11th Edition Chapter 4 McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc. Systems Design: Process Costing Chapter Four McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc. 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 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 are worked on each period. • Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs. • Process costing systems use department production reports to accumulate costs. Job-order costing systems use job cost sheets to accumulate costs. • Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job. McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc. 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. 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. McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc. Sequential vs. Parallel Processing Sequential processing means that units flow in a sequence from one department to another. Parallel processing is used when after a point, some units go through different processing departments than others. For example, a petroleum refinery separates crude oil into products like gasoline, jet fuel, and heating oil. McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc. Comparing Job-Order and Process Costing Direct Materials Direct Labor Manufacturing Overhead McGraw-Hill/Irwin Work in Proces s 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 Process - Department A XXXXX Work in Process - 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 Process - Department A XXXXX Work in Process - 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 Process - Department A XXXXX Work in Process - 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 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/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 Process - 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 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/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 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/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 unit McGraw-Hill/Irwin = Costs for the period Equivalent units of production for the period Copyright © 2006, The McGraw-Hill Companies, Inc. Process Costing and Direct Labor Dollar Amount Direct Materials Direct Labor Direct labor costs may be small in comparison to Conversion 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 Direct labor costs may be small Conversion in comparison to other product costs in process cost systems. Type of Product Cost Direct labor and manufacturing overhead may be combined into one product cost called conversion. 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 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. 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% 540 270 900 units × 30% Equivalent units of Production in Department A during June McGraw-Hill/Irwin 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% 540 270 900 units × 30% Equivalent units of Production in Department A during June McGraw-Hill/Irwin 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 quantity schedule showing the flow of units and the computation of equivalent units. A computation of cost per equivalent unit. 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 Materials: 40% complete 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 process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Conversion Materials Units accounted for as follows: Completed and transferred Work in process, 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 process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Conversion Materials Units accounted for as follows: Completed and transferred Work in process, 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 process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Conversion Materials Units accounted for as follows: Completed and transferred Work in process, 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 unit McGraw-Hill/Irwin = Costs for the period Equivalent units of production for the period 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 process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units $ 15,175 Materials Conversion $ $ 9,600 5,575 719,500 368,600 350,900 $ 734,675 $ 378,200 $ 356,475 4,960 4,900 Cost per equivalent 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 process, May 1 Costs added in the Shipping and Milling Department Total cost $ 15,175 Materials Conversion $ $ 5,575 719,500 368,600 350,900 $ 734,675 $ 378,200 $ 356,475 4,960 4,900 Equivalent units Cost per equivalent unit 9,600 $ 76.25 $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 process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units $ 15,175 Materials Conversion $ $ 9,600 5,575 719,500 368,600 350,900 $ 734,675 $ 378,200 $ 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 process, May 31: Materials Conversion Equivalent Units Materials Conversion 4,800 4,800 160 100 Total work in process, 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 process, May 31: Materials Conversion Total Cost $ 715,200 Equivalent Units Materials Conversion 4,800 4,800 160 100 Total work in process, 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 process, May 31: Materials Conversion Total work in process, 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 costing is a hybrid of job-order and process costing because it possesses attributes of both approaches. 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. The computation of equivalent units. 2. The way in which the costs of beginning inventory are treated in the cost reconciliation report. 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 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 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% 540 270 900 units × 30% Equivalent units of Production in Department A during June McGraw-Hill/Irwin 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 6,000 Units Started 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 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 Materials: 40% complete 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 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. 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% 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. 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 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. 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% 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. 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 Equivalent units Materials Conversion 719,500 368,600 350,900 $ 734,675 $ 368,600 $ 350,900 4,960 4,900 $ 15,175 Cost per equivalent unit $ 74.31 Total cost per equivalent unit = $76.25 + $72.75 = $149.00 McGraw-Hill/Irwin $ 71.61 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 Equivalent units Materials Conversion 719,500 368,600 350,900 $ 734,675 $ 368,600 $ 350,900 4,850 4,900 $ 15,175 Cost per equivalent unit $ 76.00 Total cost per equivalent unit = $76.25 + $72.75 = $149.00 McGraw-Hill/Irwin $ 71.61 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 Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units Materials Conversion 719,500 368,600 350,900 $ 734,675 $ 368,600 $ 350,900 4,850 4,840 $ 15,175 Cost per equivalent unit $ 76.00 Total cost per equivalent unit = $76.00 + $72.50 = $148.50 McGraw-Hill/Irwin $ 72.50 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 Total 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 McGraw-Hill/Irwin Total 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 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 McGraw-Hill/Irwin Total 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 All costs accounted for Copyright © 2006, The McGraw-Hill Companies, Inc. End of Chapter 4 McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
