Process Costing
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 cost.
• 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/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Differences Between Job-Order and Process
Costing
• Process
isstin
used
single
ProProcececosting
ssss cocost
uuseseddaww
hheennaasiproduct
rrooproduced
dduuctctiss pproroddon
uucecedd
nggisswhen
sinnggleeppis
aooncontinuing
basis or for a long period of time. Job-order
n
costing
isuinn
used
many
jobs
on
aaccoonntinnu
ggbbaawhen
sisissoorrfo
ggppeerriooddo
ee.Joworked
orraaloonndifferent
oftimmare
Jobb-o-orrdde
err each
period.
cocoststinnggissuuseseddwwhheennmmaannyyddiffeererenntjoobbssaarerewwoorrkekeddoonneeaachh
ppeeririoodd. costing systems accumulate costs by department.
• Process
Job-order
systems
ProProcecesscosting
inngg ssysysaccumulated
teemmss aaccuccumcosts
ss cocostst
muulaateby
e coindividual
coststss bbyy
jobs.
ddeeppaatm
r meennt. JoJobb-o-ordrdeerr cocoststinngg systsysteemmss aaccuccummuulaateedd
cocoststssbb
yyinnddivviddsystems
uuaaljoobbss. use department production reports to
• Process
costing
accumulate
ProProcecesssscosts.
cocoststiJob-order
nnggssysysteemcosting
ddeeppaartmmuse
eennt job cost
mssuusesesystems
sheets
uccummuulaateecocoststs.s. JoJobb-oordrdeerrcocosstinngg
pprorodduuto
ctctioaccumulate
onnreeppoortsstooaacccosts.
systsysteemcosting
joobbcocostcompute
mss uusese
st shsheeeetssunit
tooaacosts
ccuccumm
ateecocoststs.s.
• Process
systems
byuula
department.
Job-order
unit
costs
bycojob.
ProProcecesscosting
innggssysystecompute
ppuute
ststssbbyy
ss cocoststsystems
emmsscocomm
euunnitco
ddeeppaartmmeennt.JoJobb-o-ordrdeerrcocoststinnggsystsysteemmCopyright
sscoc©o2006,
mmTheppMcGraw-Hill
uuteeuunCompanies,
nit Inc.
McGraw-Hill/Irwin
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.
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/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
What is a Processing Department?
Any location 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.
Sequential vs. Parallel Processing
Sequential
processing
units
SSequentequent
iialal prprmeans
ococessithat
essing
ng
flow in amm
sequence
eanseansthhaatuunnfrom
itss one
department
fflowowto
innanother.
aa
sequencsequencee o
rfmomoonnee
depardepar
ttmmee
ntnttoo
processing
isiing
used
PParallel
ar
al
l
e
l
usedused
P ar a e prproocesscess
ng isswhen
aafter
annotot
her.. some
aher
point,
units go through
wwhenhen
McGraw-Hill/Irwin
af
different
processing
departments
aftterer aapoi
pointnt,, som
someeuniunittss
than
others.
Fordidi
example,
a
gogotthrhr
oughough
ffffererentent
petroleum
refinery
prpr
ococessiseparates
essingng crude
oil into
like
deparproducts
ss tthanhanjet
departtmment
entgasoline,
and
heating
ototherfuel,
FFor
hers.s.
orexexamoil.
amplplee,,aa
petpetrrololeumeum rreeffinerneryy
Copyright © 2006, The McGraw-Hill Companies, Inc.
Comparing Job-Order
and Process Costing
Direct
Materials
Direct Labor
Manufacturing
Overhead
McGraw-Hill/Irwin
Work in
Process
Finished
Goods
Cost of
Goods
Sold
Copyright © 2006, The McGraw-Hill Companies, Inc.
Comparing Job-Order
and Process Costing
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
Direct Labor
Manufacturing
Overhead
McGraw-Hill/Irwin
Jobs
Finished
Goods
Cost of
Goods
Sold
Copyright © 2006, The McGraw-Hill Companies, Inc.
Comparing Job-Order
and Process Costing
Direct
Materials
Direct Labor
Manufacturing
Overhead
McGraw-Hill/Irwin
Costs are traced and
applied to departments
in a process cost
system.
Processing
Department
Finished
Goods
Cost of
Goods
Sold
Copyright © 2006, The McGraw-Hill Companies, Inc.
T-Account and Journal Entry Views of 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/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Cost Flows
(in T-account form)
Raw Materials
•Direct
Materials
Work in Process
Department A
• Direct
Materials
Work in Process
Department B
• Direct
Materials
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Cost Flows
(in journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Proces - Department A
XXXXX
Work in Proces - Department B
XXXXX
Raw Materials
Credit
XXXXX
To record the use of direct material.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Cost Flows
(in T-account form)
Wages Payable
•Direct
Labor
Work in Process
Department A
• Direct
Materials
•Direct
Labor
Work in Process
Department B
• Direct
Materials
•Direct
Labor
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Costing
(in journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Proces - Department A
XXXXX
Work in Proces - Department B
XXXXX
Salaries and Wages Payable
Credit
XXXXX
To record direct labor costs.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Cost Flows
(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/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Costing
(In journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Proces - Department A
XXXXX
Work in Proces - Department B
XXXXX
Manufacturing Overhead
Credit
XXXXX
To apply overhead to departments.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Cost Flows
(in T-account form)
Work in Process
Department A
• Direct
Transferred
Materials
to Dept. B
•Direct
Labor
•Applied
Overhead
McGraw-Hill/Irwin
Work in Process
Department B
• Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Costing
(in journal entry form)
GENERAL JOURNAL
Date
Description
Work in Proces - Department B
Work in Proces - Department A
Post.
Ref.
Page 4
Debit
Credit
XXXXX
XXXXX
To record the transfer of goods from
Department A to Department B.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Cost Flows
(in T-account form)
Work in Process
Department B
• Direct
• Cost of
Materials
Goods
•Direct
Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
McGraw-Hill/Irwin
Finished Goods
• Cost
of
Goods
Manufactured
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Costing
(in journal entry form)
GENERAL JOURNAL
Date
Description
Finished Goods
Work in Proces - Department B
Post.
Ref.
Page 4
Debit
Credit
XXXXX
XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Cost Flows
(in journal entry form)
Work in Process
Department B
• Direct
Finished Goods
• Cost of
• Cost of
Materials
Goods
Goods
•Direct
Manufactured
Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
Cost of Goods Sold
• Cost of
Goods
Sold
• Cost of
Goods
Sold
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Costing
(in journal entry form)
GENERAL JOURNAL
Date
Description
Accounts Receivable
Post.
Ref.
Page 4
Debit
Credit
XXXXX
Sales
XXXXX
To record sales on account.
Cost of Goods Sold
Finished Goods
XXXXX
XXXXX
To record cost of goods sold.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
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.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units – The Basic Idea
Two half completed products are
equivalent to one completed product.
+
=
1
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
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/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
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/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Calculating Equivalent Units
Equivalent
becan
calculated
EquEquivivaaleunits
lentntucan
unitsnits
can bebe two
ways:
cacalculcua
l tedatedtwtwoo
wwayays:s:
The First-In, First-Out Method – FIFO is
covered
therst
appendix
toFir
this
chapter.
TThheeFiin
-In,-In, Fir
stst
-Out-Out
First
MeThe
thodoWeighted-Average
Meh
d– FFIFOIFOisiscovecovered
ininthethe
red
Method – This
appenappendidixx tototthishis chaptchapter.er.
method will be covered in the main portion of the
chapter.
TTheheWWeigeightedhted-AAvverageragee MethoMethodd
– TThhisismmeethodthodwwill bbeecovercovereded inintthehe
mmaaininporportiontion ofof thethe chapchapterter..
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units of Production
Weighted-Average Method
The weighted-average method . . .
•Makes no distinction between work done in prior or
current periods.
•Blends together units and costs from prior and
current periods.
Cost per
equivalent
=
Costs for the period
Equivalent units of production
for the period
unit
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Costing and Direct Labor
Dollar Amount
Direct
Materials
Conversion
Direct
Labor
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Type of Product Cost
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Costing and Direct Labor
Dollar Amount
Direct
Materials
Conversion
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Type of Product Cost
Direct
may
be
DDirireeccttlabor
lalabboorrand
aannddmanufacturing
mmaannuufaacctuurrininggoverhead
oovveerrhheeaaddm
maayyb
bee
combined
one
called
ccoommbbn
in
ininttoo
oonneeproduct
pprroodduucccost
tccoosstc
ccoonnvveersso
io
i eeddinto
caaleleddconversion.
i nn.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Weighted-Average Example
Smith Company reported the following activity in
Department A for the month of June:
Percent Completed
Units
Work in proces , 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 proces , June 30
McGraw-Hill/Irwin
900
Materials Conversion
40%
20%
60%
30%
Copyright © 2006, The McGraw-Hill Companies, Inc.
Weighted-Average Example
The first step in calculating the equivalent units is
to identify the units completed and transferred
out of Department A in June (5,400 units)
Materials
Units completed and transferred
out of Department A in June
McGraw-Hill/Irwin
5,400
Conversion
5,400
Copyright © 2006, The McGraw-Hill Companies, Inc.
Weighted-Average 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 add this to the
5,400 units from step one.
Materials
Units completed and transferred
out of Department A in June
5,400
Conversion
5,400
Work in process, June 30:
900 units × 60%
Equivalent units of Production in
Department A during June
McGraw-Hill/Irwin
540
5,940
Copyright © 2006, The McGraw-Hill Companies, Inc.
Weighted-Average 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 add this to the
5,400 units from step one.
Materials
Units completed and transferred
out of Department A in June
5,400
Conversion
5,400
Work in process, June 30:
900 units × 60%
540
900 units × 30%
Equivalent units of Production in
Department A during June
McGraw-Hill/Irwin
270
5,940
5,670
Copyright © 2006, The McGraw-Hill Companies, Inc.
Weighted-Average 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 Department A in June
5,400
Conversion
5,400
Work in process, June 30:
900 units × 60%
540
900 units × 30%
Equivalent units of Production in
Department A during June
McGraw-Hill/Irwin
270
5,940
5,670
Copyright © 2006, The McGraw-Hill Companies, Inc.
Weighted-Average 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/Irwin
Ending
Work in Process
900 Units
60% Complete
900 × 60%
Copyright © 2006, The McGraw-Hill Companies, Inc.
Weighted-Average 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/Irwin
Ending
Work in Process
900 Units
30% Complete
900 × 30%
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report – Weighted-Average
Production Report
Section 1
Section 2
A
schedule
AAquantity
qquuaannttityty
sscchheedduulee
showing
flow
ofoounits
sshhoowwinnggthe
ththee
flflooww
ffuunnitsts
and
aannddthe
thheecomputation
ccoommppuutatatioonnof
ooff
equivalent
eeqquuivvaaleenntuunits.
unnitsts.
AAA
computation
ccoommppuutatatioonof
nooff
cost
per
equivalent
unit.
ccoosstp
qquuivvaaleenntuu
nnit.t.
peerree
Section 3
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report
Production Report
Section 1
Section 2
Section 3
McGraw-Hill/Irwin
Cost Reconciliation
section shows the
reconciliation of all cost
flows into and out of the
department during the
period.
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Assume that Double Diamond Skis uses the
weighted-average method of process costing to
determine unit costs in it Shaping and Milling
Department.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Work in process, May 1: 200 units
Materials: 55% complete
Conversion: 30% complete
9,600
5,575
Production started during May
Production completed during May
5,000 units
4,800 units
Costs added to production in May
Materials cost
Conversion cost
$ 368,600
350,900
Work in process, May 31
40% complete
Materials:
Conversion: 25% complete
McGraw-Hill/Irwin
$
400 units
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step1: Prepare Quantity Schedule with Equivalent Units.
Units to be accounted for:
Work in proces , May 1
Started into production
Total units
200
5,000
5,200
Equivalent units
Materials
Conversion
Units accounted for as follows:
Completed and transferred
Work in proces , May 31
McGraw-Hill/Irwin
4,800
400
4,800
4,800
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step1: Prepare Quantity Schedule with Equivalent Units.
Units to be accounted for:
Work in proces , May 1
Started into production
Total units
200
5,000
5,200
Equivalent units
Materials
Conversion
Units accounted for as follows:
Completed and transferred
Work in proces , May 31
Materials 40%complete
4,800
400
4,800
160
5,200
McGraw-Hill/Irwin
4,800
4,960
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step1: Prepare Quantity Schedule with Equivalent Units.
Units to be accounted for:
Work in proces , May 1
Started into production
Total units
200
5,000
5,200
Equivalent units
Materials
Conversion
Units accounted for as follows:
Completed and transferred
Work in proces , May 31
Materials 40%complete
Conversion 25% complete
4,800
400
4,800
160
5,200
McGraw-Hill/Irwin
4,800
4,960
100
4,900
Copyright © 2006, The McGraw-Hill Companies, Inc.
Step 2: Calculating the Costs Per Equivalent
Unit
To calculate the cost per equivalent
unit for the period:
Cost per
equivalent
=
Costs for the period
Equivalent units of production
for the period
unit
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step 2: Compute the cost per equivalent unit.
Total
Cost
Cost to be accounted for:
Work in proces , May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
Cost per equivalent unit
McGraw-Hill/Irwin
$
15,175
719,500
$ 734,675
Materials
Conversion
$
$
9,600
5,575
368,600
$ 378,200
350,900
$ 356,475
4,960
4,900
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step 2: Compute the cost per equivalent unit.
Total
Cost
Cost to be accounted for:
Work in proces , May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
Cost per equivalent unit
$
15,175
719,500
$ 734,675
Materials
Conversion
$
$
9,600
5,575
368,600
$ 378,200
350,900
$ 356,475
4,960
76.25
4,900
$
$378,200 ÷ 4,960 units = $76.25
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step 2: Compute the cost per equivalent unit.
Total
Cost
Cost to be accounted for:
Work in proces , May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
$
15,175
719,500
$ 734,675
Materials
Conversion
$
$
9,600
5,575
368,600
$ 378,200
350,900
$ 356,475
4,960
4,900
Cost per equivalent unit
$ 76.25
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
$
72.75
$356,475 ÷ 4,900 units = $72.75
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step 3: Prepare a Cost Reconciliation
Total
Cost
Cost accounted for as follows:
Transferred out during May
Work in proces , May 31:
Materials
Conversion
Equivalent Units
Materials Conversion
4,800
4,800
160
100
Total work in proces , May 31
Total cost accounted for
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step 3: Prepare a Cost Reconciliation
4,800 units @ $149.00
Cost accounted for as follows:
Transferred out during May
Work in proces , May 31:
Materials
Conversion
Total
Cost
$ 715,200
Equivalent Units
Materials Conversion
4,800
4,800
160
100
Total work in proces , May 31
Total cost accounted for
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Step 3: Prepare a Cost Reconciliation
160 units @ $76.25
Cost accounted for as follows:
Transferred out during May
Work in proces , May 31:
Materials
Conversion
Total work in proces , May 31
Total cost accounted for
McGraw-Hill/Irwin
Total
Cost
Equivalent Units
Materials
100
units @ Conversion
$72.75
$ 715,200
4,800
12,200
7,275
160
19,475
$ 734,675
4,800
100
All costs
accounted for
Copyright © 2006, The McGraw-Hill Companies, Inc.
Operation Costing
Operation
OOppeerraatitioonncosting
ccoosstitinnggis
issaahhybrid
bb-oorrddeerr
hyybbrriddoof
offjoojob-order
and
because
aannddprocess
pprroocceessssccosting
coosstitinnggb
beeccaauusseeiititt
possesses
ppoosssseesssseessattributes
aattttrribbuutteessof
ooffboth
bboothhaapproaches.
apppprrooaacchheess.
Job-order
Costing
Operation Costing
(Products produced in batches)
Material Costs charged
to batches as in
job-order costing.
McGraw-Hill/Irwin
Process
Costing
Conversion costs
assigned to batches
as in process costing.
Copyright © 2006, The McGraw-Hill Companies, Inc.
FIFO Method
Appendix 4A
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more
accurate that the weighted-average method)
differs from the weighted-average method in
two ways:
1.
TThheecomputation
cocommppuutatatiotioof
nnoequivalent
1.. The
ofeeqquuivivaaleenunits.
ntuunnitsits..
2.
22. The
TThheeway
wwaayyin
ininwhich
wwhhicichhthe
ththeecosts
ccoosststsof
oofbeginning
bbeegginnnniningg
inventory
ininvveenntotorryyare
aareetreated
trtreeaateteddininnthe
ththeecost
ccoosst
reconciliation
report.
rreeccoonncciliaiatitioonn
rreeppoorrt.t.
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Assume the following
activity is reported in Department A for the month of June:
Percent Completed
Units
Work in proces , 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 proces , June 30
McGraw-Hill/Irwin
900
Materials Conversion
40%
20%
60%
30%
Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units – FIFO Method
Step 1: Determine the number of units completed and
transferred out of Department A in 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/Irwin
900
Materials Conversion
40%
20%
60%
30%
Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units – FIFO Method
Step 2: Add the equivalent units of production in ending
work in process inventory (540 units for material and 270
units for conversion) to the units completed and transferred
our during June.
Materials
Units completed and transferred
out of Department A in June
5,400
Conversion
5,400
Work in process, June 30:
900 units × 60%
540
900 units × 30%
Equivalent units of Production in
Department A during June
McGraw-Hill/Irwin
270
5,940
5,670
Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units – FIFO Method
Step 3: Subtract the equivalent units in beginning work in process
inventory (120 units for materials and 60 units for conversion) from the
sum of the units completed and transferred out and the equivalent
units in ending work in process inventory.
Materials
Equivalent units or Production in
Department A during June
5,940
Conversion
5,670
Equivalent units in beginning inventory
300 units × 40%
120
300 units × 20%
Equivalent units of Production in
Department A during June
McGraw-Hill/Irwin
60
5,820
5,610
Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units – FIFO Method
Materials
Beginning
Work in Process
300 Units
40% Complete
6,000 Units Started
Ending
Work in Process
900 Units
60% Complete
5,400 Units Started
and Completed
Units completed and transferred out
Equivalent units in ending WIP inventory
Equivalent units in beginning WIP inventory
Equivalent units of production
McGraw-Hill/Irwin
Material
5,400
540
(120)
5,820
Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units – FIFO Method
Conversion
Beginning
Work in Process
300 Units
20% Complete
Units completed
Equivalent units
Equivalent units
Equivalent units
McGraw-Hill/Irwin
6,000 Units Started
5,400 Units Started
and Completed
and transferred out
in ending WIP inventory
in beginning WIP inventory
of production
Ending
Work in Process
900 Units
30% Complete
Conversion
5,400
270
(60)
5,610
Copyright © 2006, The McGraw-Hill Companies, Inc.
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 weightedaverage 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/Irwin
Materials
5,940
Conversion
5,670
120
5,820
60
5,610
Copyright © 2006, The McGraw-Hill Companies, Inc.
The Production Report - FIFO Method
Let’s revisit the Double Diamond Skis Shaping and Milling
Department for the Month of May to prepare our production report.
Work in process, May 1: 200 units
Materials: 55% complete
Conversion: 30% complete
Production started during May
Production completed during May
Costs added to production in May
Materials cost
Conversion cost
Work in process, May 31
40% complete
Materials:
Conversion: 25% complete
McGraw-Hill/Irwin
$ 9,600
5,575
$15, 175
5,000 units
4,800 units
$ 368,600
350,900
400 units
Copyright © 2006, The McGraw-Hill Companies, Inc.
The Production Report - FIFO Method
Step 1: Prepare the quantity schedule and compute
equivalent units.
Units to be accounted for:
Work in process, May 1
Started into production
Total units
McGraw-Hill/Irwin
200
5,000
5,200
Copyright © 2006, The McGraw-Hill Companies, Inc.
The Production Report - FIFO Method
Step 2: Calculate the equivalent units of material and conversion
that were transferred from beginning work in process to the next
department.
Units to be accounted for:
Work in process, May 1
Started into production
Total units
Units accounted for as follows:
Beginning inventory:
Materials 200 units × 45%
Conversion 200 units × 70%
McGraw-Hill/Irwin
200
5,000
5,200
Equivalent units
Materials
Conversion
90
140
Copyright © 2006, The McGraw-Hill Companies, Inc.
The Production Report - FIFO Method
Step 3: Determine the number of units started and
completed during the period.
Units to be accounted for:
Work in process, May 1
Started into production
Total units
Units accounted for as follows:
Beginning inventory:
Materials 200 units × 45%
Conversion 200 units × 70%
Units started and completed
McGraw-Hill/Irwin
200
5,000
5,200
Equivalent units
Materials
Conversion
90
4,600
140
4,600
Copyright © 2006, The McGraw-Hill Companies, Inc.
The Production Report - FIFO Method
Step 4: Calculate the equivalent units of material and
conversion that are in ending work in process inventory.
Units to be accounted for:
Work in process, May 1
Started into production
Total units
Units accounted for as follows:
Beginning inventory:
Materials 200 units × 45%
Conversion 200 units × 70%
Units started and completed
Ending inventory:
Materials 400 units × 40%
Conversion 400 units × 25%
McGraw-Hill/Irwin
200
5,000
5,200
Equivalent units
Materials
Conversion
90
4,600
140
4,600
160
100
Copyright © 2006, The McGraw-Hill Companies, Inc.
The Production Report - FIFO Method
Step 5: Calculate the total equivalent units for
materials and conversion.
Units to be accounted for:
Work in process, May 1
Started into production
Total units
Units accounted for as follows:
Beginning inventory:
Materials 200 units × 45%
Conversion 200 units × 70%
Units started and completed
Ending inventory:
Materials 400 units × 40%
Conversion 400 units × 25%
Total equivalent units
McGraw-Hill/Irwin
200
5,000
5,200
Equivalent units
Materials
Conversion
90
4,600
140
4,600
160
4,850
100
4,840
Copyright © 2006, The McGraw-Hill Companies, Inc.
Cost per Equivalent Unit
Notice that the costs of beginning work in process
inventory of $15,175, is not broken down by
materials and conversion components
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
McGraw-Hill/Irwin
$
Materials
Conversion
368,600
$ 368,600
350,900
$ 350,900
15,175
719,500
$ 734,675
Copyright © 2006, The McGraw-Hill Companies, Inc.
Cost per Equivalent Unit
We divide the costs added in the Shipping and
Milling Department by the number of equivalent
unit for materials.
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
Materials
Conversion
719,500
368,600
350,900
$ 734,675
$ 368,600
$ 350,900
$
15,175
Equivalent units
Cost per equivalent unit
McGraw-Hill/Irwin
4,850
$
76.00
Copyright © 2006, The McGraw-Hill Companies, Inc.
Cost per Equivalent Unit
We follow the same procedure for conversion and
add the two equivalent unit costs to get the total cost
per equivalent unit.
Total
Cost
Materials
Conversion
719,500
368,600
350,900
$ 734,675
$ 368,600
$ 350,900
Equivalent units
4,850
Cost per equivalent unit
$ 76.00
Total cost per equivalent unit = $76.00 + $72.50 = $148.50
4,840
72.50
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
McGraw-Hill/Irwin
$
15,175
$
Copyright © 2006, The McGraw-Hill Companies, Inc.
Cost Reconciliation
Step 1: Calculate the total cost from beginning
inventory transferred to the next department.
Work in process, May 1:
Materials (90 × $76.00)
Conversion (140 × $72.50)
Total
Started and completed in May
Work in process, May 31:
Materials (160 × $76.00)
Conversion (100 × $72.50)
Total
Total cost accounted for
McGraw-Hill/Irwin
Tota l
Cost
$ 15,175
6,840
10,150
32,165
Equivalent Units
Materials
Conversion
90
140
683,100
4,600
12,160
7,250
19,410
$ 734,675
160
4,600
100
Copyright © 2006, The McGraw-Hill Companies, Inc.
Cost Reconciliation
Step 2: Calculate the cost of units started and
completed during the period.
4,600 units × $148.50
Work in process, May 1:
Materials (90 × $76.00)
Conversion (140 × $72.50)
Total
Started and completed in May
Work in process, May 31:
Materials (160 × $76.00)
Conversion (100 × $72.50)
Total
Total cost accounted for
McGrawCopyright © 2006, The McGraw-Hill Companies, Inc-Hill/Irwin
Tota l
Cost
$ 15,175
6,840
10,150
32,165
Equivalent Units
Ma te ria ls
Conve rsion
90
140
683,100
4,600
12,160
7,250
19,410
$ 734,675
160
4,600
100
.
Cost Reconciliation
Step 3: Calculate the costs in ending working in process
inventory and the sum of the cost accounted for.
Work in process, May 1:
Materials (90 × $76.00)
Conversion (140 × $72.50)
Total
Started and completed in May
Work in process, May 31:
Materials (160 × $76.00)
Conversion (100 × $72.50)
Total
Total cost accounted for
McGrawCopyright © 2006, The McGraw-Hill Companies, Inc-Hill/Irwin
Tota l
Cost
$ 15,175
6,840
10,150
32,165
Equivalent Units
Ma te ria ls
Conve rsion
90
140
683,100
4,600
12,160
7,250
19,410
$ 734,675
160
4,600
100
All costs
accounted for
.
End of Chapter 4
McGraw-Hill/Irwin
Copyright © 2006, The McGraw-Hill Companies, Inc.