6 -1

CHAPTER

Process
Costing
 6 -2

Objectives
1. Describe theAfter
basicstudying
characteristics
this and cost
flows associated with process
chapter, you should manufacturing.
2. Define equivalentbeunits
able and
to: 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.
Continued
 6 -3

Objectives
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.
 6 -4

Healthblend Sequential
Nutritional
Supplements
Processing

Picking Encapsulating Bottling Finished

Goods
 6 -5

Parallel Processing
(hard disk drives for personal computers)

Process 1 Process 2
Finished
Assembly Goods

Process 3 Process 4
Production and Testing of
assembly of write-head and
write-head and disk drive
Testing of
Production
disk driveof circuit board
circuit board
 6 -6

Flow of Manufacturing Costs Through the

Accounts of a Process-Costing Firm (Healthblend)

Picking Department Encapsulating Dept. Bottling Dept.

Work in Process Work in Process Work in Process

Materials: Transferred-in from Transferred-in

Herbs Picking from
Vitamins Materials: Encapsulating
Minerals Capsules Materials:
Picking labor Encapsulating Bottles
labor Bottling
Applied OH
Applied OH labor
Applied OH
 6 -7

Healthblend decides to produce

2,000 bottles of multivitamins.
Healthblend The Picking Department costs are:
Nutritional Direct materials $1,700
Supplements Direct labor 50
Applied overhead 450

Work in Process (Encapsulating) 2 200 00

The receiving report and the invoice are
Work in Process (Picking) 2 200 00
used to record the receipt of the
merchandise and to control the payment.

The mixture is transferred from

picking to Encapsulating.
 6 -8

The Encapsulating Department

costs are:
Healthblend Direct materials $1,000
Nutritional Direct labor 60
Supplements Applied overhead 500

Work in Process (Bottling) 3 760 00

The receiving report and the invoice are
Work in Process (Encapsulating) 3 760 00
used to record the receipt of the
merchandise and to control the payment.
$2,200 + $1,000
+ $60 + $500

The cost is transferred from

Encapsulating to Bottling.
 6 -9

The Bottling Department costs are:

Direct materials $800
Healthblend Direct labor 300
Nutritional Applied overhead 600
Supplements

Finished Goods 5 460 00

The receiving report and the invoice are
Work in Process (Bottling) 5 460 00
used to record the receipt of the
merchandise and to control the payment.
$3,760 + $800 +
$300 + $600

The cost is transferred to the

finished goods warehouse.
 6 -10
A production report
In process cost, costs are
provides information about
summarized by department
the physical units processed
for a period of time in a
in a department and the
production report.
manufacturing costs.
 6 -11

Equivalent 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.
 6 -12

Equivalent Units of Production

Department A

Units in beginning work in process ---

Units completed 1,000
Units in ending work in process
(25% complete) 600
Total manufacturing cost $11,500
 6 -13

Equivalent Units of Production

Concept:

=
100 units completed = 100 equivalent units

=
200 units, 50% completed = 100 equivalent units

Continued
 6 -14

Equivalent Units of Production

Example:
1,000 units completed, 600 units, 25% complete

1000 units completed = 1,000 equivalent units

600 units, EWIP, 25% completed = 150 equivalent units

Total = 1,150 equivalent units
 6 -15

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
 6 -16

Weighted Average Method

Healthblend
Nutritional
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
 6 -17

Weighted Average Method

Healthblend
Nutritional
Supplements

BWIP Cost July Cost

$3,525 $10,125
$13,650

Total Manufacturing Cost

 6 -18

Weighted Average Method

Output for July
60,000 Total Physical Units Becomes 52,500
BWIP Equivalent Units
20,000
+
Units Started and Completed
30,000

+
EWIP, 25% Complete
2,500
52,500
 6 -19

Weighted Average Method

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
 6 -20

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 50,000
Units in ending work in process (25%
complete) 10,000
Total units accounted for 60,000
 6 -21

Step 2: Calculation of Equivalent Units

Weighted Average Method

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
 6 -22

Step 3: Computation of Unit Cost

$13,650 =
52,500
$0.26 per equivalent
unit
 6 -23

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
 6 -24

Step 5: Cost Reconciliation

Goods transferred out $13,000
Goods in ending work in process 650
Total costs accounted for $13,650

The
manufacturing
costs to
Healthblend account for are
Nutritional also $13,650.
Supplements
 6 -25

Production
Report
 Weighte Healthblend Company 6 -26

d Picking Department
average Production Report for July 2004
UNIT INFORMATION
Physical Flow
Units to account for: Units accounted for:
Units in beginning Units completed 50,000
work in process 20,000 Units in ending
Units started 40,000 work in process 10,000
Total units to Total units
account for 60,000 accounted for 60,000
Equivalent Units
Units completed 50,000
Units in ending Continued
work in process 2,500
Total equivalent units 52,500
 6 -27

COST 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

Continued
 6 -28

Transferred
Ending
Out
Costs accounted
WIP Total 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
 6 -29

Nonuniform
Application of
Manufacturing
Inputs

Healthblend
Nutritional
Supplements
 6 -30

Equivalent Units
Healthblend Picking Department
Nutritional
Supplements
60,000
10,000 units equivalent units
Beginning
of material and
WIP inventory 50,000 units
Started and
conversion cost
completed transferred out

Materials, 100%
complete;
conversion cost,
100% complete as to
50% completeboth materials and
conversion cost
 6 -31

Equivalent Units
Healthblend Picking Department
Nutritional Conversion
Supplements
Materials Costs
10,000 units
Beginning
WIP inventory 50,000 units
Started and 60,000 60,000
completed
20,000 units
Ending WIP
September
inventory

Materials, 100% complete; conversion cost,

40% complete
 6 -32

Equivalent Units
Healthblend Picking Department
Nutritional Conversion
Supplements
Materials Costs
10,000 units
Beginning
WIP inventory 50,000 units
Started and 60,000 60,000
completed
20,000 units
Ending WIP
September 20,000 8,000
inventory
 6 -33

Equivalent Units
Healthblend Picking Department
Nutritional Conversion
Supplements
Materials Costs
10,000 units
Beginning
WIP inventory 50,000 units
Started and 60,000 60,000
completed
20,000 units
Ending WIP
September 20,000 8,000
inventory
Equivalent units 80,000 68,000
 6 -34

Healthblend
Nutritional
Materials $12,000
Materials $1,600 Conversion Supplements
Conversion cost $3,200
cost $200
MaterialsCost $13,600
Conver. $3,400
10,000 units EU 80,000
68,000
Beginning
WIP inventory 50,000 units = Cost per EU $0.22
$0.05
Started and
completed
20,000 units
Ending WIP
inventory

August September October

 Weighte Healthblend Company 6 -35

d Picking Department
average Production Report for September 2004
UNIT INFORMATION
Physical Flow
Units to be accounted for: Units accounted for:
Units in beginning Units completed 60,000
work in process 10,000 Units in ending
Units started 70,000 work in process 20,000
Total units to Total units
account for 80,000 accounted for 80,000

Continued
 6 -36

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
 6 -37

COST
INFORMATION
Conversion
Materials Cost Total
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

Continued
 6 -38

Transferred
Ending
Out
Costs accounted
WIP Total for:
Goods transferred out ($0.22 x
60,000) $13,200 --- $13,200
Goods in ending work in
process:
Materials ($0.17 x 20,000) --- $3,400 3,400
Conversion ($0.05 x 8,000) --- 400 400
Total cost accounted for $13,200 $3,800 $17,000
 6 -39

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
 6 -40

Multiple Departments
Transferred in:
Units completed 70,000
Add: 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
 6 -41

Production Report
—Fifo Costing
 6 -42

FIFO Method

BWIP Cost July Cost

$3,525 $10,125

BWIP Current-
Units Period Units
 6 -43

FIFO Method
Output for July
60,000 Total Physical Units Become 37,500
BWIP Equivalent Units
5,000

+
Units Started and Completed
30,000

+
EWIP, 25% complete
2,500
37,500
 6 -44

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
 Healthblend Company 6 -45

FIFO Picking Department

Production Report for July 2004
UNIT INFORMATION
Units accounted for:
Units in beginning
work in process 20,000
Units started during
the period 40,000
Total units to
account for 60,000

Continued
 6 -46

Physical Equivalent
Flow Units

Units accounted for:

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

Continued
 6 -47

COST 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

Continued
 6 -48

Transferred
Ending
Out
WIP Total for:
Costs accounted
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
 6 -49

Chapter Six

The End
6 -50