# ACC 3200 Chapter 3: Process Costing Process Costing.

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ACC 3200 Chapter 3: Process Costing Process Costing

Learning Objectives Describe the key features of a process costing system. Reconcile the number of physical units using the weighted average method Calculate equivalent units using the weighted average method. Calculate equivalent units using the weighted average method Prepare a process costing production report using the weighted average method Prepare Journal Entries for Process Costing

Job Order versus Process Costing
3-3 Job Order versus Process Costing Job order costing is used in companies that offer customized products or services, such as custom-built homes or custom-built ships. Because each individual product or service is unique, a job cost sheet is used to keep track of the costs of each individual unit, or job, in a job-order costing system. Process costing is used to calculate the cost of highly similar (“homogeneous”) goods and services that are produced in standardized processes. Process costing is used in companies that produce homogeneous products or services in a series of standardized processes. Canned and bottled goods are examples of a homogenous product. Because the products or services that result from standardized processes are the same, there is no need to keep a separate cost record for each individual unit. Instead, process costing tracks the total cost of each production process and spreads that cost over the total number of units that flow through the process. Throughout this presentation, we will use the CK Mondavi Family Vineyards to illustrate process costing for the crushing, fermenting and aging of wine. The company is an old, established California-based winery. At a fundamental level the company processes grapes into wine. Wine making is an example of a sequential process. In other words, the grapes must be crushed before they can be fermented and then aged, which must occur before the wine can be bottled and sold. Other companies may employ parallel processing in which multiple processes occur simultaneously.

Flow of Costs in Process Costing
3-4 Flow of Costs in Process Costing Part I Here we see cost flows for a Mondavi winery. Recall that there are three types of manufacturing costs that must be traced to the product and recorded as inventory until the product is sold: direct materials - the cost of materials purchased from suppliers but not yet put into production. direct labor - is the “hands-on” labor that can be directly and conveniently traced to the end product. Because today’s wineries tend to be highly automated, direct labor is often a very small portion of the total manufacturing cost. Thus, wineries and other process-oriented industries may combine direct labor and manufacturing overhead costs together in a single category called conversion cost. manufacturing overhead - is the “hands-on” labor that can be directly and conveniently traced to the end product. Because today’s wineries tend to be highly automated, direct labor is often a very small portion of the total manufacturing cost. Thus, wineries and other process-oriented industries may combine direct labor and manufacturing overhead costs together in a single category called conversion cost. Part II In highly automated processes, such as a modern winery, direct labor is typically a very small portion of the total cost, and is often combined with manufacturing overhead costs into a single category called conversion cost. This category represents the total cost of converting raw materials into the finished product. When the final product is sold, the total manufacturing cost for the items sold is transferred from finished goods inventory to the Cost of Goods Sold account, where it will be reported as an expense on the income statement.

Process Costing Production Report
3-5 Process Costing Production Report The foundation of a process costing system is the production report. In the report we provide information about: The number of units produced. The manufacturing costs transferred into Work in Process Inventory. The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory. The number of units remaining in process at the end of the period. The cost of units remaining in process at the end of the period. The foundation of a process costing system is the production report. In the report we provide information about: The number of units produced. The manufacturing costs transferred into Work in Process Inventory. The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory. The number of units remaining in process at the end of the period. The cost of units remaining in process at the end of the period.

Process Costing Production Report
3-6 Process Costing Production Report Section 1 of Example Production Report (Unit = 1 Barrel of Wine) The report tells managers about the total number of units worked on and where they are in the process. Part I The production report provides information about manufacturing costs and the number of units that flowed into and out of the production process during a given period. A separate report is prepared for each production process, on either a monthly or a quarterly basis. The production report is a tool that managers can use to monitor and control production costs. It tells managers how many units were completed during the period and how many units are still in the process of completion for a specific process. Part II Units that are still in process at the end of the period are only partially complete. For partially complete units we calculate the equivalent number of whole units that they represent. In our example report, the units still in the crushing, fermenting and aging process at the end of the period are complete as to materials (grapes), but are only 60 percent complete as to direct labor and manufacturing overhead (400 barrels in ending inventory times 60 percent is equal to 240 complete units). Equivalent units are used to convert partially complete units into the equivalent number of full units.

Process Costing Production Report
3-7 Process Costing Production Report The costs are either transferred out with the units completed, or kept in the processing department. Section 2 of Example Production Report (Costs) The second part of the production report shows the total manufacturing costs incurred during the period. Part I The second part of the Production Cost Report deals with the costs of manufacturing during the period. The cost portion of the report shows the costs in beginning inventory broken down into Direct Materials and Conversion Costs (direct labor and manufacturing overhead) as well as costs incurred in the current accounting period. We determine the cost per equivalent unit produced during the period. Part II We assign the costs per equivalent unit to units completed and transferred to Finished Goods Inventory and units still in process in the CFA process. As in the last chapter, we will show the journal entries necessary for the cost flows in a Supplement to this chapter.

Weighted Average vs. FIFO Process Costing
3-8 Weighted Average vs. FIFO Process Costing As shown in the exhibit on your screen, there are two different methods we can use to prepare a processing costing production report: the weighted average method and the FIFO method. The key difference between the two methods is how each method deals with any units and costs that are in Work in Process Inventory at the beginning of the period. The weighted average method combines (averages) the cost of any units in beginning inventory with the cost of units that were started during the current period. This method ignores the fact that the units in beginning inventory were started in a prior period and assumes that all of the work (and cost) of those units occurred during the current period. The FIFO (first in, first out) method assumes that any units in beginning inventory are completed first, before any new units are started into the process. As a result, the units in beginning inventory will be accounted for separately from those units that were started during the current period. The weighted average method is simpler and more commonly used in the real world. But the FIFO method gives more precise attention to the actual physical flow of units and manufacturing costs, and thus may be more accurate. In this chapter we will concentrate on the weighted average method to prepare the production report. The FIFO method is covered in a supplement to the chapter.

Preparing the Production Report (Weighted Average Method)
3-9 Preparing the Production Report (Weighted Average Method) There are five steps involved in preparing a production report: 1. Reconcile the number of physical units worked on during the period. 2. Translate the physical units into equivalent units. Calculate the cost per equivalent unit. Reconcile the total cost of work in process. Prepare a production report. Each of these steps is described in detail on the following screens.

Step 1: Reconcile the Number of Physical Units
3-10 Step 1: Reconcile the Number of Physical Units Part I To reconcile the number of physical units, we first add the number of units that were on hand at the beginning of the period to the units that were started during the current period. Part II Then we determine whether those units were completed during the period or are still being worked on at the end of the period.

Step 1: Reconcile the Number of Physical Units
3-11 Step 1: Reconcile the Number of Physical Units Part I. At Mondavi, assume that at the beginning of the period, there were 200 barrels of wine in the Crushing, Fermenting, and Aging (CFA) process. During the period, workers started another 1,800 barrels into the CFA process. At the end of the period, 400 barrels of wine were still in the CFA process. Part II. Based on this information, we can determine the number of barrels completed by subtracting the number of barrels in ending work in process inventory from the total barrels to account for. Sixteen hundred units must have been completed, because we have a total of 2,000 units to account for, but only 400 were still in process at the end of the period.

Diagram of the Crushing, Fermenting, and Aging Process
3-12 Diagram of the Crushing, Fermenting, and Aging Process Companies often have units in process at the beginning and end of an accounting period. Those units that are incomplete, their cost must be recorded on the balance sheet as Work in Process Inventory. By converting partially completed units into equivalent units, we can assign an appropriate value to those units for financial statement reporting. In our example, Direct materials (grapes) are added at the beginning of the process. Thus, once a unit has been started in the CFA process, it has 100 percent of the direct materials. Conversion costs (direct labor and manufacturing overhead) are incurred uniformly throughout the process. A total of 1,600 units were completed and transferred to the Bottling department. The remaining 400 units in ending inventory were 60 percent through the CFA conversion process. These units have all required direct materials (crushed grapes) but are only 60 percent of the way through the fermenting and aging process. To calculate equivalent units, we must convert the partially complete units in ending inventory into the equivalent of a full unit.

Step 2: Translate Physical Units into Equivalent Units
3-13 Step 2: Translate Physical Units into Equivalent Units We need to calculate equivalent units because a process usually has some partially completed units in its beginning and ending inventory. + = 1 Part I. Step 2 in preparing the production report is to translate the physical units into equivalent units. An equivalent unit is a measure of the amount of work or effort expended during the current period to produce both full and partially complete units. Companies often have units in process at the beginning and end of an accounting period. These partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to that output. Even though some units are incomplete, their cost must be recorded on the balance sheet as an asset. By converting partially completed units into equivalent units, we can assign an appropriate value to those units for financial statement reporting. Part II. Equivalent units are the product of the number of partially completed units times the percentage of completion of those units. Two half-completed products are equivalent to one completed product. Using this logic, we can say that 10,000 units 70 percent complete are equivalent to 7,000 complete units.

Step 2: Translate Physical Units into Equivalent Units
3-14 Step 2: Translate Physical Units into Equivalent Units Direct materials are added at the beginning of the process. So, once a unit is started, it will have 100% of the required direct materials. Conversion costs are incurred uniformly in the process. The 1,600 units that were transferred to bottling during the period are 100% complete for material and conversion. The 400 units in ending inventory are 60% complete as to conversion costs. To illustrate the calculation of equivalent units in our winery example, we will assume the following additional details about the CFA process at Mondavi. Direct materials (grapes) are added at the beginning of the process. Thus, once a unit has started the process, it will have 100% of the required direct materials. Conversion costs (direct labor and manufacturing overhead) are incurred uniformly throughout the process. We completed and transferred to bottling 1,600 units this period. The remaining 400 units in ending inventory were 60 percent through the CFA conversion process. These units have all required direct materials (crushed grapes) but are only 60 percent of the way through the fermenting and aging process.

Step 2: Translate Physical Units into Equivalent Units
3-15 Step 2: Translate Physical Units into Equivalent Units Exh. 20-22 To calculate the equivalent units, we need to consider how much work was done during the current period to produce the 1,600 units that were completed and transferred to bottling, and to get the 400 units in ending inventory 60% complete. This calculation must be made separately for direct materials and conversion costs, because those costs are added at different points in the production process. Because direct materials are added at the beginning of the process, we did not need to add any direct materials to the beginning inventory during the current period. All units completed and transferred out to bottling are 100 percent complete as to both materials and conversion. Since all the work on those units happened during the current period, the equivalent units are the same as the physical units. The 400 units in ending inventory were started during the current period, and received the entire amount of direct materials at the beginning of the process. Thus, the equivalent units for direct materials are the same as the 400 physical units in ending inventory. Those 400 units went only 60% of the way through the conversion process during the current period, however. Therefore, the equivalent units for conversion would be 60% of the 400 units in ending inventory, or 240. Finally, we calculate the total equivalent units by adding the equivalent units for beginning inventory, units started and completed, and ending inventory. This calculation gives us 2,000 equivalent units of direct materials and 1,840 equivalent units of conversion cost.

Step 3: Calculate Cost per Equivalent Unit
3-16 Step 3: Calculate Cost per Equivalent Unit Part I. We know from prior information that beginning costs were \$84,000 for direct materials and \$81,120 for conversion costs (direct labor plus manufacturing overhead). Current period manufacturing costs were \$810,000 for materials and \$918,000 for conversion costs. Let’s calculate the cost per equivalent unit. Part II The cost per equivalent unit is \$447 for direct materials and \$543 for conversion. This suggests that it costs about \$990 (\$447 plus \$543) to process a barrel of wine in the CFA process. ÷ ÷

Step 4: Reconcile the Total Cost of Work in Process
3-17 Step 4: Reconcile the Total Cost of Work in Process The fourth step in the preparation of the production report is to reconcile the total cost recorded in the Work in Process Inventory (CFA) account. The \$1,893,120 total costs to be accounted for in the CFA process is the sum of the beginning costs for the period plus the direct materials cost and conversion costs that were added to the process during the current period. For the 1,600 units completed, this cost must be transferred out of the Work in Process Inventory (CFA) account and transferred into the bottling department. At the same time, some barrels will remain in Work in Process (CFA). Let’s calculate the appropriate amounts.

Step 4: Reconcile the Total Cost of Work in Process
3-18 Step 4: Reconcile the Total Cost of Work in Process The cost of the barrels completed and transferred to bottling this period is \$1,584,000, and the cost remaining in Work in Process Inventory (CFA) is \$309,120.

Step 4: Reconcile the Total Cost of Work in Process
3-19 Step 4: Reconcile the Total Cost of Work in Process After we transfer \$1,584,000 out of the Work in Process (CFA) account to reflect the cost of units completed and transferred to the bottling process, the T-account for the CFA process will have a balance of \$309,120.

Step 5: Prepare a Production Report
3-20 Step 5: Prepare a Production Report Section 1 of the Production Report The first section of the production report includes information about the number of physical units (Step 1); and equivalent units (Step 2).

Step 5: Prepare a Production Report
3-21 Step 5: Prepare a Production Report Section 2 of the Production Report In this second section of the Production Report we identify the costs to be accounted for, that is, the costs in beginning inventory for materials and conversion and the costs incurred in the current period. In our example, the total cost to be accounted for is \$1,893,120. The costs are accounted for by transferring \$1,584,000 from work in process (CFA) to work in process (Bottling). These costs are associated with the 1,600 barrels completed and transferred out this period. Costs still in work in process inventory (CFA) are \$309,120, and represent the costs associated with the 400 partially completed units in work in process inventory.

Additional Factors in Processing Costing
3-22 Additional Factors in Processing Costing We have not discussed process costing when the FIFO method is applied. This material in covered in the Supplement to this chapter. The only difference between the two methods is how we treat beginning inventory. We have not considered how to account for subsequent departments in process costing. We did not look at extending our example to cover the Bottling Department. We have not discussed process costing when the FIFO method is applied. This material in covered in Supplement A to this chapter. The only difference between the two methods is how we treat beginning inventory. We have not considered how to account for subsequent departments in process costing. We did not look at extending our example to cover the Bottling Department.

Journal Entries for Process Costing
3-23 Journal Entries for Process Costing Purchase of Raw Materials Mondavi purchased \$35,000 of materials on account. Issue of Raw Material into Production Part I. Materials that are purchased but not immediately issued to production are debited to the raw materials inventory account. The credit should be to cash or accounts payable, depending on the form of payment. Assume that Mondavi purchased \$35,000 of materials on account. Part II. Mondavi withdraws \$20,000 of grapes from raw materials and adds them to production in the crushing, fermenting, and aging process. Mondavi adds \$20,000 of grapes to production.

Journal Entries for Process Costing
3-24 Journal Entries for Process Costing Recording Actual Conversion Costs Mondavi incurred the following actual conversion costs: Part I Since direct labor is typically a very small portion of this cost, most of the conversion cost is made up of indirect manufacturing costs, such as rent, factory supervision, and depreciation. Part II We record the conversion costs in a control account called conversion cost. This account is very similar to the manufacturing overhead control account described in the last chapter, except that it now includes both manufacturing overhead and direct labor.

Journal Entries for Process Costing
3-25 Journal Entries for Process Costing Recording Applied Conversion Costs Mondavi applies conversion costs to work in process based on a predetermined rate, using direct materials cost as the allocation base. The rate is 125% of direct materials cost. Part I Conversion costs are applied to work in process based on some predetermined allocation measure. For example, a winery might apply conversion cost based on the number of barrels, the number of fermentation tanks, or the cost of the grapes that are processed. In other process-oriented industries, direct labor hours and machine-hours are common allocation bases. Assume that Mondavi applies conversion cost to the work in process at a rate of 125 percent of the direct materials cost. In other words, for every \$1.00 of direct material costs, an additional \$1.25 is applied to cover direct labor and manufacturing overhead costs. Part II Previously, we recorded the issue of \$20,000 worth of direct materials into work in process. Now we need to apply \$25,000 (\$20,000 X 125%) of conversion cost to work in process. At the end of the accounting period, any difference between the actual and applied conversion cost (over- or underapplied) will be adjusted to cost of goods sold.

Summary of Recorded Transactions
3-26 Summary of Recorded Transactions Raw Materials Work in Process (CFA) Beg. Bal. = 0 Beg. Bal. = 0 Pur. = 35,000 Work in Process Bottling Here you see, in T-account form, the costs that have been recorded to this point for purchases of material, issues of material, and for actual and applied conversion. Now we are ready for a transfer from the first work in process account to the second work in process account. Conversion Cost Actual Applied 36,250

Journal Entries for Process Costing
3-27 Journal Entries for Process Costing Transfer of Cost from CFA to Bottling Mondavi transfers the entire balance, \$45,000, from the work in process (CFA) account to the Bottling work in process account. The entire balance of \$45,000 is transferred from the Crushing, Fermenting, and Aging work in process account to the Bottling and Packaging work in process account. We will debit, the asset, Work-in Process Inventory – Bottling for \$45,000, and credit Work-in Process Inventory – CFA.

Journal Entries for Process Costing
3-28 Journal Entries for Process Costing Issue of Raw Material into the Bottling Process Mondavi issues an \$10,000 worth of direct materials into Bottling Department. Once the wine is transferred from Crushing, Fermenting, and Aging into the bottling and packaging process, it will require more direct materials, such as bottles, corks, and boxes. Assume that Mondavi issues an additional \$10,000 worth of direct materials into the bottling process.

Journal Entries for Process Costing
3-29 Journal Entries for Process Costing Recording Applied Conversion Costs Mondavi applies conversion costs to the Bottling Department using direct materials cost as the allocation base. The rate is 87.5 percent of direct materials cost. Part I Mondavi applies conversion cost to the Bottling and Packaging work in process account at a rate of 87.5 percent of the direct materials cost. In other words, for every \$1.00 of direct material costs incurred in Bottling and Packaging, an additional \$0.875 is applied to cover direct labor and manufacturing overhead costs. Previously, we recorded the issue of \$10,000 worth of direct materials into the Bottling work in process account. Part II Now we need to apply \$8,750 (\$10,000 X 87.5%) of conversion cost to the Bottling and Packaging work in process account.

Updated Summary of Recorded Transactions
3-30 Updated Summary of Recorded Transactions Raw Materials Work in Process CFA Beg. Bal. = 0 Beg. Bal. = 0 Pur. 35,000 Trans. 45,000 5,000 Work in Process Bottling Conversion Cost Here you see, in T-account form, the costs that have been recorded, including the cost of transfers from the first work in process account to the second work in process account. So far, we have recorded a total of \$63,750 in the Bottling and Packaging work in process account. Notice that conversion cost is underapplied by \$2,500. We will adjust cost of goods sold for this amount later. Now we are ready for a transfer from the second work in process account to finished goods. Beg. Bal. = 0 Actual Applied 36,250 2,500 63,750

Journal Entries for Process Costing
3-31 Journal Entries for Process Costing Transferring to Finished Good Inventory Mondavi transfers the entire balance from Bottling and Packaging to Finished Goods Inventory. Unit costs for the 1,250 cases (15,00 bottles) produced: Part I. Once the wine has gone through the bottling and packaging process, it will be transferred to finished goods. Part II. Assuming that the \$63,750 cost transferred to the finished goods account represents the cost of processing 15,000 bottles (or 1,250 cases, with each case containing 12 bottles) of wine, the costs per case is \$51.00 and the cost per bottle is \$4.25.

Journal Entries for Process Costing
3-32 Journal Entries for Process Costing Sales of Finished Goods. Mondavi sold 12,000 bottles in the winery gift shop for for \$8.00 per bottle. The entry to record the sale is: Part I If Mondavi sold 12,000 bottles (1,000 cases) of this wine in the winery gift shop at a retail price of \$8.00 per bottle, we would make additional journal entries to record the sales revenue. We will debit, the asset, Cash for \$96,000, and credit the revenue account Sales Revenue for \$96,000. Part II Assuming the company uses the perpetual inventory method, we need to record the cost of the 12,000 bottles sold. The cost per unit is \$4.25, so we will debit, the expense account, Cost of Goods sold for \$51,000 (12,000 units times \$4.25), and credit the Finished Goods Inventory for \$51,000. The entry to record the cost of goods sold is:

Journal Entries for Process Costing
3-33 Journal Entries for Process Costing Adjusting for Underapplied Conversion Cost Conversion Cost Applied Actual 36,250 25,000 8,750 Underapplied 2,500 Part I. Recall that actual conversion cost was \$36,250, but only \$33,750 of that conversion cost was applied, resulting in \$2,500 of underapplied conversion cost. We will adjust for the underapplied conversion cost by increasing cost of goods sold. If the conversion cost had been overapplied, we would have decreased cost of goods sold by debiting conversion cost and crediting cost of goods sold. We will debit, the expense account, Cost of Goods Sold, for \$2,500, and credit Conversion Cost the \$2,500.This entry will balance the Conversion Cost account as well as restating the cost of goods sold. Part II. Here you see the final summary of recorded costs in T-account form. Cost of Goods Sold Finished Goods Beg. Bal. = 0 Goods Comp. 63,750 12,750 Adjusted 53,500

Supplement FIFO Method Supplement 3A: FIFO Method
When using the FIFO Method to account for units and costs in process we follow the same 5-step approach used in the Weight Average Method. FIFO Method

Step 1: Reconcile the Number of Physical Units
3-35 Step 1: Reconcile the Number of Physical Units Physical Units Beginning Units in Process Units Started and Completed Ending Units in Process + + The first step in preparing a production report is to reconcile the number of physical units that were worked on during the period. To do so, we first add the number of units that were on hand at the beginning of the period to the units that were started during the current period. Then we determine whether those units were completed during the period or are still being worked on at the end of the period. FIFO assumes that the units in beginning inventory were completed first. So, not all units that were completed during the current period were started in the current period. FIFO assumes that the units in beginning inventory were completed first. So, not all units that were completed during the current period were started in the current period.

Step 1: Reconcile the Physical Units
3-36 Step 1: Reconcile the Physical Units Units Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400 OR Units Started and Completed = Units Completed Beginning Units = 1,600 – 200 = 1,400 Part I. To reconcile the physical flow of units we determine how many units were both started and completed during the current period. Those units would have made it all the way through the CFA process during the current period, so they would not be part of either beginning or ending inventory. Part II. We have different ways that we might compute the number of units started and completed as shown on your screen. Regardless of the formula that we use, we find that Mondavi started and completed 1,400 barrels. OR Units Started and Completed = Units Started Ending Units = 1,800 – 400 = 1,400

Step 2: Translate Physical Units into Equivalent Units
3-37 Step 2: Translate Physical Units into Equivalent Units Beginning inventory is 100% complete as to materials and 70% complete as to conversion. Complete as to materials 200 units × 30% = 60 Part I To calculate the equivalent units, we need to consider how much work was done during the current period to complete the 200 units in beginning inventory, produce the 1,400 units that were started and completed this period, and to get the 400 units in ending inventory 60% complete with respect to conversion costs. This calculation must be made separately for direct materials and conversion costs, because those costs are added at different points in the production process. Part II Because direct materials are added at the beginning of the process, we did not need to add any direct materials to the beginning inventory during the current period. Part III However, the beginning inventory is 70% complete as to conversion, so we will incur 30% more conversion costs in the current period to complete this 200 units. Part IV All units started and completed this period are 100 percent complete as to both materials and conversion. Since all the work on those units happened during the current period, the equivalent units are the same as the physical units. The 400 units in ending inventory were started during the current period, and received the entire amount of direct materials at the beginning of the process. Thus, the equivalent units for direct materials are the same as the 400 physical units in ending inventory. Those 400 units went only 60% of the way through the conversion process during the current period, however. Therefore, the equivalent units for conversion would be 60% of the 400 units in ending inventory, or 240. Finally, we calculate the total equivalent units by adding the equivalent units for beginning inventory, units started and completed, and ending inventory. This calculation gives us 1,800 equivalent units of direct materials and 1,700 equivalent units of conversion cost. 400 units × 60% = 240

Step 3: Calculate Cost per Equivalent Unit
3-38 Step 3: Calculate Cost per Equivalent Unit Part I Under the FIFO method, we must then determine how many units were both started and completed during the current period. Those units would have made it all the way through the CFA process during the current period, so they would not be part of either beginning or ending inventory. Part II The cost per equivalent unit is \$450 for direct materials and \$540 for conversion. In the next step, we use these costs per equivalent unit to determine the cost of the units completed and transferred to bottling as well as the cost of the units that are still in process.

Step 4: Reconcile the Total Cost of Work in Process
3-39 Step 4: Reconcile the Total Cost of Work in Process Part I The cost of units completed and transferred are include the beginning inventory cost of \$165,120 (\$84,000 + \$81,120), the cost of the units started and completed this period, \$1,386,000 (1,400 units times \$990), and the cost incurred in the current period to finish the beginning inventory, \$32,400 (60 units times \$540). Part II Here is the calculation of the costs associated with ending inventory included in Work in Process Inventory for CFA. Since all materials are added at the beginning of the CFA process, the 400 units that remain in the CFA process ending inventory are valued at the full \$450 per equivalent unit for direct materials. The conversion cost attached to these units (or 240 equivalent units time \$540 per equivalent unit) would be added to the materials for a total ending inventory cost of \$309,600.

Step 5: Prepare a Production Report
3-40 Step 5: Prepare a Production Report Section 1 of the Production Report The first section of the production report includes information about the number of physical units (Step 1); and equivalent units (Step 2).

Step 5: Prepare a Production Report
3-41 Step 5: Prepare a Production Report Section 2 of the Production Report In this second section of the Production Report we identify the costs to be accounted for, that is, the costs in beginning inventory for materials and conversion and the costs incurred in the current period. In our example, the total cost to be accounted for is \$1,893,120. If you compare the FIFO process costing report above to the weighted average method, you will see that the reports are structured very similarly. The FIFO is slightly more detailed and gives more attention to the units that were on hand at the beginning of the period. In this particular example, the end result is very similar. The cost of units completed during the period was \$1,584,000 for the weighted average method, compared to \$1,583,520 for the FIFO method, a difference of only \$480. You get the same \$480 difference if you compare the value of ending Work in Process Inventory of \$309,120 under weighted average to \$309,600 for FIFO. The two methods may not always provide such similar results, particularly if production or manufacturing costs fluctuate from period to period and the company maintains significant Work in Process inventories.

End of Topic 6

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