Process Costing

Types of Costing Systems Used to Determine Product Costs

Job-order Costing
Chapter 5

Process Costing

Many units of a single, homogeneous product flow evenly through a continuous production process.
One unit of product is indistinguishable from any other unit of product. Each unit of product is assigned an average cost.

Equivalent Units of Production Weighted Average Method

The weighted average method . . . Makes no distinction between work done in prior and current period. Blends together units and costs from prior period and current period.

Production Report
Production Report
quantity schedule A
showing the flow of units and the computation of equivalent units.

Section 1 Section 2 Section 3

A computation of
cost per equivalent unit.
A reconciliation of cost flows for the period,including: Total cost for units completed and transferred from the processing department. Total cost for partially completed units remaining in work in process.

Production Report Example

Work in process, May 1: 200 units Materials: 55% complete. Conversion: 30% complete. Production started during May: Production completed during May: Costs added to production in May Materials cost Conversion cost Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete.

9,600 5,575 5,000 units 4,800 units

$ 368,600 350,900

Production Report Example

Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Units accounted for as follows: Completed and transferred Work in process, May 31 4,800 400 4,800 4,800

Production Report Example

Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Units accounted for as follows: Completed and transferred Work in process, May 31 Materials 40% complete 4,800 400 4,800 160 5,200 4,960 4,800

Production Report Example

Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Units accounted for as follows: Completed and transferred Work in process, May 31 Labor 25% Complete 4,800 400 4,800 160 5,200 4,960 4,800 100 4,900

Production Report Example

Section 2: Compute cost per equivalent unit
Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units Cost per equivalent unit $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 Conversion $ 5,575 350,900 $ 356,475 4,900

Production Report Example

Section 2: Compute cost per equivalent unit
Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units Cost per equivalent unit $ $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 76.25 Conversion $ 5,575 350,900 $ 356,475 4,900

$378,200 4,960 units = $76.25

Production Report Example

Section 2: Compute cost per equivalent unit
Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 $ Conversion $ 5,575 350,900 $ 356,475 4,900 72.75

Cost per equivalent unit $ 76.25 Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 4,900 units = $72.75

Production Report Example

Section 3: Cost Reconciliation
Total Cost $ 715,200 Equivalent Units Materials Conversion 4,800 160 100 4,800

4,800 units @ $149.00

Cost accounted for as follows: Transferred out during May Work in process, May 31: Materials Conversion Total work in process, May 31 Total cost accounted for

Production Report Example

Section 3: Cost Reconciliation
Total Cost $ 715,200 12,200 7,275 19,475 $ 734,675 Equivalent Units Materials @ $72.75 100 units Conversion 4,800 160 100 4,800

160 units @ $76.25

Cost accounted for as follows: Transferred out during May Work in process, May 31: Materials Conversion Total work in process, May 31 Total cost accounted for

All costs accounted for

How would the unit cost measures change if the department uses Fifo rather than weighted average costing?

Production Report -FIFO

Section 1: Quantity Schedule with Equivalent Units
Units accounted for:

Transfers: Units From beg. Invent. 200u From new starts 4600u Ending inventory 400u Current work done

Equivalent Units: Material LOH 90u 140u 4600u 4600u 160u 100u

4850u

4840u

Production Report -FIFO Compute current period cost per equivalent unit
Total Cost Cost to be accounted for: Costs added in the Shipping and Milling Department Total cost Equivalent units Materials Conversion

719,500 $ 719,500

368,600 $ 368,600 4,850 $

350,900 $ 350,900 4,840 72.50

Cost per equivalent unit $ 76.00 Total cost per equivalent unit = $76.25 + $72.75 $ 148.500 76.00+72.50 = $149.00

Cost Reconciliation -FIFO

Units accounted for:

Transfers: From beg. Invent. From new starts Ending inventory Total costs Accounted for:

Units 200u 4600u 400u

Costs: Material

LOH

Cost Reconciliation -FIFO

Units accounted for:

Transfers: From beg. Invent. From new starts Ending inventory Total costs Accounted for:
1

Units 200u 4600u 400u

Costs: Material $ 16,4401

LOH $ 15,7252

$9600 + 90eu x $76.00 = $ 16,440 2 $ 5575 + 140eu x $72.50 = $ 15,725

Cost Reconciliation -FIFO

Units accounted for:

Transfers: From beg. Invent. From new starts Ending inventory Total costs Accounted for:
1

Units 200u 4600u 400u

Costs: Material $ 16,4401 $349,6003

LOH $ 15,7252 $333,5004

$9600 + 90eu x $76.00 = 2 $ 5575 + 140eu x $72.50 = 3 4,600eu x $76.00 = 4 4,600eu x $72.50 =

$ 16,440 $ 15,725 $ 349,600 $ 333,500

Cost Reconciliation -FIFO

Units accounted for:

Transfers: From beg. Invent. From new starts Ending inventory Total costs Accounted for:
1

Costs: Units Material 200u $ 16,4401 4600u $349,6003 400u $ 12,1605

LOH $ 15,7252 $333,5004 $ 7,2506

$ 378,200+ $356,475 = $734,675

$ 16,440 $ 15,725 $ 349,600 $ 333,500 $ 12,160 $ 7,250

$9600 + 90eu x $76.00 = 2 $ 5575 + 140eu x $72.50 = 3 4,600eu x $76.00 = 4 4,600eu x $72.50 = 5 160eu x $76.00 = 6 100eu x $72.50 =

Fifo differs from weighted average :

Current period unit costs are based on current work done, and current costs charged to the process.

Fifo differs from weighted average :

Current work does not include production from the previous period, in the beginning inventory.

Fifo differs from weighted average :

Transfers out are costed as two separate lots: one from the beginning inventory, and one from current starts.

Fifo differs from weighted average :

The ending inventory is priced at current period costs (not as a weighted average of current and prior period costs).

Comparisons of Weighted Average and FIFO methods

Wtd. Avg. FIFO Diff. $715,200 $715,265 ($65) $ 19,475 $ 19,410 +$65 $734,675 $734,675 -0Materials $ 76.25 $ 76.00 $ 87.27 LOH $72.75 $72.50 $ 92.92 Total $149.00 $148.50 $180.19

Costs transferred to next dept. Costs in ending inventory Total costs accounted for Unit costs: Weighted average unit costs Current period production costs Previous period production costs

Spoilage in a Process Costing System

Terminology

Spoilage refers to unacceptable units discarded or sold for reduced prices.

Normal Spoilage

Normal spoilage is spoilage that is an inherent result of the particular production process and arises even under efficient operating conditions.

Abnormal Spoilage

Abnormal spoilage is spoilage that should not arise under efficient operating conditions.

Companies record the units of abnormal spoilage and keep a separate Loss from Abnormal Spoilage account.

Accounting for spoilage in process costing using the weighted-average method.

Weighted-Average: Spoilage

The following example is for the month of November and relates to Big Mountain, Inc. Direct materials are introduced at the beginning of the production cycle. Conversion costs are added evenly during the cycle.

Weighted-Average: Spoilage
Normally the spoiled units are 2% of the unspoiled output.
Assume that Big Mountain, Inc., had 1,000 units in the beginning work in process inventory, 100% complete for materials ($9,700), and 60% complete for conversion ($10,000). During the month, an additional 35,000 units were put into production.

Weighted-Average: Spoilage
During the month 31,000 units were completed and transferred out to the next department. Ending work in process inventory was 4,000 units (100% materials and 20% conversion). Costs added during the month were $87,500 for materials and $72,000 for conversion. What are the costs assigned to the units completed, spoiled, and in ending work in process inventory?

Physical Units (Step 1)

Work in process, beginning (November 1) 100% material, 60% conversion costs Started during November:

1,000 35,000 36,000

Good units completed and transferred out: 31,000 Work in process, ending inventory: 100% material 20% conversion costs 4,000 35,000

Physical Units
What is the number of spoiled units?
36,000 35,000 = 1,000

What is the normal spoilage? 31,000 2% = 620

What is the abnormal spoilage?

1,000 620 = 380

Compute Equivalent Units

Materials Conversion Completed and transferred 31,000 31,000 Normal spoilage 620 620 Abnormal spoilage 380 380 Ending inventory 4,000 800 Equivalent units 36,000 32,800 100% 20%

Compute Equivalent Unit Costs

Materials $ 9,700 87,500 $97,200 36,000 $2.70 Conversion $10,000 72,000 $82,000 32,800 $2.50

Beginning inventory Current costs Total Equivalent units Cost per unit

Summarize Total Costs

Work in process beginning inventory: Materials $ 9,700 Conversion 10,000 Total beginning inventory $ 19,700 + Current costs: Materials Conversion = Costs to account for $87,500 72,000 $179,200

Assign Total Costs

Good units completed and transferred out (31,000 units): Costs before adding normal spoilage: 31,000 ($2.70 + $2.50) Normal spoilage: 620 ($2.70 + $2.50) Total

$161,200 3,224 $164,424

Assign Total Costs (contd)

Abnormal spoilage: 380 ($2.70 + $2.50) $ 1,976 Work in process, ending (4,000 units): Direct materials (4,000 $2.70) $10,800 Conversion (800 $2.50) 2,000 Total $12,800

Cost Reconciliation
Costs of units completed and transferred out (including normal spoilage) $164,424 Cost of abnormal spoilage 1,976 Costs in ending inventory 12,800 Total costs accounted for $179,200 The $1,976 cost of abnormal spoilage is assigned to the Loss from Abnormal Spoilage account.

Journal entries for process costing with normal and abnormal spoilage

Return to the beginning of the Big Mountain Company example, and write out all journal entries to reflect the cost flows in the above example. For simplicity, assume that the firm has only one processing department (implying that transfers out are finished goods).

End of Process Costing Discussion

Handout 6 (a):
Process costing: FIFO

and Wtd. Average

Papermill Products Co. provides the following information for a recent months production activity in its Bleaching Department. Materials are added at the beginning of the bleaching process, and conversion costs are added evenly throughout the bleaching process. The beginning work in process was 100% complete with respect to material costs, and was 80% complete with respect to conversion costs. The ending work in process is 100% complete with respect to material costs, and is 50% complete with respect to conversion costs. Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u Conversion Costs $ 4,200 $48,000 Total Costs $ 10,200 $ 87,000 $ 97,200

Work in process, beginning New starts during this month Total to account for

Transfers to the next department 84,000u Work in process, ending 6,000u

Work in process, beginning New starts during this month Total to account for

Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u

Conversion Costs $ 4,200 $48,000

Total Costs $ 10,200 $ 87,000 $ 97,200

Transfers to the next department 84,000u Work in process, ending 6,000u

Required: Assume the company uses weighted average process costing, and determine the following amounts: (a) Equivalent units of production for materials and for conversion costs

Work in process, beginning New starts during this month Total to account for

Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u

Conversion Costs $ 4,200 $48,000

Total Costs $ 10,200 $ 87,000 $ 97,200

to the Required: Transfersprocess,next department 84,000u Work in ending 6,000u Assume the company uses weighted average process costing, and determine the following amounts: (a) Equivalent units of production for materials and for conversion costs

Measurement of equivalent units (EU) for weighted average costing: Units Materials EU Conversion EU Units transferred out 84,000 84,000 84,000 Units in ending inventory (.5) 6,000 6,000 3,000 Total 90,000 90,000 87,000

(b) Current materials and conversion costs per unit Costs per equivalent unit Charges (current and beg.invent.) Equivalent units (see above) Cost per EU Materials Conversion $45,000 $52,200 90,000 87,000 $0.50 $0.60

Work in process, beginning New starts during this month Total to account for

Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u

Conversion Costs $ 4,200 $48,000

Total Costs $ 10,200 $ 87,000 $ 97,200

Transfers to the next department 84,000u Work in process, ending 6,000u

(c)Total (material plus conversion) costs assigned to the ending work in process inventory Material 6,000 EU @ $0.50 = $3,000 Conversion (.5) 3,000 EU @ $0.60 = $1,800 Total $4,800
(d) Total costs transferred to the next department 84,000 units @ ($0.50 + 0.60) = $92,400 (e) Provide journal entries to reflect the above activities. Dr. Work in process- material Cr. Raw materials Dr. Work in process- conversion (LOH) Cr. Payroll suspense; Applied OH Dr. Finished goods (or WIP/ subs. dept.) Cr. Work in process/ Bleaching dept. $39,000 $39,000 $48,000 $48,000 $92,400 $92,400

Work in process, beginning New starts during this month Total to account for

Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u

Conversion Costs $ 4,200 $48,000

Total Costs $ 10,200 $ 87,000 $ 97,200

Transfers to the next department 84,000u Work in process, ending 6,000u

Assume instead that the company uses FIFO process costing, and determine the following amounts: (f) Equivalent units of production for materials and for conversion costs Measurement of equivalent units (EU) for FIFO costing: units Materials EU Units transferred out From beginning inventory (.8) 5,000 --New starts and completes 79,000 79,000 Units in ending inventory (.5) 6,000 6,000 Total 90,000 85,000

Conversion EU 1,000 79,000 3,000 83,000

(g) Current materials and conversion costs per unit Costs per equivalent unit Materials Conversion Charges (current only) $39,000 $48,000 Equivalent units (see above) 85,000 83,000 Cost per EU $0.4588 $0.5783 Total unit cost in the current period: $ 1.0371

Work in process, beginning New starts during this month Total to account for

Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u

Conversion Costs $ 4,200 $48,000

Total Costs $ 10,200 $ 87,000 $ 97,200

Transfers to the next department 84,000u Work in process, ending 6,000u

(h) Total (material plus conversion) costs assigned to the ending work in process inventory Material 6,000 EU @ $0.4588 = $2,753 Conversion (.5) 3,000 EU @ $0.5783 = $1.735 Total $4,488

(i) Total costs transferred to the next department Costs transferred out: From beginning inventory $10,200 + (1,000 EU)($.5783) = $10,778 New starts and completes (79,000EU)($1.0371) = $81,931 Total = $92,709 Note: $92,709 + 4.488 = $97,197. Differs from $97,200 due to $3. rounding error. (j) Unit cost for materials and for conversion in the previous period, based on information regarding the costs assigned to the beginning inventory The beginning inventory includes $6,000 of materials cost for 5,000 equivalent units, or $1.20 per unit. The beginning inventor includes $$4,200 of conversion cost for 4,000 equivalent units, of $1.05 per unit.

(k) Provide journal entries to reflect the above activities. Dr. Work in process- material Cr. Raw materials Dr. Work in process- conversion (LOH) Cr. Payroll suspense; Applied OH Dr. Finished goods (or WIP/ subs. dept.) Cr. Work in process/ Bleaching dept. $39,000 $39,000 $48,000 $48,000 $92,709 $92,709

Handout 6 (b):
Process costing: Spoiled Units

Papermill Products Co. provides the following information for Julys production activity in its Bleaching Department. Materials are added at the beginning of the bleaching process, and conversion costs are added evenly throughout the bleaching process. Inspection occurs at the very end of the bleaching process, before goods are transferred out to the Cutting Department.. The company expects normal spoilage to average about ten percent of the unspoiled units transferred out (i.e., normally, one unit is spoiled for every ten good units transferred to the next department). The beginning work in process was 100% complete with respect to material costs, and was 80% complete with respect to conversion costs. The ending work in process is 100% complete with respect to material costs, and is 50% complete with respect to conversion costs. Pertinent information regarding current activity in the bleaching department is given in the following table: Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u Conversion Costs $ 4,200 $48,000 Total Costs $ 10,200 $ 87,000 $ 97,200

Work in process, beginning New starts during this month Total to account for

Transfers to the next department 72,000u Normal spoilage ? Abnormal spoilage ? Work in process, ending 6,000u

Work in process, beginning New starts during this month Total to account for

Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u

Conversion Costs $ 4,200 $48,000

Total Costs $ 10,200 $ 87,000 $ 97,200

Transfers to the next department 72,000u Normal spoilage ? Abnormal spoilage ? Work in process, ending 6,000u

Required: Assume the company uses weighted average process costing, and determine the following amounts: (a) Number of units of normal and abnormal spoilage A total of 12,000 units are spoiled (90,000 78,000 units). Normal spoilage is 7,200 units (10% of 72,000 unspoiled units transferred out). Abnormal spoilage is 4,800 units (12,000 7,200 units). (b) Equivalent units of production for materials and for conversion costs Measurement of equivalent units (EU) for weighted average costing: Units Materials EU Conversion EU Units transferred out 72,000 72,000 72,000 Normal spoilage 7,200 7,200 7,200 Abnormal spoilage 4,800 4,800 4,800 Units in ending inventory (.5) 6,000 6,000 3,000 Total 90,000 90,000 87,000

Work in process, beginning New starts during this month Total to account for

Physical Material Units Costs 5,000u $ 6,000 85,000u $39,000 90,000u

Conversion Costs $ 4,200 $48,000

Total Costs $ 10,200 $ 87,000 $ 97,200

Transfers to the next department 72,000u Normal spoilage ? Abnormal spoilage ? Work in process, ending 6,000u

(c) Current period unit costs for materials and conversion costs Costs per equivalent unit Materials Conversion Charges (current and beg.invent.) $45,000 $52,200 Equivalent units (see above) 90,000 87,000 Cost per EU $0.50 $0.60 (d) Total costs assigned to units transferred to the cutting department (including the cost of normal spoilage) (72,000 + 7,200 units) @ ($0.50 + 0.60) = $87,120

(e) Total (material plus conversion) costs assigned to the ending work in process inventory Material 6,000 EU @ $0.50 = $3,000 Conversion (.5) 3,000 EU @ $0.60 = $1,800 Total $4,800

(f) Total costs assigned to abnormal spoilage 4,800 units @ $1.10 = $5,280 Note that ($87,120 + 4,800 + 5,280) = $97,200

Provide journal entries to record the cost flows into and out of the Bleaching department for the month of July. Dr. Work in process- material Cr. Raw materials Dr. Work in process- conversion (LOH) Cr. Payroll suspense; Applied OH Dr. Work in process/Cutting dept. Cr. Work in process/ Bleaching dept. Dr. Abnormal spoilage (expense) Cr. Work in process/Bleaching dept. $39,000 $39,000 $48,000 $48,000 $87,120 $87,120 $5,280 $5,280

Handout 6(c)

Multiple choice questions

1. Colby Company has a process costing system in which the weighted-average method is used. The company adds all materials at the beginning of the process in the Molding Department, which is the first of two stages of its production process. Information concerning the materials used in the Molding Department during March is as follows:

What was the materials cost of the units transferred out during March? A. $5,100 B. $7,500 C. $11,220 D. $49,470

1. Colby Company has a process costing system in which the weighted-average method is used. The company adds all materials at the beginning of the process in the Molding Department, which is the first of two stages of its production process. Information concerning the materials used in the Molding Department during March is as follows:

What was the materials cost of the units transferred out during March? A. $5,100 B. $7,500 Total costs are $57,120 and total C. $11,220 units are 112,000, so unit costs are D. $49,470

$0.51. Transfers consist of 97,000 units costed at $49,470 (97,000 x $.51).

2. Jimmy Company uses the weighted-average method in its process costing system. The ending work in process inventory consists of 9,000 units. The ending work in process inventory is 100% complete with respect to materials and 70% complete with respect to labor and overhead. If the cost per equivalent unit for the period is $3.75 for material and $1.25 for labor and overhead, what is the balance of the ending work in process inventory account? A. $31,500 B. $33,750 C. $41,625 D. $45,000

2. Jimmy Company uses the weighted-average method in its process costing system. The ending work in process inventory consists of 9,000 units. The ending work in process inventory is 100% complete with respect to materials and 70% complete with respect to labor and overhead. If the cost per equivalent unit for the period is $3.75 for material and $1.25 for labor and overhead, what is the balance of the ending work in process inventory account? A. $31,500 B. $33,750 Materials cost is $33,750 C. $41,625 (9,000 x 3.75) and conversion D. $45,000 cost is $7,875 (6,300 x 1.25). The total is $41,625.

3. Jersey Company has a process costing system in which it uses the weighted-average method. The equivalent units for conversion costs for the month were 47,500 units. The beginning work in process inventory consisted of 15,000 units, 60% complete with respect to conversion costs. The ending work in process inventory consisted of 10,000 units, 75% complete with respect to conversion costs. The number of units started during the month was: A. 25,000 units B. 34,000 units C. 35,000 units D. 40,000 units

3. Jersey Company has a process costing system in which it uses the weighted-average method. The equivalent units for conversion costs for the month were 47,500 units. The beginning work in process inventory consisted of 15,000 units, 60% complete with respect to conversion costs. The ending work in process inventory consisted of 10,000 units, 75% complete with respect to conversion costs. The number of units started during the month was: A. 25,000 units B. 34,000 units The equivalent units for conversion imply that C. 35,000 units 40,000 units were transferred, so 50,000 units D. 40,000 units were available. The beginning inventory is 15,000 units, so an additional 35,000 units were started (15,000 + 35,000 = 50,000).

4. Boswal Company uses the weighted-average method in its process costing system. The Assembly Department started the month with 6,000 units in its beginning work in process inventory that were 80% complete with respect to conversion costs. An additional 52,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 18,000 units in the ending work in process inventory of the Assembly Department that were 20% complete with respect to conversion costs. What were the equivalent units for conversion costs in the Assembly Department for the month? A. 43,600 B. 38,800 C. 64,000 D. 40,000

4. Boswal Company uses the weighted-average method in its process costing system. The Assembly Department started the month with 6,000 units in its beginning work in process inventory that were 80% complete with respect to conversion costs. An additional 52,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 18,000 units in the ending work in process inventory of the Assembly Department that were 20% complete with respect to conversion costs. What were the equivalent units for conversion costs in the Assembly Department for the month? A. 43,600 A total of 58,000 units are available (6,000 + 52,000). B. 38,800 Of these units, 40,000 were complete and transferred. C. 64,000 D. 40,000 The remaining 18,000 units are 20% complete, equivalent to 3,600 units. The total equivalent units is 43,600 (40,000 + 3,600).

5. The following information was provided by Fystro Corporation for the month of March. Fystro uses the weighted-average method in its process costing system.

How much cost did Fystro add to production during March? A. $57,000 B. $67,000 C. $81,000 D. $62,000

5. The following information was provided by Fystro Corporation for the month of March. Fystro uses the weighted-average method in its process costing system.

How much cost did Fystro add to production during March? A. $57,000 Total cost available is $79,000 ($74,000 + B. $67,000 C. $81,000 5,000). Of this amount, $12,000 was in the D. $62,000

beginning inventory, and the remaining $67,000 was added to production during the month.