.20 per unit. The beginning inventor includes $$4,200 of conversion cost for 4,000 equivalent units, of $1.05 per unit.

Physical Units

Material Costs

Conversion Costs

Total Costs


(k) Provide journal entries to reflect the above activities. Dr. Work in process- material $39,000 Cr. Raw materials

$39,000


$48,000

Dr. Finished goods (or WIP/ subs. dept.) $92,709 Cr. Work in process/ Bleaching dept. $92,709

Handout 6 (b):

Process costing: Spoiled Units

Papermill Products Co. provides the following information for July’s production activity in its

Bleaching Department. Materials are added at the beginning of the bleaching process, and

conversion costs are added evenly throughout the bleaching process. Inspection occurs at the very

end of the bleaching process, before goods are transferred out to the Cutting Department.. The

company expects “normal” spoilage to average about ten percent of the unspoiled units transferred

out (i.e., normally, one unit is spoiled for every ten good units transferred to the next department).

The beginning work in process was 100% complete with respect to material costs, and was 80%

complete with respect to conversion costs. The ending work in process is 100% complete with

respect to material costs, and is 50% complete with respect to conversion costs. Pertinent

information regarding current activity in the bleaching department is given in the following table:

Physical Units

Material Costs

Conversion Costs

Total Costs

Work in process, beginning 5,000u $ 6,000 $ 4,200 $ 10,200 New starts during this month 85,000u $39,000 $48,000 $ 87,000 Total to account for 90,000u $ 97,200 Transfers to the next department 72,000u Normal spoilage ? Abnormal spoilage ? Work in process, ending 6,000u

Physical Units

Material Costs

Conversion Costs

Total Costs



(a) Number of units of normal and abnormal spoilage

A total of 12,000 units are spoiled (90,000 – 78,000 units). Normal spoilage is 7,200

units (10% of 72,000 unspoiled units transferred out). Abnormal spoilage is 4,800

units (12,000 – 7,200 units).

(b) Equivalent units of production for materials and for conversion costs

Measurement of equivalent units (EU) for weighted average costing: Units Materials EU Conversion EU Units transferred out 72,000 72,000 72,000 Normal spoilage 7,200 7,200 7,200 Abnormal spoilage 4,800 4,800 4,800 Units in ending inventory (.5) 6,000 6,000 3,000 Total 90,000 90,000 87,000

(c) Current period unit costs for materials and conversion costs

Costs per equivalent unit Materials Conversion Charges (current and beg.invent.) $45,000 $52,200 Equivalent units (see above) 90,000 87,000 Cost per EU $0.50 $0.60 (d) Total costs assigned to units transferred to the cutting department (including the cost of normal

spoilage)

(72,000 + 7,200 units) @ ($0.50 + 0.60) = $87,120

(e) Total (material plus conversion) costs assigned to the ending work in process inventory Material 6,000 EU @ $0.50 = $3,000 Conversion (.5) 3,000 EU @ $0.60 = $1,800 Total $4,800

(f) Total costs assigned to abnormal spoilage

4,800 units @ $1.10 = $5,280 Note that ($87,120 + 4,800 + 5,280) = $97,200

Physical Units

Material Costs

Conversion Costs

Total Costs


Provide journal entries to record the cost flows into and out of the Bleaching department for the month of July.

Dr. Work in process- material $39,000 Cr. Raw materials

$39,000


$48,000

Dr. Work in process/Cutting dept. $87,120 Cr. Work in process/ Bleaching dept. $87,120 Dr. Abnormal spoilage (expense) $5,280 Cr. Work in process/Bleaching dept. $5,280

Handout 6(c)

Multiple choice questions

1. Colby Company has a process costing system in which the weighted-average method is used. The company adds all materials at the beginning of the process in the Molding Department, which is the first of two stages of its production process. Information concerning the materials used in the Molding Department during March is as follows:

What was the materials cost of the units transferred out during March? A. $5,100 B. $7,500 C. $11,220 D. $49,470

1. Colby Company has a process costing system in which the weighted-average method is used. The company adds all materials at the beginning of the process in the Molding Department, which is the first of two stages of its production process. Information concerning the materials used in the Molding Department during March is as follows:

What was the materials cost of the units transferred out during March? A. $5,100 B. $7,500 C. $11,220 D. $49,470

Total costs are $57,120 and total units are 112,000, so unit costs are $0.51. Transfers consist of 97,000 units costed at $49,470 (97,000 x $.51).

2. Jimmy Company uses the weighted-average method in its process costing system. The ending work in process inventory consists of 9,000 units. The ending work in process inventory is 100% complete with respect to materials and 70% complete with respect to labor and overhead. If the cost per equivalent unit for the period is $3.75 for material and $1.25 for labor and overhead, what is the balance of the ending work in process inventory account? A. $31,500 B. $33,750 C. $41,625 D. $45,000

2. Jimmy Company uses the weighted-average method in its process costing system. The ending work in process inventory consists of 9,000 units. The ending work in process inventory is 100% complete with respect to materials and 70% complete with respect to labor and overhead. If the cost per equivalent unit for the period is $3.75 for material and $1.25 for labor and overhead, what is the balance of the ending work in process inventory account? A. $31,500 B. $33,750 C. $41,625 D. $45,000

Materials cost is $33,750 (9,000 x 3.75) and conversion cost is $7,875 (6,300 x 1.25). The total is $41,625.

3. Jersey Company has a process costing system in which it uses the weighted-average method. The equivalent units for conversion costs for the month were 47,500 units. The beginning work in process inventory consisted of 15,000 units, 60% complete with respect to conversion costs. The ending work in process inventory consisted of 10,000 units, 75% complete with respect to conversion costs. The number of units started during the month was: A. 25,000 units B. 34,000 units C. 35,000 units D. 40,000 units

3. Jersey Company has a process costing system in which it uses the weighted-average method. The equivalent units for conversion costs for the month were 47,500 units. The beginning work in process inventory consisted of 15,000 units, 60% complete with respect to conversion costs. The ending work in process inventory consisted of 10,000 units, 75% complete with respect to conversion costs. The number of units started during the month was: A. 25,000 units B. 34,000 units C. 35,000 units D. 40,000 units

The equivalent units for conversion imply that 40,000 units were transferred, so 50,000 units were available. The beginning inventory is 15,000 units, so an additional 35,000 units were started (15,000 + 35,000 = 50,000).

4. Boswal Company uses the weighted-average method in its process costing system. The Assembly Department started the month with 6,000 units in its beginning work in process inventory that were 80% complete with respect to conversion costs. An additional 52,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 18,000 units in the ending work in process inventory of the Assembly Department that were 20% complete with respect to conversion costs. What were the equivalent units for conversion costs in the Assembly Department for the month? A. 43,600 B. 38,800 C. 64,000 D. 40,000

4. Boswal Company uses the weighted-average method in its process costing system. The Assembly Department started the month with 6,000 units in its beginning work in process inventory that were 80% complete with respect to conversion costs. An additional 52,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 18,000 units in the ending work in process inventory of the Assembly Department that were 20% complete with respect to conversion costs. What were the equivalent units for conversion costs in the Assembly Department for the month? A. 43,600 B. 38,800 C. 64,000 D. 40,000

A total of 58,000 units are available (6,000 + 52,000). Of these units, 40,000 were complete and transferred. The remaining 18,000 units are 20% complete, equivalent to 3,600 units. The total equivalent units is 43,600 (40,000 + 3,600).

5. The following information was provided by Fystro Corporation for the month of March. Fystro uses the weighted-average method in its process costing system.

How much cost did Fystro add to production during March? A. $57,000 B. $67,000 C. $81,000 D. $62,000

5. The following information was provided by Fystro Corporation for the month of March. Fystro uses the weighted-average method in its process costing system.

How much cost did Fystro add to production during March? A. $57,000 B. $67,000 C. $81,000 D. $62,000

Total cost available is $79,000 ($74,000 + 5,000). Of this amount, $12,000 was in the beginning inventory, and the remaining $67,000 was added to production during the month.

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Ch 06 Process Costing

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