Lecture 15

Process Costing

Readings
Chapter 17,Cost Accounting, Managerial Emphasis, 14th edition by Horengren
Chapter 4, Managerial Accounting 12th edition by Garrison, Noreen, Brewer

1
 Learning Objectives
 Record the flow of materials, labor, and overhead through a process cost
system.
 Compute the equivalent units of production using the weighted-average
method.
 Compute the cost per equivalent unit using the weighted-average method.
 Assign costs to units using the weighted-average method.
 Compute the equivalent units of production using the FIFO method.
 Compute the cost per equivalent unit using the FIFO method.
 Assign costs to units using the FIFO method
 Allocate service department costs to operating departments using the
direct method.
 To allocate service department costs to operating departments using the
step-down method.
2
Equivalent Units – FIFO Method
Let’s revisit the Double Diamond Skis example.
Assume the following activity is reported in Shaping
and Milling Department for May:

Percent Completed
Shaping and Milling Department Units Materials Conversion
Beginning work in process 200 55% 30%

Units started into production in May 5,000

Units completed during May and 4,800 100% 100%

transferred to the next department

Ending working process 400 40% 25%

3
Equivalent Units – FIFO Method
Step 1: Determine equivalent units needed to complete
beginning inventory.

Materials Conversion
To complete beginning work in process:
Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160
Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840

4
 Equivalent Units – FIFO Method
Step 2: Determine units started and completed during the
period.

Materials Conversion
To complete beginning work in process:
Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160
Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840

5
Equivalent Units – FIFO Method
Step 3: Add the equivalent units in ending working in
process inventory.

Materials Conversion
To complete beginning work in process:
Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160
Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840
6
FIFO Example
Materials 5,000 Units Started

Beginning Ending
Work in Process 4,600 Units Started Work in Process
200 Units and Completed 400 Units
55% Complete 40% Complete

200 × 45%
90 Equivalent Units
4,600 Units Completed 400 × 40%
160 Equivalent Units
4,850 Equivalent units
of production
7
FIFO Example
Conversion 5,000 Units Started

Beginning Ending
Work in Process 4,600 Units Started Work in Process
200 Units and Completed 400 Units
30% Complete 25% Complete

200 × 70%
140 Equivalent Units
4,600 Units Completed 400 × 25%
100 Equivalent Units
4,840 Equivalent units
of production
8
Equivalent Units: Weighted Average vs.
FIFO
As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the weighted-
average method to obtain the equivalent units of production under the
FIFO method.

Materials Conversion
Equivalent units - weighted average method 4,960 4,900
Less equivalent units in beginning inventory:
200 units × 55% 110
200 units × 30% 60
Equivalent units - FIFO method 4,850 4,840

9
 Cost per Equivalent Unit - FIFO
Let’s revisit the Double Diamond Skis Shaping and Milling
Department for the Month of May to prepare our production report.
Beginning work in process: 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575
$15, 175

Production started during May 5,000 units

Production completed during May 4,800 units

Costs added to production in May

Materials cost $ 368,600
Conversion cost 350,900
Ending work in process: 400 units
Materials: 40% complete
Conversion: 25% complete

10
Cost per Equivalent Unit - FIFO
The formula for computing the cost per equivalent
unit under FIFO method is :

Cost per Cost added during the period

equivalent =
unit Equivalent units of production

11
Cost per Equivalent Unit - FIFO
Total
Cost Materials Conversion
Costs added in the Shaping
and Milling Department $ 719,500 $ 368,600 $ 350,900
Equivalent units 4,850 4,840
Cost per equivalent unit $ 76.00 $ 72.50
Total cost per equivalent unit = $76.00 + $72.50 = $148.50

12
 Applying Costs - FIFO
Step 1: Record the equivalent units of production in ending work in
process inventory.

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

13
 Applying Costs - FIFO
Step 2: Record the cost per equivalent unit.

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.00 $ 72.50
Cost of ending work in process inventory $ 12,160 $ 7,250 $ 19,410

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

14
 Applying Costs - FIFO
Step 3: Compute the cost of ending work in process inventory.

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.00 $ 72.50
Cost of ending work in process inventory $ 12,160 $ 7,250 $ 19,410

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

15
 Cost of Units Transferred Out
Step 1: Record the cost in beginning work in process inventory.

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 9,600 $ 5,575 $ 15,175
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost per equivalent unit $ 76.00 $ 72.50
Cost to complete beginning WIP $ 6,840 $ 10,150 $ 16,990
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost per equivalent unit $ 76.00 $ 72.50
Cost of units started and completed in May $ 349,600 $ 333,500 $ 683,100
Cost of units transferred out $ 715,265

16
 Cost of Units Transferred Out
Step 2: Compute the cost to complete the units in beginning
work in process inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 9,600 $ 5,575 $ 15,175
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost per equivalent unit $ 76.00 $ 72.50
Cost to complete beginning WIP $ 6,840 $ 10,150 $ 16,990
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost per equivalent unit $ 76.00 $ 72.50
Cost of units started and completed in May $ 349,600 $ 333,500 $ 683,100
Cost of units transferred out $ 715,265

17
 Cost of Units Transferred Out
Step 3: Compute the cost of units started and completed this period.

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 9,600 $ 5,575 $ 15,175
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost per equivalent unit $ 76.00 $ 72.50
Cost to complete beginning WIP $ 6,840 $ 10,150 $ 16,990
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost per equivalent unit $ 76.00 $ 72.50
Cost of units started and completed in May $ 349,600 $ 333,500 $ 683,100
Cost of units transferred out $ 715,265

18
 Cost of Units Transferred Out
Step 4: Compute the total cost of units transferred out.

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 9,600 $ 5,575 $ 15,175
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost per equivalent unit $ 76.00 $ 72.50
Cost to complete beginning WIP $ 6,840 $ 10,150 $ 16,990
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost per equivalent unit $ 76.00 $ 72.50
Cost of units started and completed in May $ 349,600 $ 333,500 $ 683,100
Cost of units transferred out $ 715,265

19
Reconciling Costs
Shaping and Milling Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory $ 15,175
Costs added to production during the period 719,500
Total cost to be accounted for $ 734,675

Cost accounted for as follows:

Cost of ending work in process inventory $ 19,475
Cost of units transferred out 715,200
Total cost accounted for $ 734,675

20
Reconciling Costs
Shaping and Milling Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory $ 15,175
Costs added to production during the period 719,500
Total cost to be accounted for $ 734,675

Cost accounted for as follows:

Cost of ending work in process inventory $ 19,475
Cost of units transferred out 715,200
Total cost accounted for $ 734,675

21
A Comparison of Costing Methods
In a lean production environment, FIFO and weighted-average methods yield
similar
unit costs.

When considering cost control, FIFO is superior to weighted-average because it

does not mix costs of the current period with costs of the prior period.

22
Service Department Allocations

23
Operating Departments
An operating department carries out the
central purpose of the organization

The An
Accounting Assembly
Department Department
at your at General
University. Motors.

24
Service Departments
A service department does not directly
engage in operating activities.

The The Human

Accounting Resources
Department Department
at Macys at Walgreens.

25
Interdepartmental Services

Service Operating
Department Department

Costs of the service

department become
overhead costs to the
operating
department

26
Allocation Approaches
Direct

Method


Step-Down
Method

Reciprocal

Method

27
Reciprocal Services

Service Service
Department 1 Department 2
When service
departments provide
services to each other
we call them
reciprocal services.

28
Direct Method
Service Operating
Interactions Department Department
between service (Cafeteria) (Machining)
departments are
ignored and all
costs are
allocated directly
to operating Service Operating
departments. Department Department
(Custodial) (Assembly)

29
Direct Method

Service Department Allocation Base

Cafeteria Number of employees
Custodial Square feet occupied

30
Direct Method

How much of the Cafeteria and Custodial costs

should be allocated to each operating department
using the direct method of cost allocation?

31
Direct Method

20
$360,000 × = $144,000
20 + 30

Allocation base: Number of employees

32
Direct Method

30
$360,000 × = $216,000
20 + 30

Allocation base: Number of employees

33
Direct Method

25,000
$90,000 × = $30,000
25,000 + 50,000

Allocation base: Square feet occupied

34
Direct Method

50,000
$90,000 × = $60,000
25,000 + 50,000

Allocation base: Square feet occupied

35
Step Method
Service Operating
Department Department
Once a service (Cafeteria) (Machining)
department’s costs
are allocated,
other service
department costs
are not allocated
back to it.
Service Operating
Department Department
(Custodial) (Assembly)

36
Step Method
There are three key points to understand
regarding the step method:
 In both the direct and step methods, any amount of
the allocation base attributable to the service
department whose cost is being allocated is always
ignored.
 Any amount of the allocation base that is
attributable to a service department whose cost has
already been allocated is ignored.
 Each service department assigns its own costs to
operating departments plus the costs that have
been allocated to it from other service departments.
37
Step Method
We will use the same data used
in the direct method example.

Service Department Allocation Base

Cafeteria Number of employees
Custodial Square feet occupied
38
Step Method

Allocate Cafeteria costs first since

it provides more service than Custodial.

39
Step Method

10
$360,000 × = $60,000
10 + 20 + 30

Allocation base: Number of employees

40
Step Method

20
$360,000 × = $120,000
10 + 20 + 30

Allocation base: Number of employees

41
Step Method

30
$360,000 × = $180,000
10 + 20 + 30

Allocation base: Number of employees

42
Step Method

New total = $90,000 original Custodial cost

plus $60,000 allocated from the Cafeteria.

43
Step Method

25,000
$150,000 × = $50,000
25,000 + 50,000

Allocation base: Square feet occupied

44
Step Method

50,000
$150,000 × = $100,000
25,000 + 50,000

Allocation base: Square feet occupied

45
Reciprocal Method
Service Operating
Department Department
Interdepartmental (Cafeteria) (Machining)
services are given
full recognition
rather than partial
recognition as with
the step method. Service Operating
Department Department
(Custodial) (Assembly)

Because of its mathematical complexity,

the reciprocal method is rarely used.
46
Quick Check Data
for Direct and Step Methods

The direct method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):
Number of employees
BusinessAdministration computer services
(BACS): Number of personal computers
47
Quick Check 
How much cost will be allocated from Administration
to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000

48
Quick Check 
How much cost will be allocated from Administration
to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000

20
$180,000 × = $36,000
20 + 80
49
Quick Check 
How much total cost will be allocated from ADMIN
and BACS combined to the Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500

50
Quick Check 

How much total cost will be allocated from ADMIN

and BACS combined to the Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500

18
$90,000 × = $13,500
18 + 102
51
Quick Check Data

The step method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Businessadministration computer services
(BACS): Number of personal computers
52
Quick Check 
How much total cost will be allocated from ADMIN
and BACS combined to the Accounting Department?
a. $35,250
b. $49,072
c. $18,000
d. $26,333

53
Quick Check 
How much total cost will be allocated from ADMIN
and BACS combined to the Accounting Department?
a. $35,250
b. $49,072
c. $18,000
d. $26,333

54
End of Lecture 15

55