Session 9 (1/17/2002)

Process Costing• Elaborate on the process of process

costing

• Understand the concept of equivalent units

• Talk about costs to account for

Step 1: Summarize the flow of physical units – show me the units?

Step 2: Determine output of the period (work done) in terms of equivalent units (EU’s)

Process Costing - 5 Key Steps

Process Costing - 5 Key Steps

Step 3: Summarize the total costs to account for, which are the costs charged (debited) to WIP during the period

Step 4: Calculate equivalent unit costs for DM and either CC or both DL and OH (applied)

Process Costing - 5 Key Steps

Step 5: Allocate the total cost to the units completed and transferred to the next department, and to units in the ending WIP. In weighted-average costing, the total cost is the sum of the beginning balance in the WIP account for the department plus the costs incurred during the period.

Step 1 and Step 2: In Pictures

Two one-half completed units are equivalent to one complete unit of a product.

+ =

So, 10,000 units 80 percent completeare equivalent to ? complete units.

Example

Answer: 8,000 units!

(10,000 physical units 80%)

MY NOTESThe deal is that if we have no incomplete units at the end of the period, then we don’t have a problem.

If we have incomplete units, then we need to think about how to allocate costs.

Not like ending WIP in a job order costing system - WHY?

There we have tracked costs to a job. Here we are worried about getting an average cost so we can track the cost of products produced/work done in the department

Step 1 and Step 2 -- Equivalent Units

Costs are accumulated for a period of time for products in work-in-process inventory.

Products in work-in-process inventory at the beginning and end of the period are only partially complete.

Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

During the current period, Regina started 15,000 units and completed 10,000 units, leaving 5,000 units in process, 30 percent complete.

How many equivalent units of production did Regina have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Equivalent Units Question 1

Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units for the period

Regina incurred $27,600 in production costs for the 11,500 equivalent units. What was Regina’s cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units Question 2

Equivalent Units of Production –Weighted-Average Method

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

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

The weighted-average method . .

MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching.

MVP uses the weighted-average process costing method.

Material is added at the beginning of the Cutting Department, and conversion costs are incurred uniformly throughout the process.

A Process Costing Example

Work in process, March 1: 20,000 units Materials: 100% complete. $ 50,000Conversion: 10% complete. 7,200

Units started into production in March: 30,000 unitsUnits completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 unitsMaterials 100% complete.Conversion 50% complete.

Costs incurred during MarchMaterials cost $ 90,000Conversion cost 193,500

Cost

Production Report

(1) Analysis of Physical Flow of Units

PhysicalUnits

Work in process, March 1 20,000 Units started during March 30,000 Total units to account for 50,000

Units completed and transferred out during March 40,000 Work in process, March 31 10,000 Total units accounted for 50,000

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000

Total equivalent units 50,000 45,000

100% of 10,000 units, allmaterial added at beginning

(2) Calculation of Equivalent Units

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000

Total equivalent units 50,000 45,000

(2) Calculation of Equivalent Units (con’t)

50% of 10,000 units

Beginning inventory % is not used in weighted-average method.

(3) Computation of total costs to account for

DirectMaterial Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$ Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$

(4) Computation of unit costs

DirectMaterial Conversion Total

Work in Process, March1 50,000$ 7,200$ 57,200$ Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$

Equivalent units 50,000 45,000 Cost per equivalent unit 2.80$ 4.46$ 7.26$

$140,000 ÷ 50,000 equivalent units

$200,700 ÷ 45,000 equivalent units

$2.80 + $4.46

(5) Analysis of total costs

Cost of goods completed and transferred during March 40,000 units × $7.26 per equivalent unit 290,400$

Cost of goods completed and transferred during March 40,000 units × $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units × $2.80 per equivalent unit 28,000$

Conversion: 5,000 equivalent units × $4.46 per equivalent unit 22,300

Total cost of March 31 work in process 50,300

Total costs accounted for 340,700$All costs

accounted for

(5) Analysis of total costs

Equivalent Units Practice

The following data are from Energy Resource’s Amarillo Plant:

WIP, November 1 2,000,000 gallons

DM 100% complete

CC 25% complete

Units started during November 950,000 gallons

WIP, November 30 240,000 gallons

DM 100% complete

CC 80% complete

Calculate the equivalent unit amounts necessary to determine per unit costs.

Process Costing

Equivalent Units Physical

Units % comp w/r/t CC

Direct Materials

Conversion Costs

Beginning WIP Total units started Units to account for Comp & Transferred Out

Ending WIP Units to account for

Process Costing

Equivalent Units Physical

Units % comp w/r/t CC

Direct Materials

Conversion Costs

Beginning WIP Total units started Units to account for Comp & Transferred Out

Ending WIP Units to account for

Process Costing Practice

Centura completed and transferred 900,000 units to finished goods during 1999. WIP as of December 31, 1999, had 300,000 units that were 50% complete w/r/t CC and 100% w/r/t DM. Finished goods inventory consisted of 200,000 units. Materials are added at the beginning of production and overhead is applied at a rate of 60% of direct labor costs. There was no finished goods inventory on January 1, 1999. Their inventory cost records provide the following information:

Units Materials Labor

WI P 1/ 1/ 1999 (80% complete w/ r/ t CC) 200,000 $200,000 $315,000

Units started in production 1,000,000

Direct materials cost $1,300,000

Direct labor cost $1,995,000

Costs

Process Costing

Equivalent Units Physical

Units % comp w/r/t CC

Direct Materials

Conversion Costs

Beginning WIP Total units started Units to account for Comp & Transferred Out

Ending WIP Units to account for

Process Costing in Subsequent Production Departments

An added complication in process costing system is that production often takes place in more than one department.

In the previous example, only costs and units in the MVP’s Cutting Department were taken into consideration.

Now let’s work with the Cutting and Stitching Department.

Subsequent Departments

Work In Process Inventory:

Stitching Department

Work In Process Inventory:

Cutting Department

Directmaterial

Conversion:Direct laborManufacturingoverhead

Cost of goodscompleted andtransferredout

Transferred-in costs

Directmaterial

Conversion:Direct laborManufacturingoverhead

Cost of goodscompleted andtransferredout

MVP Sports - Additional FactsIn Stitching, DM are added at the end of production process.

40,000 units from Cutting are transferred in to Stitching during March

10,000 units are in Stitching’s Beginning WIP (March 1)

30,000 units are transferred to Finished Goods in March

With respect to Stitching’s Ending WIP (March 31)

Transferred In: 100% complete

Direct Material: None

Conversion: 90% complete

Transferred-In Costs

The costs assigned to the units completed in each department and transferred to the next department’s work in process inventory account.

Equivalent Units for Stitching

Step 1

Physical Units

% comp w/r/t Transferred

conversion In DM CC

Step 2

Equivalent Units

For Friday

Finish Chapter 4 - reading and homework problems!