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management, 4e
Process Costing
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Learning Objectives (2 of 2)
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Operational Process System
Introduction
© 2019to Cost management
Cengage. All rights reserved.
EXHIBIT 6.1 - An Operational Process
System: Antihistamine Manufacturing
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Production Report
• Traces the flow of units through a department and
identifies the costs charged
– Shows the computation of unit costs and reveals the
disposition of the department’s costs for the reporting
period
• Divided into unit information and cost information
sections
• Unit information section
– Units to account for
– Units accounted for
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Unit Costs
Introduction
© 2019to Cost management
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Exhibit 6.4 - Basic Features of a Process-
Costing System (1 of 2)
1. Homogeneous units pass through a seroies of similar
processes.
2. Each unit in each process receives a similar dose of
manufacturing costs.
3. Manufacturing costs are accumulated by a process for a
given period of time.
4. There is a work-in-process account for each process.
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Exhibit 6.4 - Basic Features of a Process-
Costing System (2 of 2)
5. Manufacturing cost flows and the associated journal
entries are generally similar to job-order costing.
6. The departmental production report is the key document
for tracking manufacturing activity and costs.
7. Unit costs are computed by dividing the departmental
costs of the period by the output of the period.
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Equivalent Units of Output
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Steps in Building a Production Report for
Process Costing
• Preparation of a physical flow schedule
– Physical flow schedule: Provides an analysis of the
physical flow units
• Calculation of the period’s equivalent units
• Unit cost calculation
• Valuation of inventories
• Cost reconciliation
– Costs in beginning WIP and costs incurred during the
current period should equal the total costs assigned to
goods transferred out and to goods in ending WIP
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Physical Flow Analysis and Calculation of
Equivalent Units - Example
• Richardson Testing Center had the following data for CBC
production for January
– Output is measured in number of tests
– Prepare a physical flow schedule
– Prepare an equivalent units schedule
Explain why output is measured in equivalent units
Particulars Number of units
Units, beginning work in process -
Units started 36,000
Units completed 30,000
Units, ending work in process (25% 6,000
complete)
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Physical Flow Analysis and Calculation of
Equivalent Units – Solution (2 of 3)
Physical flow schedule:
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Unit Cost, Inventory Valuation, and
Cost Reconciliation – Example (2 of 2)
• Solution
– Unit cost = $787,500 ÷ 31,500 = $25 per test
– Costs assigned:
Particulars Amount
Tests completed ($25 × 30,000) $750,000
EWIP ($25 × 1,500) 37,500
Total assigned $787,500
– Reconciliation
The costs assigned equal the costs to account for of
$787,500
Introduction
© 2019to Cost management
Cengage. All rights reserved.
FIFO Costing Method
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Physical Flow Analysis and Calculation of
Equivalent Units: FIFO
• The production of Bienestar’s antihistamine product
begins in the Blending Department
– The production data for May are as follows:
– Prepare a physical flow schedule for May
– Prepare an equivalent units schedule for May using the
FIFO method
Particulars Units
Units in process, May 1, 70% complete* 15,000
Units completed and transferred out 90,000
Units in process, May 31, 40% complete* 30,000
*With respect to conversion costs
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Unit Cost and Cost Assignment: FIFO
(3 of 4)
Step 4: Valuation of Inventories
Using unit cost information and the information from the
equivalent units schedule (Step 2 of Cornerstone 6.7):
Cost of goods transferred out:
From BWIP $2,025
To complete BWIP ($0.05×4,500) 225
Started and completed ($0.23×75,000) 17,250
Total $19,500
EWIP:
($0.18×30,000)+($0.05×12,000) $6,000
Total costs assigned (accounted for) $25,500
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Physical Flow Analysis and Calculation of
Equivalent Units: Weighted Average Method (1 of 3)
• Prepare a physical flow schedule and an equivalent
units schedule for Bienestar’s Blending Department for
the month of May using the weighted average method
– Solution
Units started and completed = Units completed – Units,
BWIP
= 90,000-15,000 = 75,000
Units started = Units started and completed + Units, EWIP
= 75,000 + 30,000 = 105,000
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Physical Flow Analysis and Calculation of
Equivalent Units: Weighted Average
Method (2 of 3)
Step 1: Physical Flow Schedule: Blending
Department
Units to account for:
Units, beginning work in process (70% complete) 15,000
Units started during May 105,000
Total units to account for 120,000
Units accounted for:
Units completed and transferred out:
Started and completed 75,000
From beginning work in process 15,000 90,000
Units in ending work in process(40% complete) 30,000
Total units accounted for 120,000
Direct Conversion
Materials Costs
Units completed 90,000 90,000
Add: Units in ending work in process ×
Percentage complete:
30,000 × 100% direct materials 30,000
30,000 × 40% conversion costs 12,000
Equivalent units of output 120,000 102,000
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Unit Cost and Cost Assignment:
Weighted Average Method (2 of 3)
Step 3: Unit Cost Calculation
Unit cost = Unit materials cost + Unit conversion cost
= ($1,500 + $18,900)/120,000 + ($525 + $4,575)/102,000
=$0.17 + $0.05 = $0.22 per ounce
Step 4: Valuation of Inventories
Using unit cost information and the information from the equivalent
units schedule (Step 2 of Cornerstone 6.9):
Cost of goods transferred out:
Units completed ($0.22 × 90,000) $19,800
EWIP:
($0.17 × 30,000) + ($0.05 + 12,000) 5,700
Total costs assigned (accounted for) $25,500
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Treatment of Transferred-In Goods
• Cost of this material is the cost of the goods transferred
out computed in the prior department
• Units started in the subsequent department correspond
to the units transferred out from the prior department
• Units of the transferring department may be measured
differently than the units of the receiving department
– Goods transferred in must be converted to the units of
measure used by the second department
Introduction
© 2019to Cost management
Cengage. All rights reserved.
EXHIBIT 6.7 - Production and Cost
Data: Encapsulating Department
Introduction
© 2019to Cost management
Cengage. All rights reserved.
STEP 4: Valuation of Inventories
Cost of goods transferred out = $0.08 × 375,000 =
$30,000