Chapter Six
Process Costing
COPYRIGHT © 2012 Nelson Education Ltd.
Learning Objectives
1. Describe the basic characteristics and cost flows
associated with process manufacturing
2. 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
3. Prepare a departmental production report using the
weighted average method
4. Explain how non-uniform inputs and multiple
processing departments affect process costing
5. (Appendix) Prepare a departmental production report
using the FIFO method
6-2
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OBJECTIVE 1
Describe the basic
characteristics and cost
flows associated with
process manufacturing
Characteristics of Process
Manufacturing
Process costing works well whenever relatively
homogeneous products pass through a series of
processes and they receive similar amount of
manufacturing costs
Example Industries:
Food
Chemicals
Tire
manufacturers
Large manufacturing
plants
6-4
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Types of Processes
Sequential processing
Requires that units pass through one process before they
can be worked on in later processes
Parallel processing
Partially completed units can be worked on simultaneously in
different processes and then brought together in a final
process for completion
6-5
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Raw Materials Cost Flow
Manufacturing cost flows are same as those
for a job-order system
Raw Materials
Materials
purchases
As raw materials are
purchased, cost of these
materials flow into a raw
materials account
6-6
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Cost Flows Into Work In
Process
Work in Process
+ Materials
+ Direct labour
Finished Goods
Completed
Goods
+ Completed
Goods
+ Overhead
Materials, labour and
overhead flow into the
Work-In-Process account
Completed goods are
transferred out of WorkIn-Process and into
Finished Goods
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6-7
Cost Flows Into
Work In Process
Finished Goods
+ Completed
Goods
Cost of Goods
Sold
Sold
Goods
+ Sold Goods
Goods that are sold are
transferred out of Finished Goods
and into Cost of Goods Sold
6-8
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Example: Cornerstone 6-1
How to Calculate Cost Flows Without Work-In-Process (WIP)
Information:
Healthblend produces 2,000 bottles of multivitamins with the
following costs:
Picking Encapsulating
Bottling
Dept.
Dept.
Dept.
Direct materials
Direct labour
Applied overhead
$1,700
50
450
$1,000
60
500
$800
300
600
Required:
• Calculate the costs transferred out of each department
• Prepare journal entries that reflect these cost transfers
6-9
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Costs Transferred Out
Picking Encapsulating Bottling
Dept.
Dept.
Dept.
Direct materials
$1,700
$1,000
$ 800
50
450
60
500
300
600
Costs added
Costs transferred in
$2,200
$1,560
$1,700
0
2,200
3,760
Costs transferred out
$2,200
$3,760
$5,460
Direct labour
Applied overhead
6-10
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Journal Entries
Work in Process (Encapsulating)
Work in Process (Picking)
$2,200
Work in Process (Bottling)
$3,760
$2,200
Work in Process (Encapsulating)
Finished Goods
$3,760
$5,460
Work in Process (Bottling)
$5,460
6-11
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Transferred-In Costs
Transferred-In Costs are costs transferred from a
prior process to a subsequent process
From the viewpoint of the subsequent process,
transferred-in costs are a type of raw material cost
6-12
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Production Report
Summary of manufacturing activity of a process
department for a given period of time
Unit Information
section
Units to
Account For
Cost Information
section
Units
Accounted For
Unit Information Section has
two major subdivisions
6-13
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Production Report
Unit Information
section
Cost Information
section
Costs to
Account For
Costs
Accounted For
Cost Information Section has
two major subdivisions
6-14
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OBJECTIVE 2
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
Equivalent Units Example
Assume that Department A had the following
data for October:
Units in BWIP
---
Units completed
Units in EWIP (25% complete)
Total manufacturing costs
1,000
600
$11,500
What is the output for this department?
1000 units? 1600 units?
6-16
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Equivalent Units of Output
• Equivalent units
– Total number of complete units that could have been
produced given the total manufacturing effort used
during the period
• Dilemma
– Some units are physically complete
– Some units are not complete
6-17
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Example: Cornerstone 6-2
How to Calculate Equivalent Units of Production:
No Beginning Work-In-Process
Information:
October Data:
1,000 units completed
600 units
25 percent complete
Required:
Calculate the equivalent units for October
6-18
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Equivalent Units
Equivalent
Units
Units Completed
1,000
Units in Ending WIP × 25% complete
150
1,150
6-19
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Example: Cornerstone 6-3
How To Measure Output and Assign Costs: No
Beginning Work-In-Process
Information:
Manufacturing Costs for the period
Units Transferred Out
Units in Ending Work In Process
(25% Complete)
11,500
1,000
600
Required:
• Calculate the unit cost
• Calculate the cost of goods transferred out and
the cost of ending work-in-process (EWIP)
6-20
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Calculating Unit Cost
Cost per
equivalent unit
=
Cost per
equivalent unit
=
Cost per
equivalent unit
=
Manufacturing costs
Number of Equivalent Units
$11,500
1,150
$10
6-21
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Cost of Goods Transferred
Out
Cost of goods
transferred out
Cost of goods
transferred out
=
=
Unit
Cost
×
$10
×
Units
Transferred
Out
1,000 units
$10,000
6-22
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Cost of Ending Work-InProcess (EWIP)
Cost of ending
=
work in process
Unit
Cost
$10
Cost of ending
=
work in process
Units in
×
EWIP
×
150
$1,500
Things get more complicated if there
are units in work-in-process at the
beginning of the period
6-23
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Beginning Work In Process
• Work done on these beginning inventory units
– Represents prior period costs
• How should these costs figure into the
computation of current period unit costs?
1. Weighted Average method
2. FIFO method
6-24
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Weighted Average Method
• Combines
– Beginning inventory costs
– Current period costs
• Calculates Unit Cost for the period
– By averaging
• Unit cost is used to compute costs for:
– Goods transferred out
– Goods remaining in work-in-process
6-25
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FIFO Method
Separates work and costs for the equivalent units in
beginning inventory from work and costs of the
equivalent units produced during the current period
Only current work and costs
are used to calculate this
period’s unit cost
6-26
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OBJECTIVE 3
Prepare a departmental
production report using the
weighted average method
Preparing a Weighted
Average Production Report
Step 1: Physical Flow Analysis
• Trace the physical units of production
– Two amounts are computed
• Units Started and Completed
– (Units Completed minus Units in BWIP)
• Units Started
– (Add Units Started and Completed plus EWIP)
6-28
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Preparing a Weighted
Average Production Report
Step 2: Calculation of Equivalent Units
• Adding together
– Units Completed
– Units in Ending Work In Process × Fraction Complete
• Beginning Inventory
– Included in the units completed
– Treats beginning inventory as if it was started and
completed the current period
6-29
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Preparing a Weighted
Average Production Report
Step 3: Computation of Unit Cost
• Manufacturing Costs ÷ Equivalent Unit
– Costs include:
• Prior period costs associated with beginning work-in-process
• Current period manufacturing costs
6-30
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Preparing a Weighted
Average Production Report
Step 4: Valuation of Inventories
• Computing cost of goods transferred out
– Multiplying
• Unit cost (computed in step #3)
• Units completed (computed in step #1)
• Computing cost of ending work in process
– Multiplying
• Unit cost (computed in step #3)
• Equivalent units (computed in step #2)
6-31
COPYRIGHT © 2012 Nelson Education Ltd.
Preparing a Weighted
Average Production Report
Step 5: Cost Reconciliation
• Checks to see if:
– Costs to account for
• Beginning Work In Process + Costs incurred during the period
– Equal
• Costs assigned to inventory
– Transferred out + Ending Work-In-Process
Cornerstones 6-4, 6-5, and 6-6 will walk us
through an example
6-32
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Example: Cornerstone 6-4
How to Measure Output and Assign Costs: Weighted
Average
Information:
Production:
Units in process, July 1, 75% complete
Units completed and transferred out
Units in process, July 31, 25% complete
Costs:
Work in process, July 1
Costs added during July
20,000 litres
50,000 litres
10,000 litres
$3,525
$10,125
6-33
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Required:
•
Calculate an output measure for July
•
Assign costs to units transferred out and ending work in
process using the weighted average method
6-34
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Measuring Output
Add Units in Beginning WIP to the Units
Started and Completed
Started &
Completed
BWIP
20,000
+
30,000
50,000 units completed
this period
6-35
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Measuring Output
Add equivalent units in Ending WIP
Units
Completed
50,000
EWIP
10,000 units (25% complete)
+
50,000
+
2,500
52,500 equivalent units
manufactured this period
6-36
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Assigning Costs
Compute Unit Cost
Work in process, July 1
$ 3,525
Costs added during July
Total costs assigned
10,125
$13,650
Unit cost
= $13,650/52,500 equivalent units
Unit cost
= $0.26 per equivalent unit
6-37
COPYRIGHT © 2012 Nelson Education Ltd.
Assigning Costs
Assign Costs to Units
Transferred Out (50,000 units × $0.26) $13,000
Ending WIP (2,500 equiv. units × $0.26)
650
$13,650
Total Costs Assigned
All the manufacturing costs
have been assigned
6-38
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 6-5
How to Prepare a Physical Flow Schedule
Information:
Production:
Units in process, July 1, 75% complete
Units completed and transferred out
Units in process, July 31, 25% complete
20,000 litres
50,000 litres
10,000 litres
Required:
Prepare a physical flow schedule
6-39
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Physical Flow Schedule
Units to account for:
Units in beginning work in
process (75% complete)
20,000
Units started during the period
This needs to be computed
6-40
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Units Started and Completed
Units started and
completed
Units
– Units, BWIP
=
completed
Units started and
completed
=
Units started and
completed
=
50,000 –
20,000
30,000
6-41
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Units Started
Units started
Units
= started and + Units, EWIP
completed
Units started
=
Units started
=
30,000
+
10,000
40,000
6-42
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Physical Flow Schedule
Units to account for:
Units in beginning work in
process (75% complete)
Units started during the period
Total units to account for
20,000
40,000
60,000
6-43
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Physical Flow Schedule
continued
Units accounted for:
Units 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)
Total units accounted for
10,000
60,000
All the units “to be accounted
for” have been “accounted for”
6-44
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Example
Calculation of Equivalent Units
Units completed
Add: Units in ending work in
process × fraction complete
50,000
Equivalent units of output
52,500
10,000
× 25%
2,500
Now we need to
calculate the unit cost
6-45
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Example
Computation of Unit Cost
Work in process, July 1
$ 3,525
Costs added during July
Total manufacturing costs for July
10,125
$13,650
Unit cost = $13,650/52,500
Unit cost = $0.26 per equivalent unit
6-46
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Cost Reconciliation
Total manufacturing costs assigned to
inventories are as follows:
Goods transferred out
Goods in ending work in process
Total costs accounted for
50,000 units
× $0.26
$13,000
650
$13,650
2,500 units
× $0.26
6-47
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 6-6
How to Prepare a Production Report: Weighted
Average Method
Information:
Calculations in Cornerstones 6-4 & 6-5
Required:
Prepare a production report
6-48
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Healthblend Company
Picking Department
Production Report for July 2011
Physical Flow
Units To Account For:
Units in Beg. WIP
Units started
Total units to
account for
Equivalent Units
Units completed
Units in EWIP
Total equivalent
units
Unit Information
20,000
40,000
60,000
Units Accounted For:
Units completed
50,000
Units in End. WIP 10,000
Total units
accounted for
60,000
50,000
2,500
52,500
6-49
COPYRIGHT © 2012 Nelson Education Ltd.
Healthblend Company
Picking Department
Production Report for July 2011
(Continued)
Cost Information
Costs to account for:
Beginning Work In Process
Incurred during the period
$ 3,525
10,125
Total costs to account for
$13,650
Cost per equivalent unit
$
0.26
6-50
COPYRIGHT © 2012 Nelson Education Ltd.
Healthblend Company
Picking Department
Production Report for July 2011
(Continued)
Transferred
Out
Costs accounted for:
Goods transferred out
$13,000
Goods in Ending WIP
--Total costs accounted for $13,000
Ending
WIP
Total
--$650
$650
$13,000
650
$13,650
6-51
COPYRIGHT © 2012 Nelson Education Ltd.
Evaluation of the Weighted
Average Method
Major benefit of this method is the simplicity
Main disadvantage is reduced accuracy in
computing unit costs
If greater accuracy is desired, a
company should use the FIFO
method to determine unit costs
6-52
COPYRIGHT © 2012 Nelson Education Ltd.
OBJECTIVE 4
Explain how nonuniform
inputs and multiple
processing departments
affect process costing
Nonuniform Application of
Manufacturing Inputs
• In the prior example
– Materials, labour and overhead were applied uniformly
throughout the process
• But often materials is not added uniformly
– Instead it is added at the beginning and ending of the
process
Separate equivalent units, unit costs and
category costs are computed for materials
and conversion costs
6-54
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 6-7
How to Calculate Equivalent Units, Unit Costs, and Value
Inventories with Nonuniform Inputs
Information:
Production:
Units in process, Sept 1, 50% complete*
Units completed and transferred out
Units in process, Sept 30, 40% complete*
10,000
60,000
20,000
* Percentage complete as to conversion costs
6-55
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Information continued:
Costs:
Work in process, Sept 1:
Materials*
Conversion costs
Total
Current costs:
Materials*
Conversion costs
Total
$ 1,600
200
$ 1,800
$12,000
3,200
$15,200
* Materials are added at the beginning of the process
6-56
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Required:
•
Calculate equivalent units
•
Calculate unit cost
•
Calculate the valuation of the inventories
6-57
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Calculation of Equivalent Units
Materials
Conversion
Units completed
60,000
60,000
Add: Units in ending
work in process ×
fraction complete
20,000
8,000
20,000 × 100%
Since these units
have all their materials
20,000 × 40%
These units have 40% of
their labour and overhead
COPYRIGHT © 2012 Nelson Education Ltd.
6-58
Example
Calculation of Equivalent Units
Materials
Conversion
Units completed
60,000
60,000
Add: Units in ending
work in process ×
fraction complete
Equivalent units of
output
20,000
8,000
80,000
68,000
6-59
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Calculation of Unit Cost
Unit materials cost = ($1,600 + $12,000)/80,000
Unit materials cost = $0.17
Unit conversion cost = ($200 + $3,200)/68,000
Unit conversion cost = $0.05
Total unit cost = $0.17 + $0.05
Total unit cost = $0.22
6-60
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Valuation of Ending Work in Process and
Goods Transferred Out
Cost of ending work in process:
Materials $0.17 × 20,000
$3,400
400
Conversion $0.05 × 8,000
Total cost
$3,800
Valuation of goods transferred out:
Cost of goods transferred out
$13,200
$0.22 × 60,000
6-61
COPYRIGHT © 2012 Nelson Education Ltd.
Multiple Departments
Some departments receive partially
completed goods from prior departments
Usual approach is to treat transferred-in
goods as a separate material category
Cost of this material is the cost of the
goods transferred out as computed in
the prior department
6-62
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 6-8
How to Calculate the Physical Flow Schedule, Equivalent
Units, Unit Costs, and Transferred-In Goods
Information:
• For September, Healthblend’s encapsulating dept had:
– 15,000 units in beginning inventory
• With transferred-in costs of $3,000
– 70,000 units completed during the month
• Picking department
– Completed and transferred-out
• 60,000 units at a cost of $13,200
6-63
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Required:
• Prepare a physical flow schedule with transferred-in goods
• Calculate equivalent units for the transferred-in category
• Calculate unit cost for the transferred-in category
6-64
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Physical Flow Schedule
Units to account for:
Units in beginning work in process 15,000
Units transferred in during Sept.
60,000
75,000
Total units to account for
6-65
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Physical Flow Schedule
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
6-66
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Equivalent Units for the transferred-in
category
Transferred-in:
Units completed
70,000
Add: Units in ending work in
process × fraction complete 5,000
Equivalent units of output
COPYRIGHT © 2012 Nelson Education Ltd.
70,000
5,000 ×
100%
since
these units
have all
their
materials
Example
Calculation of Unit Cost for the
Transferred-in Category
For the transferred-in category
Unit cost
=
Unit cost
=
Unit cost
=
($13,200 + $3,000)/75,000
$16,200 / 75,000
$0.216
6-68
COPYRIGHT © 2012 Nelson Education Ltd.
OBJECTIVE 5
Appendix:
Prepare a departmental
production report using
the FIFO method
Production Report
FIFO Costing
• Separates the cost of BWIP from cost of current
period
• Review:
– Cornerstone 6-9, How to calculate output and cost
assignments: FIFO method, page 264; and
– Cornerstone 6-10, How to prepare a production report:
FIFO method, page 267
6-70
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