CHAPTER Process Costing

After studying this chapter, you should be able to: Objectives 1. Describe the basic characteristics and cost flows associated with process manufacturing. 2. Define equivalent units and explain their role in process costing. Explain the differences between the weighted average method and the FIFO method of accounting for process cost. 3. Prepare a departmental production report using the weighted average method. After studying this chapter, you should be able to: Continued

Objectives 4. Explain how process costing is affected by nonuniform application of manufacturing inputs and the existence of multiple processing departments. 5. Appendix: Complete a departmental production report using the FIFO method.

Healthblend Nutritional Supplements Sequential Processing Finished Goods Picking Encapsulating Bottling

Parallel Processing (hard disk drives for personal computers) Assembly Finished Goods Production and assembly of write-head and disk drive Testing of write-head and disk drive Process 3 Process 4 Production of circuit board Testing of circuit board

Flow of Manufacturing Costs Through the Accounts of a Process-Costing Firm (Healthblend) Picking Department Work in Process Encapsulating Dept. Work in Process Transferred-in from Picking Materials: Capsules Encapsulating labor Applied OH Bottling Dept. Work in Process Transferred-in from Encapsulating Materials: Bottles Bottling labor Applied OH Materials: Herbs Vitamins Minerals Picking labor Applied OH

Healthblend Nutritional Supplements Healthblend decides to produce 2,000 bottles of multivitamins. The Picking Department costs are: Direct materials $1,700 Direct labor 50 Applied overhead 450 Work in Process (Encapsulating) 2 200 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Work in Process (Picking) 2 200 00 The mixture is transferred from picking to Encapsulating.

Healthblend Nutritional Supplements The Encapsulating Department costs are: Direct materials $1,000 Direct labor 60 Applied overhead 500 Work in Process (Bottling) 3 760 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Work in Process (Encapsulating) 3 760 00 $2,200 + $1,000 + $60 + $500 The cost is transferred from Encapsulating to Bottling.

Healthblend Nutritional Supplements The Bottling Department costs are: Direct materials $800 Direct labor 300 Applied overhead 600 Finished Goods 5 460 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Work in Process (Bottling) 5 460 00 $3,760 + $800 + $300 + $600 The cost is transferred to the finished goods warehouse.

A production report provides information about the physical units processed in a department and the manufacturing costs. In process cost, costs are summarized by department for a period of time in a production report.

Equivalent Units of Production Equivalent units of output are the complete units that could have been produced given the total amount of manufacturing effort expended for the period under consideration.

Equivalent Units of Production Department A Units in beginning work in process --- Units completed 1,000 Units in ending work in process (25% complete) 600 Total manufacturing cost $11,500

Equivalent Units of Production Concept: = 100 units completed = 100 equivalent units 200 units, 50% completed = 100 equivalent units = Continued

Equivalent Units of Production Example: 1,000 units completed, 600 units, 25% complete 1000 units completed = 1,000 equivalent units 600 units, EWIP, 25% completed = 150 equivalent units = 150 equivalent units Total = 1,150 equivalent units

Preparing a Production Report Physical units flow analysis Calculation of equivalent units Computation of unit cost Valuation of inventories (goods transferred out and ending work in process) Cost reconciliation

Healthblend Nutritional Supplements Weighted Average Method Production: Units in process, July 1, 75% complete 20,000 Units completed and transferred out 50,000 Units in process, July 31, 25% complete 10,000 Costs: Work in process, July 1 $ 3,525 Cost added during July 10,125

Healthblend Nutritional Supplements Weighted Average Method BWIP Cost July Cost $3,525 $10,125 $13,650 Total Manufacturing Cost

Weighted Average Method Output for July 60,000 Total Physical Units BWIP Becomes 52,500 Equivalent Units 20,000 30,000 + Units Started and Completed EWIP, 25% Complete + 2,500 52,500

Weighted Average Method Cost Assignment: Cost/Unit = $13.650 ÷ 52,500 = $0.26 Transferred Out ($0.26 x 50,000) $13,000 EWIP ($0.26 x 2,500) 650 Total Cost Assigned $13,650

Step 1: Physical Flow Schedule Units to account for: Units in beginning work in process (75% complete) 20,000 Units started during the period 40,000 Total units to account for 60,000 Units accounted for: Unit completed and transferred out: Started and completed 30,000 From beginning work in process 20,000 50,000 Units in ending work in process (25% complete) 10,000 Total units accounted for 60,000

Weighted Average Method Step 2: Calculation of Equivalent Units Weighted Average Method Units completed 50,000 Add: Units in ending work in process x Fraction complete (10,000 x 25%) 2,500 Equivalent units of output 52,500 Healthblend Nutritional Supplements

Step 3: Computation of Unit Cost $13,650 52,500 = $0.26 per equivalent unit

Healthblend Nutritional Supplements Step 4: Valuation of Inventories Cost of goods transferred to the encapsulating department: 50,000 equivalent units x $0.26 $13,000 Ending inventory: 2,500 equivalent units x $0.26 650 Healthblend Nutritional Supplements

Healthblend Nutritional Supplements Step 5: Cost Reconciliation Goods transferred out $13,000 Goods in ending work in process 650 Total costs accounted for $13,650 The manufacturing costs to account for are also $13,650. Healthblend Nutritional Supplements

Production Report

Production Report for July 2004 Healthblend Company Picking Department Production Report for July 2004 Weighted average UNIT INFORMATION Physical Flow Units to account for: Units accounted for: Units in beginning Units completed 50,000 work in process 20,000 Units in ending Units started 40,000 work in process 10,000 Total units to Total units account for 60,000 accounted for 60,000 Equivalent Units Units completed 50,000 Units in ending work in process 2,500 Total equivalent units 52,500 Continued

COST INFORMATION Costs to account for: Beginning work in process $ 3,525 Incurred during period 10,125 Total cost to account for $13,650 Cost per equivalent unit $ 0.26 Continued

Transferred Ending Out WIP Total Costs accounted for: Goods transferred out ($0.26 x 50,000) $13,000 --- $13,000 Goods in ending work in process ($0.26 x 2,500) --- $650 650 Total cost accounted for $13,000 $650 $13,650

Nonuniform Application of Manufacturing Inputs Healthblend Nutritional Supplements

Healthblend Nutritional Supplements Equivalent Units Picking Department 60,000 equivalent units of material and conversion cost transferred out Beginning WIP inventory 10,000 units Started and completed 50,000 units Materials, 100% complete; conversion cost, 50% complete 100% complete as to both materials and conversion cost

Healthblend Nutritional Supplements Equivalent Units Picking Department September Conversion Materials Costs Beginning WIP inventory 10,000 units Started and completed 50,000 units 60,000 60,000 Ending WIP inventory 20,000 units Materials, 100% complete; conversion cost, 40% complete

Healthblend Nutritional Supplements Equivalent Units Picking Department September Conversion Materials Costs Beginning WIP inventory 10,000 units Started and completed 50,000 units 60,000 60,000 Ending WIP inventory 20,000 units 20,000 8,000

Healthblend Nutritional Supplements Equivalent Units Picking Department September Conversion Materials Costs Beginning WIP inventory 10,000 units Started and completed 50,000 units 60,000 60,000 Ending WIP inventory 20,000 units September 20,000 8,000 Equivalent units 80,000 68,000

Healthblend Nutritional Supplements Materials $12,000 Conversion cost $3,200 Materials $1,600 Conversion cost $200 September Conver. Cost $3,400 EU 68,000 = Cost per EU $0.05 Materials $13,600 EU 80,000 = Cost per EU $0.22 Beginning WIP inventory 10,000 units Started and completed 50,000 units Ending WIP inventory 20,000 units August October

Production Report for September 2004 Healthblend Company Picking Department Production Report for September 2004 Weighted average UNIT INFORMATION Physical Flow Units to be accounted for: Units accounted for: Units in beginning Units completed 60,000 work in process 10,000 Units in ending Units started 70,000 work in process 20,000 Total units to Total units account for 80,000 accounted for 80,000 Continued

Equivalent Units Materials Conversion Cost Units completed 60,000 60,000 Units in ending work in process 20,000 8,000 Total equivalent units 80,000 68,000 Continued

COST INFORMATION Conversion Materials Cost Total Costs to account for: Beginning work in process $ 1,600 $ 200 $ 1,800 Incurred during the period 12,000 3,200 15,200 Total costs to account for $13,600 $3,400 $17,000 Cost per equivalent unit $ 0.17 $ 0.05 $ 0.22 Continued

Transferred Ending Out WIP Total Costs accounted for: Goods transferred out ($0.22 x 60,000) $13,200 --- $13,200 Goods in ending work in process: Materials ($0.17 x 20,000) --- $3,400 3,400 Conversion ($0.05 x 8,000) --- 400 400 Total cost accounted for $13,200 $3,800 $17,000

Multiple Departments Units to account for: Units in beginning work in process 15,000 Units transferred in during September 60,000 Total units to account for 75,000 Units accounted for: Units completed and transferred out: Started and completed 55,000 From beginning work in process 15,000 Units in ending work in process 5,000 Total units accounted for 75,000

Multiple Departments Transferred in: Units completed 70,000 Add: Units in ending work in process X Fraction complete (5,000 x 100%) 5,000 Equivalent units of output 75,000 Unit cost (transferred-in category) = ($13,200 + $3,000/75,000) = $16,200/75,000 = $0.216

Production Report—Fifo Costing Appendix Production Report—Fifo Costing

FIFO Method BWIP Cost July Cost $10,125 $3,525 BWIP Units Current- Period Units

FIFO Method + Output for July + 60,000 Total Physical Units BWIP Become 37,500 Equivalent Units 5,000 30,000 + Units Started and Completed EWIP, 25% complete + 2,500 37,500

FIFO Method Cost Assignment: Unit Cost = $10,125 ÷ 37,500 = $0.27 Transferred Out: From beginning work in process $ 3,525 Complete BWIP ($0.27 x 5,000) 1,350 Started and Completed in July ($0.27 x 30,000) 8,100 EWIP ($0.27 x 2,500) 675 Total Cost Assigned $13,640

Production Report for July 2004 Healthblend Company Picking Department Production Report for July 2004 FIFO UNIT INFORMATION Units accounted for: Units in beginning work in process 20,000 Units started during the period 40,000 Total units to account for 60,000 Continued

Physical Equivalent Flow Units Units accounted for: Units started and completed 30,000 30,000 Units completed from beginning work in process 20,000 5,000 Units in ending work in process 10,000 2,500 Total units accounted for 60,000 37,500 Continued

COST INFORMATION Costs to account for: Beginning work in process $ 3,525 Incurred during period 10,125 Total cost to account for $13,650 Cost per equivalent unit $ 0.27 Continued

Transferred Ending Out WIP Total Costs accounted for: Units in beginning work in process: From prior period $ 3,525 --- $ 3,525 From current period ($0.27 x 5,000) 1,350 --- 1,350 Units started and completed ($0.27 x 30,000) 8,100 --- 8,100 Goods in ending work in process ($0.27 x 2,500) --- $675 675 Total cost accounted for $12,975 $675 $13,650

Chapter Six The End