1. CHAPTER
Process Costing

2. 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

3. 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.

4. Healthblend Nutritional Supplements
Sequential Processing
Finished Goods
Picking
Encapsulating
Bottling

5. 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

6. 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

7. 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)
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
Work in Process (Picking)
The mixture is transferred from picking to Encapsulating.

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

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

10. 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.

11. 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.

12. 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

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

14. 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
= equivalent units
= equivalent units
Total = 1,150 equivalent units

15. 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

16. 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

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

18. 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

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

20. 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

21. 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

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

23. 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 $
Healthblend Nutritional Supplements

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

25. Production Report

26. 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, 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

27. 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 $
Continued

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

29. Nonuniform Application of Manufacturing Inputs
Healthblend Nutritional Supplements

30. 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

31. 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

32. 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

33. 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
Equivalent units
80,000 68,000

34. 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

35. 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, work in process 20,000
Total units to Total units
account for 80,000 accounted for 80,000
Continued

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

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

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

39. 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

40. 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

41. Production Report—Fifo Costing
Appendix
Production Report—Fifo Costing

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

43. 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

44. 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)
Total Cost Assigned $13,640

45. 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

46. 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, ,500
Total units accounted for 60,000 37,500
Continued

47. 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 $
Continued

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

49. Chapter Six
The End