4-1
MANAGERIAL
ACCOUNTING
Ninth Canadian Edition
GARRISON, CHESLEY, CARROLL, WEBB, LIBBY
Systems Design:
Process Costing
Chapter 4
PowerPoint Author:
Robert G. Ducharme, MAcc, CA
University of Waterloo, School of Accounting and Finance
Copyright © 2012 McGraw-Hill Ryerson Limited
Similarities Between Job-Order and Process
Costing
4-2
 Both systems assign material, labour, and overhead
costs to products and they provide a mechanism for
computing unit product costs.
 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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-3
Differences Between Job-Order and Process
Costing
Differences:
1. 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 having different production requirements
are worked on each period.
2. Process costing systems accumulate costs by department. Job-order
costing systems accumulated costs by individual jobs.
3. Process costing systems use department production reports to
accumulate costs. Job-order costing systems use job cost sheets to
accumulate costs.
4. Process costing systems compute unit costs by department. Job-
order costing systems compute unit costs by job on the job cost
sheet.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-4
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-5
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-6
Processing Departments
Any unit in an organization where materials,
labour, 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.
Products in a process costing environment
typically flow in a sequence from one department
to another.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-7
Comparing Job-Order and Process Costing
Direct
Materials
Direct Labour
Manufacturing
Overhead
Copyright © 2012 McGraw-Hill Ryerson Limited
Work in
Process
Finished
Goods
Cost of
Goods
Sold
LO 1
4-8
Comparing Job-Order and Process Costing
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
Direct Labour
Manufacturing
Overhead
Copyright © 2012 McGraw-Hill Ryerson Limited
Jobs
Finished
Goods
Cost of
Goods
Sold
LO 1
4-9
Comparing Job-Order and Process Costing
Direct
Materials
Direct Labour
Manufacturing
Overhead
Copyright © 2012 McGraw-Hill Ryerson Limited
Costs are traced and
applied to departments
in a process cost
system.
Processing
Department
Finished
Goods
Cost of
Goods
Sold
LO 1
4-10
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-11
Process Cost Flows: The Flow of Raw Materials
(in T-account form)
Raw Materials
•Direct
Materials
Work in Process
Department A
•Direct
Materials
Work in Process
Department B
•Direct
Materials
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-12
Process Cost Flows: The Flow of Raw Materials
(in journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Process – Department A
XXX
Work in Process – Department B
XXX
Raw Materials
Credit
XXX
To record the use of direct material.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-13
Process Cost Flows: The Flow of Labour Costs
(in T-account form)
Salaries and
Wages Payable
•Direct
Labour
Work in Process
Department A
•Direct
Materials
•Direct
Labour
Work in Process
Department B
•Direct
Materials
•Direct
Labour
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-14
Process Cost Flows: The Flow of Labour Costs
(in journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Process – Department A
XXX
Work in Process – Department B
XXX
Salaries and Wages Payable
Credit
XXX
To record direct labour costs.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (in T-account form)
4-15
Work in Process
Department A
Manufacturing
Overhead
•Actual
Overhead
•Overhead
Applied to
Work in
Process
Copyright © 2012 McGraw-Hill Ryerson Limited
•Direct
Materials
•Direct
Labour
•Applied
Overhead
Work in Process
Department B
•Direct
Materials
•Direct
Labour
•Applied
Overhead
LO 1
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (in journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Process – Department A
XXX
Work in Process – Department B
XXX
Manufacturing Overhead
4-16
Credit
XXX
To apply overhead to departments.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
Process Cost Flows: Transfers from WIP-Dept. A
to WIP-Dept. B (in T-account form)
Work in Process
Department A
•Direct
Transferred
Materials
to Dept. B
•Direct
Labour
•Applied
Overhead
Department
A
Copyright © 2012 McGraw-Hill Ryerson Limited
4-17
Work in Process
Department B
•Direct
Materials
•Direct
Labour
•Applied
Overhead
•Transferred
from Dept. A
Department
B
LO 1
4-18
Process Cost Flows: Transfers from WIP-Dept. A
to WIP-Dept. B (in journal entry form)
GENERAL JOURNAL
Description
Date
Work in Process – Department B
Work in Process – Department A
Post.
Ref.
Page 4
Debit
Credit
XXX
XXX
To record the transfer of goods from
Department A to Department B.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
Process Cost Flows: Transfers from WIP-Dept. B
to Finished Goods (in T-account form)
Work in Process
Department B
•Direct
•Cost of
Materials
Goods
•Direct
Manufactured
Labour
•Applied
Overhead
•Transferred
from Dept. A
Copyright © 2012 McGraw-Hill Ryerson Limited
4-19
Finished Goods
•Cost of
Goods
Manufactured
LO 1
Process Cost Flows: Transfers from WIP-Dept. B
to Finished Goods (in journal entry form)
GENERAL JOURNAL
Date
Description
Finished Goods
Work in Process – Department B
Post.
Ref.
4-20
Page 4
Debit
Credit
XXX
XXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
Process Cost Flows: Transfers from Finished
Goods to COGS (in T-account form)
Work in Process
Department B
4-21
Finished Goods
•Direct
•Cost of
•Cost of
•Cost of
Materials
Goods
Goods
Goods
•Direct
Manufactured
Manufactured
Sold
Labour
•Applied
Overhead
•Transferred
Cost of Goods Sold
from Dept. A
•Cost of
Goods
Sold
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-22
Process Cost Flows: Transfers from Finished
Goods to COGS (in journal entry form)
GENERAL JOURNAL
Description
Date
Accounts Receivable
Post.
Ref.
Page 4
Debit
Credit
XXX
XXX
Sales
To record sales on account.
Cost of Goods Sold
Finished Goods
XXX
XXX
To record cost of goods sold.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
4-23
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-24
Equivalent Units – The Basic Idea
Two half completed products are
equivalent to one complete product.
+
=
1
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-25
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
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-26
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
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-27
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-28
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.
• Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending work in process inventory.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-29
Treatment of Direct Labour
Dollar Amount
Direct
Materials
Manufacturing
Overhead
Direct
Labour
Direct labour
costs
may be small
in comparison to
other product
costs in process
cost systems.
Type of Product Cost
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-30
Treatment of Direct Labour
Dollar Amount
Direct
Materials
Conversion
Direct
Labour
Direct
Labour
Manufacturing
Overhead
Direct labour and
manufacturing
overhead may be
combined into
one classification
of product
cost called
conversion costs.
Type of Product Cost
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-31
Weighted-Average Example
Double Diamond Skis reported the following activity in
Shaping and Milling Department for the month of May:
Percent Completed
Shaping and Milling Department
Beginning work in process
Units
200
Materials Conversion
55%
30%
Units started into production in May
5,000
Units completed during May and
transferred to the next department
4,800
100%
100%
400
40%
25%
Ending work in process
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
4-32
Weighted-Average Example
The first step in calculating the equivalent units is to identify
the units completed and transferred out of the
Department in May (4,800 units)
Materials
Units completed and transferred
to the next department
Copyright © 2012 McGraw-Hill Ryerson Limited
4,800
Conversion
4,800
LO 2
4-33
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 (160 units) and add this to the
4,800 units from step one.
Materials
Units completed and transferred
to the next department
4,800
Conversion
4,800
Work in process, June 30:
400 units × 40%
Equivalent units of Production in
during the month of May
Copyright © 2012 McGraw-Hill Ryerson Limited
160
4,960
LO 2
4-34
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 (100 units) and add this to the 4,800 units from step
one.
Materials
Units completed and transferred
to the next department
4,800
Conversion
4,800
Work in process, June 30:
400 units × 40%
160
400 units × 25%
Equivalent units of Production in
during the month of May
Copyright © 2012 McGraw-Hill Ryerson Limited
100
4,960
4,900
LO 2
4-35
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
to the next department
4,800
Conversion
4,800
Work in process, June 30:
400 units × 40%
160
400 units × 25%
Equivalent units of Production in
during the month of May
Copyright © 2012 McGraw-Hill Ryerson Limited
100
4,960
4,900
LO 2
4-36
Weighted-Average Example
Materials
Beginning
Work in Process
200 Units
55% Complete
5,000 Units Started
4,800 Units Started
and Completed
4,800 Units Completed
160 Equivalent Units
4,960 Equivalent units
of production
Copyright © 2012 McGraw-Hill Ryerson Limited
Ending
Work in Process
400 Units
40% Complete
400 × 40%
LO 2
4-37
Weighted-Average Example
Conversion
Beginning
Work in Process
200 Units
30% Complete
5,000 Units Started
4,800 Units Started
and Completed
4,800 Units Completed
100 Equivalent Units
4,900 Equivalent units
of production
Copyright © 2012 McGraw-Hill Ryerson Limited
Ending
Work in Process
400 Units
25% Complete
400 × 25%
LO 2
4-38
Compute and Apply Costs
Beginning work in process:
Materials: 55% complete
Conversion: 30% complete
200 units
$
Production started during May
Production completed during May
9,600
5,575
5,000 units
4,800 units
Costs added to production in May
Materials cost
$ 368,600
Conversion cost
350,900
Ending work in process
Materials:
40% complete
Conversion: 25% complete
Copyright © 2012 McGraw-Hill Ryerson Limited
400 units
LO 3
4-39
Compute and Apply Costs
The formula for computing the cost per equivalent
unit is :
Cost per
equivalent =
unit
Cost of beginning
work in process + Cost added during
inventory
the period
Equivalent units of production
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
4-40
Compute and Apply Costs
Here is a schedule with the cost and equivalent
unit information.
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
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
4-41
Compute and Apply Costs
Here is a schedule with the cost and equivalent
unit information.
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
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
Copyright © 2012 McGraw-Hill Ryerson Limited
5,575
$
72.75
$356,475
÷ 4,900
unitsunits
= $72.75
$378,200
÷ 4,960
= $76.25
LO 3
4-42
Applying Costs
Shaping and Milling Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.25
$
72.75
Cost of ending work in process inventory
$
12,200
$
7,275
$
19,475
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 4
4-43
Applying Costs
Shaping and Milling Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.25
$
72.75
Cost of ending work in process inventory
$
12,200
$
7,275
$
19,475
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 4
4-44
Applying Costs
Shaping and Milling Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.25
$
72.75
Cost of ending work in process inventory
$
12,200
$
7,275
$
19,475
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 4
4-45
Computing the Cost of Units Transferred Out
Shaping and Milling Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.25
$
72.75
Cost of ending work in process inventory
$
12,200
$
7,275
$
19,475
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 4
4-46
Computing the Cost of Units Transferred Out
Shaping and Milling Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.25
$
72.75
Cost of ending work in process inventory
$
12,200
$
7,275
$
19,475
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 4
4-47
Computing the Cost of Units Transferred Out
Shaping and Milling Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.25
$
72.75
Cost of ending work in process inventory
$
12,200
$
7,275
$
19,475
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 4
4-48
Reconciling Costs
Shaping and Milling Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
$
Costs added to production during the period
Total cost to be accounted for
$
15,175
719,500
734,675
Cost accounted for as follows:
Cost of ending work in process inventory
Cost of units transferred out
Total cost accounted for
19,475
715,200
734,675
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
LO 5
4-49
Reconciling Costs
Shaping and Milling Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
$
Costs added to production during the period
Total cost to be accounted for
$
15,175
719,500
734,675
Cost accounted for as follows:
Cost of ending work in process inventory
Cost of units transferred out
Total cost accounted for
19,475
715,200
734,675
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
LO 5
4-50
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.
Process
Costing
Conversion costs
assigned to batches
as in process costing.
Operation costing is commonly used when batches of many different
products pass through the same processing department.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 5
4-51
FIFO Method
Appendix 4A
Copyright © 2012 McGraw-Hill Ryerson Limited
4-52
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
4-53
Equivalent Units – FIFO Method
Let’s revisit the Double Diamond Skis example. Assume the
following activity is reported in Shaping and Milling Department
for May:
Percent Completed
Shaping and Milling Department
Beginning work in process
Units
200
Materials Conversion
55%
30%
Units started into production in May
5,000
Units completed during May and
transferred to the next department
4,800
100%
100%
400
40%
25%
Ending work in process
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
4-54
Equivalent Units – FIFO Method
Step 1: Determine equivalent units needed to complete
beginning inventory.
Materials
To complete beginning work in process:
Materials: 200 units × (100% - 55%)
90
Conversion: 200 units × (100% - 30%)
Units started and completed during May
Conversion
140
4,600
4,600
Ending work in process
Materials: 400 units × 40% complete
Conversion: 400 units × 25% complete
Equivalent units of production
Copyright © 2012 McGraw-Hill Ryerson Limited
160
100
4,850
4,840
LO 6
4-55
Equivalent Units – FIFO Method
Step 2: Determine units started and completed during
the period.
Materials
To complete beginning work in process:
Materials: 200 units × (100% - 55%)
90
Conversion: 200 units × (100% - 30%)
Units started and completed during May
Conversion
140
4,600
4,600
Ending work in process
Materials: 400 units × 40% complete
Conversion: 400 units × 25% complete
Equivalent units of production
Copyright © 2012 McGraw-Hill Ryerson Limited
160
100
4,850
4,840
LO 6
4-56
Equivalent Units – FIFO Method
Step 3: Add the equivalent units in ending work in
process inventory.
Materials
To complete beginning work in process:
Materials: 200 units × (100% - 55%)
90
Conversion: 200 units × (100% - 30%)
Units started and completed during May
Conversion
140
4,600
4,600
Ending work in process
Materials: 400 units × 40% complete
Conversion: 400 units × 25% complete
Equivalent units of production
Copyright © 2012 McGraw-Hill Ryerson Limited
160
100
4,850
4,840
LO 6
4-57
FIFO Example
Materials
Beginning
Work in Process
200 Units
55% Complete
200 × 45%
5,000 Units Started
4,600 Units Started
and Completed
90 Equivalent Units
4,600 Units Completed
160 Equivalent Units
4,850 Equivalent units
of production
Copyright © 2012 McGraw-Hill Ryerson Limited
Ending
Work in Process
400 Units
40% Complete
400 × 40%
LO 6
4-58
FIFO Example
Conversion
Beginning
Work in Process
200 Units
30% Complete
200 × 70%
5,000 Units Started
4,600 Units Started
and Completed
140 Equivalent Units
4,600 Units Completed
100 Equivalent Units
4,840 Equivalent units
of production
Copyright © 2012 McGraw-Hill Ryerson Limited
Ending
Work in Process
400 Units
25% Complete
400 × 25%
LO 6
4-59
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:
200 units × 55%
200 units × 30%
Equivalent units - FIFO method
Copyright © 2012 McGraw-Hill Ryerson Limited
Materials
4,960
Conversion
4,900
110
4,850
60
4,840
LO 6
4-60
Cost per Equivalent Unit - FIFO
Let’s revisit the Double Diamond Skis Shaping and Milling
Department for the Month of May to prepare our production report.
Beginning work in process:
Materials: 55% complete
Conversion: 30% complete
Production started during May
Production completed during May
200 units
$ 9,600
5,575
$ 15,175
5,000 units
4,800 units
Costs added to production in May
Materials cost
$ 368,600
Conversion cost
350,900
Ending work in process:
400 units
Materials:
40% complete
Conversion:
25% complete
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
4-61
Cost per Equivalent Unit - FIFO
The formula for computing the cost per
equivalent unit under FIFO method is as follows:
Cost per
equivalent =
unit
Copyright © 2012 McGraw-Hill Ryerson Limited
Cost added during the period
Equivalent units of production
LO 7
4-62
Cost per Equivalent Unit - FIFO
Total
Cost
Costs added in the Shaping
and Milling Department
Equivalent units
$ 719,500
Materials
Conversion
$ 368,600
4,850
$ 350,900
4,840
Cost per equivalent unit
$ 76.00
Total cost per equivalent unit = $76.00 + $72.50 = $148.50
Copyright © 2012 McGraw-Hill Ryerson Limited
$
72.50
LO 7
4-63
Applying Costs - FIFO
Step 1: Record the equivalent units of production in ending work
in process inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.25
$
72.75
Cost of ending work in process inventory
$
12,200
$
7,275
$
19,475
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 8
4-64
Applying Costs - FIFO
Step 2: Record the cost per equivalent unit.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.00
$
72.50
Cost of ending work in process inventory
$
12,160
$
7,250
$
19,410
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 8
4-65
Applying Costs - FIFO
Step 3: Compute the cost of ending work in process inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.00
$
72.50
Cost of ending work in process inventory
$
12,160
$
7,250
$
19,410
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
LO 8
4-66
Cost of Units Transferred Out
Step 1: Record the cost in beginning work in process inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials
Conversion
Units transferred out:
Cost in beginning work in process (WIP)
$
9,600
$
5,575
Cost to complete beginning WIP:
Equivalent units to complete
90
140
Cost per equivalent unit
$
76.00
$
72.50
Cost to complete beginning WIP
$
6,840
$
10,150
Cost of units started and completed in May
Units started and completed in May
4,600
4,600
Cost per equivalent unit
$
76.00
$
72.50
Cost of units started and completed in May
$ 349,600
$
333,500
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
Total
$
15,175
$
16,990
$
$
683,100
715,265
LO 8
4-67
Cost of Units Transferred Out
Step 2: Compute the cost to complete the units in beginning
work in process inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials
Conversion
Units transferred out:
Cost in beginning work in process (WIP)
$
9,600
$
5,575
Cost to complete beginning WIP:
Equivalent units to complete
90
140
Cost per equivalent unit
$
76.00
$
72.50
Cost to complete beginning WIP
$
6,840
$
10,150
Cost of units started and completed in May
Units started and completed in May
4,600
4,600
Cost per equivalent unit
$
76.00
$
72.50
Cost of units started and completed in May
$ 349,600
$
333,500
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
Total
$
15,175
$
16,990
$
$
683,100
715,265
LO 8
4-68
Cost of Units Transferred Out
Step 3: Compute the cost of units started and completed this
period.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials
Conversion
Units transferred out:
Cost in beginning work in process (WIP)
$
9,600
$
5,575
Cost to complete beginning WIP:
Equivalent units to complete
90
140
Cost per equivalent unit
$
76.00
$
72.50
Cost to complete beginning WIP
$
6,840
$
10,150
Cost of units started and completed in May
Units started and completed in May
4,600
4,600
Cost per equivalent unit
$
76.00
$
72.50
Cost of units started and completed in May
$ 349,600
$
333,500
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
Total
$
15,175
$
16,990
$
$
683,100
715,265
LO 8
4-69
Cost of Units Transferred Out
Step 4: Compute the total cost of units transferred out.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials
Conversion
Units transferred out:
Cost in beginning work in process (WIP)
$
9,600
$
5,575
Cost to complete beginning WIP:
Equivalent units to complete
90
140
Cost per equivalent unit
$
76.00
$
72.50
Cost to complete beginning WIP
$
6,840
$
10,150
Cost of units started and completed in May
Units started and completed in May
4,600
4,600
Cost per equivalent unit
$
76.00
$
72.50
Cost of units started and completed in May
$ 349,600
$
333,500
Cost of units transferred out
Copyright © 2012 McGraw-Hill Ryerson Limited
Total
$
15,175
$
16,990
$
$
683,100
715,265
LO 8
4-70
Reconciling Costs
Shaping and Milling Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
Costs added to production during the period
Total cost to be accounted for
Cost accounted for as follows:
Cost of ending work in process inventory
Cost of units transferred out
Total cost accounted for
Copyright © 2012 McGraw-Hill Ryerson Limited
$
15,175
719,500
$ 734,675
$
19,475
715,200
$ 734,675
LO 8
4-71
Reconciling Costs
Shaping and Milling Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
Costs added to production during the period
Total cost to be accounted for
Cost accounted for as follows:
Cost of ending work in process inventory
Cost of units transferred out
Total cost accounted for
Copyright © 2012 McGraw-Hill Ryerson Limited
$
15,175
719,500
$ 734,675
$
19,410
715,265
$ 734,675
LO 8
4-72
A Comparison of Costing Methods
In a lean production environment, FIFO and
weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is superior
to weighted-average because it does not mix
costs of the current period with costs of the
prior period.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
4-73
Service Department
Allocations
Appendix 4B
Copyright © 2012 McGraw-Hill Ryerson Limited
4-74
Operating Departments
An operating department carries out
the central purpose of the organization.
The
Geography
Department
at your
University.
Copyright © 2012 McGraw-Hill Ryerson Limited
An
Assembly
Department
at
Bombardier.
LO 9
4-75
Service Departments
A service department does not directly
engage in operating activities.
The
Accounting
Department
at Lowes.
Copyright © 2012 McGraw-Hill Ryerson Limited
The Human
Resources
Department
at Walmart.
LO 9
4-76
Interdepartmental Services
Service
Department
Operating
Department
Costs of the service
department become
overhead costs to
the operating
department.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
4-77
Allocation Approaches
Direct
Method

Step-Down
Method

Reciprocal
Method
Copyright © 2012 McGraw-Hill Ryerson Limited

LO 9
4-78
Reciprocal Services
Service
Department 1
Service
Department 2
When service
departments provide
services to each
other we call them
reciprocal services.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
4-79
Direct Method
Interactions
between service
departments are
ignored and all
costs are
allocated directly
to operating
departments.
Copyright © 2012 McGraw-Hill Ryerson Limited
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
LO 9
4-80
Direct Method
Service Department
Allocation Base
Cafeteria
Custodial
Number of employees
Square feet occupied
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
4-81
Direct Method
How much of the Cafeteria and Custodial costs
should be allocated to each operating department
using the direct method of cost allocation?
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
4-82
Direct Method
20
$360,000 ×
= $144,000
20 + 30
Allocation base: Number of employees
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
4-83
Direct Method
$360,000 ×
30
= $216,000
20 + 30
Allocation base: Number of employees
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
4-84
Direct Method
25,000
$90,000 ×
25,000 + 50,000
= $30,000
Allocation base: Square feet occupied
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
4-85
Direct Method
50,000
$90,000 ×
25,000 + 50,000
= $60,000
Allocation base: Square feet occupied
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
4-86
Step-Down Method
Once a service
department’s costs
are allocated,
other service
department costs
are not allocated
back to it.
Copyright © 2012 McGraw-Hill Ryerson Limited
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
LO 10
4-87
Step-Down Method
There are three key points to understand regarding the
step method:
 In both the direct and step methods, any amount of
the allocation base attributable to the service
department whose cost is being allocated is always
ignored.
 Any amount of the allocation base that is
attributable to a service department whose cost has
already been allocated is ignored.
 Each service department assigns its own costs to
operating departments plus the costs that have
been allocated to it from other service departments.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-88
Step-Down Method
We will use the same data used
in the direct method example.
Service Department
Allocation Base
Cafeteria
Custodial
Number of employees
Square feet occupied
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-89
Step-Down Method
Allocate Cafeteria costs first since
it provides more service than Custodial.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-90
Step-Down Method
10
$360,000 ×
10 + 20 + 30
= $60,000
Allocation base: Number of employees
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-91
Step-Down Method
20
$360,000 ×
10 + 20 + 30
= $120,000
Allocation base: Number of employees
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-92
Step-Down Method
30
$360,000 ×
10 + 20 + 30
= $180,000
Allocation base: Number of employees
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-93
Step-Down Method
New total = $90,000 original Custodial cost
plus $60,000 allocated from the Cafeteria.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-94
Step-Down Method
25,000
$150,000 ×
25,000 + 50,000
= $50,000
Allocation base: Square feet occupied
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-95
Step-Down Method
50,000
$150,000 ×
25,000 + 50,000
= $100,000
Allocation base: Square feet occupied
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 10
4-96
Reciprocal Method
Interdepartmental
services are given
full recognition
rather than partial
recognition as with
the step method.
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
Because of its mathematical complexity,
the reciprocal method is rarely used.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 11
Quick Check Data
for Direct and Step Methods
4-97
The direct method of allocation is used.
Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business
Administration computer services
(BACS): Number of personal computers
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 11
4-98
Quick Check 
How much cost will be allocated from
Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 11
4-99
Quick Check 
How much cost will be allocated from
Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000
20
$180,000 ×
= $36,000
20 + 80
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 11
4-100
Quick Check 
How much total cost will be allocated
from ADMIN and BACS combined to
the Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 11
4-101
Quick Check 
How much total cost will be allocated
from ADMIN and BACS combined to
the Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500
$90,000 ×
Copyright © 2012 McGraw-Hill Ryerson Limited
18
= $13,500
18 + 102
LO 11
4-102
Quick Check Data
The step method of allocation is used.
Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business
administration computer services
(BACS): Number of personal computers
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 11
4-103
Quick Check 
How much total cost will be allocated from
ADMIN and BACS combined to the
Accounting Department?
a. $35,250
b. $49,072
c. $18,000
d. $26,333
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 11
4-104
Quick Check 
How much total cost will be allocated from
ADMIN and BACS combined to the
Accounting Department?
a. $35,250
b. $49,072
c. $18,000
d. $26,333
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 11
4-105
End of Chapter 4
Copyright © 2012 McGraw-Hill Ryerson Limited