TM 4-1

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

AGENDA: PROCESS COSTING 1. 2. 3. 4. 5. Differences between job-order and process costing. Overview of cost flows in process costing. The concept of equivalent (whole) units for partially completed units. Overview of the weighted-average method for determining costs. Departmental production report using the weighted-average method. a. Quantity schedule and computation of equivalent units. b. Computation of costs per equivalent unit. c. Cost reconciliation: assigning costs to units transferred out and to ending work in process inventory. 6. 7. (Appendix) FIFO method production report. (Appendix) Comparison of weighted-average and FIFO methods.

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-2

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

DIFFERENCES BETWEEN JOB-ORDER AND PROCESS COSTING (Exhibit 4-1)

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-3

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

SEQUENTIAL PROCESSING DEPARTMENTS (Exhibit 4-2)

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-4

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

T-ACCOUNT MODEL OF PROCESS COSTING FLOWS (Exhibit 4-3)

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-5

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

OVERVIEW OF PROCESS COSTING A. B. In process costing, costs are accumulated in processing departments. A separate departmental production report is compiled for each processing department. This report provides the details of how costs are assigned to units that pass through the department. Costs to be accounted for in each processing department consist of: 1) Costs of the beginning work in process inventory in the department. 2) Costs added during the period. a. Costs of units transferred in from a preceding department. b. Costs added in the department itself. Materials + Labor + Overhead Conversion Costs D. Costs are accounted for by assigning them to: 1) Ending work in process inventory in the department. 2) Units transferred out to the next department (or to finished goods).

C.

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-6

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

OVERVIEW OF PROCESS COSTING (continued) E. F. In process costing, each unit is assigned the average cost of units processed through the department. Two things must be known to compute the average cost per unit in a department: 1) The total cost. 2) The total number of units processed. G. Partially completed units are converted to equivalent (whole) units. For example, 200 units in ending inventory are 25% complete with respect to conversion costs.

Equivalent = Number of partially Percentage units completed units completion = 200 50% = 50 EUs H. The two common methods of computing average costs per unit are the weighted-average method and the FIFO method. The FIFO method is discussed in Appendix 4A.

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-7

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

WEIGHTED-AVERAGE METHOD

The weighted-average method averages together the beginning work in process inventories with the units started during the current period. For each category of cost in each processing department the following calculations are made:
Costs to be Costs of Costs added accounted = beginning WIP + during the for inventory current period
Equivalent Units Equivalent units units of = transferred + of ending WIP production out inventory

Units transferred out of the department are 100% complete with respect to the work done in the department.

Cost per = Costs to be accounted for EU Equivalent units of production

Costs of units = Units Cost transferred out transferred out per EU Costs of units in = Equivalent units of Cost ending WIP inventory ending WIP inventory per EU

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-8

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

WEIGHTED-AVERAGE METHOD (contd)

EXAMPLE: Halsey Company makes small sailboats. During the most recent month, the following activity was recorded in the Hull Fabrication Department for conversion costs. Work in process, beginning (80% complete) .. Units started into production......................... Units transferred out .................................... Work in process, ending (30% complete)....... 15,000 180,000 175,000 20,000 $24,000 $338,000 units units units units

Conversion Costs:

Work in process, beginning........................... Conversion costs incurred during the month...

Costs to be Costs of Costs added accounted = beginning WIP + during the for inventory current period = $24,0000 + $338,000 = $362,000 Equivalent Units Equivalent units units of = transferred + of ending WIP production out inventory =175,000 + (20,000 30%) = 181,000
Cost per EU = = Costs to be accounted for Equivalent units of production $362,000 = $2 per EU 181,000 EU

Costs of units = Units Cost transferred out transferred out per EU = 175,000 $2 = $350,000

Costs of units in = Equivalent units of Cost ending WIP inventory ending WIP inventory per EU = (20,000 30%) $2 = $12,000

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-9

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

PRODUCTION REPORT

The production report summarizes all of the activity and cost flows in a department. The production report has three separate, but highly interrelated, parts: 1. A quantity schedule with equivalent units. 2. Computation of costs per equivalent unit. 3. A reconciliation of all cost flows into and out of the department during the period. EXAMPLE: The following data are for the first processing department at Midwest Refining, a company that reclaims petroleum products from used motor oil. Work in process, beginning: Units in process .......................... Percentage completion ................ Cost of beginning inventory ......... Units started into production .......... Costs added in the department during the current period............. Units completed and transferred ..... Work in process, ending: Units in process .......................... Percentage completion ................

Units
10,000 190,000 180,000 20,000

Materials
60% $4,300 $74,100

Conversion
50% $7,600 $140,400

80%

25%

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-10

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

QUANTITY SCHEDULE AND EQUIVALENT UNITS: WEIGHTED-AVERAGE METHOD

The quantity schedule accounts for the physical flow of units through a department for a period. The equivalent units are also shown for the units transferred out of the department and for ending work in process inventory.

Units to be accounted for: Work in process, beginning .... Started into production .......... Total units to be accounted for.. Units accounted for as follows: Units transferred out.............. Work in process, ending* ....... Total units accounted for ..........

Quantity Schedule
10,000 190,000 200,000

Equivalent Units (EU) Materials Conversion

180,000 16,000 196,000 180,000 5,000 185,000

180,000 20,000 200,000

* Materials: 20,000 units 80% complete = 16,000 EUs; Conversion: 20,000 units 25% complete = 5,000 EUs Note: The quantity schedule is based on the following equation: Units in beginning work in process + Units started into production = Units transferred out + Units in ending work in process

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-11

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

COMPUTATION OF COSTS PER EQUIVALENT UNIT: WEIGHTED-AVERAGE METHOD

Cost to be accounted for: Work in process, beginning. $ 11,900 Costs added ...................... 214,500 Total cost to be accounted for (a)............................... $226,400 Equivalent units (b) .............. Cost per EU (a) (b) ..........
COST RECONCILIATION: WEIGHTED-AVERAGE METHOD

Total Cost

Materials Conversion
$ 4,300 74,100 $78,400 196,000 $0.40 $ 7,600 140,400

Whole Unit

$148,000 185,000 + $0.80 = $1.20

Cost accounted for as follows: Transferred out: 180,000 units @ $1.20 each...... Work in process, ending: Materials @ $0.40 per EU ......... Conversion @ $0.80 per EU ...... Total work in process, ending ...... Total cost accounted for.................

Total Cost
$216,000 6,400 4,000 10,400 $226,400

Equivalent Units (EU) Materials Conversion

180,000 16,000 180,000 5,000

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-12

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

FIFO METHOD (Appendix)

The FIFO method separates the costs of beginning inventory from the costs incurred during the current period. (The weighted-average method combines them.) FIFO assumes the beginning inventory is completed before any new units are started.
QUANTITY SCHEDULE AND EQUIVALENT UNITS: FIFO METHOD

Units to be accounted for: Work in process, beginning........... Started into production................. Total units to be accounted for ........ Units accounted for as follows: Transferred out: From beginning inventory* ........ Started and completed ............. Work in process, ending ............... Total units accounted for ................

Quantity Schedule
10,000 190,000 200,000

Equivalent Units (EU) Materials Conversion

4,000 170,000 16,000 190,000 5,000 170,000 5,000 180,000

10,000 170,000 20,000 200,000

* Materials: 10,000 (100% 60%) = 4,000 EUs Conversion: 10,000 (100% 50%) = 5,000 EUs

19,000 units started 20,000 units in ending WIP = 170,000 units

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-13

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

COMPARISON OF EQUIVALENT UNITS

Weighted-Average Method
190,000 Units Started Beginning Work in Process: 10,000 Units 60% Complete Started and Completed: 170,000 Units Ending Work in Process: 20,000 Units 80% Complete

Units transferred to next department: Work in process, ending: 20,000 units x 80% Equivalent units of production

180,000 16,000 196,000

FIFO Method
190,000 Units Started Beginning Work in Process: 10,000 Units 60% Complete Started and Completed: 170,000 Units Ending Work in Process: 20,000 Units 80% Complete

Work in process, beginning: 10,000 units x (100% - 60%) Units started and completed: Work in process, ending: 20,000 units x 80% Equivalent units of production

4,000 170,000 16,000 190,000

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-14

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

COMPUTATION OF COSTS PER EQUIVALENT UNIT: FIFO METHOD

Cost to be accounted for: Work in process, beginning... Cost added in the department (a).................. Total cost to be accounted for . Equivalent units (b) ................ Cost per EU (a) (b)

Total Cost
$ 11,900

Materials Conversion

Whole Unit

214,500 $ 74,100 $226,400 190,000 $0.39

$140,400 180,000 + $0.78 = $1.17

Note: Unlike the weighted-average method, under the FIFO method only the costs added by the department during the current month are included when computing the costs per EU. The costs of beginning inventory are not included in the cost per EU under the FIFO method.

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-15

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

COST RECONCILIATION: FIFO METHOD

Cost accounted for as follows: Transferred out: From beginning inventory: Cost in beginning inventory ..... Cost to complete these units: Materials @ $0.39 per EU.... Conversion @ $0.78 per EU. Total cost from beginning inventory ................................. Units started and completed 170,000 units @ $1.17 each...... Total cost transferred ..................... Work in process, ending: Materials @ $0.39 per EU ............ Conversion @ $0.78 per EU ......... Total work in process, ending ......... Total cost accounted for....................

Total Cost

Equivalent Units Materials Conversion

$ 11,900 1,560 3,900 17,360 198,900 170,000 216,260 6,240 3,900 10,140 $226,400 16,000 170,000 4,000 5,000

5,000

The McGraw-Hill Companies, Inc., 2006. All rights reserved.

TM 4-16

GarrisonNoreenBrewer: Student Lecture Aid t/a Managerial Accounting, 11/e

4. Process Costing

Text

The McGrawHill Companies, 2005

A COMPARISON OF PRODUCTION REPORT CONTENT (Exhibit 4A-4)

The McGraw-Hill Companies, Inc., 2006. All rights reserved.