Systems Design: Process Costing
Chapter 9
© 2012 McGraw-Hill Education (Asia)
Similarities Between Job-Order and Process
Costing
 Both systems assign material, labor and overhead costs
to products and they provide a mechanism for
computing unit product costs.
 Both systems use the same manufacturing accounts,
including Manufacturing Overhead, Raw Materials, Work
in Process, and Finished Goods.
 The flow of costs through the manufacturing accounts
is basically the same in both systems.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 2
Differences Between Job-Order and Process
Costing
 Process costing is used when a single product is
produced on a continuing basis or for a long period of
time. Job-order costing is used when many different jobs
having different production requirements are worked on
each period.
 Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by
individual jobs.
 Process costing systems compute unit costs by
department. Job-order costing systems compute unit
costs by job on the job cost sheet.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 3
Quick Check 
Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 4
Quick Check 
Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 5
Processing Departments
Any unit in an organization where materials, labor
or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one department
to another.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 6
Learning Objective 1
Record the flow of
materials, labor, and
overhead through a
process costing system.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 7
Comparing Job-Order and Process Costing
Direct
Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
McGraw-Hill Education (Asia)
Finished
Goods
Cost of
Goods
Sold
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 8
Comparing Job-Order and Process Costing
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
Direct Labor
Jobs
Manufacturing
Overhead
McGraw-Hill Education (Asia)
Finished
Goods
Cost of
Goods
Sold
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 9
Comparing Job-Order and Process Costing
Direct
Materials
Direct Labor
Costs are traced and
applied to departments
in a process cost
system.
Processing
Department
Manufacturing
Overhead
McGraw-Hill Education (Asia)
Finished
Goods
Cost of
Goods
Sold
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 10
T-Account and Journal Entry Views of
Process Cost Flows
For purposes of this example, assume
there are two processing departments –
Departments A and B.
We will use T-accounts and journal
entries.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 11
Process Cost Flows: The Flow of Raw
Materials (in T-account form)
Work in Process
Department A
Raw Materials
•Direct
Materials
•Direct
Materials
Work in Process
Department B
•Direct
Materials
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 12
Process Cost Flows: The Flow of Raw
Materials (in journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Process - Department A
XXXXX
Work in Process - Department B
XXXXX
Raw Materials
Credit
XXXXX
To record the use of direct material.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 13
Process Cost Flows: The Flow of Labor
Costs (in T-account form)
Work in Process
Department A
Salaries and
Wages Payable
•Direct
Materials
•Direct
Labor
•Direct
Labor
Work in Process
Department B
•Direct
Materials
•Direct
Labor
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 14
Process Costing: The Flow of Labor Costs
(in journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Process - Department A
XXXXX
Work in Process - Department B
XXXXX
Salaries and Wages Payable
Credit
XXXXX
To record direct labor costs.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 15
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (in T-account form)
Work in Process
Department A
Manufacturing
Overhead
•Actual
Overhead
•Overhead
Applied to
Work in
Process
•Direct
Materials
•Direct
Labor
•Applied
Overhead
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 16
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (in journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Process - Department A
XXXXX
Work in Process - Department B
XXXXX
Manufacturing Overhead
Credit
XXXXX
To apply overhead to departments.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 17
Process Cost Flows: Transfers from
WIP-Dept. A to WIP-Dept. B (in T-account form)
Work in Process
Department A
•Direct
Transferred
Materials
to Dept. B
•Direct
Labor
•Applied
Overhead
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
Department
A
McGraw-Hill Education (Asia)
Department
B
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 18
Process Cost Flows: Transfers from WIP-Dept.
A to WIP-Dept. B (in journal entry form)
GENERAL JOURNAL
Date
Description
Work in Process - Department B
Work in Process - Department A
Post.
Ref.
Page 4
Debit
Credit
XXXXX
XXXXX
To record the transfer of goods from
Department A to Department B.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 19
Process Cost Flows: Transfers from WIP-Dept.
B to Finished Goods (in T-account form)
Work in Process
Department B
Finished Goods
•Direct
•Cost of
Materials
Goods
•Direct
Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
McGraw-Hill Education (Asia)
•Cost of
Goods
Manufactured
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 20
Process Cost Flows: Transfers from WIP-Dept.
B to Finished Goods (in journal entry form)
GENERAL JOURNAL
Date
Description
Finished Goods
Post.
Ref.
Page 4
Debit
Credit
XXXXX
Work in Process - Department B
XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 21
Process Cost Flows: Transfers from Finished
Goods to COGS (in T-account form)
Work in Process
Department B
Finished Goods
•Direct
•Cost of
•Cost of
•Cost of
Materials
Goods
Goods
Goods
•Direct
Manufactured
Manufactured
Sold
Labor
•Applied
Overhead
•Transferred
Cost of Goods Sold
from Dept. A
•Cost of
Goods
Sold
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 22
Process Cost Flows: Transfers from Finished
Goods to COGS (in journal entry form)
GENERAL JOURNAL
Date
Description
Cost of Goods Sold
Finished Goods
Post.
Ref.
Page 4
Debit
Credit
XXXXX
XXXXX
To record the transfer of finished
goods inventory to cost of goods
sold.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 23
Equivalent Units of Production
Equivalent units are the product of the number of
partially completed units and the percentage
completion of those units.
We need to calculate equivalent units because a
department usually has some partially completed units
in its beginning and ending inventory. These partially
completed units complicate the determination of a
department’s output for a given period and the unit cost
that should be assigned to that output.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 24
Equivalent Units – The Basic Idea
Two half completed products are
equivalent to one complete product.
+
=
1
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 25
Quick Check 
For the current period, Jones 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 Jones
have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 26
Quick Check 
For the current period, Jones 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 Jones
have for the period?
a. 10,000
10,000 units + (5,000 units × 0.30)
b. 11,500
= 11,500 equivalent units
c. 13,500
d. 15,000
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 27
Calculating Equivalent Units
Equivalent units can be calculated
two ways:
The First-In, First-Out Method – FIFO is
covered in the appendix to this chapter.
The Weighted-Average Method – This method
will be covered in the main portion of the chapter.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 28
Learning Objective 2
Compute the equivalent
units of production using
the weighted-average
method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 29
Equivalent Units of Production
Weighted-Average Method
The weighted-average method . . .
1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 30
Treatment of Direct Labor
Dollar Amount
Direct
Materials
Manufacturing
Overhead
Direct
Labor
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Type of Product Cost
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Slide 31
Treatment of Direct Labor
Dollar Amount
Direct
Materials
Conversion
Direct
Labor
Direct
Labor
Manufacturing
Overhead
Direct labor and
manufacturing
overhead may be
combined into
one classification
of product
cost called
conversion costs.
Type of Product Cost
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 32
Weighted-Average – An Example
Smith Company reported the following activity in
the Assembly Department for the month of June:
Percent Completed
Units
Work in process, June 1
300
Units started into production in June
6,000
Units completed and transferred out
of Department A during June
5,400
Work in process, June 30
McGraw-Hill Education (Asia)
900
Garrison, Noreen, Brewer, Cheng & Yuen
Materials Conversion
40%
20%
60%
30%
Slide 33
Weighted-Average – An Example
The first step in calculating the equivalent units is to
identify the units completed and transferred out of
Assembly Department in June (5,400 units)
Materials
Units completed and transferred
out of the Department in June
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
5,400
Conversion
5,400
Slide 34
Weighted-Average – An Example
The second step is to identify the equivalent units of
production in ending work in process with respect to
materials for the month (540 units) and adding this to the
5,400 units from step one.
Materials
Units completed and transferred
out of the Department in June
5,400
Conversion
5,400
Work in process, June 30:
900 units × 60%
540
Equivalent units of Production in
the Department during June
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
5,940
Slide 35
Weighted-Average – An Example
The third step is to identify the equivalent units of production in
ending work in process with respect to conversion for the month
(270 units) and adding this to the 5,400 units from step one.
Materials
Units completed and transferred
out of the Department in June
5,400
Conversion
5,400
Work in process, June 30:
900 units × 60%
540
900 units × 30%
270
Equivalent units of Production in
the Department during June
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
5,940
5,670
Slide 36
Weighted-Average – An Example
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Materials
Units completed and transferred
out of the Department in June
5,400
Conversion
5,400
Work in process, June 30:
540
900 units × 60%
270
900 units × 30%
Equivalent units of Production in
the Department during June
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
5,940
5,670
Slide 37
Weighted-Average – An Example
Materials
Beginning
Work in Process
300 Units
40% Complete
6,000 Units Started
5,100 Units Started
and Completed
5,400 Units Completed
540 Equivalent Units
5,940 Equivalent units
of production
McGraw-Hill Education (Asia)
Ending
Work in Process
900 Units
60% Complete
900 × 60%
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 38
Weighted-Average – An Example
Conversion
Beginning
Work in Process
300 Units
20% Complete
6,000 Units Started
5,100 Units Started
and Completed
5,400 Units Completed
270 Equivalent Units
5,670 Equivalent units
of production
McGraw-Hill Education (Asia)
Ending
Work in Process
900 Units
30% Complete
900 × 30%
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 39
Learning Objective 3
Compute the cost per
equivalent unit using the
weighted-average method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 40
Compute and Apply Costs
Beginning Work in Process Inventory:
400 units
Materials: 40% complete
$
6,119
Conversion: 20% complete
$
3,920
Production started during June
Production completed during June
Costs added to production in June
Materials cost
Conversion cost
Ending Work in Process Inventory:
Materials:
60% complete
Conversion: 30% complete
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
6,000 units
5,400 units
$ 118,621
$ 81,130
900 units
Slide 41
Compute and Apply Costs
The formula for computing the cost per
equivalent unit is:
Cost per
equivalent =
unit
Cost of beginning
Work in Process + Cost added during
Inventory
the period
Equivalent units of production
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 42
Compute and Apply Costs
Here is a schedule with the cost and equivalent
unit information.
Total
Cost
Cost to be accounted for:
Work in process, June 1
Cost added in Assembly
Total cost
Conversion
$
10,039
199,751
$
6,119
118,621
$
3,920
81,130
$
209,790
$ 124,740
$
85,050
Equivalent units
McGraw-Hill Education (Asia)
Materials
5,940
Garrison, Noreen, Brewer, Cheng & Yuen
5,670
Slide 43
Compute and Apply Costs
Here is a schedule with the cost and equivalent
unit information.
$124,740 ÷ 5,940 units = $21.00
$85,050 ÷ 5,670 units = $15.00
Total
Cost
Cost to be accounted for:
Work in process, June 1
Cost added in Assembly
Total cost
Materials
Conversion
$
10,039
199,751
$
6,119
118,621
$
3,920
81,130
$
209,790
$ 124,740
$
85,050
Equivalent units
5,940
Cost per equivalent unit
$
21.00
5,670
$
15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 44
Learning Objective 4
Assign costs to units using
the weighted-average
method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 45
Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 46
Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 47
Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
Cost of Ending WIP inventory
$ 11,340
$
4,050
$ 15,390
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 48
Computing the Cost of Units Transferred Out
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
Cost of Ending WIP inventory
$ 11,340
$
4,050
$ 15,390
Units completed and transferred out:
Units transferred
5,400
5,400
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 49
Computing the Cost of Units Transferred Out
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
Cost of Ending WIP inventory
$ 11,340
$
4,050
$ 15,390
Units completed and transferred out:
Units transferred
5,400
5,400
Cost per equivalent unit
$
21.00
$
15.00
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 50
Computing the Cost of Units Transferred Out
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
Cost of Ending WIP inventory
$ 11,340
$
4,050
$ 15,390
Units completed and transferred out:
Units transferred
5,400
5,400
Cost per equivalent unit
$
21.00
$
15.00
Cost of units transferred out
$ 113,400
$ 81,000
$ 194,400
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 51
Learning Objective 5
Prepare a cost
reconciliation report.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 52
Reconciling Costs
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory
Costs added to production during the period
Total cost to be accounted for
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
$
$
10,039
199,751
209,790
Slide 53
Reconciling Costs
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory
Costs added to production during the period
Total cost to be accounted for
Cost accounted for as follows:
Cost of ending Work in Process Inventory
Cost of units transferred out
Total cost accounted for
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
$
$
$
$
10,039
199,751
209,790
15,390
194,400
209,790
Slide 54
Operation Costing
Operation cost is a hybrid of job-order and
process costing because it possesses attributes
of both approaches
Operation costing is
commonly used when
batches of many different
products pass through the
same processing
department.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 55
Supplementary Notes for the Weighted
Average Method
1. Summarize the physical
flow of units (the Green
area)
2. Compute equivalent units
of productions (the Blue
area)
3. Summarize the total cost
incurred for the period
and then compute the
cost per equivalent unit
(the Yellow area)
WEIGHTED-AVERAGE METHOD PHYSICAL
UNITS
BEGINNING WORK IN PROCESS (BWIP)
STARTED
TOTAL AVAILABLE or INPUTS
MATERIALS CONVERSION
EQUIVALENT UNIT
COMPLETED (i.e. TRANSFERRED OUT)
ENDING WORK IN PROCESS (EWIP)
TOTAL PRODUCED or OUTPUTS
COSTS
4. Calculate the values of
completed units and
ending work in process
inventories (the Peach
area)
BWIP
5. Check cost reconciliation
(the Black cells: Total cost
= Total value)
VALUE OF GOODS TRANSFER OUT (i.e. COMPLETED)
McGraw-Hill Education (Asia)
%
TOTAL
INCURRED DURING THE PERIOD
TOTAL
TOTAL COST
COST PER EQUIVALENT UNIT
VALUATION
TOTAL
VALUE OF EWIP
TOTAL VALUE
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 56
To Summarize the Physical Flow of Units
For the weighted average
calculation, the percentages
of completion related to
BWIP with respect to material
and conversion are not used.
Weighted-Average method
Physical Units
Beginning work in process (BWIP)
Started
%
300
6,000
Total available or Inputs
6,300
Completed (i.e. transferred out)
5,400 100%
Ending work in process (EWIP)
900 60%
30%
Total produced or Ouputs
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
6,300
Slide 57
Compute the equivalent Units of Production
For the weighted average
calculation, the Inputs
information is not required for
the remaining calculation.
Weighted-Average method
Physical Units
Beginning work in process (BWIP)
%
300
Started
6,000
Total available or Inputs
6,300
Materials
Conversion
Equivalent Unit
Completed (i.e. transferred out)
5,400 100%
5,400
Ending work in process (EWIP)
900 60%
540
30%
-
270
5,940
5,670
Total produced or Ouputs
McGraw-Hill Education (Asia)
6,300
Garrison, Noreen, Brewer, Cheng & Yuen
5,400
-
Slide 58
Summarize the Total Cost Incurred in the
Period
Weighted-Average method
Beginning work in process (BWIP)
Started
Physical Units
%
300
6,000
Total available or Inputs
6,300
Materials
Conversion
Equivalent Unit
Completed (i.e. transferred out)
5,400 100%
5,400
Ending work in process (EWIP)
900 60%
540
-
30%
-
270
5,940
5,670
Total produced or Ouputs
6,300
5,400
Costs
Total
BWIP
$
6,119 $
3,920 $
10,039
Incurred during the period
$
118,621 $
81,130 $
199,751
TOTAL $
124,740 $
85,050 $
209,790
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 59
Compute the Cost per Equivalent Unit
Weighted-Average method
Beginning work in process (BWIP)
Started
Physical Units
%
300
6,000
Total available or Inputs
6,300
Materials
Conversion
Equivalent Unit
Completed (i.e. transferred out)
5,400 100%
5,400
Ending work in process (EWIP)
900 60%
540
-
30%
-
270
5,940
5,670
Total produced or Ouputs
6,300
5,400
Costs
Total
BWIP
$
6,119 $
3,920 $
10,039
Incurred during the period
$
118,621 $
81,130 $
199,751
TOTAL $
124,740 $
85,050 $
209,790
$
21.00 $
15.00 $
36.00
Cost per equivalent unit
$124,740
 $21
5,940
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
$85,050
 $15
5,670
Slide 60
Calculate The Values Of Completed Goods
And Ending WIP Inventories
Weighted-Average method
Beginning work in process (BWIP)
Started
Physical Units
%
300
6,000
Total available or Inputs
6,300
Materials
Conversion
Equivalent Unit
Completed (i.e. transferred out)
5,400 100%
5,400
Ending work in process (EWIP)
900 60%
540
-
30%
-
270
5,940
5,670
Total produced or Ouputs
6,300
5,400
Costs
Total
BWIP
$
6,119 $
3,920 $
10,039
Incurred during the period
$
118,621 $
81,130 $
199,751
TOTAL $
124,740 $
85,050 $
209,790
$
21.00 $
15.00 $
36.00
Cost per equivalent unit
Valuation
Total
Value of goods transferred out (i.e. completed)
$
113,400 $
81,000 $
194,400
Value of EWIP
$
11,340 $
4,050 $
15,390
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
$
209,790
Slide 61
Check Cost Reconciliation
Weighted-Average method
Beginning work in process (BWIP)
Started
Physical Units
%
300
6,000
Total available or Inputs
6,300
Materials
Conversion
Equivalent Unit
Completed (i.e. transferred out)
5,400 100%
5,400
Ending work in process (EWIP)
900 60%
540
-
30%
-
270
5,940
5,670
Total produced or Ouputs
6,300
5,400
Costs
Total
BWIP
$
6,119 $
3,920 $
10,039
Incurred during the period
$
118,621 $
81,130 $
199,751
TOTAL $
124,740 $
85,050 $
209,790
$
21.00 $
15.00 $
36.00
Cost per equivalent unit
Valuation
Total
Value of goods transferred out (i.e. completed)
$
113,400 $
81,000 $
194,400
Value of EWIP
$
11,340 $
4,050 $
15,390
$
209,790
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 62
FIFO Method
Appendix 9A
© 2012 McGraw-Hill Education (Asia)
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more
accurate than the weighted-average method)
differs from the weighted-average method in
two ways:
1. The computation of equivalent units.
2. The way in which the costs of beginning
inventory are treated.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 64
Learning Objective 6
Compute the equivalent
units of production using
the FIFO method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 65
Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Here is
information concerning the Assembly Department
for the month of June.
Percent Completed
Units
Work in process, June 1
300
Units started into production in June
6,000
Units completed and transferred out
of Department A during June
5,400
Work in process, June 30
McGraw-Hill Education (Asia)
900
Garrison, Noreen, Brewer, Cheng & Yuen
Materials Conversion
40%
20%
60%
30%
Slide 66
Equivalent Units – FIFO Method
Step 1: Determine equivalent units needed to complete
beginning Work in Process Inventory.
Materials
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%)
Conversion: 300 units × (100% - 20%)
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Conversion
180
240
Slide 67
Equivalent Units – FIFO Method
Step 2: Determine units started and completed during
the period.
Materials
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%)
180
Conversion: 300 units × (100% - 20%)
Units started and completed during June
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Conversion
240
5,100
5,100
Slide 68
Equivalent Units – FIFO Method
Step 3: Add the equivalent units in ending Work in
Process Inventory.
Materials
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%)
180
Conversion: 300 units × (100% - 20%)
Units started and completed during June
Conversion
240
5,100
5,100
Ending Work in Process
Materials: 900 units × 60% complete
Conversion: 900 units × 30% complete
Equivalent units of production
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
540
270
5,820
5,610
Slide 69
FIFO Example
Materials
Beginning
Work in Process
300 Units
40% Complete
300 × 60%
McGraw-Hill Education (Asia)
6,000 Units Started
5,100 Units Started
and Completed
180 Equivalent Units
5,100 Units Completed
540 Equivalent Units
5,820 Equivalent units
of production
Garrison, Noreen, Brewer, Cheng & Yuen
Ending
Work in Process
900 Units
60% Complete
900 × 60%
Slide 70
FIFO Example
Conversion
Beginning
Work in Process
300 Units
20% Complete
300 × 80%
McGraw-Hill Education (Asia)
6,000 Units Started
5,100 Units Started
and Completed
240 Equivalent Units
5,100 Units Completed
270 Equivalent Units
5,610 Equivalent units
of production
Garrison, Noreen, Brewer, Cheng & Yuen
Ending
Work in Process
900 Units
30% Complete
900 × 30%
Slide 71
Equivalent Units: Weighted-Average vs.
FIFO
As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the
weighted-average method to obtain the equivalent units of
production under the FIFO method.
Equivalent units - weighted-average method
Less equivalent units in beginning inventory:
300 units × 40%
300 units × 20%
Equivalent units - FIFO method
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Materials
5,940
Conversion
5,670
120
5,820
60
5,610
Slide 72
Learning Objective 7
Compute the cost per
equivalent unit using the
FIFO method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 73
Cost per Equivalent Unit - FIFO
Let’s revisit the Smith Company Assembly Department
for the month of June to prepare our production report.
Beginning work in process:
Materials: 40% complete
Conversion: 20% complete
$
$
400 units
6,119
3,920
Production started during June
Production completed during June
6,000 units
5,400 units
Costs added to production in June
Materials cost
Conversion cost
$ 118,621
$ 81,130
Ending work in process
Materials:
60% complete
Conversion: 30% complete
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
900 units
Slide 74
Cost per Equivalent Unit - FIFO
The formula for computing the cost per
equivalent unit under FIFO method is:
Cost per
equivalent =
unit
McGraw-Hill Education (Asia)
Cost added during the period
Equivalent units of production
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 75
Cost per Equivalent Unit - FIFO
Total
Cost
Cost added in June
Equivalent units
$ 199,751
Cost per equivalent unit
$118,600 ÷ 5,820
Materials
Conversion
$ 118,621
5,820
$
$ 20.3816
$ 14.4617
81,130
5,610
$81,130 ÷ 5,610
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 76
Learning Objective 8
Assign costs to units using
the FIFO method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 77
Applying Costs - FIFO
Step 1: Record the equivalent units of production in ending Work
in Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials Conversion
Ending WIP inventory:
Equivalent units
540
900 units × 60%
McGraw-Hill Education (Asia)
Total
270
900 units × 30%
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 78
Applying Costs - FIFO
Step 2: Record the cost per equivalent unit.
Assembly Department
Cost of Ending WIP Inventory
Materials Conversion
Ending WIP inventory:
Equivalent units
Cost per equivalent unit
McGraw-Hill Education (Asia)
540
$ 20.3816
Garrison, Noreen, Brewer, Cheng & Yuen
Total
270
$ 14.4617
Slide 79
Applying Costs - FIFO
Step 3: Compute the cost of ending Work in Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials Conversion
Ending WIP inventory:
Equivalent units
Cost per equivalent unit
Cost of Ending WIP inventory
540
$ 20.3816
$ 11,006
540 × $20.3816
McGraw-Hill Education (Asia)
270
$ 14.4617
$
3,905
Total
$
14,911
270 × 14.4617
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 80
Cost of Units Transferred Out
Step 1: Record the cost in beginning Work in Process Inventory.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion
Cost of Units Transferred Out:
Cost in beginning WIP inventory
$
6,119
$
3,920
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Total
$
10,039
Slide 81
Cost of Units Transferred Out
Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion
Cost of Units Transferred Out:
Cost in beginning WIP inventory
$
6,119
$
3,920
Cost to complete beginning WIP
Equivalent units to complete
180
240
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost to complete beginning WIP
$
3,668
$
3,471
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Total
$
10,039
7,139
Slide 82
Cost of Units Transferred Out
Step 3: Compute the cost of units started and completed this
period.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion
Cost of Units Transferred Out:
Cost in beginning WIP inventory
$
6,119
$
3,920
Cost to complete beginning WIP
Equivalent units to complete
180
240
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost to complete beginning WIP
$
3,668
$
3,471
Cost of units started and completed:
Units started and completed
5,100
5,100
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost of units started and completed
$ 103,946
$ 73,755
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Total
$
10,039
7,139
177,701
Slide 83
Cost of Units Transferred Out
Step 4: Compute the total cost of units transferred out.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion
Cost of Units Transferred Out:
Cost in beginning WIP inventory
$
6,119
$
3,920
Cost to complete beginning WIP
Equivalent units to complete
180
240
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost to complete beginning WIP
$
3,668
$
3,471
Cost of units started and completed:
Units started and completed
5,100
5,100
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost of units started and completed
$ 103,946
$ 73,755
Cost of Units Transferred Out
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Total
$
10,039
7,139
177,701
$ 194,879
Slide 84
Learning Objective 9
Prepare a cost
reconciliation report
using the FIFO method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 85
Reconciling Costs
Assembly Department
Cost Reconciliation for June
Costs to be accounted for:
Cost of beginning Work in Process Inventory
Costs added to production during the period
Total cost to be accounted for
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
$
$
10,039
199,751
209,790
Slide 86
Reconciling Costs
Assembly Department
Cost Reconciliation for June
Costs to be accounted for:
Cost of beginning Work in Process Inventory
Costs added to production during the period
Total cost to be accounted for
Cost accounted for as follows:
Cost of ending Work in Process Inventory
Cost of units transferred out
Total cost accounted for
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
$
$
$
$
10,039
199,751
209,790
14,911
194,879
209,790
Slide 87
A Comparison of Costing Methods
In a lean production environment, FIFO and
weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is
superior to weighted-average because it
does not mix costs of the current period with
costs of the prior period.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 88
Supplementary Notes for the FIFO Method
1. Summarize the physical
flow of units (the Green
area)
FIRST IN FIRST OUT METHOD
2. Compute equivalent units
of productions (the Blue
area)
BWIP (PORTION TO BE COMPLETED)
3. Summarize the total cost
incurred for the period
and then compute the
cost per equivalent unit
(the Yellow area)
ENDING WORK IN PROCESS (EWIP)
PHYSICAL UNITS % COMPLETED
IN THIS PERIOD
MATERIALS
CONVERSION
EQUIVALENT UNIT
STARTED AND COMPLETED
( i.e. Completed minus BWIP)
TOTAL PRODUCED or OUTPUTS
COSTS
TOTAL
BWIP (IRRELEVANT FOR THE COST PER EQUIVALENT UNIT CALCULATION BUT IMPORTANT FOR COST RECONCILIATION)
INCURRED DURING THE PERIOD
TOTAL COST
4. Calculate the values of
completed units and
ending work in process
inventories (the Peach
area)
5. Check cost reconciliation
(the Black cells: Total cost
= Total value)
McGraw-Hill Education (Asia)
COST PER EQUIVALENT UNIT
VALUATION
TOTAL
VALUE OF GOODS TRANSFER OUT (i.e. COMPLETED)
1. Total cost associated with BWIP
a) Cost brought forward from the previous period by BWIP
b) Cost incrred in the period to complete BWIP
2. Cost associated with units Started and Completed in the period
TOTAL COMPLETED
VALUE OF EWIP
TOTAL VALUE
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 89
Physical Flow of Units: FIFO
Completed – BWIP
= 5400 – 300
= 5100
Weighted-Average method
Beginning work in process (BWIP)
Started
Physical Units
FIFO method
Physical Units
% completed in
this period
300
6,000
Total available or Inputs
6,300 BWIP (Portion to be completed)
300 60% = (1 - 40%)
80% = (1 - 20%)
Started and completed
Completed (i.e. transferred out)
Ending work in process (EWIP)
5,400
5,100
100%
900
60%
( i.e. completed minus BWIP)
900 Ending work in process (EWIP)
30%
Total produced or Ouputs
McGraw-Hill Education (Asia)
6,300
Total produced or Outputs
Garrison, Noreen, Brewer, Cheng & Yuen
6,300
Slide 90
Compute the Equivalent Units of Production
FIFO method
Physical Units
% completed in
this period
Materials
Conversion
Equivalent Unit
BWIP (Portion to be completed)
Started and completed
300
60% = (1 - 40%)
180
-
80% = (1 - 20%)
-
240
5,100
5,100
100%
5,100
900
60%
540
-
30%
-
270
5,820
5,610
( i.e. completed minus BWIP)
Ending work in process (EWIP)
Total produced or Outputs
McGraw-Hill Education (Asia)
6,300
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 91
Summarize The Total Cost Incurred For The
Period and Compute the Cost Per Equivalent Unit
$118,621
 $20.38
5,820
FIFO method
$81,130
 $14.46
5,610
Physical Units
% completed in
this period
Materials
Conversion
Equivalent Unit
BWIP (Portion to be completed)
Started and completed
300
60% = (1 - 40%)
180
-
80% = (1 - 20%)
-
240
5,100
5,100
100%
5,100
900
60%
540
-
30%
-
270
5,820
5,610
( i.e. completed minus BWIP)
Ending work in process (EWIP)
Total produced or Outputs
6,300
Costs
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations)
Incurred during the period
Cost per equivalent unit
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
$
118,621 $
81,130
$
20.38 $
14.46
Slide 92
FIFO method
Physical Units
Calculate the Values of
Completed Goods and
Ending WIP inventories
% completed in
this period
Materials
Conversion
Equivalent Unit
BWIP (Portion to be completed)
Started and completed
300
60% = (1 - 40%)
180
-
80% = (1 - 20%)
-
240
5,100
5,100
100%
5,100
900
60%
540
30%
-
270
5,820
5,610
( i.e. completed minus BWIP)
Ending work in process (EWIP)
Total produced or Outputs
6,300
-
Costs
Total
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations)
Incurred during the period
$
Cost per equivalent unit
$
118,621 $
20.38 $
$
10,039
81,130 $
199,751
$
209,790
14.46
Valuation
Total
Value of goods transferred out (i.e. completed)
1. Total cost associated with BWIP
a) Cost brought forward from the previous period by BWIP
$
6,119 $
3,920
$
10,039
b) Cost incrred in the period to complete BWIP
$
3,669 $
3,471
$
7,139
$
103,946 $
73,755
$
177,701
Total completed $
113,734 $
81,145
$
194,879
$
11,006 $
3,905
$
14,911
2. Cost associated with units Started and Completed in the period
Value of EWIP
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 93
Check Cost Reconciliation
FIFO method
Physical Units
% completed in
this period
Materials
Conversion
BWIP
$ 6,119
$ 3,920
$10,039
Equivalent Unit
BWIP (Portion to be completed)
300
Started and completed
60% = (1 - 40%)
180
-
80% = (1 - 20%)
-
240
5,100
5,100
100%
5,100
900
60%
540
30%
-
270
5,820
5,610
( i.e. completed minus BWIP)
Ending work in process (EWIP)
Total produced or Outputs
6,300
-
Costs
Total
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations)
Incurred during the period
$
118,621 $
$
10,039
81,130 $
199,751
$
209,790
Total Cost Accountable For
Cost per equivalent unit
$
20.38 $
14.46
Valuation
Total
Value of goods transferred out (i.e. completed)
1. Total cost associated with BWIP
a) Cost brought forward from the previous period by BWIP
$
6,119 $
3,920
$
10,039
b) Cost incrred in the period to complete BWIP
$
3,669 $
3,471
$
7,139
$
103,946 $
73,755
$
177,701
Total completed $
113,734 $
81,145
$
194,879
$
11,006 $
3,905
$
14,911
$
209,790
2. Cost associated with units Started and Completed in the period
Value of EWIP
Total Inventory Value
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 94
Weighted Average vs FIFO
Weighted-Average method
Beginning work in process (BWIP)
Physical
Units
%
300
Started
FIFO method
Physical
Units
% completed
in this period
Materials
6,000
Total available or Inputs
Equivalent Unit
6,300
BWIP (Portion to be completed)
Materials
Started and completed
Completed (i.e. transferred out)
5,400 100%
5,400
Ending work in process (EWIP)
900 60%
540
-
30%
-
270
5,940
5,670
6,300
300 60% = (1 - 40%)
180
-
80% = (1 - 20%)
-
240
Conversion
Equivalent Unit
Total produced or Ouputs
5,400
Total produced or Outputs
$
6,119 $
3,920 $
10,039
Incurred during the period
$ 118,621 $
81,130 $
199,751
TOTAL $ 124,740 $
85,050 $
209,790
15.00 $
36.00
$
21.00 $
Value of goods transferred out (i.e. completed)
$ 113,400 $
Value of EWIP
$
Valuation
11,340 $
100%
5,100
5,100
900
60%
540
-
30%
-
270
5,820
5,610
6,300
Total
BWIP
Cost per equivalent unit
5,100
( i.e. completed minus BWIP)
Ending work in process (EWIP)
Costs
Costs
Incurred during the period
$
Cost per equivalent unit
$
Total
81,000 $
Total
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations)
118,621 $
20.38 $
$
10,039
81,130 $
199,751
$
209,790
14.46
Valuation
Total
194,400 Value of goods transferred out (i.e. completed)
4,050 $
15,390
$
209,790
1. Total cost associated with BWIP
a) Cost brought forward from the previous period by BWIP
$
6,119 $
3,920 $
10,039
b) Cost incrred in the period to complete BWIP
$
3,669 $
3,471 $
7,139
2. Cost associated with units Started and Completed in the period
Value of EWIP
McGraw-Hill Education (Asia)
Conversion
Garrison, Noreen, Brewer, Cheng & Yuen
$
103,946 $
73,755 $
177,701
Total completed $
113,734 $
81,145 $
194,879
$
11,006 $
3,905 $
14,911
$
209,790
Slide 95
Summary of Weighted Average vs FIFO
Physical flow calculation
Equivalent Unit calculation
Weighted Average
FIFO
Calculate physical flow (in units):
BWIP + Units started = Units completed + EWIP
All units are assumed to be pooled
Emphasize percentage of input and
together without differentiating the
work done in the period strictly on the
period of completing the work
FIFO basis
Calculate the equivalent units based
on
1. Completed units
2. EWIP
Brought Forward Costs
Cost incurred in the period
Cost per Equiv. Unit
(CEU)
Cost of completed Units
Cost of EWIP
Final Checking
#
Calculate the equivalent units based on
1. Work done to complete the
remaining part of BWIP
#
2. Units Started and Completed
within the period
3. Work started on EWIP
Add to the current period to
Add to the cost of completed units as
calculate the average cost per
all items are assumed completed
equivalent unit
before starting new production
Differentiate Material and Conversion costs
Costs b/f + Costs in the period
Costs in the period
.
Equivalent unit produced
Equivalent unit produced
Completed units
Units started and completed x CEU
x
+
CEU
Completion of BWIP**
+
Cost brought forward
Equivalent EWIP Units completed in the period x CEU
Cost reconciliation:
Costs brought forward + incurred in the period = completed units + Ending WIP
Total costs
related to
BWIP
Started and Completed = Completed Units – BWIP = Units Started in the period – EWIP
** Completion of BWIP:
Equivalent units of Raw Materials to complete BWIP x CEUraw materials + Equivalent units of Conversion to complete BWIP x CEUconversion
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 96
Losses in Process Costing
Appendix 9B
© 2012 McGraw-Hill Education (Asia)
Production Losses

Losses in production can be classified into:

Expected – Normal Losses
•

Expected – Normal Losses with scrap value
•

In clothes/shirts manufacturing – part of the fabrics are in irregular
formats after trimming out the shape required, leaving some losses
which may be able to sell as scrap
Unexpected – Abnormal Losses
•

In packaged/canned manufacturing – parts of vegetables purchased are
not suitable for consumption
In packaged/canned manufacturing – the refrigerator broke down
without notice and food stored inside cannot be used – abnormal losses
Unexpected – Abnormal Losses with scrap value
•
In clothes/shirts manufacturing – a batch of shirts being rejected due to
wrong fabric being used could be sold to rejected clothing
merchandisers after removing the logos.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 98
Accounting for Normal Losses and Scrap
Value

Normal Losses



It is part of the production outputs
It is treated as part of the normal production cost for the finished
items (i.e. is absorbed into all products and is included in
inventory valuation)
Normal Losses with scrap value

Scrap value is part of the expected income to offset the expense
therefore is net-off from the expenses.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 99
Accounting for Abnormal Losses and Scrap
Value

Abnormal Losses



It is a part of the production outputs
It is not part of the normal production cost therefore is
expensed off separately from the production costs (i.e. cannot
be used for inventory valuation)
Abnormal Losses with scrap value

Scrap value receivable is also not part of the normal production
income therefore is treated as other income.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 100
An Example: Losses with Scrap Value
Let’s revisit the Smith Company Assembly Department for the month of June
with the additional losses information.
Beginning Work in Process Inventory:
Materials: 40% complete
Conversion: 20% complete
Production started during June
Production completed during June
400 units
$
6,119
$
3,920
6,000 units
5,400 units
Expected losses of 2% completed units cannot pass quality check. These rejected
items can normal be sold for $5 each as scrap.
In addition to the normal losses of 2%, 200 of the latest produced items were found
out of shape during the problem of the finishing touch from the machine.
Costs added to production in June
Materials cost
Conversion cost
Ending Work in Process Inventory:
Materials:
60% complete
Conversion:
30% complete
McGraw-Hill Education (Asia)
$ 118,621
$ 81,130
900 units
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 101
Understand the
treatment of losses in the
weighted average
process costing method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 102
Physical Flow of Units (the Weighted
Average Method)
• Normal and Abnormal Losses are parts of the outputs
• Completed quantity is most effectively calculated as a balancing figure
Weighted-Average method
Beginning work in process (BWIP)
Physical
Units
300
Started
%
6,000
Total available or Inputs
Completed (i.e. transferred out)
6,300
5,092
100%
Normal loss 2% of 5400 units
108
100%
Abnormal loss 200 units
200
100%
Ending work in process (EWIP)
900
60%
30%
Total produced or Ouputs
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
6,300
Slide 103
Compute the Equivalent Units of Production
Weighted-Average method
Beginning work in process (BWIP)
Started
Physical
Units
300
%
6,000
Total available or Inputs
6,300
Materials
Conversion
Equivalent Unit
Completed (i.e. transferred out)
5,092
100%
5,092
5,092
Normal loss 2% of 5400 units
108
100%
108
108
Abnormal loss 200 units
200
100%
200
200
Ending work in process (EWIP)
900
60%
540
30%
-
Total produced or Ouputs
McGraw-Hill Education (Asia)
6,300
Garrison, Noreen, Brewer, Cheng & Yuen
5,940
270
5,670
Slide 104
Summarize the Total Cost Incurred and
Compute the Cost Per Equivalent Unit
Scrap value receivable from Normal Losses normally is netting-off the cost as the
Physical
Weighted-Average
method
loss and
the income are
part of theUnits
expected
% process. In most cases, scrap value
isBeginning
off-setting
material
scrap is normal valuing the material. In
work inthe
process
(BWIP) cost because300
some
Started cases, conversion work may even
6,000 reduce the value of the scrap because
the conversionTotal
may
makeor itInputs
difficult to
salvage the scrap material.
available
6,300
Materials
Conversion
Equivalent Unit
Completed (i.e. transferred out)
5,092
100%
5,092
5,092
Normal loss 2% of 5400 units
108
100%
108
108
Abnormal loss 200 units
200
100%
200
200
Ending work in process (EWIP)
900
60%
540
30%
-
Total produced or Ouputs
6,300
5,940
270
5,670
Costs
BWIP
$
6,119 $
3,920
Incurred during the period
$
118,621 $
81,130
Less: Scrap value of the normal loss
$
(540) $
Total costs added $
124,200 $
85,050
$124,200
 $20.91 $
5,940
20.91 $
15.00
Cost per equivalent unit
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
-
$85,050
 $15.00
5,670
Slide 105
Calculate the Values of Completed and
Ending WIP Inventories
Weighted-Average method
ginning work in process (BWIP)
arted
Physical
Units
300
Abnormal loss is not
a part of the
inventory valuation
%
6,000
Total available or Inputs
6,300
Materials
Conversion
Equivalent Unit
ompleted (i.e. transferred out)
5,092
100%
5,092
5,092
ormal loss 2% of 5400 units
108
100%
108
108
bnormal loss 200 units
200
100%
200
200
900
60%
540
-
30%
-
ding work in process (EWIP)
Total produced or Ouputs
6,300
5,940
270
5,670
Costs
Total
WIP
$
6,119 $
3,920 $
10,039
curred during the period
$
118,621 $
81,130 $
199,751
ss: Scrap value of the normal loss
$
(540) $
Total costs added $
$
ost per equivalent unit
-
$
(540)
124,200 $
85,050 $
209,250
20.91 $
15.00 $
35.91
Valuation
lue of goods transferred out (before normal loss value)
Total
$
106,469 $
76,380 $
182,849
$
2,258 $
1,620 $
3,878
lue of goods transferred out (normal loss value included)
$
108,727 $
78,000 $
186,727
lue of EWIP
$
11,291 $
ormal loss
McGraw-Hill Education (Asia)
Noreen, Brewer, Cheng & Yuen
Total value ofGarrison,
inventory
4,050
$
15,341
$
202,068
Slide 106
Cost Reconciliation
Weighted-Average method
Beginning work in process (BWIP)
Physical
Units
300
Started
Abnormal loss is not
a part of the
inventory valuation.
It is treated as a part
of the expense in
COGS.
%
6,000
Total available or Inputs
6,300
Materials
Conversion
Equivalent Unit
Completed (i.e. transferred out)
5,092
100%
5,092
5,092
Normal loss 2% of 5400 units
108
100%
108
108
Abnormal loss 200 units
200
100%
200
200
Ending work in process (EWIP)
900
60%
540
-
30%
-
Total produced or Ouputs
6,300
5,940
270
5,670
Costs
Total
BWIP
$
6,119 $
3,920 $
10,039
Incurred during the period
$
118,621 $
81,130 $
199,751
Less: Scrap value of the normal loss
$
(540) $
Total costs added $
$
Cost per equivalent unit
-
$
(540)
124,200 $
85,050 $
209,250
20.91 $
15.00 $
35.91
Valuation
Total
Value of goods transferred out (before normal loss value)
$
106,469 $
76,380 $
182,849
Normal loss
$
2,258 $
1,620 $
3,878
Value of goods transferred out (normal loss value included)
$
108,727 $
78,000 $
186,727
Value of EWIP
$
11,291 $
Total value of inventory
Value of abnormal loss to be written off as incurred
McGraw-Hill Education (Asia)
$
4,182 $
Total inventory andGarrison,
abnomalNoreen,
loss Brewer, Cheng & Yuen
4,050
$
15,341
$
202,068
3,000 $
7,182
$
209,250
Slide 107
Understand the
treatment of losses in the
FIFO process costing
method
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 108
Process Costing with Losses
Physical Flow of Units (the FIFO Method)
FIFO method
BWIP (Portion to be completed)
Physical
Units
300
% completed in
this period
60% = (1 - 40%)
80% = (1 - 20%)
Started and completed (S&C)
5,400
units
4,792
100%
Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP)
108
100%
Abnormal loss 200 units
200
100%
Ending work in process (EWIP)
900
60%
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)
30%
Total produced or Outputs
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
6,300
Slide 109
Compute the Equivalent Units of Production
Physical
Units
FIFO method
% completed in
this period
Materials
Conversion
Equivalent Unit
BWIP (Portion to be completed)
300
Started and completed (S&C)
60% = (1 - 40%)
180
-
80% = (1 - 20%)
-
240
4,792
100%
4,792
4,792
Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP)
108
100%
108
108
Abnormal loss 200 units
200
100%
200
200
Ending work in process (EWIP)
900
60%
540
-
30%
-
270
5,820
5,610
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)
Total produced or Outputs
McGraw-Hill Education (Asia)
6,300
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 110
Summarize the Total Cost Incurred and
Compute the Cost Per Equivalent Unit
Physical
Units
FIFO method
% completed in
this period
Conversion
Materials
Equivalent Unit
300
BWIP (Portion to be completed)
-
60% = (1 - 40%)
180
80% = (1 - 20%)
-
240
4,792
100%
4,792
4,792
Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP)
108
100%
108
108
Abnormal loss 200 units
200
100%
200
200
Ending work in process (EWIP)
900
60%
540
-
30%
-
270
5,820
5,610
Started and completed (S&C)
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)
Total produced or Outputs
6,300
Costs
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations)
81,130
Incurred during the period
$
118,621 $
Less Scrap value of the normal loss
$
(540) $
Total costs added $
118,081 $
81,130
$
20.29 $
14.46
Cost per equivalent unit
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
-
Slide 111
Calculate the Values of Completed and
Ending WIP Inventories
Physical
Units
FIFO method
% completed in
this period
Materials
Conversion
Equivalent Unit
BWIP (Portion to be completed)
300
Started and completed (S&C)
60% = (1 - 40%)
180
80% = (1 - 20%)
-
240
-
4,792
100%
4,792
4,792
Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP)
108
100%
108
108
Abnormal loss 200 units
200
100%
200
200
Ending work in process (EWIP)
900
60%
540
-
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)
30%
Total produced or Outputs
6,300
-
270
5,820
5,610
Costs
Total
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations)
Incurred during the period
$
118,621 $
Less Scrap value of the normal loss
$
(540) $
Total costs added $
$
Cost per equivalent unit
$
10,039
81,130 $
199,751
-
$
(540)
118,081 $
81,130 $
209,250
20.29 $
14.46 $
34.75
Valuation
Total
Value of goods transferred out (i.e. completed)
1. Total cost associated with BWIP
a) Cost brought forward from the previous period by BWIP
$
6,119 $
3,920
$
b) Cost incrred in the period to complete BWIP
$
3,652 $
3,471
$
7,123
$
97,224 $
69,300
$
166,524
2. Cost associated with units Started and Completed in the period
3. Cost associated with normal loss in the period
10,039
$
2,191 $
1,562
$
3,753
Total value of completed goods
$
109,186 $
78,253
$
187,439
Value of EWIP
$
10,956 $
3,905
$
14,861
$
202,300
Total value of inventory
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 112
Cost Reconciliation
Physical
Units
FIFO method
% completed in
this period
Materials
Conversion
Equivalent Unit
BWIP (Portion to be completed)
300
60% = (1 - 40%)
180
80% = (1 - 20%)
-
-
240
4,792
100%
4,792
4,792
Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP)
108
100%
108
108
Abnormal loss 200 units
200
100%
200
200
Ending work in process (EWIP)
900
60%
540
30%
-
270
5,820
5,610
Started and completed (S&C)
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)
Total produced or Outputs
6,300
-
Costs
Total
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations)
Incurred during the period
$
118,621 $
Less Scrap value of the normal loss
$
(540) $
Total costs added $
$
Cost per equivalent unit
$
10,039
81,130 $
199,751
-
$
(540)
118,081 $
81,130 $
209,250
20.29 $
14.46 $
Valuation
34.75
Total
Value of goods transferred out (i.e. completed)
1. Total cost associated with BWIP
a) Cost brought forward from the previous period by BWIP
$
b) Cost incrred in the period to complete BWIP
6,119 $
3,920
$
10,039
$
3,652 $
3,471
$
7,123
2. Cost associated with units Started and Completed in the period
$
97,224 $
69,300
$
166,524
3. Cost associated with normal losses in the period
$
2,191 $
1,562
$
3,753
Total value of completed goods
$
109,186 $
78,253
$
187,439
Value of EWIP
$
10,956 $
3,905
$
14,861
$
202,300
Total value of inventory
Value of abnormal loss to be written off as incurred
McGraw-Hill Education (Asia)
$
4,058 $
Garrison, Noreen, Brewer, Cheng & Yuen
2,892
$
6,950
$
209,250
Slide 113
Activity-based Process Costing
Appendix 9C
© 2012 McGraw-Hill Education (Asia)
Solving the Losses
Problems by the FIFO
Method.
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 115
Activity-based Process Costing





Large quantity homogeneous products with
similarities
Sharing production facilities
Premium and low-end products with different
consumption of the shared production facilities
Resource and activity consumption being traceable
by using the activity-based costing technique within
the process costing environment
Examples: Candies manufacturing, instant noodle
manufacturing and wine bottling
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 116
End of Chapter 9
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 117