Chapter Three Process Costing.

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Presentation transcript:

Chapter Three Process Costing

Weighted Average Process Costing Goal is to figure a cost per unit for inventory by dividing total costs by total units Problem is that there are different numbers of units for different inputs as materials are added at different points than labor and OH Solution is to figure “equivalent units” for each input

Example Assume that Feelwell Drug Company has 1000 units of beginning WIP that is 60% complete with respect to conversion cost (direct labor and overhead); all material is added at the beginning of the process The cost of material in the beginning inventory was $300 and the conversion cost was $420

Example - Continued During the month 10,000 units were put into process. At the end of the month there were 700 units of WIP, 80% complete Material cost incurred in the month was $3,110, and conversion cost was $7,725

Cost of Production Report - Units

Calculating Total Cost You now need to get the cost number that represents the costs incurred during the month. To do this, take, for each factor of production the cost in the beginning WIP and add the current cost.

Total Cost Calculation

Calculating Equivalent Units First take the units complete for each factor of production Then take the ending WIP units times the % complete for that factor of production Remember - in our example all material was added at the beginning so all ending WIP units are 100% complete with respect to material These units will match the cost from above

Equivalent Units

Calculation of Cost per Unit Take the total costs from the total cost calculation and divide by the total units from the units calculation

Calculation of Cost per Unit

Cost Reconciliation To compute cost to transfer take units completed times total cost per unit To calculate ending WIP, take cost for each production factor times ending equivalent units for that factor Purpose of this is to determine the cost to be transferred to the next stage (finished goods if a one step process) verify mathematical accuracy of calculations

Cost Reconciliation

Complete Cost of Production Report for this example appears on the next slide!

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