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Copyright © 2008 Prentice Hall All rights reserved 4-4 Cost of Goods Sold Manufacturing Wages Materials Inventory Finished Goods Process Costing Work in Process, Mixing Dept Work in Process, Molding Dept Work in Process, Packaging Dept Manufacturing Overhead

Copyright © 2008 Prentice Hall All rights reserved 4-5 Building Blocks of Process Costing Conversion costs  Costs incurred to convert raw materials into a finished product  Direct labor plus manufacturing overhead Equivalent unit of production  Amount of work done during a period in terms of fully complete units of output Inventory flow assumptions  Weighted average  First-in, first-out

Copyright © 2008 Prentice Hall All rights reserved 4-7 E4-28: Equivalent Units Calculation Example Step 1: Summarize the flow of physical units Units to account for Units accounted for Blending Department Beginning WIP Units placed in production + Units completed Units in Ending WIP 08,0006,0002,000 ++ +

Copyright © 2008 Prentice Hall All rights reserved 4-8 Start Dyes added 100% complete 30% complete 2,000 units started but not finished 6,000 units completed and transferred out Step 2: Compute output in terms of equivalent units

Copyright © 2008 Prentice Hall All rights reserved 4-9 E4-28: Equivalent Units for Direct Materials and for Conversion Costs Equivalent units for direct materials: 8,000 units x 100% complete8,000 Equivalent units for conversion costs: 6,000 units x 100% complete6,000 2,000 units x 30% complete600 6,600

Copyright © 2008 Prentice Hall All rights reserved 4-10 Objective 3 Use process costing to assign manufacturing costs to units completed and to units in ending work in process inventory in a first department

Copyright © 2008 Prentice Hall All rights reserved 4-11 E4-28: Assign manufacturing costs to units completed Step 3: Summarize total costs for which to account: Beginning work in process inventory \$ 0 Costs added during May: Direct materials (dyes) 4,800 Direct labor 800 Manufacturing overhead 1,840 Total costs to account for\$7,440

Copyright © 2008 Prentice Hall All rights reserved 4-12 E4-28 Blending Department Direct Materials Conversion Costs Beginning work in process\$ 0 Costs added during period Divide by equivalent units Cost per equivalent unit Step 3: Compute the cost per equivalent unit \$4,800 \$0.40 \$2,640 ÷ 6,600 Refer back to the calculation of equivalent units for Direct Materials.

Copyright © 2008 Prentice Hall All rights reserved 4-13 E4-28 Direct Materials Conversion Costs Total Completed and transferred out (6,000) Ending WIP (2,000) Direct materials Conversion costs Total cost of ending WIP Total costs accounted for Step 4: Assign costs to units completed and to units in ending work in process inventory 6,000 x (\$0.60 + 0.40) \$6,000 600 x 0.40 \$7,440 1,440 240 \$1,200 Refer back to the equivalent cost per equivalent unit calculation to compute the total cost of direct materials.

Copyright © 2008 Prentice Hall All rights reserved 4-15 E4-28: General Journal Entry - WIP GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory packaging department6,000 Work in process inventory blending department6,000

Copyright © 2008 Prentice Hall All rights reserved 4-16 E4-28: T-account view of General Journal Entry for Transferred Out Work in process inventory - blending 7,4406,000 Bal. 1,440

Copyright © 2008 Prentice Hall All rights reserved 4-17 E4-28: Average Cost Used to assign cost to Transferred Out Average cost per gallon transferred out of blending is: \$6,000 ÷ 6,000 gallons = \$1.00 per gallon

Copyright © 2008 Prentice Hall All rights reserved 4-18 Objective 4 Use process costing to assign manufacturing costs to units completed and to units in ending work in process inventory in a second or later department

Copyright © 2008 Prentice Hall All rights reserved 4-19 E4-35 Step 1: Summarize the flow of physical units Units to account for Units accounted for Photolithography Department Beginning WIP Units placed in production + Units completed Units in Ending WIP 8,00027,00026,0009,000 ++ +

Copyright © 2008 Prentice Hall All rights reserved 4-20 E4-35 Step 1: Summarize the flow of physical units Beg. Bal. 8,000 Transferred in 27,000 End Bal. 9,000 Work in process, Photolithography Dept (units) 26,000

Copyright © 2008 Prentice Hall All rights reserved 4-21 E4-35 Materials added Start 100% complete 80% complete Step 2: Compute output in terms of equivalent units 18,000 units started and completed 8,000 units in process & completed 70% complete 9,000 units started but not finished

Copyright © 2008 Prentice Hall All rights reserved 4-22 Step 1Step 2EquivalentUnits Flow of Physical Units Transferred InDirect MaterialsConversion Costs Units to account for: Beginning WIP8,000 Transferred In27,000 Total Physical Units to Account for 35,000 Units Accounted For: Completed and Transferred Out 26,00026,000*26,000 Ending WIP-70% Complete 9,0009000*90006,300 Total Physical Units Accounted for 35,000 Equivalent Units35,000*35,00032,300

Copyright © 2008 Prentice Hall All rights reserved 4-26 Step 3: Compute the cost per equivalent unit E4-35 Costs to be Accounted For: Trans inDir. Mat. Conv. Costs Total Beginning WIP \$ 20,050\$20,250\$19,816\$60,116 Costs added 97,20074,25090,650262,100 Total costs \$117,250\$94,500\$110,466 ÷ equivalent unit 35,000 32,300 Cost/equiv unit \$3.35\$2.70\$3.42 Total costs to account for \$322,216

Copyright © 2008 Prentice Hall All rights reserved 4-27 Step 3: Compute the cost per equivalent unit E4-35 Trans inDir. Mat.Conv CostsTotal Completed & transferred out 26,000 x (\$3.35+\$2.70+\$3.42)\$246,220 Ending WIP Transferred in 9,000x\$3.35 \$30,150 Direct materials 9,000 \$2.70 24,300 Conversion 6,300x\$3.4221,546 Total WIP \$75,996 Total costs accounted for \$322,216

Copyright © 2008 Prentice Hall All rights reserved 4-28 E4-35 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT a.Raw materials inventory9,000 Accounts payable9,000 b.Work in process inventory Assembly 4,000 Work in process inventory Finishing2,000 Raw materials inventory6,000