Week 2

TCO F - Given appropriate financial data, compare and contrast job order and process costing systems (1) to value ending inventory and costs of goods sold for a manufacturing company and/or (2) to determine the cost of services rendered in a service organization. Key Concepts: Understand job order and process costing methods to value ending inventory and costs of goods sold. Demonstrate the steps used to prepare a production report under FIFO and W/A costing methods. Using given data, determine ending inventory and costs of goods sold for a manufacturing organization. Using given data, determine the cost of services rendered for a service organization

McGraw-Hill/Irwin

Slide 1

Systems Design: Process Costing

Managers need to assign costs to products to facilitate external financial reporting and internal decision making. This chapter illustrates an absorption costing approach to calculating product costs known as process costing.

Chapter 4

2010 The McGraw-Hill Companies, Inc.

Similarities Between Job-Order and Process Costing

Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product costs. Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods. The flow of costs through the manufacturing accounts is basically the same in both systems.

McGraw-Hill/Irwin

Slide 3

Differences Between Job-Order and Process Costing

Process costing is used when a single product is produced on a continuing basis or for a long period

of time. Job-order costing is used when many different jobs having different production requirements are worked on each period.
Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs. Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.
McGraw-Hill/Irwin
Slide 4

Quick Check
Process costing is used for products that are:
a. Different and produced continuously. b. Similar and produced continuously.

c. Individual units produced to customer specifications.

d. Purchased from vendors.

McGraw-Hill/Irwin

Slide 5

Quick Check
Process costing is used for products that are:
a. Different and produced continuously. b. Similar and produced continuously.

c. Individual units produced to customer specifications.

d. Purchased from vendors.

McGraw-Hill/Irwin

Slide 6

Processing Departments
Any unit in an organization where materials, labor or overhead are added to the product. The activities performed in a processing department are performed uniformly on all units of production. Furthermore, the output of a processing department must be homogeneous. Products in a process costing environment typically flow in a sequence from one department to another.

McGraw-Hill/Irwin

Slide 7

Learning Objective 1

Record the flow of materials, labor, and overhead through a process costing system.

McGraw-Hill/Irwin

Slide 8

Comparing Job-Order and Process Costing

Direct Materials
Direct materials, direct labor and manufacturing overhead are added to Work in Process. When work in process is completed, the costs are transferred to Finished Goods. When finished goods are sold, the costs are transferred to Cost of Goods Sold.

Direct Labor

Work in Process

Finished Goods

Manufacturing Overhead

Cost of Goods Sold

McGraw-Hill/Irwin

Slide 9

Comparing Job-Order and Process Costing

There is a key fundamental difference between process and job-order costing systems. Job-order costing systems trace and apply manufacturing costs to jobs. One Work in Process account is often used to accumulate costs for all jobs. The individual job cost sheets serve as a subsidiary ledger.

Direct Materials

Costs are traced and applied to individual jobs in a job-order cost system.

Direct Labor

Jobs

Finished Goods

Manufacturing Overhead

Cost of Goods Sold

Slide 10

McGraw-Hill/Irwin

Comparing Job-Order and Process Costing

Direct Materials Costs are traced and applied to departments in a process cost system.

Direct Labor

Processing Department

Finished Goods

Manufacturing Overhead
In some companies there may be several processing departments that goods must pass through to become finished goods. A separate Work in Process account is maintained for each processing department. Material, labor and overhead costs transferred from one departments Work in Process account to another departments Work in Process account are called transferred-in costs.

Cost of Goods Sold

Slide 11

McGraw-Hill/Irwin

T-Account and Journal Entry Views of Process Cost Flows

For purposes of this example, assume there are two processing departments Departments A and B. We will use T-accounts and journal entries.

McGraw-Hill/Irwin

Slide 12

Process Cost Flows: The Flow of Raw Materials (in T-account form)
Raw Materials
Direct Materials

Work in Process Department A

Direct Materials

Work in Process Department B

Direct Materials
Direct materials can be requisitioned for use in both Department A and Department B. These direct materials are likely to be different in nature. Direct material costs are debited to the appropriate departmental Work in Process account depending upon where the materials were added to the production process. The Raw Materials Inventory account is credited for the corresponding amounts. McGraw-Hill/Irwin

Slide 13

Process Cost Flows: The Flow of Raw Materials (in journal entry form)
GENERAL JOURNAL
Date Description Work in Process - Department A Work in Process - Department B Raw Materials To record the use of direct material. Post. Ref. Debit XXXXX XXXXX XXXXX

Page 4
Credit

McGraw-Hill/Irwin

Slide 14

Process Cost Flows: The Flow of Labor Costs (in T-account form)
Salaries and Wages Payable
Direct Labor

Work in Process Department A

Direct Materials Direct Labor

Work in Process Department B

Direct Materials Direct Labor

Direct labor is transferred from the Salaries and Wages Payable account into the work in process account of Departments A and B depending upon where the individual employee worked. Direct labor costs are debited to the appropriate departmental Work in Process account depending upon where the labor was added to the production process. Salaries and Wages Payable is credited for the corresponding amounts.

McGraw-Hill/Irwin

Slide 15

Process Costing: The Flow of Labor Costs (in journal entry form)
GENERAL JOURNAL
Date Description Work in Process - Department A Work in Process - Department B Salaries and Wages Payable To record direct labor costs. Post. Ref. Debit XXXXX XXXXX XXXXX

Page 4
Credit

McGraw-Hill/Irwin

Slide 16

Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)
Work in Process Department A Manufacturing Overhead
Actual Overhead Overhead Applied to Work in Process Direct Materials Direct Labor Applied Overhead

Work in Process Department B

Direct Materials Direct Labor Applied Overhead
Slide 17

Manufacturing overhead is applied to each processing department based on a predetermined rate for each department. The predetermined rate does not have to be based on the same cost driver for each processing department. Manufacturing overhead costs are debited to the respective departmental Work in Process accounts. Manufacturing overhead is credited by the corresponding amounts.
McGraw-Hill/Irwin

Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form)
GENERAL JOURNAL
Date Description Work in Process - Department A Work in Process - Department B Manufacturing Overhead To apply overhead to departments. Post. Ref. Debit XXXXX XXXXX XXXXX

Page 4
Credit

McGraw-Hill/Irwin

Slide 18

Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)
Work in Process Department A Direct Transferred Materials to Dept. B Direct Labor Applied Overhead
The cost of units complete as to processing in Department A are transferred into Department B for additional work. Department B has incurred additional costs to work on units that were in process at the beginning of the period. The transferred-in costs from Department A are added to the manufacturing costs incurred in Department B.

Work in Process Department B Direct Materials Direct Labor Applied Overhead Transferred from Dept. A

Department A
McGraw-Hill/Irwin

Department B

Slide 19

Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form)
GENERAL JOURNAL
Date Description Work in Process - Department B Work in Process - Department A To record the transfer of goods from Department A to Department B. Post. Ref. Debit XXXXX XXXXX

Page 4
Credit

McGraw-Hill/Irwin

Slide 20

Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form)
Work in Process Department B

Finished Goods Cost of Goods Manufactured

Direct Cost of Materials Goods Direct Manufactured Labor Applied Overhead Transferred from Dept. A

The transfer of completed goods from Work in Process Department B into Finished Goods Inventory. The costs transferred represent the cost of good manufactured.

McGraw-Hill/Irwin

Slide 21

Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form)
GENERAL JOURNAL
Date Description Finished Goods Work in Process - Department B To record the completion of goods and their transfer from Department B to finished goods inventory. Post. Ref. Debit XXXXX XXXXX

Page 4
Credit

McGraw-Hill/Irwin

Slide 22

Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form)
Work in Process Department B Finished Goods

Direct Cost of Cost of Cost of Materials Goods Goods Goods Direct Manufactured Manufactured Sold Labor Applied Overhead Transferred Cost of Goods Sold from Dept. A Cost of Goods Sold
Once we sell finished goods, we debit Cost of Goods Sold and credit Finished Goods Inventory.

McGraw-Hill/Irwin

Slide 23

Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form)
GENERAL JOURNAL
Date Description Cost of Goods Sold Finished Goods To record the transfer of finished goods inventory to cost of goods sold. Post. Ref. Debit XXXXX XXXXX

Page 4
Credit

McGraw-Hill/Irwin

Slide 24

Equivalent Units of Production

Equivalent units are the product of the number of partially completed units and the percentage completion of those units.

We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory. These partially completed units complicate the determination of a departments output for a given period and the unit cost that should be assigned to that output.
McGraw-Hill/Irwin
Slide 25

Equivalent Units The Basic Idea

Two half completed products are equivalent to one complete product.

+
McGraw-Hill/Irwin

So, 10,000 units 70% complete are equivalent to 7,000 complete units.
Slide 26

Quick Check
For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

McGraw-Hill/Irwin

Slide 27

Quick Check
For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 10,000 units + (5,000 units 0.30) b. 11,500 = 11,500 equivalent units c. 13,500 d. 15,000

McGraw-Hill/Irwin

Slide 28

Calculating Equivalent Units

Equivalent units can be calculated two ways: The First-In, First-Out Method FIFO is
covered in the appendix to this chapter.

The Weighted-Average Method This method

will be covered in the main portion of the chapter.

McGraw-Hill/Irwin

Slide 29

Learning Objective 2

Compute the equivalent units of production using the weighted-average method.

McGraw-Hill/Irwin

Slide 30

Equivalent Units of Production

Weighted-Average Method

The weighted-average method . . .

1. Makes no distinction between work done in prior or current periods. 2. Blends together units and costs from prior and current periods. 3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.
McGraw-Hill/Irwin
Slide 31

Treatment of Direct Labor

Direct Materials Dollar Amount Manufacturing Overhead

Direct Labor

Direct labor costs may be small in comparison to other product costs in process cost systems.
In todays economy, direct labor costs are becoming small when compared to materials and overhead costs. Automation is one of the causes for this shift.

Type of Product Cost

McGraw-Hill/Irwin

Slide 32

Treatment of Direct Labor

Direct Materials Dollar Amount Conversion
Direct Labor

Direct Labor

Manufacturing Overhead

Direct labor and manufacturing overhead may be combined into one classification of product cost called conversion costs.

Type of Product Cost

As a consequence of the change in volume of direct labor costs, many companies combine labor and overhead costs and refer to the total as conversion costs. That is, these are the costs incurred to convert the direct materials into a finished good.
Slide 33

McGraw-Hill/Irwin

Weighted-Average An Example
Smith Company reported the following activity in the Assembly Department for the month of June:
Percent Completed Units Work in process, June 1 Units started into production in June Units completed and transferred out of Department A during June Work in process, June 30 300 6,000 5,400 Materials Conversion 40% 20%

900

60%

30%

McGraw-Hill/Irwin

Slide 34

Weighted-Average An Example
The first step in calculating the equivalent units is to identify the units completed and transferred out of Assembly Department in June (5,400 units)
Materials Units completed and transferred out of the Department in June 5,400 Conversion 5,400

McGraw-Hill/Irwin

Slide 35

Weighted-Average An Example
The second step is to identify the equivalent units of production in ending work in process with respect to materials for the month (540 units) and adding this to the 5,400 units from step one.
Materials Units completed and transferred out of the Department in June Work in process, June 30: 900 units 60% 540 5,400 Conversion 5,400

Equivalent units of Production in the Department during June

5,940

McGraw-Hill/Irwin

Slide 36

Weighted-Average An Example
The third step is to identify the equivalent units of production in ending work in process with respect to conversion for the month (270 units) and adding this to the 5,400 units from step one.
Materials Units completed and transferred out of the Department in June Work in process, June 30: 900 units 60% 900 units 30% Equivalent units of Production in the Department during June 5,940 540 270 5,670 5,400 Conversion 5,400

McGraw-Hill/Irwin

Slide 37

Weighted-Average An Example
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Materials Units completed and transferred out of the Department in June Work in process, June 30: 900 units 60% 900 units 30% Equivalent units of Production in the Department during June 5,940 540 270 5,670 5,400 Conversion 5,400

McGraw-Hill/Irwin

Slide 38

Weighted-Average An Example

Materials
Beginning Work in Process 300 Units 40% Complete

6,000 Units Started

5,100 Units Started and Completed

Ending Work in Process 900 Units 60% Complete

5,400 Units Completed 540 Equivalent Units 5,940 Equivalent units of production
McGraw-Hill/Irwin

900 60%

Slide 39

Weighted-Average An Example

Conversion
Beginning Work in Process 300 Units 20% Complete

6,000 Units Started

5,100 Units Started and Completed

Ending Work in Process 900 Units 30% Complete

5,400 Units Completed 270 Equivalent Units 5,670 Equivalent units of production
McGraw-Hill/Irwin

900 30%

Slide 40

Learning Objective 3

Compute the cost per equivalent unit using the weighted-average method.

McGraw-Hill/Irwin

Slide 41

Compute and Apply Costs

Beginning Work in Process Inventory: 400 units Materials: 40% complete $ 6,119 Conversion: 20% complete $ 3,920 Production started during June Production completed during June Costs added to production in June Materials cost Conversion cost Ending Work in Process Inventory: Materials: 60% complete Conversion: 30% complete 6,000 units 5,400 units $ 118,621 $ 81,130 900 units

McGraw-Hill/Irwin

Slide 42

Compute and Apply Costs

The formula for computing the cost per equivalent unit is:
Cost per equivalent = unit Cost of beginning Work in Process + Cost added during Inventory the period Equivalent units of production

McGraw-Hill/Irwin

Slide 43

Compute and Apply Costs

Here is a schedule with the cost and equivalent unit information.
Total Cost Cost to be accounted for: Work in process, June 1 Cost added in Assembly Total cost Equivalent units $ $ 10,039 199,751 209,790 Materials $ 6,119 118,621 Conversion $ $ 3,920 81,130 85,050 5,670

$ 124,740 5,940

McGraw-Hill/Irwin

Slide 44

Compute and Apply Costs

Here is a schedule with the cost and equivalent unit information.
$124,740 5,940 units = $21.00

$85,050 5,670 units = $15.00

Total Cost Materials $ 6,119 118,621 Conversion $ $ 3,920 81,130 85,050 5,670 $ 15.00

Cost to be accounted for: Work in process, June 1 Cost added in Assembly Total cost Equivalent units Cost per equivalent unit

$ $

10,039 199,751 209,790

$ 124,740 5,940 $ 21.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00

McGraw-Hill/Irwin
Slide 45

Learning Objective 4

Assign costs to units using the weighted-average method.

McGraw-Hill/Irwin

Slide 46

Applying Costs
Assembly Department Cost of Ending WIP Inventory and Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270

McGraw-Hill/Irwin

Slide 47

Applying Costs
Assembly Department Cost of Ending WIP Inventory and Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit $ 21.00 $ 15.00

McGraw-Hill/Irwin

Slide 48

Applying Costs
Assembly Department Cost of Ending WIP Inventory and Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit $ 21.00 $ 15.00 Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390

McGraw-Hill/Irwin

Slide 49

Computing the Cost of Units Transferred Out

Assembly Department Cost of Ending WIP Inventory and Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit $ 21.00 $ 15.00 Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390 Units completed and transferred out: Units transferred 5,400 5,400

McGraw-Hill/Irwin

Slide 50

Computing the Cost of Units Transferred Out

Assembly Department Cost of Ending WIP Inventory and Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit $ 21.00 $ 15.00 Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390 Units completed and transferred out: Units transferred 5,400 5,400 Cost per equivalent unit $ 21.00 $ 15.00

McGraw-Hill/Irwin

Slide 51

Computing the Cost of Units Transferred Out

Assembly Department Cost of Ending WIP Inventory and Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit $ 21.00 $ 15.00 Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390 Units completed and transferred out: Units transferred 5,400 5,400 Cost per equivalent unit $ 21.00 $ 15.00 Cost of units transferred out $ 113,400 $ 81,000 $ 194,400

McGraw-Hill/Irwin

Slide 52

Learning Objective 5

Prepare a cost reconciliation report.

McGraw-Hill/Irwin

Slide 53

Reconciling Costs
Assembly Department Cost Reconciliation Costs to be accounted for: Cost of beginning Work in Process Inventory Costs added to production during the period Total cost to be accounted for

$ $

10,039 199,751 209,790

Reconcile the costs. The first step is to record the cost of beginning Work in Process Inventory of $10,039. The second step is to record the costs added to production during the period as shown of $199,751. The third step is to sum these two costs for a total to be accounted for of $209,790.

McGraw-Hill/Irwin

Slide 54

Reconciling Costs

Computing the costs accounted for: The first step is to record the previously computed cost of ending Work in Process Inventory $15,390. The second step is to record the previously computed cost of units transferred out $194,400. The third step is to sum these two costs for a total of $209,790. Notice the two totals agree indicating that all costs have been accounted for.

Assembly Department Cost Reconciliation Costs to be accounted for: Cost of beginning Work in Process Inventory Costs added to production during the period Total cost to be accounted for Cost accounted for as follows: Cost of ending Work in Process Inventory Cost of units transferred out Total cost accounted for

$ $

10,039 199,751 209,790

$ $

15,390 194,400 209,790

McGraw-Hill/Irwin

Slide 55

Operation Costing
Operation cost is a hybrid of job-order and process costing because it possesses attributes of both approaches Operation costing is commonly used when batches of many different products pass through the same processing department.

Operation costing is similar to job-order costing. For example, a shoe manufacturer may charge each batch of shoes for its own specific material costs (e.g., shoes made with expensive leather would be charged accordingly, as would shoes made with inexpensive synthetic materials). It is also similar to process costing, the shoe manufacturer may accumulate the labor and overhead costs by department and assign the same conversion cost per unit to each shoe regardless of the shoe style

McGraw-Hill/Irwin

Slide 56

FIFO Method
Appendix 4A

2010 The McGraw-Hill Companies, Inc.

FIFO vs. Weighted-Average Method

The FIFO method (generally considered more accurate than the weighted-average method) differs from the weighted-average method in two ways:

1. The computation of equivalent units.

2. The way in which the costs of beginning inventory are treated.

McGraw-Hill/Irwin

Slide 58

Learning Objective 6

Compute the equivalent units of production using the FIFO method.

McGraw-Hill/Irwin

Slide 59

Equivalent Units FIFO Method

Lets revisit the Smith Company example. Here is information concerning the Assembly Department for the month of June.
Percent Completed Units Work in process, June 1 Units started into production in June Units completed and transferred out of Department A during June Work in process, June 30 300 6,000 5,400 Materials Conversion 40% 20%

900

60%

30%

McGraw-Hill/Irwin

Slide 60

Equivalent Units FIFO Method

Step 1: Determine equivalent units needed to complete beginning Work in Process Inventory.
Materials To complete beginning Work in Process: Materials: 300 units (100% - 40%) Conversion: 300 units (100% - 20%) 180 240 Conversion

The first step in the accounting process is to determine the equivalent units needed to complete beginning Work in Process Inventory (180 units for materials and 240 units for conversion). Recall that the units in beginning inventory were 40% complete as to materials, so we must have to add 60% of the materials this month to complete the units. As to conversion costs, the units in beginning inventory were 20% complete so we must incur 80% of the conversion costs this month to complete the units.
McGraw-Hill/Irwin
Slide 61

Equivalent Units FIFO Method

Step 2: Determine units started and completed during the period.
Materials To complete beginning Work in Process: Materials: 300 units (100% - 40%) Conversion: 300 units (100% - 20%) Units started and completed during June 5,100 180 240 5,100 Conversion

The 5,100 units represent the total units completed and transferred out this month (5,400 units) less those units in beginning inventory (300). Remember, in FIFO we must keep track of the units in beginning inventory, started this month, and ending inventory separately. The first units in inventory, beginning inventory, are the first units transferred out this month.

McGraw-Hill/Irwin

Slide 62

Equivalent Units FIFO Method

Step 3: Add the equivalent units in ending Work in Process Inventory.
Materials To complete beginning Work in Process: Materials: 300 units (100% - 40%) Conversion: 300 units (100% - 20%) Units started and completed during June Ending Work in Process Materials: 900 units 60% complete Conversion: 900 units 30% complete Equivalent units of production
McGraw-Hill/Irwin

Conversion

180 240 5,100 540 270 5,820 5,610

Slide 63

5,100

FIFO Example

Materials
Beginning Work in Process 300 Units 40% Complete

6,000 Units Started

5,100 Units Started and Completed

Ending Work in Process 900 Units 60% Complete

300 60%

180 Equivalent Units 5,100 Units Completed 540 Equivalent Units 5,820 Equivalent units of production

900 60%

McGraw-Hill/Irwin

Slide 64

FIFO Example

Conversion
Beginning Work in Process 300 Units 20% Complete

6,000 Units Started

5,100 Units Started and Completed

Ending Work in Process 900 Units 30% Complete

300 80%

240 Equivalent Units 5,100 Units Completed 270 Equivalent Units 5,610 Equivalent units of production

900 30%

McGraw-Hill/Irwin

Slide 65

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.
Equivalent units - weighted-average method Less equivalent units in beginning inventory: 300 units 40% 300 units 20% Equivalent units - FIFO method Materials 5,940 120 5,820 60 5,610 Conversion 5,670

The FIFO method removes the equivalent units that were already in beginning inventory from the equivalent units as defined using the weighted-average method. Thus, the FIFO method isolates the equivalent units due to work performed during the current period. This can be illustrated using the Smith Company example.
McGraw-Hill/Irwin
Slide 66

Learning Objective 7

Compute the cost per equivalent unit using the FIFO method.

McGraw-Hill/Irwin

Slide 67

Cost per Equivalent Unit - FIFO

Lets revisit the Smith Company Assembly Department for the month of June to prepare our production report.
Beginning work in process: Materials: 40% complete Conversion: 20% complete $ $ 400 units 6,119 3,920 6,000 units 5,400 units $ 118,621 $ 81,130 900 units

Production started during June Production completed during June Costs added to production in June Materials cost Conversion cost Ending work in process Materials: 60% complete Conversion: 30% complete
McGraw-Hill/Irwin

Slide 68

Cost per Equivalent Unit - FIFO

The formula for computing the cost per equivalent unit under FIFO method is: Cost per equivalent = unit Cost added during the period Equivalent units of production

McGraw-Hill/Irwin

Slide 69

Cost per Equivalent Unit - FIFO

Total Cost Cost added in June Equivalent units Cost per equivalent unit $ 199,751

Materials $ 118,621 5,820 $ 20.3816

Conversion $ 81,130 5,610

$ 14.4617

$118,600 5,820

$81,130 5,610

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

McGraw-Hill/Irwin

Slide 70

Learning Objective 8

Assign costs to units using the FIFO method.

McGraw-Hill/Irwin

Slide 71

Applying Costs - FIFO

Step 1: Record the equivalent units of production in ending Work in Process Inventory.
Assembly Department Cost of Ending WIP Inventory Materials Conversion Ending WIP inventory: Equivalent units 540 270

Total

900 units 60%

900 units 30%

McGraw-Hill/Irwin

Slide 72

Applying Costs - FIFO

Step 2: Record the cost per equivalent unit.
Assembly Department Cost of Ending WIP Inventory Materials Conversion Ending WIP inventory: Equivalent units Cost per equivalent unit 540 $ 20.3816 270 $ 14.4617

Total

McGraw-Hill/Irwin

Slide 73

Applying Costs - FIFO

Step 3: Compute the cost of ending Work in Process Inventory.
Assembly Department Cost of Ending WIP Inventory Materials Conversion Ending WIP inventory: Equivalent units Cost per equivalent unit Cost of Ending WIP inventory 540 $ 20.3816 $ 11,006 270 $ 14.4617 $ 3,905

Total

14,911

540 $20.3816

270 14.4617

McGraw-Hill/Irwin

Slide 74

Cost of Units Transferred Out

Step 1: Record the cost in beginning Work in Process Inventory.
Assembly Department Cost of Units Transferred Out in June Materials Conversion Cost of Units Transferred Out: Cost in beginning WIP inventory $ 6,119 $ 3,920

Total $ 10,039

McGraw-Hill/Irwin

Slide 75

Cost of Units Transferred Out

Step 2: Compute the cost to complete the units in beginning Work in Process Inventory.
Assembly Department Cost of Units Transferred Out in June Materials Conversion Cost of Units Transferred Out: Cost in beginning WIP inventory $ 6,119 $ 3,920 Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit $ 20.3816 $ 14.4617 Cost to complete beginning WIP $ 3,668 $ 3,471 Total $ 10,039

7,139

McGraw-Hill/Irwin

Slide 76

Cost of Units Transferred Out

Step 3: Compute the cost of units started and completed this period.
Assembly Department Cost of Units Transferred Out in June Materials Conversion Cost of Units Transferred Out: Cost in beginning WIP inventory $ 6,119 $ 3,920 Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit $ 20.3816 $ 14.4617 Cost to complete beginning WIP $ 3,668 $ 3,471 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit $ 20.3816 $ 14.4617 Cost of units started and completed $ 103,946 $ 73,755 Total $ 10,039

7,139

177,701

McGraw-Hill/Irwin

Slide 77

Cost of Units Transferred Out

Step 4: Compute the total cost of units transferred out.
Assembly Department Cost of Units Transferred Out in June Materials Conversion Cost of Units Transferred Out: Cost in beginning WIP inventory $ 6,119 $ 3,920 Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit $ 20.3816 $ 14.4617 Cost to complete beginning WIP $ 3,668 $ 3,471 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit $ 20.3816 $ 14.4617 Cost of units started and completed $ 103,946 $ 73,755 Cost of Units Transferred Out

Total $ 10,039

7,139

177,701 $ 194,879

McGraw-Hill/Irwin

Slide 78

Learning Objective 9

Prepare a cost reconciliation report using the FIFO method.

McGraw-Hill/Irwin

Slide 79

Reconciling Costs
Assembly Department Cost Reconciliation for June Costs to be accounted for: Cost of beginning Work in Process Inventory Costs added to production during the period Total cost to be accounted for

$ $

10,039 199,751 209,790

McGraw-Hill/Irwin

Slide 80

Reconciling Costs
Assembly Department Cost Reconciliation for June Costs to be accounted for: Cost of beginning Work in Process Inventory Costs added to production during the period Total cost to be accounted for Cost accounted for as follows: Cost of ending Work in Process Inventory Cost of units transferred out Total cost accounted for

$ $

10,039 199,751 209,790

$ $

14,911 194,879 209,790

McGraw-Hill/Irwin

Slide 81

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.

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Slide 82

Service Department Allocations

Appendix 4B

2010 The McGraw-Hill Companies, Inc.

Operating Departments
An operating department carries out the central purpose of the organization
The Surgery Department at Mount Sinai Hospital. The Geography Department at the University of Washington.

A Production Department at Mitsubishi.

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Service Departments
Service departments do not directly engage in operating activities.
The Accounting Department at Macys. The Human Resources Department at Walgreens.

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Interdepartmental Services

Service Department

Operating Department

Costs of the service department become overhead costs to the operating department

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Allocation Approaches
Direct Method

Step-Down Method

Reciprocal Method

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Reciprocal Services

Service Department 1

When service departments provide services to each other we call them reciprocal services.

Service Department 2

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Learning Objective 10

Allocate service department costs to operating departments using the direct method.

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Direct Method
Service Department (Cafeteria) Operating Department (Machining)

Interactions between service departments are ignored and all costs are allocated directly to operating departments.

Service Department (Custodial)

Operating Department (Assembly)

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Direct Method An Example

Service Department Cafeteria Custodial

Allocation Base Number of employees Square feet occupied

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Direct Method An Example

How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation?
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Direct Method An Example

20 $360,000 = $144,000 20 + 30 Allocation base: Number of employees

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Direct Method An Example

$360,000

30 = $216,000 20 + 30

Allocation base: Number of employees

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Direct Method An Example

25,000 $90,000 25,000 + 50,000

= $30,000

Allocation base: Square feet occupied

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Direct Method An Example

50,000 $90,000 25,000 + 50,000

= $60,000

Allocation base: Square feet occupied

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Learning Objective 11

To allocate service department costs to operating departments using the step-down method.

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Step-Down Method
Service Department (Cafeteria) Operating Department (Machining)

Once a service departments costs are allocated, other service department costs are not allocated back to it.

Service Department (Custodial)

Operating Department (Assembly)

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Step-Down Method
There are three key points to understand regarding the step-down method:
In both the direct and step-down 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.
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Step-Down Method An Example

We will use the same data used in the direct method example.

Service Department Cafeteria Custodial

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Allocation Base Number of employees Square feet occupied

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Step-Down Method An Example

Allocate Cafeteria costs first since it provides more service than Custodial.
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Step-Down Method An Example

10 $360,000 10 + 20 + 30

= $60,000

Allocation base: Number of employees

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Step-Down Method An Example

20 $360,000 10 + 20 + 30

= $120,000

Allocation base: Number of employees

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Step-Down Method An Example

30 $360,000 10 + 20 + 30

= $180,000

Allocation base: Number of employees

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Step-Down Method An Example

New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria.

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Step-Down Method An Example

25,000 $150,000 25,000 + 50,000

= $50,000

Allocation base: Square feet occupied

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Step-Down Method An Example

50,000 $150,000 25,000 + 50,000

= $100,000

Allocation base: Square feet occupied

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Reciprocal Method
Service Department (Cafeteria) Operating Department (Machining)

Interdepartmental services are given full recognition rather than partial recognition as with the step method.

Service Department (Custodial)

Operating Department (Assembly)

Because of its mathematical complexity, the reciprocal method is rarely used.

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Quick Check Data for Direct and Step-Down Methods

The direct method of allocation is used.

Allocation bases: Business school administration costs (ADMIN): Number of employees
Business
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Administration computer services (BACS): Number of personal computers

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

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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
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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

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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

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

The step method of allocation is used.

Allocation bases: Business school administration costs (ADMIN): Number of employees
Business
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administration computer services (BACS): Number of personal computers

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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

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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

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End of Chapter 4

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