Process Costing - · PDF fileProcess Costing: The Basics!Determine total Direct Material costs...

© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill

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Process Costing

Student Tutorial

7


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Process Costing System Design

Process Costing is a costing system thatassigns costs equally to homogeneous units

within a particular time period.

This is an appropriate system to usewhen:•Units do not differ from each other.

•Unit cycle time is relatively short.

•The production process is continuous.

This is an appropriate system to usewhen:•Units do not differ from each other.

•Unit cycle time is relatively short.

•The production process is continuous.


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Process Costing at Monterrey BayAbalone

Human andphysical

resources

Human andphysical

resources

Cultivation processactivities

Cultivation processactivities

Grow-out processactivities

Grow-out processactivities

Market-size abaloneMarket-size abalone

Finished Goods InventoryFinished Goods Inventory


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Process Costing: The Basics

Costs will be accumulated by process. They willnot be traced to individual units of product.


Direct MaterialsDirect Materials Conversion CostsConversion Costs


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Raw material directlytraceable to the

process.

Raw material directlytraceable to the

process.



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labour and overheaddirectly traceable to the

process.

labour and overheaddirectly traceable to the

process.



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DirectMaterials (DM)


ConversionCosts (CC)


+

Total Cost per Unit

CC $

÷Units

Produced =

CC Cost per Unit

DM $

÷Units

Produced =

DM Cost per Unit


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!Determine total Direct Material costs

"Compute DM Cost per Unit

#Determine total Conversion Costs

$Compute CC Cost per Unit

%Add Steps 2 and 4 to get Total Costper Unit

&COGS = Step 5 × Units Sold

'Ending Inventory = Step 5 × Units NotSold

!Determine total Direct Material costs

"Compute DM Cost per Unit

#Determine total Conversion Costs

$Compute CC Cost per Unit

%Add Steps 2 and 4 to get Total Costper Unit

&COGS = Step 5 × Units Sold

'Ending Inventory = Step 5 × Units NotSold


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Example 1: All Units FullyCompleted (No WIP)

Clark, Inc. is a new company that makes shinglesfrom storm-damaged cedar trees. The product

sells at a premium and is in high demand.

During June, they purchased 90,000 board feetcedar costing $350,000. They spent $105,000 on

labour. Clark, Inc. incurred other processoverhead (insurance, rent, benefits, etc.) of$280,000. The result was 1,000,000 shingles

produced. There were no units in beginning orending WIP.

Compute the cost per shingle produced.

Clark, Inc. is a new company that makes shinglesfrom storm-damaged cedar trees. The product

sells at a premium and is in high demand.

During June, they purchased 90,000 board feetcedar costing $350,000. They spent $105,000 on

labour. Clark, Inc. incurred other processoverhead (insurance, rent, benefits, etc.) of$280,000. The result was 1,000,000 shingles

produced. There were no units in beginning orending WIP.



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Example 1: All Units FullyCompleted (No WIP)





+

Total Cost Per Unit $0.455

$350,000 ÷ 1,000,000 = $0.350

$105,000 ÷ 1,000,000 = $0.105


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Some Units Not Fully Complete(Ending WIP)

In many cases,there will be

some units at theend of the month

still in theprocess.

In many cases,there will be

some units at theend of the month

still in theprocess.

With a continuousprocess, it would beunrealistic to expect

every unit to be completeat the end of each month

With a continuousprocess, it would beunrealistic to expect

every unit to be completeat the end of each month

We must compute EQUIVALENT UNITS ofProduction for the items still in Ending WIP.



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Equivalent Units representthe amount of work

actually accomplished,expressed as the numberof units that could havebeen fully completed.

+

½

½

1

+

=


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# of Partially Completed Units

× % Completion =Equivalent Units in Ending WIP

We have to compute EQUIVALENT UNITS inEnding WIP for both Direct Materials and for

Conversion Costs.

We have to compute EQUIVALENT UNITS inEnding WIP for both Direct Materials and for

Conversion Costs.

For example, four quarters is equivalentto one dollar.

For example, four quarters is equivalentto one dollar.


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Total EQUIVALENT UNITS = EU in Ending WIP +Units Completed and Transferred to Finished

Goods.

Total EQUIVALENT UNITS = EU in Ending WIP +Units Completed and Transferred to Finished

Goods.

Equivalent Units in Ending WIP

+

Units Completed & Transferred

Out

=Total Equivalent

Units


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!Summarize the flow of physicalunits.

"Compute the number ofequivalent units.

#Summarize the total costs toaccount for (for both DM and CC)

$Compute costs per equivalentunit.

%Assign costs to COGS and toending WIP.

!Summarize the flow of physicalunits.

"Compute the number ofequivalent units.

#Summarize the total costs toaccount for (for both DM and CC)

$Compute costs per equivalentunit.

%Assign costs to COGS and toending WIP.


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In its first month, Clark, Inc. purchased 90,000 boardfeet of cedar for $350,000. They spent $105,000 on

labour and had other process overhead of $280,000.

Clark started 1,200,000 shingles in July, completed1,000,000 shingles and sold 900,000 shingles.

The ending WIP was 80% complete with respect tomaterial, but only 30% of the conversion work has

been done.


In its first month, Clark, Inc. purchased 90,000 boardfeet of cedar for $350,000. They spent $105,000 on


Clark started 1,200,000 shingles in July, completed1,000,000 shingles and sold 900,000 shingles.

The ending WIP was 80% complete with respect tomaterial, but only 30% of the conversion work has

been done.


Example 2: Some Units Not FullyComplete (Ending WIP)


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Step 1: Compute the flow of physical goods

Beginning

Balance +

Transfers

In -

Transfers

Out =

Ending

Balance0 + 1,200,000 - 1,000,000 = 200,000

100% complete for materials

100% complete for conversion







. .


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. .

Step 2: Compute Equivalent Units:



Equivalent Units for Materials:? × ? = ?

Equivalent Units for Conversion:? × ? = ?


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. .




Equivalent Units for Materials:200,000 × 80% = 160,000

Equivalent Units for Conversion:200,000 × 30% = 60,000


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. .



+


Out

=Total

Equivalent Units

Equivalent Units for Materials:? + ? = ?

Equivalent Units for Conversion:? + ? = ?


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. .



+


Out

=Total

Equivalent Units

Equivalent Units for Materials:160,000 + ? = ?

Equivalent Units for Conversion:60,000 + ? = ?

From the priorcomputation.

From the priorcomputation.


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. .



+


Out

=Total

Equivalent Units

Equivalent Units for Materials:160,000 + 1,000,000 = ?

Equivalent Units for Conversion:60,000 + 1,000,000 = ?

Transferred from WIP to FinishedGoods

Transferred from WIP to FinishedGoods


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. .



+


Out

=Total

Equivalent Units

Equivalent Units for Materials:160,000 + 1,000,000 = 1,160,000

Equivalent Units for Conversion:60,000 + 1,000,000 = 1,060,000


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.

Materials ConversionStep 3: Summarize the Total Costs to Account For $350,000 $385,000

Step 4: Compute Cost per Equivalent Unit ÷ 1,160,000 ÷ 1,060,000

Per Unit Cost $0.3017 $0.3632


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UnitsCost Per

Unit TotalGoods Completed 1,000,000 0.6649 $664,936Ending WIP: Materials 160,000 0.3017 48,272 Conversion 60,000 0.3632 21,792Total $735,000

Step 5: Assign Costs to Units Completed and In-Process

Note that this number is rounded by $36.Note that this number is rounded by $36.


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.UnitsCost Per

Unit TotalGoods Completed 1,000,000 0.6649 $664,936Ending WIP: Materials 160,000 0.3017 48,272 Conversion 60,000 0.3632 21,792Total $735,000

Step 5: Assign Costs to Units Completed and In-Process

Ending WIP = $48,272 + $21,792 = $70,064Ending WIP = $48,272 + $21,792 = $70,064


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Recognizing Spoilage

Spoilage represents the amount of resources that gointo the process, but DO NOT result in finished product.

The 5-step approach discussed earlier can be modifiedby including Spoilage as an additional type of input and

adjusting the formulas accordingly.

Spoilage represents the amount of resources that gointo the process, but DO NOT result in finished product.

The 5-step approach discussed earlier can be modifiedby including Spoilage as an additional type of input and

adjusting the formulas accordingly.


Beginning

Balance +

Transfers

In -

Transfers

Out =

Ending

Balance.

This now includes FinishedGoods & Spoilage.

This now includes FinishedGoods & Spoilage.


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Recognizing SpoilageStep 2: Computing Equivalent Units:

# of Partially

Completed Units

×%

Completion =

Equivalent Units of Production

(EU)

Use this computation for EU in Ending WIP and EU in Spoilage.

EU in Ending

WIP +

EU in Spoilage

+Units Completed

& Transferred Out =

Total Equivalent

Units


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Recognizing SpoilageSteps 3 & 4 are not affected by Spoilage.Steps 3 & 4 are not affected by Spoilage.

UnitsCost Per

Unit TotalGoods CompletedSpoilageEnding WIP: Materials ConversionTotal

Step 5: Assign Costs

Spoilage is added as anadditional line item in

Step 5.

Spoilage is added as anadditional line item in

Step 5.


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Beginning & Ending WIP PlusSpoilage

When there is Beginning WIP, thedetermination of equivalent units

becomes somewhat more complicated.

When there is Beginning WIP, thedetermination of equivalent units

becomes somewhat more complicated.

Primary question to be answered:Which units were completed first

during the period?(How you answer this question willaffect the Total EU for the period.)

Primary question to be answered:Which units were completed first

during the period?(How you answer this question willaffect the Total EU for the period.)


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Weighted Average vs. FIFOWeighted Average vs. FIFO

Weighted-Average

All units and costsare considered

together to determineaverage cost per EU,regardless of whether

the costs wereincurred last period

or currently.

Weighted-Average




or currently.

FIFOCosts are accountedfor by layer. Cost perEU for this period iscomputed separatelyfrom the Cost per EU

for last period.

FIFOCosts are accountedfor by layer. Cost perEU for this period iscomputed separatelyfrom the Cost per EU

for last period.


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Weighted-Average




or currently.

Weighted-Average




or currently.

Weighted-Average isthe most

commonlyused method.

Weighted-Average isthe most

commonlyused method.

Weighted Average vs. FIFOWeighted Average vs. FIFO


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Example: Weighted-AverageFor August, Clark purchased 100,000 board feet ofcedar for $400,000. They spent $120,000 on labour

and had other process overhead of $155,000.

Clark started 1,400,000 units in August, completing1,200,000 units. Ending WIP had 350,000 shingles.Beginning WIP was 200,000 shingles. Spoilage was

50,000 completed shingles.

The ending WIP was 70% complete for material, and40% complete for conversion. Beginning WIP was80% for material and 30% complete for conversion.

Compute the cost per toothpick produced in August.

For August, Clark purchased 100,000 board feet ofcedar for $400,000. They spent $120,000 on labour

and had other process overhead of $155,000.

Clark started 1,400,000 units in August, completing1,200,000 units. Ending WIP had 350,000 shingles.Beginning WIP was 200,000 shingles. Spoilage was

50,000 completed shingles.

The ending WIP was 70% complete for material, and40% complete for conversion. Beginning WIP was80% for material and 30% complete for conversion.

Compute the cost per toothpick produced in August.


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Example: Weighted-Average


Beginning

Balance +

Transfers

In -

Transfers

Out =

Ending

Balance200,000 + 1,400,000 - 1,250,000 = 350,000









. .

Goods Completed + SpoilageGoods Completed + Spoilage

.


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. .



× % Completion =Equivalent Units

in Beginning WIP




7-36


. .







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. .

EU in Ending

WIP +

EU in Spoilage

+Units Completed

& Transferred Out =

Total Equivalent

Units

EU for Materials245,000 + 50,000 + 1,200,000 = 1,495,000

EU for Conversion140,000 + 50,000 + 1,200,000 = 1,390,000

Step 2: Total Equivalent UnitsStep 2: Total Equivalent Units


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.

Materials ConversionStep 3: Beg. WIP Costs $48,272 $21,792 Current Costs 400,000 275,000 Total $448,272 $296,792Step 4: ÷ 1,495,000 ÷ 1,390,000 Per Unit Cost 0.2998 0.2135


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UnitsCost Per

Unit TotalGoods Completed 1,200,000 0.5133 $616,040 *Spoilage 50,000 0.5133 $25,668 *Ending WIP: Materials 245,000 0.2998 $73,463 * Conversion 140,000 0.2135 $29,893 *Total $745,064

* rounded





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Let’s go overthat storyagain . . .Only thistime, let’suse FIFO!


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Example: FIFO


Beginning

Balance +

Transfers

In -

Transfers

Out =

Ending

Balance200,000 + 1,400,000 - 1,250,000 = 350,000









. .

Goods Completed + SpoilageGoods Completed + Spoilage

.


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Example: FIFO

. .Total EU –Beg. WIP

EU =

Current Period EU

EU for Materials1,495,000 – 160,000 = 1,335,000

EU for Conversion1,390,000 – 60,000 = 1,330,000

Step 2: With FIFO, compute the Current PeriodEquivalent Units by subtracting the Beg. WIP

Equivalent Units.

Step 2: With FIFO, compute the Current PeriodEquivalent Units by subtracting the Beg. WIP

Equivalent Units.


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Example: FIFO

.

Materials ConversionStep 3: Beg. WIP Costs Ignore! Ignore! Current Costs 400,000 275,000 Total $400,000 $275,000Step 4: ÷ 1,335,000 ÷ 1,330,000 Per Unit Cost $0.2996 $0.2068

Step 3: With FIFO, we only use the CurrentPeriod Costs, and we ignore the Beg. WIP

Costs.

Step 3: With FIFO, we only use the CurrentPeriod Costs, and we ignore the Beg. WIP

Costs.


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UnitsCost Per

Unit TotalGoods Completed 1,200,000 Mixed $617,390 *Spoilage 50,000 $0.5064 $25,320 *

Ending WIP: Materials 245,000 $0.2996 $73,402 *

Conversion 140,000 $0.2068 $28,952 *Total $745,064

* rounded


Example: FIFO



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UnitsCost Per

Unit TotalBeginning Costs 200,000 $70,064Costs to Complete Beg. Inventory Materials (20% left) 200,000 $0.2996 11,984 * Conversion (70% left) 200,000 $0.2068 $28,952 *Started & Finished 1,000,000 $0.5064 $506,400 *Total $617,400

* rounded

Proof of Cost of Completed Goods

Example: FIFO

Return


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Now let’s see if you cancompute the Cost per

Equivalent Unit yourself. Ofcourse, if you don’t think

you can handle thechallenge, you can end thissession by clicking on the

sad fellow below.


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Cost Per Equivalent UnitExample: Weighted-Average

For September, Clark, Inc. purchased 95,000 boardfeet of cedar for $375,000. Clark spent $140,000 onlabour and had other process overhead of $120,000.

Clark started 1,100,000 units in July, completing1,000,000 units. Beginning WIP was 350,000 units.They were 70% complete for material ($78,719) and40% complete for conversion ($32,214). Spoilage

was 60,000 completed shingles.

The ending WIP was 75% complete for material, and60% complete for conversion.

Compute the September cost per shingle produced.

For September, Clark, Inc. purchased 95,000 boardfeet of cedar for $375,000. Clark spent $140,000 onlabour and had other process overhead of $120,000.






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What are the equivalent units in Ending WIPwith respect to materials?

A. 350,000 shingles

B. 390,000 shingles

C. 245,000 shingles

D. 292,500 shingles

Return to originalinfo.


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A. 350,000 shingles

B. 390,000 shingles

C. 245,000 shingles

D. 292,500 shingles


This is the number ofunits (at various stages

of completion) inBeginning WIP. Try

again.


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A. 350,000 shingles

B. 390,000 shingles

C. 245,000 shingles

D. 292,500 shingles


This is the number ofunits (at various stages

of completion) inEnding WIP. Try again.


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A. 350,000 shingles

B. 390,000 shingles

C. 245,000 shingles

D. 292,500 shingles


This is the number ofequivalent units in

Beginning WIP. Tryagain.


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A. 350,000 shingles

B. 390,000 shingles

C. 245,000 shingles

D. 292,500 shingles

Congratulations!You can now

proceed.

390,000 × 75.00% = 292,500


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For September, Clark, Inc. purchased 95,000 boardfeet of cedar $375,000. Clark spent $140,000 on






For September, Clark, Inc. purchased 95,000 boardfeet of cedar $375,000. Clark spent $140,000 on







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What is the cost per equivalent unit withrespect to materials?

A. $ .2258 per shingle

B. $ .3213 per shingle

C. $ .3355 per shingle

D. $ .3655 per shingle








7-55













This is not thecorrect answer.

Try again.


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This is not thecorrect answer.

Try again.


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This is the cost perequivalent with

respect toconversion. Try

again.


7-58












Congratulations!You can now

proceed.

$453,719 ÷ 1,352,500 = 0.3355


7-59

End of Chapter 7

I get thefeelingI’m in

over myhead!

Process Costing - · PDF fileProcess Costing: The Basics!Determine total Direct Material costs...

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