A Simple Example of process costing: (No Beg. WIP and one production dept.

)
ACME Industries machines engine castings for an engine manufacturer.
Thus only inputs direct labor and manufacturing overhead into production. (There is no direct
material.)
There is only one production department the machining work center.
It began business on 1/1/90 and uses actual absorption costing.
The following information is available for January 1990.
Units in beginning W-I-P Inv.
0
Units started into production
230
Units completed
180
Units in ending W-I-P Inv
= (0 + 230 180) = 50
Manufacturing costs for January:
Direct labor
Manufacturing overhead

$10,000
$20,000

The 50 incomplete units were on average 40% complete as regards all conversion costs (
Direct Labor + Manufacturing Overhead)
Note: In general the degree of completion can be different for each cost component.
Required: Compute the following for January using actual absorption costing.
a. Cost-of-Goods-Manufactured

b. Ending balance of W-I-P inventory

Solution: Consider the W-I-P Inventory account

Work-In-Process Inventory
Beg.Bal 0 units
$0
Started 230 units
Manf. costs for Jan.
DL
$10,000
MOH
$20,000
End.Bal 50 units

180 units completed

$ ? (COGM)

$?

What is the accounting task at hand here?

To allocate the dollars in the Beg. Bal. ($0 here) and the periods manf. costs ($30,000 here)
between two groups of units the 180 (complete units) finished in the period and the 50
incomplete units (only 40% finished) left on the factory floor at the end of the period.
What seems a reasonable way to do this?
If a completed unit is charged $Y, then a 40% complete unit should be charged $0.4Y.
180 Y + 50 0.4 Y = 30,000 (180 + 50 0.4) Y = 30,000
Y = 30,000 / (180 + 500.4) Y = $150

Completing the allocation task:

the COGM for January

= 180 $150

= $27,000

the Ending W-I-P Inv.

= 50 0.4 $150

= $ 3,000
$ 30,000

Accountants refer to the denominator in the last expression for Y above, namely the sum (180 +
50 0.4) = 200, as the equivalent units of production for the period.
Makes sense, working on 180 units (100%) and 50 units (40%) is akin to working on 200
units (100%).
Accordingly, the resulting value for Y, $150, is referred to as the cost per equivalent unit.
Similarly, while there are 50 physical units (40% complete on average) in ending W-I-P, one
would say there are 20 equivalent units therein.
The dollar amount of ending W-I-P can thus be computed as either 500.4$150 = $3,000 or
20$150 =$3,000.

Process Costing Example 2: (different degrees of completion for cost components)

Midwest Refining reprocesses used motor oil. The following data are is for January 1999.
January 1999
Units
Materials
Conversion
Work in process, beginning:
0
Units started into production
200,000
Manf. Costs added
$78,400
$148,000
Units completed
180,000
Work in process, ending:
Units in process
?
Percentage completion
80%
25%
Required: Compute COGM and End WIP Inv. for January 1999.

SOLUTION
W-I-P
Beg. Inv Jan 99
0 Units
(180,000 units completed)
Cost of Beg. Inv.
$0
(200,000 Units started in Jan)
cost/eq.unit # eq.units
Material added:$78,400
Materials content $0.40180,000 = $72,000
Conversion:
$148,000
Conversion content $0.80180,000 = $144,000
Costs added in Jan.
$226,400
COGM in Jan.
$216,000
Total costs to be accounted for
$226,400
End. Inv Jan99 (0 + 200,000 180,000 =20,000 Units)
cost/eq.unit # eq.units
Matl. (80% complete): 0.40 16,000 = $6,400
Conv. (25% complete): 0.80 5,000 = $4,000
Cost of End. Jan. Inv.
$10,400
Cost/eq. unit for materials:
=

Total material content of production

Eq. units of production (material)

$78,400
=
180,000 + 20,000 0.80

$78,400
196,000

$0.40

Cost/eq. unit for conversion:

= Total conversion content of production =
$148,000
Eq. units of production (conversion)
180,000 + 20,000 0.25

$148,000
185,000

$0.80

Process Costing Example 3: (with beginning WIP Inventory)

Continuing with Example 2 into February 1999 (whence the ending WIP calculated earlier
becomes the beginning WIP), and given the following information:
February 1999

Units

Materials

Units started into production

Costs added
Units completed
Work in process, ending:
Units in process
Percentage completion

220,000
$96,200

Conversion

$171,890

210,000
?
60%

15%

Required: Compute COGM and End WIP Inv. for February 1999.
(Since now there is beginning WIP, we need to make a cost flow assumption. Use the weighted
average method.)

SOLUTION

W-I-P
End. Inv Jan99 (20,000 Units)
cost/eq.unit # eq.units
Matl. (80% complete): 0.40 16,000 = $6,400
Conv. (25% complete): 0.80 5,000 = $4,000
Cost of End. Jan. Inv.
$10,400

(210,000 units completed)

(220,000 Units started in Feb)

cost/eq.unit # eq.units
Material added:$96,200
Materials content $0.45210,000 = $94,500
Conversion:
$171,890
Conversion content $0.82210,000 = $172,200
Costs added in Feb.
$268,090
COGM in Feb.
$266,700
Total costs to be accounted for
$278,490
End. Inv Feb99 (20,000 + 220,000 210,000 = 30,000 Units)
cost/eq.unit # eq.units
Matl. (60% complete): 0.45 18,000 = $8,100
Conv. (15% complete): 0.82 4,500 = $3,690
Cost of End. Feb. Inv.
$11,790
Cost/eq. unit for materials:
=

Total material content of production

Eq. units of production (material)

$(6,400 + 96,200)
=
210,000 + 30,000 0.60

$102,600
228,000

$0.45

= Total conversion content of production =

Eq. units of production (conversion)

$(4,000 + 171,890)
=
210,000 + 30,000 0.15

$175,890
214,500

$0.82

Cost/eq. unit for conversion: