6 -1

CHAPTER

Process
Costing

6 -2

Objectives
1. Describe theAfter
basicstudying
characteristics
this and cost
flows associated
with
process
manufacturing.
chapter, you should
2. Define equivalent
beunits
able and
to: 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
Continued
using the weighted
average method.

6 -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.

6 -4

Healthblend
Nutritional
Supplements

Picking

Encapsulating

Sequential
Processing

Bottling

Finished
Goods

6 -5

Parallel Processing
(hard disk drives for personal computers)
Process 1

Process 2
Assembly

Process 3
Production and
assembly of
write-head and
Production
disk driveof
circuit board

Process 4
Testing of
write-head and
disk drive
Testing of
circuit board

Finished
Goods

6 -6

Flow of Manufacturing Costs Through the

Accounts of a Process-Costing Firm (Healthblend)
Picking Department
Work in Process

Materials:
Herbs
Vitamins
Minerals
Picking labor
Applied OH

Encapsulating Dept.
Work in Process

Transferred-in
from Picking
Materials:
Capsules
Encapsulating
labor
Applied OH

Bottling Dept.
Work in Process

Transferred-in
from
Encapsulatin
g
Materials:
Bottles
Bottling
labor
Applied OH

6 -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)

2 200 00

The receiving report and the invoice are

Work in Process (Picking)
used to record the receipt of the
merchandise and to control the payment.

The mixture is transferred from

picking to Encapsulating.

2 200 00

6 -8

The Encapsulating Department

costs are:
Healthblend
Nutritional
Supplements

Direct materials
Direct labor
Applied overhead

Work in Process (Bottling)

$1,000
60
500
3 760 00

The receiving report and the invoice are

Work in Process (Encapsulating)
3
used to record the receipt of the
merchandise and to control the
payment.
$2,200
+ $1,000
+ $60 + $500

The cost is transferred from

Encapsulating to Bottling.

760 00

6 -9

The Bottling Department costs are:

Healthblend
Nutritional
Supplements

Finished Goods

Direct materials
Direct labor
Applied overhead

$800
300
600

5 460 00

The receiving report and the invoice are

Work in Process (Bottling)
5
used to record the receipt of the
merchandise and to control the
payment.
$3,760
+ $800 +
$300 + $600

The cost is transferred to the

finished goods warehouse.

460 00

6 -10

A production report provides

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

6 -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.

6 -12

Equivalent Units of Production

Department A
Units in beginning work in process
Units completed

Units in ending work in process

(25% complete)
Total manufacturing cost

--1,000
600
$11,500

6 -13

Equivalent Units of Production

Concept:

=
100 units completed

= 100 equivalent units

=
200 units, 50% completed

= 100 equivalent units

Continued

6 -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

= 150 equivalent units

Total = 1,150 equivalent units

6 -15

Preparing a Production Report

1. Physical units flow analysis
2. Calculation of equivalent units

3. Computation of unit cost

4. Valuation of inventories (goods transferred
out and ending work in process)

5. Cost reconciliation

6 -16

Weighted Average Method

Healthblend
Nutritional
Supplements

Production:
Units in process, July 1, 75% complete
Units completed and transferred out
Units in process, July 31, 25% complete
Costs:
Work in process, July 1
Cost added during July

20,000
50,000
10,000

$ 3,525
10,125

6 -17

Weighted Average Method

Healthblend
Nutritional
Supplements
BWIP Cost

July Cost

$3,525

$10,125

$13,650

Total Manufacturing Cost

6 -18

Weighted Average Method

Output for July
60,000 Total Physical Units
BWIP

Becomes 52,500
Equivalent Units
20,000

+
Units Started and Completed
30,000
EWIP, 25% Complete

+
2,500
52,500

6 -19

Weighted Average Method

Cost Assignment:

Cost/Unit = $13.750 52,500 + $0.26

Transferred Out ($0.26 x 50,000)
EWIP ($0.26 x 2,500)
Total Cost Assigned

$13,000
650
$13,650

6 -20

Step 1: Physical Flow Schedule

Units to account for:
Units in beginning work in process (75% complete)
Units started during the period
Total units to account for
Units accounted for:
Unit completed and transferred out:
Started and completed
From beginning work in process

Units in ending work in process (25%

complete)
Total units accounted for

20,000
40,000
60,000

30,000
20,000 50,000
10,000
60,000

6 -21

Step 2: Calculation of Equivalent Units

Weighted Average Method
Units completed
Add: Units in ending work in process x Fraction
complete (10,000 x 25%)

Equivalent units of output

50,000
2,500

52,500

Healthblend
Nutritional
Supplements

6 -22

Step 3: Computation of Unit Cost

$13,650
52,500

$0.26 per equivalent

unit

6 -23

Step 4: Valuation of Inventories

Cost of goods transferred to the encapsulating
department:
50,000 equivalent units x $0.26
Ending inventory:
2,500 equivalent units x $0.26

Healthblend
Nutritional
Supplements

$13,000

650

6 -24

Step 5: Cost Reconciliation

Goods transferred out
Goods in ending work in process
Total costs accounted for

$13,000
650
$13,650

Healthblend
Nutritional
Supplements

The
manufacturing
costs to
account for are
also $13,650.

6 -25

Production
Report

Weighted
average

Healthblend Company
Picking Department
Production Report for July 2004

6 -26

UNIT INFORMATION
Physical Flow
Units to account for:
Units in beginning
work in process
Units started
Total units to
account for

Units accounted for:

Units completed
20,000
Units in ending
40,000
work in process
Total units
60,000
accounted for

Equivalent Units
Units completed
50,000
Units in ending
work in process
2,500
Total equivalent units 52,500

Continued

50,000
10,000
60,000

6 -27

COST INFORMATION
Costs to account for:
Beginning work
in process
Incurred during
period
Total cost to
account for

$ 3,525
10,125
$13,650

Cost per equivalent unit $

0.26
Continued

6 -28

Costs accounted for:

Goods transferred out ($0.26 x
50,000)
Goods in ending work in
process ($0.26 x 2,500)
Total cost accounted for

Transferred

Ending

Out

WIP

Total

$13,000

---

$13,000

--$13,000

$650
$650

650
$13,650

6 -29

Nonuniform
Application of
Manufacturing
Inputs
Healthblend
Nutritional
Supplements

6 -30

Healthblend
Nutritional
Supplements
10,000 units
Beginning
WIP inventory 50,000 units
Started and
completed
Materials, 100%
complete; conversion
100% complete as to
cost, 50% complete
both materials and
conversion cost

Equivalent Units
Picking Department
60,000
equivalent units
of material and
conversion cost
transferred out

6 -31

Equivalent Units
Picking Department

Healthblend
Nutritional
Supplements

Materials

Conversion
Costs

60,000

60,000

10,000 units
Beginning
WIP inventory 50,000 units
Started and
completed

September

20,000 units
Ending WIP
inventory

Materials, 100% complete; conversion cost,

40% complete

6 -32

Equivalent Units
Picking Department

Healthblend
Nutritional
Supplements

Materials

Conversion
Costs

60,000

60,000

20,000

8,000

10,000 units
Beginning
WIP inventory 50,000 units
Started and
completed

September

20,000 units
Ending WIP
inventory

6 -33

Equivalent Units
Picking Department

Healthblend
Nutritional
Supplements

Materials

Conversion
Costs

60,000

60,000

20,000
80,000

8,000
68,000

10,000 units
Beginning
WIP inventory 50,000 units
Started and
completed

September

20,000 units
Ending WIP
inventory

Equivalent units

6 -34

Materials $1,600
Conversion
cost
$200

Healthblend
Nutritional
Supplements

Materials
$12,000
Conversion
cost
$3,200

MaterialsCost $13,600
Conver.
$3,400
EU

10,000 units
Beginning
WIP inventory 50,000 units
Started and
completed

= Cost per EU
20,000 units
Ending WIP
inventory

August

September

October

80,000
68,000
$0.22
$0.05

Weighted
average

Healthblend Company
Picking Department
Production Report for September 2004

6 -35

UNIT INFORMATION
Physical Flow
Units to be accounted for:
Units accounted for:
Units in beginning
Units completed
work in process
10,000
Units in ending
Units started
70,000
work in process
Total units to
Total units
account for
80,000
accounted for

Continued

60,000
20,000
80,000

6 -36

Equivalent Units
Materials Conversion Cost
Units completed
Units in ending work in
process
Total equivalent units

60,000

60,000

20,000
80,000

8,000
68,000

Continued

6 -37

COST INFORMATION
Conversion
Materials
Cost

Total

Costs to account for:

Beginning work in process
Incurred during the period
Total costs to account for

$ 1,600
12,000
$13,600

$ 200
3,200
$3,400

$ 1,800
15,200
$17,000

Cost per equivalent unit

$ 0.05

0.17

Continued

0.22

6 -38

Costs accounted for:

Goods transferred out ($0.22 x
60,000)
Goods in ending work in
process:
Materials ($0.17 x 20,000)
Conversion ($0.05 x 8,000)
Total cost accounted for

Transferred

Ending

Out

WIP

Total

$13,200

---

$13,200

----$13,200

$3,400
400
$3,800

3,400
400
$17,000

6 -39

Multiple Departments
Units to account for:
Units in beginning work in process
Units transferred in during September
Total units to account for
Units accounted for:
Units completed and transferred out:
Started and completed
From beginning work in process
Units in ending work in process
Total units accounted for

15,000
60,000
75,000

55,000
15,000
5,000
75,000

6 -40

Multiple Departments
Transferred in:
Units completed
Add: Units in ending work in
process X Fraction complete
(5,000 x 100%)
Equivalent units of output

70,000

5,000
75,000

Unit cost (transferred-in category) = ($13,200 $3,000/75,000)

= $16,200/75,000
= $0.216

6 -41

Production
ReportFifo
Costing

6 -42

FIFO Method
BWIP Cost

July Cost

$3,525

$10,125

BWIP
Units

CurrentPeriod Units

6 -43

FIFO Method
Output for July
60,000 Total Physical Units
BWIP

Become 37,500
Equivalent Units
5,000

Units Started and Completed

30,000

+
EWIP, 25% complete
2,500
37,500

6 -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

675
$13,640

FIFO

Healthblend Company
Picking Department
Production Report for July 2004
UNIT INFORMATION

Units accounted for:

Units in beginning
work in process
Units started during
the period
Total units to
account for

20,000
40,000
60,000

Continued

6 -45

6 -46

Physical Equivalent
Flow
Units
Units accounted for:
Units started and completed
Units completed from beginning work
in process
Units in ending work in process
Total units accounted for

30,000

30,000

20,000
10,000
60,000

5,000
2,500
37,500

Continued

6 -47

COST INFORMATION
Costs to account for:
Beginning work
in process
Incurred during
period
Total cost to
account for

$ 3,525
10,125
$13,650

Cost per equivalent unit $

0.27
Continued

6 -48

Transferred
Out
Costs accounted for:
Units in beginning work in process:
From prior period
$ 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

Ending
WIP

Total

---

$ 3,525

---

1,350

---

8,100

$675
$675

675
$13,650

6 -49

Chapter Six

The End

6 -50