CHAPTER 17 PROCESS COSTING Eugene Sauls

Costing Systems Standard Costing Actual Costing Job Order Process

PROCESS COSTING Used with non-unique production, i.e, all items are basically the same. An example is a beer producer Periodic (monthly) costs are allocated on a proportional basis Units in ending work-in-process will be allocated a proportional amount of costs

ILLUSTRATION Chico Cola Co. uses a weighted average process costing system (we will deal with LIFO, FIFO later). They began January with 1,000 bottles in process. All materials had been added ($200 costs were assigned in December) and they are assumed to be 1/2 complete as to conversion (labor and overhead) ($300 were assigned in December).

During January, enough materials were added to produce 10,000 bottles of product. The materials cost $2,110. January conversion costs were $5,790 9,500 bottles were completed 1,500 bottles were in work-in-process, complete as to materials and 2/3 complete as to conversion costs ALLOCATE THE COSTS

ALLOCATE MATERIAL COSTS COSTS TO BE ALLOCATED: $200 in beginning inventory and $2,110 incurred during January Allocate the $2,310 to goods completed and to ending work-in-process COMPLETED (9,500 x 1.0) ENDING WIP (1,500 x 1.0) TOTAL $2,310 9,500 X 2,310 = $1,995 11,000 1,500 $ 315

ALLOCATE CONVERSION COSTS COSTS TO BE ALLOCATED: $300 in beginning inventory and $5,790 incurred during January Allocate the $6,090 to goods completed and to ending work-in-process COMPLETED (9,500 x 1.0) ENDING WIP (1,500 x 2/3) TOTAL $6,090 9,500 X 6,090 = $5,510 10,500 1,000 $ 580

DIAGRAMMATICALLY (You will have to do it this way.) CC $300 10,000 M $2,110 CC $5,790 9,500 1,500 (2/3)

SOLUTION 1,000 M $200 CC $300 10,000 9,500 M $2,110 1,500 CC 5,790 M $1,995 M $315 CC $5,510 CC $580 $7,505 $895

DIFFERENT ALGORITHM Let’s use a different technique to solve the same problem. We will arrive at the same solution. 1- Calculate the equivalent units, i.e., the number of units over which costs are applied. 2- Calculate units costs for materials and for conversion costs 3- Apply the unit costs to goods completed and to work-in-process

EQUIVALENT UNITS 9,500 units of costs to finished goods Materials: We will apply 9,500 units of costs to finished goods 1,500 units of costs to work-in-process 11,000 Equivalent units of materials Conversion Costs: We will apply 1,000 units of costs to WIP (1,500 X 2/3) 10,500 Equivalent units of conversion costs

UNIT COSTS MATERIALS: Total costs Equivalent units CONVERSION COSTS: TOTAL = $ 2,310 11,000 = $0.21 = $6,090 10,500 = $0.58 $0.79

APPLY COSTS 1,000 M $200 CC $300 10,000 9,500 M $2,110 1,500 (2/3) 10,000 9,500 M $2,110 1,500 (2/3) CC 5,790 @ $0.79 $7,505 M: 1,500 @ $0.21 $315 CC: 1,000 @ $0.58 $580

ADD SECOND DEPARTMENT In Department 2 the product is worked on until the very end of the process where paint is sprayed on the units Beginning WIP inventory was 2,000 units, ¼ complete as to conversion. Costs in beginning WIP was: Transferred In ( Prior Dept. Costs) $1,695 Conversion Costs $110 January’s conversion costs were $440 Units completed: 10,500 units Ending WIP: 1,000 units that were ½ complete as to conversion

DIAGRAM Paint $1,050 2,000 TI $1,695 CC $110 10,500 9,500 $7505 1,000 (1/2 conversion) $440

SOLUTION EU: Transferred In 10,500 + 1,000 = 11,500 Material (Paint) 10,500 Conversion 10,500 + 1,000 (1/2) = 11,000 UNIT COSTS TI ($7,505 + $1,695) / 11,500 = $0.80 MATERIAL $1,050 / 10,500 = $0.10 CONVERSION ($440 + $110) / 11,000 = $0.05 Total $0.95

APPLY COSTS 10,500 1,000 (1/2) @ $0.95 $9,975 TI 1,000 @ $0.80 $800 CC 500 @ $0.05 $25

“T” ACCOUNTS (Yes, again) Materials WIP 1 WIP 2 Purchased Conversion Incurred Finished Goods 2,110 500 1,805 7,505 9,975 2,110 1,050 7,505 1,050 5,790 440 895 5,790 825 440 9,975

ADD A SECOND PERIOD During February, 9,500 units were added and 10,000 were completed. Ending WIP was 1,000 units that were ½ complete as to conversion February material costs were $2,105. February conversion costs were $5,405

DIAGRAM M: $315 1,500 (2/3) CC $580 9,500 10,000 1,000 (1/2) M: $2,105

CALCULATE E.U. Materials 10,000 Completed 1,000 WIP 11,000 Conversion 10,000 Completed (1,000 X ½) 500 WIP 10,500

CALCULATE UNIT COSTS = $0.22 = $0.57 MATERIALS $315 + $2,105 11,000 CONVERSION COSTS $580 + $5,405 10,500 = $0.22 = $0.57 TOTAL = $0.79

APPLY COSTS @$0.79 $7,900 M: $315 1,500 (2/3) CC $580 9,500 10,000 9,500 10,000 Mat 2,105 1,000 (1/2) CC 5,405 M: CC: @$0.79 $7,900 1,000 @$0.22 $220 500 @$0.57 $285

RECONCILING COSTS Costs to account for: Beg. WIP $315 + $580 = $ 895 Put In $2,105 + $5,405 = $7,510 $8,405 Costs accounted for: Completed $7,900 End. WIP $220 + $285 = 505

ADDING LIFO OR FIFO LIFO OR FIFO can be applied but it makes the allocation more complex. Let’s deal only with FIFO Remember that FIFO separate current costs from prior period costs. So, there will be n+1 unit costs, where n = number of departments. Use the information from Dept. 1 for January, except that ending WIP is 1/3 complete, instead of 2/3 complete.

RECONSTRUCTION OF DATA 1,000 (1/2) M $200 CC $300 10,000 9,500 M $2,110 1,500 (1/3) CC 5,790

CALCULATE EU MATERIALS Completed 9,500 - Beg WIP -1,000 End. WIP 1,500 Total 10,000 CONVERSION - Beg WIP (1,000 X ½) - 500 End. WIP (1,500 X 1/3) 500 Total 9,500

CALCULATE UNIT COSTS MATERIALS = $0.211 CONVERSION COSTS $5,790 $2,110 = $0.211 10,000 $5,790 = $0.609 9,500

APPLY COSTS M $200 CC $300 CC 500X0.609=$304 $804 @$0.82 $6,970 1,000 (1/2) 10,000 M $2,110 CC 5,790 M: CC: CC 500X0.609=$304 1,000 $804 8,500 @$0.82 $6,970 1,500 (1/3) 1,500 @ 0.211 = $317 1,500 X 1/3 @ 0.609 = $305