AMIS 525 Process Costing

Chapter 17 Equivalent Units

Process Physical Units Flow Model:

new units started finished units

new units started

finished units

new units started

finished units

FIFO cost flow model matches this physical flow model.

The Process Cost Allocation Dilemma The Dranik Manufacturing Company begins operation at the start of January. In the first month the company starts work on 1,000 units of its product. At the end of the month, 500 units have been completed and 500 units are still in process with an estimated degree of completion of 30 percent. Cost incurred for the month was $5,200. What is the cost transferred to the finished goods account and and the cost which remains in the work in process account at the end of the period?

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Solution: Incorrect FG WIP $5,200 / 1,000 = $5.20 per unit 500 * $5.20 = 500 * $5.20 = $2,600 $2,600 $5,200

Correct Equivalent Whole Units: 500 * 1.00 = 500 * .30 = Total 500 150 650

$5,200 / 650 = $8.00 per equivalent whole unit FG WIP 500 * $8.00 = 150 * $8.00 = $4,000 $1,200 $5,200

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Extended Example: In the second period (February) of operations, the Dranik Manufacturing Company started an additional 1,000 units and completed an additional 1,300 units. Cost incurred during the period was $10,000. The ending inventory was 50% completed. What is the cost transferred to the finished goods account and and the cost which remains in the work in process account at the end of the period?

Solution:

start of period

during the period

end of period

Beginning 500

Started STEP 1 1,000 Physical Completed Ending Units 800 200 1,500 Analysis

1,300 Completed

Q % @ START % ADDED % @ END E. U. @ Start E. U. Added E. U. @ End

B 500 30% 70% 100% 150 350 500

S&F 800 0% 100% 100% 0 800 800

E T STEP 2 200 1,500 Equivalent

Units

0% 50% 50%

Calculation

0 150 OLD 100 1,250 NEW 100 1,400 TOTAL

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COST OLD $1,200 NEW $10,000 TOTAL $11,200 $11,200 / 1,400 = $1,200 / 150 = $10,000 / 1,250 = $8.00 WA $8.00 FIFO $8.00 FIFO

STEP 3
Cost Per Equivalent Whole Unit

Solution: FG

150 * $8.00 = 350 * $8.00 = 800 * $8.00 = 100 * $8.00 =

$1,200 $2,800 $6,400 $800 $11,200

STEP 4 $4,000 $6,400 $10,400 $800 $11,200 $10,400 $800 $11,200 B S&F OUT E
Cost Allocation

WIP

or

FG WIP

1300 * $8.00 = 100 * $8.00 =

OUT E

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Extended Example: At the start of March, the WIP was 200 units 50% completed at a per equivalent unit cost of $8.00. In the third period (March) of operations, the Dranik Manufacturing Company started an additional 1,150 units. Cost incurred per equivalent unit of work during the period was $7.50. The ending inventory of 250 units was 60% completed. What is the cost transferred to the finished goods account and the cost which remains in the work in process account at the end of the period?

Solution:

start of period

during the period

end of period

Beginning 200

Started STEP 1 1,150 Physical Completed Ending Units 900 250 1,350 Analysis

1,100 Completed

B Q % @ START % ADDED % @ END E. U. @ Start E. U. Added E. U. @ End 200 50% 50% 100% 100 100 200

S&F 900 0% 100% 100% 0 900 900

E 250 0% 60% 60% 0 150 150

T 1350

STEP 2
Equivalent Units Calculation

100 OLD 1150 NEW 1250 TOTAL

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COST OLD NEW TOTAL

$800 $8,625 $9,425 new cost / 1,150 = $7.50 new cost = $8,625 $9,425 / 1,250 = FIFO

STEP 3
Cost Per Equivalent Whole Unit

$7.54 WA

Solution: FG

WIP

WA 100 * 100 * 900 * 1100 150 * 1250

STEP 4 $7.54 = $7.54 = $7.54 = $7.54 = $754 $754 $6,786 $8,294 $1,131 $9,425
Cost

$1,508 $6,786 $8,294 $1,131 $9,425 $8,294 $1,131 $9,425

B S&F OUT E Total OUT E

Allocation

or

FG WIP

1100 * $7.54 = 150 * $7.54 = 1250

Solution: FG

WIP
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FIFO 100 * 100 * 900 * 1100 150 * 1250

STEP 4 $8.00 = $7.50 = $7.50 = $7.50 = $800 $750 $6,750 $8,300 $1,125 $9,425
Cost

$1,550 $6,750 $8,300 $1,125 $9,425

B S&F OUT E Total

Allocation