Management Accounting
Fundamentals
Module 3
Process costing
Lectures and handouts by:
Shirley Mauger, HB Comm, CGA
Module 3 - Table of Contents
Part
1
2
3
4
N/A
5
6
7
8
Content
3.1 Comparison of job-order and process costing
3.2 A perspective of process cost flows
3.3 Equivalent units of production
3.4 Production report – Weighted average method
3.5 Production report – FIFO method
3.6 Shrinkage, spoilage, and lost units
3.7 Operation costing
3.8 Computer illustration: Production report (not covered)
Review questions: Production worksheet - spoilage
Review questions: Comprehensive process costing –
weighted average method
Multiple choice questions: Questions 1-8
Multiple choice questions: Questions 9-13
2
MA1 – MODULE 3
Part 1
Comparison of job-order and
process costing
A perspective of process cost
flows
Equivalent units of production
Topics 3.1-3.3
3
Part 1 – Comparison of job-order and process costing
(Topic 3.1)
Identify the major similarities and differences between joborder and process costing. (Level 2)
Process
costing
•Masses of identical
or similar units of a
product or service
Job-order
costing
•Distinct units of a
product or service
4
Part 1 – Comparison of job-order and process costing
(Topic 3.1)
Process
costing
Job-order
costing
• Cost object: department
(Costs are accumulated by
departments)
• Cost object: job
(Costs are accumulated
by individual jobs)
• Unit costs are computed by
department
• Unit costs are computed
by job
• A single product is
produced for a long period
of time.
• Many jobs are worked
during the period.
• Department production
report is the key document.
• Job cost sheet is the
key document.
5
Part 1 – Comparison of job-order and process costing
(Topic 3.1)
Manufacturing costs
From
module 1…
Conversion cost
Manufacturing
Overhead
labour
materials
•Heat
Direct
•Electricity
Tires, seat, handlebars
Labour
•Rent
Workers who assemble bikes
•Etc.
Direct
Materials
•Indirect
•Indirect
6
Part 1 – A perspective of process cost flows (Topic 3.2)
Prepare journal entries to record the flow of materials,
labour, and overhead through a process costing system.
(Level 1)
Direct
materials
used in
production
Raw Materials
Issued to each
departments' WIP
To finished
goods
Department
A
Department
B
WIP - Dept. A
WIP – Dept. B
Raw
materials
used
Raw
materials
used
7
Part 1 – A perspective of process cost flows (Topic 3.2)
Direct
materials
used in
production
Raw Materials
Issued to each
departments' WIP
Department
A
Department
B
To finished
goods
WIP – Dept. A
WIP – Dept. B
Raw materials
xxx
xxx
xxx
8
Part 1 – A perspective of process cost flows (Topic 3.2)
Direct labour used to produce goods
Salaries & wages payable
Recorded in each
departments' WIP
Department
A
WIP - Dept. A
Direct labour
Department
B
To finished
goods
WIP – Dept. B
Direct labour
9
Part 1 – A perspective of process cost flows (Topic 3.2)
Direct labour used to produce goods
Salaries & wages payable
Recorded in each
departments' WIP
Department
A
Department
B
To finished
goods
WIP – Dept. A
WIP – Dept. B
Salaries & wages payable
xxx
xxx
xxx
10
Part 1 – A perspective of process cost flows (Topic 3.2)
Overhead applied
Manufacturing overhead
Recorded in each
departments' WIP
Department
A
WIP - Dept. A
Overhead
applied
Department
B
To finished
goods
WIP – Dept. B
Overhead
applied
11
Part 1 – A perspective of process cost flows (Topic 3.2)
Overhead applied
Manufacturing overhead
Recorded in each
departments' WIP
Department
A
Department
B
WIP – Dept. A
WIP – Dept. B
Manufacturing overhead
To finished
goods
xxx
xxx
xxx
12
Part 1 – A perspective of process cost flows (Topic 3.2)
Transfer goods completed in department
A to department B
Department
A
WIP - Dept. A
Cost of
goods
completed
Department
B
To finished
goods
WIP – Dept. B
Transferred
in cost
13
Part 1 – A perspective of process cost flows (Topic 3.2)
Transfer goods completed in department
A to department B
WIP – Dept. B
WIP – Dept. A
Department
A
WIP - Dept. A
Cost of
goods
completed
xxx
xxx
Department
B
To finished
goods
WIP – Dept. B
Transferred
in cost
14
Part 1 – A perspective of process cost flows (Topic 3.2)
Completed and transferred to
finished goods.
Department
A
Department
B
WIP - Dept. A
WIP – Dept. B
Finished goods
Cost of
completed
goods
Cost of
completed
goods
15
Part 1 – A perspective of process cost flows (Topic 3.2)
Completed and transferred to
finished goods.
Finished goods
WIP – Dept. B
xxx
xxx
Department
A
Department
B
WIP - Dept. A
WIP – Dept. B
Finished goods
Cost of
completed
goods
Cost of
completed
goods
16
Part 1 – Equivalent units of production (Topic 3.3)
Explain and compute the equivalent units of production
for both the weighted-average method and the FIFO
method. (Level 1)
Equivalent units:
The amount of whole units that could be gained
from the amount of materials and effort
contained in the partially completed units
eg: Work in process consists of 2 unfinished
units that are ½ complete. That is equal to 1
equivalent unit.
+
=
© McGraw-Hill Ryerson Limited., 2004
17
Part 1 – Equivalent units of production (Topic 3.3)
Equivalent units example:
Walner company had 2,000 litres of apple juice in process on
January 1. 80% of the ingredients had been added to the juice.
What are the equivalent units?
18
Part 1 – Equivalent units of production (Topic 3.3)
Equivalent units example:
Walner company had 2,000 litres of apple juice in process on
January 1. 80% of the ingredients had been added to the juice.
What are the equivalent units?
2,000 x 80% = 1,600
equivalent litres
19
Part 1 – Equivalent units of production (Topic 3.3)
Equivalent units example:
Walner company had 2,000 litres of apple juice in process on
January 1. 80% of the ingredients had been added to the juice.
The company records show that 40,000 litres were transferred to
the finished goods inventory during the year. Furthermore, 1,500
litres were on hand on December 31. This juice contained 60% of
the total ingredients.
Beginning
Ending
WIP
WIP
2,000
litres 80%
complete
How many litres were
started and completed
for the year?
1,500
litres 60%
complete
20
Part 1 – Equivalent units of production (Topic 3.3)
Equivalent units example:
Walner company had 2,000 litres of apple juice in process on
January 1. 80% of the ingredients had been added to the juice.
The company records show that 40,000 litres were transferred to
the finished goods inventory during the year. Furthermore, 1,500
litres were on hand on December 31. This juice contained 60% of
the total ingredients.
Beginning
Ending
WIP
WIP
2,000
litres 80%
complete
38,000 litres started and
completed
40,000 litres were transferred to
finished goods. 2,000 of those litres
were started the previous year.
1,500
litres 60%
complete
21
Part 1 – Equivalent units of production (Topic 3.3)
Equivalent units example:
Weighted average method
Beginning
WIP
2,000
litres 80%
complete
38,000 litres started and
completed
Units completed and transferred to
next department
Work in process ending
(1,500 x 60%)
Equivalent units of production
Ending
WIP
1,500
litres 60%
complete
40,000
900
40,900
22
Part 1 – Equivalent units of production (Topic 3.3)
Equivalent units example:
First in first out (FIFO) method
Beginning
WIP
2,000
litres 80%
complete
38,000 litres started and
completed
Work in process beginning
(2,000 x (100%-80%))
Units started and completed
Work in process ending
(1,500 x 60%)
Equivalent units of production
Ending
WIP
1,500
litres 60%
complete
400
38,000
900
39,300
23
MA1 – MODULE 3
Part 2
Production report –
Weighted average
method
Topic 3.4
24
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Prepare a production report using the weighted-average
method. (Level 1)
Process Costing –
production report
tutorial
Weighted average method:
pages 1 – 3 of handout 1
Stop the audio and download the handouts
• Questions with solutions: ma1_mod3_handout1.doc
• Production worksheets: ma1_mod3_handout2.doc
25
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Steps to preparing a production report
STEP 1:Prepare a quantity schedule and
compute the equivalent units
STEP 2:Compute costs per equivalent unit
STEP 3:Prepare a cost reconciliation
Handout1 – P. 2 26
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
Fraser Inc. has two processing departments; assembly and
finishing. In the assembly department, direct materials are added
at the beginning of the process while conversion costs are
added evenly throughout the process.
Conversion costs
Assembly
Direct
materials
Finishing
Handout1 – P. 1 27
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
Fraser Inc. has two processing departments; assembly and
Percentage
completion
finishing. In the assembly department,
direct materials
are added
numbers are helpful for
at the beginning of the process while conversion costs are
STEP 1 of the production
added evenly throughout the process.
report
Beginning WIP inventory:
• 2,000 units
•. Completion is:
• 100% of materials: $5,400
• 40% of conversion cost:
$4,000
Activity and costs incurred
for the period
•Units started: 28,000
•Materials: $67,200
• Conversion costs: $49,600
Ending WIP inventory:
• 4,000 units
•. Completion is:
• 100% of materials
• 20% of conversion cost
Allocate the assembly department
costs to work in process and the
costs transferred to the finishing
department
Handout1 – P. 1 28
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
Fraser Inc. has two processing departments; assembly and
Dollar
figures
are required
finishing. In the assembly department,
direct
materials
are added
for STEP 2 of the
at the beginning of the process while conversion costs are
production report
added evenly throughout the process.
Beginning WIP inventory:
• 2,000 units
•. Completion is:
• 100% of materials: $5,400
• 40% of conversion cost:
$4,000
Activity and costs incurred
for the period
•Units started: 28,000
•Materials: $67,200
• Conversion costs: $49,600
Ending WIP inventory:
• 4,000 units
•. Completion is:
• 100% of materials
• 20% of conversion cost
Allocate the assembly department
costs to work in process and the
costs transferred to the finishing
department
Handout1 – P. 1 29
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Steps to preparing a production report
STEP 1:Prepare a quantity schedule and
compute the equivalent units
STEP 2:Compute costs per equivalent unit
STEP 3:Prepare a cost reconciliation
30
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Quantity
schedule
Production report:
Assembly department
2,000
Started into production
28,000
Total units
30,000
Equivalent Units
Units accounted for:
Materials
Conversion
Transferred to finishing
Work in process ending
Total units and equivalent
units of production
Handout1 – P. 2 31
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Quantity
schedule
Production report:
Assembly department
2,000
Started into production
28,000
Total units
30,000
Equivalent Units
Units accounted for:
Materials
Transferred to finishing
26,000
Work in process ending
Total units and equivalent
units of production
4,000
Conversion
30,000
Handout1 – P. 2 32
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Quantity
Production report:
All goodsAssembly
transferred
to
schedule
department
finishing are completed
2,000
during the period. (100% of
materials and conversion
28,000
costs)
30,000
Equivalent Units
Units accounted for:
Transferred to finishing
26,000
Work in process ending
Total units and equivalent
units of production
4,000
Materials
Conversion
26,000
26,000
30,000
Handout1 – P. 2 33
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Quantity
Production report:
Because materials
schedule
Assemblyare
department
added at the beginning of
2,000
the
process, work in
process at year end has
28,000
100% of materials cost.
30,000
Equivalent Units
Units accounted for:
Materials
Conversion
26,000
Transferred to finishing
26,000
26,000
Work in process ending
Total units and equivalent
units of production
4,000
4,000
30,000
Handout1 – P. 2 34
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Quantity
Production report:
schedule
Assembly department
The ending work in process
2,000
is
only 20% complete with
respect to conversion costs.
28,000
(20% of 4,000)
30,000
Equivalent Units
Units accounted for:
Materials
Conversion
Transferred to finishing
26,000
26,000
26,000
Work in process ending
Total units and equivalent
units of production
4,000
4,000
800
30,000
30,000
26,800
Handout1 – P. 2 35
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Quantity
schedule
Production report:
Assembly department
2,000
Started into production
28,000
Total units
30,000
Equivalent Units
Units accounted for:
Materials
Conversion
Transferred to finishing
26,000
26,000
26,000
Work in process ending
Total units and equivalent
units of production
4,000
4,000
800
30,000
30,000
26,800
Handout1 – P. 2 36
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Steps to preparing a production report
STEP 1:Prepare a quantity schedule and
compute the equivalent units
STEP 2:Compute costs per equivalent unit
STEP 3:Prepare a cost reconciliation
37
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 2:
(Assembly department
production report)
Cost to be accounted for:
Work in process,
beginning
Cost added in the
assembly department
Total cost (a)
Total
Production
Costs Materials Conversion
$9,400
$5,400
$4,000
$116,800
$67,200
$49,600
$126,200
$72,600
$53,600
Equivalent units of
production (b) (Step 1
above)
Cost per equivalent unit
(a / b)
Handout1 – P. 2 38
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 2:
(Assembly department
production report)
Cost to be accounted for:
Work in process,
beginning
Cost added in the
assembly department
Total cost (a)
Equivalent units of
production (b) (Step 1
above)
Cost per equivalent unit
(a / b)
Total
Production
Costs Materials Conversion
$9,400
$5,400
$4,000
$116,800
$67,200
$49,600
$126,200
$72,600
$53,600
30,000
26,800
$2.42
$2.00
Handout1 – P. 2 39
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Steps to preparing a production report
STEP 1:Prepare a quantity schedule and
compute the equivalent units
STEP 2:Compute costs per equivalent unit
STEP 3:Prepare a cost reconciliation
40
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 3:
Cost Reconciliation
Cost accounted for as follows:
Transferred to finishing:
26,000 x ($2.42 + $2.00)
TOTAL
Equivalent units
COST Materials Conversion
$114,920
26,000
26,000
Ending work in process:
Materials
Conversion
Total ending work in
process
Total cost
Handout1 – P. 2 41
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 3:
Cost Reconciliation
Cost accounted for as follows:
Transferred to finishing:
26,000 x ($2.42 + $2.00)
TOTAL
Equivalent units
COST Materials Conversion
$114,920
26,000
Materials at $2.42 per EU
$9,680
4,000
Conversion at $2.00 per EU
$1,600
26,000
Ending work in process:
800
Total ending work in
process
Total cost
Handout1 – P. 2 42
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
STEP 3:
Cost Reconciliation
Cost accounted for as follows:
Transferred to finishing:
24,000 x ($2.40 + $2.00)
TOTAL
Equivalent units
COST Materials Conversion
$114,920
26,000
Materials at $2.42 per EU
$9,680
4,000
Conversion at $2.00 per EU
$1,600
26,000
Ending work in process:
Total ending work in
process
Total cost
800
$11,280
$126,200
Handout1 – P. 2 43
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
Direct materials are purchased as needed. What is the
journal entry for direct materials usage in the
assembly department?
DR
CR
Work in process, assembly
Accounts payable
67,200
67,200
Handout1 – P. 3 44
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
What is the journal entry for conversion costs?
DR
CR
Work in process, assembly
Various accounts
(overhead and salaries
and wages payable)
49,600
49,600
Handout1 – P. 3 45
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
What is the journal entry to transfer goods completed
in assembly to the finishing department?
(transferred in cost)
DR
CR
Work in process, finishing
Work in process, assembly
114,920
114,920
Handout1 – P. 3 46
Part 2 – Production report – Weighted-average method
(Topic 3.4)
Production report tutorial
WIP Assembly
Conversion
Accounts Payable
67,200
Beg. inv. 9,400
Materials.
67,200 114,920
49,600
End. inv.11,280
Transfer to finishing
Various Accounts
49,600
WIP Finishing
114,920
Handout1 – P. 3 47
MA1 – MODULE 3
Part 3
Production report –
FIFO method
Topic 3.5
48
Part 3 – Production report – FIFO method (Topic 3.5)
Prepare a production report using the FIFO method. (Level 1)
Process Costing –
production report
tutorial
FIFO method:
pages 4 – 5 of handout 1
Stop the audio and download the handouts
• Questions with solutions: ma1_mod3_handout1.doc
• Production worksheets: ma1_mod3_handout2.doc
49
Part 3 – Production report – FIFO method (Topic 3.5)
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Units accounted for:
Transferred to finishing
From beginning inventory:
Quantity
Schedule
2,000
28,000
30,000
ASSEMBLY
DEPARTMENT
FIFO Method
Equivalent units
Materials Conversion
Started and completed
Ending inventory
Total units and EU of
production
Production report tutorial
Handout1 – P. 4
50
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Units accounted for:
Transferred to finishing
From beginning inventory:
Units inASSEMBLY
beginning
Quantity
work in process do not
Schedule
DEPARTMENT
require any additional
2,000
FIFO
materials
to Method
complete.
28,000
30,000
Equivalent units
Materials Conversion
2,000
0
1,200
Started and completed
Ending inventory
Total units and EU of
production
Handout1 – P. 4
51
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Units accounted for:
Transferred to finishing
From beginning inventory:
60% of ASSEMBLY
total
Quantity
conversion costs are
Schedule
DEPARTMENT
required to complete
2,000
FIFO Method
the units.
28,0002000 x (100%-40%)
30,000
Equivalent units
Materials Conversion
2,000
0
1,200
Started and completed
Ending inventory
Total units and EU of
production
52
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Units accounted for:
Transferred to finishing
From beginning inventory:
Started and completed
Ending inventory
Quantity
Schedule
2,000
28,000
30,000
2,000
24,000
ASSEMBLY
DEPARTMENT
FIFO Method
Equivalent units
Materials Conversion
0
24,000
1,200
24,000
Total units and EU of
production
Total units minus
beginning and
ending inventories
30,000-(2,000 + 4,000)
Handout1 – P. 4
53
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Units accounted for:
Transferred to finishing
From beginning inventory:
Started and completed
Ending inventory
Total units and EU of
production
Quantity
Schedule
2,000
28,000
30,000
ASSEMBLY
DEPARTMENT
FIFO Method
Equivalent units
Materials Conversion
2,000
24,000
0
24,000
1,200
24,000
4,000
4,000
800
Ending inventory
contains 100% of
materials and 20% of
conversion costs
Handout1 – P. 4
54
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 1:
Units to be accounted for:
Work in process, beginning
Started into production
Total units
Units accounted for:
Transferred to finishing
From beginning inventory:
Started and completed
Ending inventory
Total units and EU of
production
Quantity
Schedule
2,000
28,000
30,000
ASSEMBLY
DEPARTMENT
FIFO Method
Equivalent units
Materials Conversion
2,000
24,000
0
24,000
1,200
24,000
4,000
4,000
800
30,000
28,000
26,000
Handout1 – P. 4
55
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 2:
Cost to be accounted for:
Total
Total costs
Production Materials Conversion
Costs
Work in process, beginning
$9,400
Cost added in the
assembly department
$116,800 $67,200
$49,600
Total cost (a)
$126,200
Equivalent units of
production (b) (Step 1)
Cost per equivalent unit
(a / b)
28,000
26,000
$2.40
$1.9076*
(* don’t round)
Handout1 – P. 4
56
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 3:
Cost Reconciliation
Cost accounted for as follows:
Transferred to finishing:
From beginning inventory:
Cost in beginning inventory
Cost to complete the units
Total cost
Units started and completed
this period
Total cost transferred
Ending work in process
Materials at $2.40 per EU
Conversion at $1.9076* per EU
Total
Total cost
Equivalent units
Materials Conversion
$9,400
$2,289
$11,689
0
1,200
Conversion costs to
complete
$1.9076 x 1,200 units
Handout1 – P. 5
57
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 3:
Equivalent units
Cost Reconciliation
Materials Conversion
Cost accounted for as follows:
Transferred to finishing:
From beginning inventory:
Cost in beginning inventory
$9,400
Cost to complete the units
$2,289
0
1,200
Total cost
$11,689
Units started and completed
this period
$103,385
24,000
24,000
Total cost transferred
$115,074
Ending work in process
Materials plus conversion costs
Materials at $2.40 per EU
Conversion at $1.9076* per EU ($1.9076* + $2.40) x 24,000 units
Total
Total cost
Handout1 – P. 5 58
(* don’t round)
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 3:
Cost Reconciliation
Cost accounted for as follows:
Transferred to finishing:
From beginning inventory:
Cost in beginning inventory
Cost to complete the units
Total cost
Units started and completed
this period
Total cost transferred
Ending work in process
Materials at $2.40 per EU
Conversion at $1.9076 per EU
Ending work in process
Total cost
Equivalent units
Materials Conversion
$9,400
$2,289
$11,689
0
1,200
$103,385
$115,074
24,000
24,000
$9,600
$1,526
$11,126
$126,200
4,000
800
Handout1 – P. 5
59
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
STEP 3:
Cost Reconciliation
Cost accounted for as follows:
Transferred to finishing:
From beginning inventory:
Cost in beginning inventory
Cost to complete the units
Total cost
Units started and completed
this period
Total cost transferred
Ending work in process
Materials at $2.40 per EU
Conversion at $1.9076 per EU
Ending work in process
Total cost
Equivalent units
Materials Conversion
$9,400
$2,289DR WIP -0Finishing
1,200
$11,689 CR WIP - Assembly
$103,385
$115,074
$9,600
$1,526
$11,126
$126,200
24,000
24,000
Ending balance in
4,000
WIP - Assembly
800
Handout1 – P. 5
60
Part 3 – Production report – FIFO method (Topic 3.5)
Production report tutorial
WIP Assembly
Beg. inv. 9,400
Materials.
67,200 115,074
49,600
End. inv.11,126
Conversion
Accounts Payable
67,200
Transfer to finishing
Various Accounts
49,600
WIP Finishing
115,074
Handout1 – P. 5 61
Part 3 – Production report – FIFO method (Topic 3.5)
Weighted Average
FIFO
• equivalent units and costs
relate to beginning work in
process and work done
during the current period.
•equivalent units and units
costs relate only to work
done during the current
period
• Beginning work in process
inventory is treated as if they
were started and completed
during the current period.
•both beginning and ending
work in process inventories
are converted to an
equivalent unit basis.
62
MA1 – MODULE 3
Part 4
Shrinkage, spoilage
and lost units
Operation costing
Topics 3.6-3.7
63
Part 4 – Shrinkage, spoilage, and lost units (Topic 3.6)
Compute the cost of lost units or shrinkage. (Level 1)
Normal spoilage
an inherent result of the particular production
process and arises even under efficient
operating conditions.
Abnormal spoilage
spoilage that should not arise under efficient
operating conditions. Write off the cost of
spoiled units as a loss of the accounting period.
64
Part 4 – Shrinkage, spoilage, and lost units (Topic 3.6)
Page 6: Handout 1
Silver Valley Inc., manufactures snowboarding equipment.
All direct materials are added at the beginning of the
production process and conversion costs are added evenly
throughout the process. In September, $47,600 in direct
materials were introduced into production. 17,500 units
were started and 15,000 good units were completed. 500
units were spoiled (all normal spoilage). Ending work in
process was 2,000 units (each 100% complete as to direct
material costs).
Allocate the direct materials costs to work in process,
completed goods, and spoilage.
Stop the audio and download the handout
(ma1_mod3_handout1.doc)
65
Part 4 – Shrinkage, spoilage, and lost units (Topic 3.6)

Approach A
 recognize spoiled units when computing
output in equivalent units.

Approach B
 do not count spoiled units when
computing output in equivalent units.
66
Part 4 – Shrinkage, spoilage, and lost units (Topic 3.6)
Page 6: Handout 1
Direct materials costs added
Divide by equivalent units
Cost per equivalent unit
Good units completed: 15,000 x $2.72
Don’t
Recognize
recognize
(count)
(count)
spoiled units spoiled units
$47,600
$47,600
17,500
17,000
$2.72
$2.80
$40,800
15,000 x $2.80
Add normal spoilage:
500 x $2.72
Cost of good units transferred out
Work in process:
2,000 x $2.72
$42,000
$1,360
$42,160
2,000 x $2.80
Costs accounted for
$42,000
$5,440
$5,600
$47,600
$47,600
67
Part 4 – Shrinkage, spoilage, and lost units (Topic 3.6)
Page 6: Handout 1
Direct materials costs added
Divide by equivalent
units
Cost
of spoilage
is unit
allocated to
Cost per equivalent
completed goods
Good units completed: 15,000 x $2.72
Don’t
Recognize
recognize
(count)
(count)
spoiled units spoiled units
$47,600
$47,600
17,500
17,000
$2.72
$2.80
$40,800
15,000 x $2.80
Add normal spoilage:
500 x $2.72
Cost of good units transferred out
Work in process:
2,000 x $2.72
$42,000
$1,360
$42,160
2,000 x $2.80
Costs accounted for
$42,000
$5,440
$5,600
$47,600
$47,600
68
Part 4 – Shrinkage, spoilage, and lost units (Topic 3.6)
Cost of spoilage is split
between completed goods
and work in process
Direct materials costs added
Spoilage recorded in
Divide by equivalent units
ending work in
Cost per equivalent
unit
process is
carried into
the next period.
Good units completed: 15,000 x $2.72
Don’t
Recognize
recognize
(count)
(count)
spoiled units spoiled units
$47,600
$47,600
17,500
17,000
$2.72
$2.80
$40,800
15,000 x $2.80
Add normal spoilage:
500 x $2.72
Cost of good units transferred out
Work in process:
2,000 x $2.72
$42,000
$1,360
$42,160
2,000 x $2.80
Costs accounted for
$42,000
$5,440
$5,600
$47,600
$47,600
69
Part 4 – Shrinkage, spoilage, and lost units (Topic 3.6)
Recognize (count) the spoiled units when
computing output in equivalent units.
•Highlights the cost of normal spoilage
•Ending work in process costs will not be distorted by
being charged twice for spoiled units (from this period
and the next)
70
Part 4 – Operation costing (Topic 3.7)
State the conditions under which operation costing is useful to
management, and explain the impact of a flexible manufacturing
system on job-order and process costing (Level 2)
Operation
costing
•Units have some common and some
individual characteristics
•Batches of units
•Materials are added as in job-order costing
•Labour and overhead are accumulated and
applied by department as in process costing
Process costing
Job-order costing
•Masses of identical or
similar units of a
product or service
•Distinct units of a
product or service
71
MA1 – MODULE 3
Part 5
Review question:
Production worksheet
Spoilage
(download the additional questions handout:
ma1_mod2_handout1.pdf)
72
Part 5 – Review questions: Production worksheet spoilage
Handout pages 7 thru 12
What are the costs assigned to units completed,
spoiled, and in ending work in process inventory?
•
•
Using the weighted average approach
Using the FIFO approach
Stop the audio, read and attempt the
question in the handout then come back to
listen to the solution.
73
Part 5 – Review questions: Production worksheet spoilage
Handout pages 7 thru 12
Now working on pages 8-9
What are the costs assigned to units completed,
spoiled, and in ending work in process inventory?
•
•
Using the weighted average approach
Using the FIFO approach
74
Part 5 – Review questions: Production worksheet spoilage
Handout pages 7 thru 12
Now working on pages 10-12
What are the costs assigned to units completed,
spoiled, and in ending work in process inventory?
•
•
Using the weighted average approach
Using the FIFO approach
75
MA1 – MODULE 3
Part 6
Review question:
Comprehensive process costing:
Weighted average method
(download the additional questions handout:
ma1_mod2_handout1.pdf)
76
Part 6 – Review question: Comprehensive process
costing: Weighted average method
Problem 4-24 pages 181-182
Handout pages 13 thru 15
Required
•
Prepare journal entries
•
Post the journal entries to T-accounts
•
Prepare a production report for the assembly
department
Stop the audio, read and attempt the
question in the handout then come back to
listen to the solution.
77
Part 6 – Review question: Comprehensive process
costing: Weighted average method
Problem 4-24 pages 181-182
Handout pages 13 thru 15
Now working on page 13
Required
•
Prepare journal entries
•
Post the journal entries to T-accounts
•
Prepare a production report for the assembly
department
78
Part 6 – Review question: Comprehensive process
costing: Weighted average method
Problem 4-24 pages 181-182
Handout pages 13 thru 15
Now working on page 14
Required
•
Prepare journal entries
•
Post the journal entries to T-accounts
•
Prepare a production report for the assembly
department
79
Part 6 – Review question: Comprehensive process
costing: Weighted average method
Problem 4-24 pages 181-182
Handout pages 13 thru 15
Now working on page 15
Required
•
Prepare journal entries
•
Post the journal entries to T-accounts
•
Prepare a production report for the assembly
department
80
MA1 – MODULE 3
Part 7
Review questions:
Multiple Choice Questions
Questions 1-8
(download the additional questions handout:
ma1_mod2_handout1.pdf)
81
Part 7 – Review questions: Multiple choice 1-8
Multiple choice questions
Handout pages 16 thru 19
Now working on page 16
Q1 Cost of units completed and transferred out
Q2 Equivalent units of production
Q3 Cost of production for equivalent unit
Stop the audio, read and attempt the
question in the handout then come back to
listen to the solution.
82
Part 7 – Review questions: Multiple choice 1-8
Multiple choice questions
Handout pages 16 thru 19
Now working on page 17
Q4 Operation costing
Q5 Production report
Q6 Process costing journal entries
83
Part 7 – Review questions: Multiple choice 1-8
Multiple choice questions
Handout pages 16 thru 19
Now working on page 18
Q7 a) Process costing unit cost
b) Units completed and transferred
84
Part 7 – Review questions: Multiple choice 1-8
Multiple choice questions
Handout pages 16 thru 19
Now working on page 19
Q8 a) Work in process account
b) Direct materials cost
c) Conversion costs in work in process
85
MA1 – MODULE 3
Part 8
Review questions:
Multiple Choice Questions
Questions 8-13
(download the additional questions handout:
ma1_mod2_handout1.pdf)
86
Part 8 – Review questions: Multiple choice 9-13
Multiple choice questions
Handout pages 20 thru 22
Now working on page 20
Q9 Cost of units completed and transferred out
Q10 Effect of errors on computation of equivalent units and
costs
Q11 Equivalent units
Stop the audio, read and attempt the
question in the handout then come back to
listen to the solution.
87
Part 8 – Review questions: Multiple choice 9-13
Multiple choice questions
Handout pages 20 thru 22
Now working on page 21
Q12 a) Units in ending work in process
b) Equivalent units of production - materials
c) Equivalent units of production – conversion costs
88
Part 8 – Review questions: Multiple choice 9-13
Multiple choice questions
Handout pages 20 thru 22
Now working on page 22
Q13 a) Units in ending work-in-process inventory
b) Equivalent number of units produced
c) Unit cost of production
89