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Managerial Accounting
Seminar 4
1 1
Mangerial Accounting
STUDY UNIT 4
Process Costing
Chapter 2
❑ Four Steps for Process
Costing
2 2
Learning outcomes
4 4
Assigning Costs to Products –
Some Units Not Fully Completed
5 5
Assigning Costs to Products –
Some Units Not Fully Completed
Step 1 Step 2
Physical Equivalent Units
Flow of Units in Feb Units Material Conversion
Units to account for
Beginning work in process inventory 0
Units started this period 80,000
Total units to account for 80,000
Units accounted for
Completed and transferred out 40,000 40,000 40,000
Ending work in process inventory 40,000 40,000 10,000
Total units accounted for 80,000 80,000 50,000
25% x 40,000
6 6
Assigning Costs to Products –
Some Units Not Fully Completed
$40,000/80,000 $20,000/50,000
Flow of Costs in Feb Material Conversion Total
Costs to account for
Costs in beginning work in process inventory $ 0 $ 0 $ 0
Current period costs 40,000 20,000 60,000
Total costs to account for $ 40,000 $ 20,000 $ 60,000
7 7
Process Costing with Beginning and Ending WIP Inventory
More challenging :
Beginning WIP Inventory consists of goods
started last period but not
completed by the end of last period.
8 8
Assigning Costs Using Weighted-Average
Costing
❑ The weighted average method . . .
➢ Makes no distinction between work done in the
prior period and work done in the current
period.
➢ Blends together units and costs in beginning
inventory with units and costs in the current
period.
9 9
Assigning Costs Using Weighted-Average
Costing
10 10
Flow of units
Units accounted for
Beginning
Inventory 130,000 units
40,000 units completed
(40% completed) 160,000 units
(units to account
for) Ending Inventory
120,000 units 30,000 units
started (30% completed)
11 11
Assigning Costs Using Weighted-Average
Costing
Step 1 Step 2
Physical Equivalent Units
Flow of Units in March Units Material Conversion
Units to account for
Beginning work in process inventory 40,000
Units started this period 120,000
Total units to account for 160,000
Units accounted for
Completed and transferred out 130,000 130,000 130,000
Ending work in process inventory 30,000 12,000 18,000
Total units accounted for 160,000 142,000 148,000
30,000*40% 30,000*60%
Complete step 2
12 12
Assigning Costs Using Weighted-Average
Costing
$71,000/142,000 $66,600/148,000
Flow of Costs in March Material Conversion Total
Costs to account for
Costs in beginning work in process inventory $ 20,000 $ 4,000 $ 24,000
Current period costs 51,000 62,600 113,600
Total costs to account for $ 71,000 $ 66,600 $ 137,600
FIFO costing
Assumes units in
Distinguishes between
beginning work in
work done in the prior
process inventory are
period and work done in
completed and
the current period.
transferred first.
14 14
Assigning Costs Using (FIFO) Costing
Advantages of
FIFO costing
15 15
Using the four-step process in FIFO method
Step 1 Step 2
Physical Equivalent Units
Flow of Units in Mar Units Material Conversion
Units to account for
Beginning work in process inventory 40,000
Units started this period 120,000
Total units to account for 160,000
Units accounted for
Units completed and transferred out 130,000
16 16
Using the four-step process in FIFO method
Step 1 Step 2
Physical Equivalent Units
Flow of Units in Mar Units Material Conversion
Units to account for
Beginning work in process inventory 40,000
Units started this period 120,000
Total units to account for 160,000
Units accounted for
Started last period & completed 40,000 - 30,000
Started this period & completed 90,000 90,000 90,000
Ending work in process inventory 30,000 12,000 18,000
Total units accounted for 160,000 102,000 138,000
40,000x0% (all completed last month) 40,000x75% (25% done last month)
30,000x40% 30,000x60%
17 17
Assigning Costs Using FIFO Costing
Use current costs only to compute cost/EU
$51,000/102,000 $62,600/138,000
Flow of Costs in March Material Conversion Total
Costs to account for
Prior period costs $ 20,000 $ 4,000 $ 24,000
Current period costs 51,000 62,600 113,600
Total costs to account for $ 71,000 $ 66,600 $ 137,600
18 18
Cost of goods manufactured for the
month
Weighted average method
Cost of goods manufactured
= Costs assigned to units completed & transferred out
= $123,500 (slide 13)
FIFO
Cost of goods manufactured
= Cost of opening WIP + Current period’s costs
assigned to units completed & transferred out
= $24,000 + $45,000 + $54,450
= $123,450 (slide 18)
19 19
Flow of Manufacturing Costs
Required:
1.Calculate the costs transferred out of each department.
2.Prepare journal entries that reflect these costs transfers.
20 20
Journal entries & Costs transferred out
21 21
Journal entries & Costs transferred out
22 22
Journal entries & Costs transferred out
23 23
Journal entries & Costs transferred out
24 24
Journal entries & Costs transferred out
25 25
Journal entries & Costs transferred out
26 26
Journal entries for Be Tech
27 27
Journal entries for Be Tech
28 28
Spoilage & Process Costing
❑ Normal spoilage
➢ treated as part of cost of goods manufactured and transferred
out with the good units produced
➢ considered a product cost
❑ Abnormal spoilage
➢ Treated as a “loss” on the income statement and must be
expensed in the period it is incurred.
➢ considered a period cost.
29 29
Spoilage illustration (Jul 2020 Q2
adapted
❑ P Ltd manufactures small plastic pails with metal handles. P Ltd uses
process costing and weighted average costing. The production process
takes place in two sequential departments. Pails completed in Moulding
Department during a certain calendar month are transferred to Assembly
Department to be attached with the metal handles and packaging, in the
following month.
Moulding Department Assembly Department
(April X0) (May X0)
Direct material incurred $134,000 $156,000
30 30
Spoilage illustration (Jul 2020 Q2
adapted
❑ There was no beginning and ending WIP in April 20X0 for the Moulding
Department. All material and conversion costs are added evenly throughout the
Moulding process. In Assembly Department, handles (DM) are added at the
beginning of the production process. Pails are inspected at 90% point in Assembly
Department. If a pail does not pass the inspection, no packaging cost is added to
the product cost, and the defective pails are discarded. At the end of the
production process in Assembly Department, ‘good’ pails are transferred to the
warehouse for storage.
❑ There were 4,000 units of pails in WIP at the beginning of May 20X0 in Assembly
Department. These pails were 50% complete with respect to conversion costs.
Conversion costs are incurred evenly throughout the production process. At the
end of May 20X0, there were 1,000 pails in WIP and these pails were 80%
complete with respect to conversion costs. During May 20X0, 180,000 pails were
started. At the end of May 20X0, 177,000 finished pails were transferred to the
warehouse. Normal spoilage is set at 3% of inspected pails.
(a) Compute the normal and abnormal spoilage in units (b) the cost incurred for spoilage,
WIP and the cost per pail manufactured and (c) journal entries to close the spoilage costs
(normal and abnormal) at the end of May 2020 from Assembly Department.
31 31
Spoilage illustration
a) Compute the normal and abnormal spoilage in units
32 32
Spoilage illustration
b) Calculate the cost incurred for spoilage, WIP and the cost per
pail manufactured
Calculate the EU
equivalent units Physical units TIC DM CC
Beg WIP 4,000 100% 100% 50%
Started 180,000
Total 184,000
Completed 177,000 177,000 177,000 177,000
Spoiled (90% complete) 6,000 6,000 6,000 5,400
End WIP (80% complete) 1,000 1,000 1,000 800
Total 184,000 184,000 184,000 183,200
$1.98 x 5,490
(See slide 32) $0.86 x 510
(See slide 32) $1.68 x 800
34 34
Spoilage illustration
❑ Normal loss is treated as part of cost of goods
manufactured and transferred out with the good units
produced.
➢ The costs of completed units from assembly process
for the period = $798,751 + $23,855
➢ = $822,606
➢ Cost per unit (litre) = $822,606 ÷ 177,000
➢ = $4.65
35 35
Spoilage illustration
c) Post the relevant journal entries journal entries to close the
spoilage costs (normal and abnormal)
Dr Cr
Finished Goods Inventory $822,606
WIP Assembly Dept (completed) $798,751
WIP Assembly Dept (normal spoilage) $23,855
36 36
Class Participation Feedback
37 37
Activity
38 38