MANAGEMENT ACCOUNTING

AGUS SISWANDI 01153056

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Chapter Six

Process Costing

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Learning Objectives
q Describe the basic characteristics and

cost flows associated with process manufacturing.

q 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 costs.
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Learning Objectives (continued)

q Prepare a departmental production report

using the weighted average method.

q Explain how process costing is affected by

nonuniform application of manufacturing inputs and the existence of multiple processing departments.
q Prepare a departmental production report

using the FIFO method. (Appendix)

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Comparison of Job-Order and Process Costing

Job-Order Costing 1. Wide variety of distinct products 2. Cost accumulated by job 3. Unit cost computed by dividing total job costs by units produced on that job Process Costing 1. Homogeneous products 2. Costs accumulated by process or department 3. Unit cost computed by dividing process costs of the period by the units produced in the period

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Characteristics of Process Costing

q Homogeneous units pass

through a series of similar processes.

q Each unit in each process

receives a similar dose of manufacturing costs.

q Manufacturing costs are

accumulated for a process for a given period of time.

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Characteristics of Process Costing (continued)

q Manufacturing cost flows and the

associated journal entries are generally similar to job-order costing.

q The departmental production report

is the key document for tracking manufacturing activity and costs.

q Unit costs are computed by dividing

the departmental costs of the period by the output for the period.

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The Concept of Equivalent Units

1,000 units - 20% of materials added; 60% of conversion costs added Units in BWIP Units Started 10,000 units; 1,500 units - 33% of materials added; 50% of conversion costs added Units in EWIP Units Completed 9,500 units

Work in Process

Units to account for = Units accounted for Units in BWIP + Units Started = Units in EWIP + Units Completed 1,000 + 10,000 = 1,500 + 9,500
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The Concept of Equivalent Units (continued)

Equivalent Units Calculation: Direct Materials Units Completed 9,500 Ending WIP Inventory 500 Total Units Processed *10,000 Less beginning WIP Inventory 200 Units Processed This Period **9,800 ==== *Equivalent units for weighted average (total units worked on) ** Equivalent units for FIFO (units worked on this period) Conversion Costs 9,500 750 *10,250 600 **9,650 ====

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A Cost Analysis
1,000 units - $5,000 materials added; $10,000 conversion costs added Cost added to BWIP Cost of Units Started 10,000 units; $23,000 matl added; $120,175 conversion cost added 1,500 units - $8,000 materials added; $13,000 conversion costs added Costs added to EWIP Cost of Units Completed 9,500 units

Work in Process

Costs to account for = Costs accounted for $158,175 = $158,175

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Steps for Preparing a Production Report

1. Analysis of the flow of physical units 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 Costing

Step 1- Physical Flow Analysis Units to account for: Units, BWIP 1,000 Units, Started 10,000 Total 11,000 ===== Units accounted for: Units, Completed Units, EWIP Total 9,500 1,500 11,000 =====

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Weighted Average Costing (continued)

Step 2 - Calculation of Equivalent Units Materials 500 9,500 10,000 ===== Conversion Costs 750 9,500 10,250 =====

Completed EWIP Total Equivalent Units

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Weighted Average Costing (continued)

Step 3 - Computation of Unit Cost Materials $ 5,000 23,000 $ 28,000 10,000 $ 2.80 ======= CC $ 10,000 120,175 $130,175 10,250 $ 12.70 ======= Total $ 15,000 143,000 $158,175 $ 15.50 =======
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Beginning WIP Added this period Total Equivalent units Unit cost

Weighted Average Costing (continued)

Step 4 - Valuation of Inventories Goods Transferred out (9,500 x 15.50) EWIP Materials (500 x $2.80) Conversion Cost (750 x $12.70) $1,400 9,525 $ 10,925 $158,175
========

$147,250

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Weighted Average Costing (continued)

Step 5 - Cost Reconciliation: Costs to account for: BWIP Cost added

$ 15,000 143,000 $158,175

======
Costs accounted for: Goods Transferred out EWIP $147,250 10,925 $158,175 6 -16 PPT =======

Nonuniform Inputs: Example

Materials are added at the beginning of the process. Units in process, May 1, 60% complete 2,000 Units completed and transferred out 10,000 Units in process, May 31, 40% complete 1,000 Costs: Materials Conversion Costs BWIP Cost Current Cost $300 $3,000 600 4,600

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Nonuniform Inputs: Example (continued)

Step 1 - Physical Flow Analysis: Units to account for: Units, BWIP Units started Total Units accounted for: Units completed Units, EWIP Total

2,000 9,000 11,000 ===== 10,000 1,000 11,000

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Nonuniform Inputs: Example (continued)

Step 2 - Calculation of Equivalent units (Weighted Average): Materials Units completed EWIP Total Equivalent Units 10,000 1,000 11,000 Conversion 10,000 400 10,400

====

====
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Nonuniform Inputs: Example (continued)

Step 3 - Unit Cost: Unit Cost = $3,300/11,000 + $5,200/10,400 = $0.30 + $0.50 = $0.80

====

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Nonuniform Inputs: Example (continued)

Step 4 - Valuation of Inventories: Goods Transferred Out: $0.80 x 10,000 = $8,000

===== Ending Work in Process: ($0.30 x 1,000) + ($0.50 x 4000) = $500

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Nonuniform Inputs: Example (continued)

Step 5 - Cost Reconciliation: Costs to account for: BWIP Cost added

$ 900 7,600 $8,500

====
Costs accounted for: Goods transferred out EWIP $8,000 500 $8,500 6 -22 PPT =====

FIFO Costing
Step 1- Physical Flow Analysis Units to account for: Units, BWIP 1,000 Units, Started 10,000 Total 11,000 ===== Units accounted for: Units, Completed Units, EWIP Total 9,500 1,500 11,000 =====

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FIFO Costing (continued)

Step 2 - Calculation of Equivalent Units Units started and completed Units in Beginning WIP x fraction Units in Ending WIP x fraction Total Equivalent Units Materials 8,500 800 500 9,800 ==== Conversion Costs 8,500 400 750 9,650 ====

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FIFO Costing (continued)

Step 3 - Computation of Unit Cost Materials $ 5,000 23,000 $ 28,000 $ 23,000 9,800 $ 2.3469 ======= CC $ 10,000 120,175 $130,175 $ 120,175 9,650 $ 12.4534 ======= Total $ 15,000 143,000 $158,175 $ 143,000 $ 14.8003
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Beginning WIP Added this period Total Added this period Equivalent units Unit cost

FIFO Costing (continued)

Step 4 - Valuation of Inventories Trans. Out Units in BWIP: From Prior Period From Current Period: Materials (800 x $2.3469) Labor (400 x $12.4534) Units Started and Completed (8,500 x $14.8003) Units in EWIP Materials (500 x $2.3469) Conversion Costs (750 x $12.4534) Total Costs accounted for $15,000 1,877 4,981 125,803 ----$147,661 ======= EWIP --------$1,173 9,340 $10,513 ====== Total $15,000 1,877 4,981 125,803 1,173 9,340 $158,174 =======
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FIFO Costing (continued)

Step 5 - Cost Reconciliation: Cost to account for: BWIP Cost added

$ 15,000 143,000 $158,175

======
Cost accounted for: Goods transferred out EWIP $147,661 10,513 *$158,174 6 -27 PPT =======

End of Chapter 6

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