hm-ch06 process costing

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ProcessCosting

CHAPTER


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1. Describe the basic characteristics and cost

flows associated with process manufacturing.

2. Define equivalent unitsand 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.

Objectives

After studying this

chapter, you should

be able to:

Continued


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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.

Objectives


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Finished

Goods

Process 2

Parallel Processing

(hard disk drives for personal computers)

Process 1

Process 4Process 3

Production and

assembly ofwrite-head and

disk drive

Testing of

write-head anddisk drive

Production of

circuit board

Testing of

circuit board

Assembly


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Bottling Dept.

Work in Process

Transferred-in

from

Encapsulatin

gMaterials:

Bottles

Bottling

labor

Applied OH

Encapsulating Dept.

Work in Process

Transferred-in

from Picking

Materials:

CapsulesEncapsulating

labor

Applied OH

Flow of Manufacturing Costs Through the

Accounts of a Process-Costing Firm (Healthblend)

Picking Department

Work in Process

Materials:

Herbs

Vitamins

MineralsPicking labor

Applied OH


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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

HealthblendNutritional

Supplements

Healthblend decides to produce

2,000 bottles of multivitamins.

The Picking Department costs are:

Direct materials $1,700

Direct labor 50

Applied overhead 450


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The cost is transferred from

Encapsulating to Bottling.




Work in Process (Bottling) 3 760 00

Work in Process (Encapsulating) 3 760 00


Supplements

The Encapsulating Department

costs are:

Direct materials $1,000Direct labor 60

Applied overhead 500

$2,200 + $1,000

+ $60 + $500


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The cost is transferred to the

finished goods warehouse.




Finished Goods 5 460 00

Work in Process (Bottling) 5 460 00


Supplements

The Bottling Department costs are:

Direct materials $800

Direct labor 300Applied overhead 600

$3,760 + $800 +

$300 + $600


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In process cost, costs are

summarized by department

for a period of time in aproduction report.

A production report provides

information about the

physical units processed in adepartment and the

manufacturing costs.


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Equivalent Units of Production

Equivalent unitsof output are thecomplete 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

=

Continued

=


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Example:

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 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 Method


Supplements

Production:Units in process, July 1, 75% complete 20,000

Units completed and transferred out 50,000

Units in process, July 31, 25% complete 10,000

Costs:Work in process, July 1 $ 3,525

Cost added during July 10,125


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Healthblend

Nutritional

Supplements

BWIP Cost July Cost

$3,525 $10,125

$13,650

Total Manufacturing Cost


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Output for July60,000 Total Physical UnitsBWIP

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 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 20,000 50,000Units in ending work in process (25%

complete) 10,000

Total units accounted for 60,000


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Step 2: Calculation of Equivalent Units

Units completed 50,000

Add: Units in ending work in process x Fraction

complete (10,000 x 25%) 2,500

Equivalent units of output 52,500


Healthblend

Nutritional

Supplements


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Step 3: Computation of Unit Cost

$13,650

52,500=

$0.26 per equivalent

unit


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Step 4: Valuation of Inventories

Cost of goods transferred to the encapsulating

department:

50,000 equivalent units x $0.26 $13,000

Ending inventory:

2,500 equivalent units x $0.26 650

Healthblend

Nutritional

Supplements


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Step 5: Cost Reconciliation

Healthblend

Nutritional

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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ProductionReport


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Picking Department

Production Report for July 2004

UNIT INFORMATIONPhysical Flow

Units to account for: Units accounted for:

Units in beginning Units completed 50,000

work in process 20,000 Units in endingUnits started 40,000 work in process 10,000

Total units to Total units

account for 60,000 accounted for 60,000

Equivalent UnitsUnits completed 50,000

Units in ending

work in process 2,500

Total equivalent units 52,500

Continued

Weighted

average


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COST INFORMATION

Costs to account for:

Beginning work

in process $ 3,525

Incurred during

period 10,125Total cost to

account for $13,650

Continued

Cost per equivalent unit $ 0.26


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Transferred Ending

Out WIP 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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NonuniformApplication of

Manufacturing

Inputs

Healthblend

Nutritional

Supplements


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Supplements

Materials, 100%

complete; conversion

cost, 50% complete100% complete as to

both materials and

conversion cost

60,000

equivalent unitsof material and

conversion cost

transferred out

Equivalent Units

Picking Department

BeginningWIP inventory

10,000 units

Started and

completed

50,000 units


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September


Supplements

Equivalent Units

Picking Department

Materials, 100% complete; conversion cost,

40% complete

60,000 60,000

Ending WIPinventory

20,000 units

Conversion

Materials Costs


10,000 units

Started and

completed

50,000 units


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September


Supplements

Equivalent Units

Picking Department

60,000 60,000

Ending WIPinventory

20,000 units

20,000 8,000

Conversion

Materials Costs


10,000 units

Started and

completed

50,000 units


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SeptemberSeptember


Supplements

Equivalent Units

Picking Department


10,000 units

60,000 60,000Started andcompleted

50,000 units

Ending WIPinventory

20,000 units

20,000 8,000

80,000 68,000Equivalent units

Conversion

Materials Costs


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Materials $1,600

Conversion

cost $200

September

Healthblend

NutritionalSupplements

Beginning

WIP inventory

10,000 units

Started and

completed

50,000 units

Ending WIP

inventory

20,000 units

August October

Materials $12,000

Conversion

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

Healthblend Compan


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Picking Department

Production Report for September 2004

UNIT INFORMATIONPhysical Flow

Units to be accounted for: Units accounted for:

Units in beginning Units completed 60,000

work in process 10,000 Units in endingUnits started 70,000 work in process 20,000

Total units to Total units

account for 80,000 accounted for 80,000

Continued

Weighted

average


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Equivalent Units

Materials Conversion Cost

Units completed 60,000 60,000

Units in ending work in

process 20,000 8,000

Total equivalent units 80,000 68,000

Continued


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COST INFORMATION

Conversion

Materials Cost Total


Beginning work in process $ 1,600 $ 200 $ 1,800

Incurred during the period 12,000 3,200 15,200Total costs to account for $13,600 $3,400 $17,000

Cost per equivalent unit $ 0.17 $ 0.05 $ 0.22

Continued


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Transferred Ending

Out WIP Total


Goods transferred out ($0.22 x

60,000) $13,200 --- $13,200

Goods in ending work inprocess:

Materials ($0.17 x 20,000) --- $3,400 3,400

Conversion ($0.05 x 8,000) --- 400 400

Total cost accounted for $13,200 $3,800 $17,000


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Multiple Departments

Units to account for:Units in beginning work in process 15,000

Units transferred in during September 60,000

Total units to account for 75,000

Units accounted for:Units completed and transferred out:

Started and completed 55,000

From beginning work in process 15,000

Units in ending work in process 5,000

Total units accounted for 75,000


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Multiple Departments

Transferred in:Units completed 70,000

Add: Units in ending work in

process X Fraction complete

(5,000 x 100%) 5,000Equivalent 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

FifoCosting

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FIFO Method

BWIP Cost

$3,525

July Cost

BWIP

Units

$10,125

Current-

Period Units

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FIFO Method

Output for July

60,000 Total Physical Units

BWIPBecome 37,500

Equivalent Units

30,000

+Units Started and Completed

EWIP, 25% complete+

2,500

37,500

5,000

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FIFO Method

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

6 45Healthblend Company


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Picking Department

Production Report for July 2004

UNIT INFORMATION

Continued

Units accounted for:

Units in beginning

work in process 20,000

Units started duringthe period 40,000

Total units to

account for 60,000

FIFO


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COST INFORMATION


Beginning work

in process $ 3,525

Incurred during

period 10,125

Total cost to

account for $13,650

Continued

Cost per equivalent unit $ 0.27

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Transferred Ending

Out WIP 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 End

Chapter Six

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hm-ch06 process costing

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