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of conversion costs ($10 3 25 hours). If the batch of sandals takes 12 machine hours, it will be
assigned $120 of conversion costs ($10 3 12). Again, even though the products consume the
same resources per machine hour, the batches can differ in total amount of resources consumed
in an operation. So it is necessary to use a work order for each batch to collect costs.
Exhibit 6.10 illustrates the physical f low and cost f low features of operation costing. The
illustration is for two batches and three processes. Panel A illustrates the physical flows, and Panel
B shows the cost flows. The letters a and f represent the assignment of direct materials cost to the
two batches. This example assumes that all direct materials are issued at the very beginning. Thus,
direct materials cost would be assigned to the work-in-process account for the beginning process
for each batch. The example also illustrates that batches do not have to participate in every process. Batch A uses Processes 2 and 3, while Batch B uses Processes 1 and 2. The letters immediately
following the process represent the application of conversion costs to the respective batches.
Exhibit 6.10
Basic Features of Operation Costing
Panel A: Physical Flows
(a)
Batch B
Process 1
(b)
Direct
Materials
Batch B
(c)
(f)
Batch A
Process 2
(g)
Batch A
(h)
Process 3
(d)
(i)
Batch B
Batch A
(e)
(j)
Finished
Goods
Panel B: Cost Flows (shown by letter in Panel A and in dollars below)
Materials
(f) 300
(a) 200
Work in Process 1
Work in Process 2
Work in Process 3
(a) 200
(b) 300
(f) 300
(g) 100
(c) 500
(d) 325
(h) 400
(i) 250
(c) 500
(h) 400
(j) 650
(e) 825
Finished Goods
(e) 825
(j) 650
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293
Operation Costing Example
To illustrate operation costing, consider the Des Moines plant of Bienestar Company. The Des
Moines plant produces a variety of vitamin and mineral products. The company produces a
multivitamin and mineral product as well as single vitamin and mineral products, e.g., bottles
of vitamins C and E, calcium, and so on. Assume that the company also produces different
strengths of vitamins (for example, 200 mg and 1,000 mg doses of vitamin C). The company
also uses different sizes of bottles (for example, 60 and 120 capsules). There are four operations:
picking, encapsulating, tableting, and bottling. Consider the following two work orders:
Work Order 100
Work Order 101
Direct materials
Ascorbic acid
Capsules
Bottle (100 capsules)
Cap and labels
Operations
Picking
Encapsulating
Bottling
5,000 bottles
Vitamin E
Vitamin C
Vitamin B1
Vitamin B2
Vitamin B4
Vitamin B12
Biotin
Zinc
Bottle (60 tablets)
Cap and labels
Picking
Tableting
Bottling
10,000 bottles
Number in batch
Notice how the work order specifies the direct materials needed, the operation required, and
the size of the batch. Assume the following costs are collected by work order:
Direct materials
Conversion costs:
Picking
Encapsulating
Tableting
Bottling
Total production costs
Work Order 100
$4,000
Work Order 101
$15,000
1,000
3,000
—
1,500
$9,500
3,000
—
4,000
2,000
$24,000
The journal entries associated with Work Order 100 are illustrated below. The first entry assumes
that all materials needed for the batch are requisitioned at the start. Another possibility is to requisition the materials needed for the batch in each process as the batch enters that process.
1. Work in Process—Picking
Materials
2. Work in Process—Picking
Conversion Costs Applied
3. Work in Process—Encapsulating
Work in Process—Picking
4. Work in Process—Encapsulating
Conversion Costs Applied
5. Work in Process—Bottling
Work in Process—Encapsulating
6. Work in Process—Bottling
Conversion Costs Applied
7. Finished Goods
Work in Process—Bottling
4,000
1,000
5,000
3,000
8,000
1,500
9,500
4,000
1,000
5,000
3,000
8,000
1,500
9,500
The journal entries for the other work order are not shown but would follow a similar pattern.
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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