1. Session 9 (1/17/2002) Process Costing Elaborate on the process of process costing Understand the concept of equivalent units Talk about costs to account for

2. Step 1: Summarize the flow of physical units – show me the units? Step 2: Determine output of the period (work done) in terms of equivalent units (EU’s) Process Costing - 5 Key Steps

3. Step 3: Summarize the total costs to account for, which are the costs charged (debited) to WIP during the period Step 4: Calculate equivalent unit costs for DM and either CC or both DL and OH (applied)

4. Process Costing - 5 Key Steps Step 5: Allocate the total cost to the units completed and transferred to the next department, and to units in the ending WIP. In weighted- average costing, the total cost is the sum of the beginning balance in the WIP account for the department plus the costs incurred during the period.

5. Step 1 and Step 2: In Pictures Two one-half completed units are equivalent to one complete unit of a product. + = So, 10,000 units 80 percent complete are equivalent to ? complete units.

6. Example Answer: 8,000 units! (10,000 physical units  80%)

7. MY NOTES The deal is that if we have no incomplete units at the end of the period, then we don’t have a problem. If we have incomplete units, then we need to think about how to allocate costs. Not like ending WIP in a job order costing system - WHY? There we have tracked costs to a job. Here we are worried about getting an average cost so we can track the cost of products produced/work done in the department

8. Step 1 and Step 2 -- Equivalent Units Costs are accumulated for a period of time for products in work-in-process inventory. Products in work-in-process inventory at the beginning and end of the period are only partially complete. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

9. During the current period, Regina 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 Regina have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Equivalent Units Question 1

10. Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit = Costs for the period Equivalent units for the period

11. Regina incurred $27,600 in production costs for the 11,500 equivalent units. What was Regina’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Equivalent Units Question 2

12. Equivalent Units of Production – Weighted-Average Method Makes no distinction between work done in the prior period and work done in the current period. Blends together units and costs from the prior period and the current period. The weighted-average method..

13. MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching. MVP uses the weighted-average process costing method. Material is added at the beginning of the Cutting Department, and conversion costs are incurred uniformly throughout the process. A Process Costing Example

14. Work in process, March 1: 20,000 units Materials: 100% complete. $ 50,000 Conversion: 10% complete. 7,200 Units started into production in March:30,000 units Units completed and transferred out in March:40,000 units Work in process, March 31: 10,000 units Materials100% complete. Conversion 50% complete. Costs incurred during March Materials cost$ 90,000 Conversion cost 193,500 Cost Production Report

15. (1) Analysis of Physical Flow of Units

16. 100% of 10,000 units, all material added at beginning (2) Calculation of Equivalent Units

17. (2) Calculation of Equivalent Units (con’t) 50% of 10,000 units Beginning inventory % is not used in weighted-average method.

18. (3) Computation of total costs to account for

19. (4) Computation of unit costs $140,000 ÷ 50,000 equivalent units $200,700 ÷ 45,000 equivalent units $2.80 + $4.46

20. (5) Analysis of total costs

21. All costs accounted for (5) Analysis of total costs

22. Equivalent Units Practice The following data are from Energy Resource’s Amarillo Plant: WIP, November 1 2,000,000 gallons DM 100% complete CC 25% complete Units started during November 950,000 gallons WIP, November 30 240,000 gallons DM 100% complete CC 80% complete Calculate the equivalent unit amounts necessary to determine per unit costs.

23. Process Costing

25. Process Costing Practice Centura completed and transferred 900,000 units to finished goods during 1999. WIP as of December 31, 1999, had 300,000 units that were 50% complete w/r/t CC and 100% w/r/t DM. Finished goods inventory consisted of 200,000 units. Materials are added at the beginning of production and overhead is applied at a rate of 60% of direct labor costs. There was no finished goods inventory on January 1, 1999. Their inventory cost records provide the following information:

26. Process Costing

27. Process Costing in Subsequent Production Departments An added complication in process costing system is that production often takes place in more than one department. In the previous example, only costs and units in the MVP’s Cutting Department were taken into consideration. Now let’s work with the Cutting and Stitching Department.

28. Subsequent Departments Work In Process Inventory: Stitching Department Work In Process Inventory: Cutting Department Direct material Conversion: Direct labor Manufacturing overhead Cost of goods completed and transferred out Transferred- in costs Direct material Conversion: Direct labor Manufacturing overhead Cost of goods completed and transferred out

29. MVP Sports - Additional Facts In Stitching, DM are added at the end of production process. 40,000 units from Cutting are transferred in to Stitching during March 10,000 units are in Stitching’s Beginning WIP (March 1) 30,000 units are transferred to Finished Goods in March With respect to Stitching’s Ending WIP (March 31) Transferred In: 100% complete Direct Material: None Conversion: 90% complete

30. Transferred-In Costs The costs assigned to the units completed in each department and transferred to the next department’s work in process inventory account.

31. Equivalent Units for Stitching Step 1 Physical Units % comp w/r/tTransferred conversionInDMCC Step 2 Equivalent Units

32. For Friday Finish Chapter 4 - reading and homework problems!