1. Process Costing Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

2. Learning Objectives 1.Describe the basic characteristics and cost flows associated with process manufacturing. 2.Define equivalent units and explain their role in process costing. Explain the differences between the weighted average method and the FIFO method of accounting for process costs.

3. Learning Objectives 3.Prepare a departmental production report using the weighted average method. 4.Explain how nonuniform inputs and multiple processing departments affect process costing. 5.(Appendix) Prepare a departmental production report using the FIFO method.

4. Match Definitions Sequential Process Parallel Process Two or more sequential processes are required to produce a finished product A document that summarizes the manufacturing activity that takes place in a process, department or activity for a given period of time Production Report Units must pass through a given process before they can be worked on in a later process

5. Illustration of a Sequential Process

6. Illustration of a Parallel Process

7. How to calculate cost flows without Work in Process (WIP). Healthblend decides to bottle 4,000 units of multivitamins with the following costs. 6-1 PickingEncapsulatingBottling Direct Materials $ 3,400 $ 2,000 $ 1,600 Direct Labor 100 120 600 Applied Overhead 900 1,000 1,200

8. REQUIRED: 1. Calculate the costs transferred out of each department. 2. Prepare journal entries that reflect these cost transfers. Calculation: Appears on the following slides 6-1 How to calculate cost flows without WIP.

9. PickingEncapsulatingBottling Direct Materials $ 3,400 $ 2,000 $ 1,600 Direct Labor 100 120 600 Applied Overhead 900 1,000 1,200 Cost Added $ 4,400 $ 3,120 $ 3,400 Cost Trans In - 4,400 7,520 Cost Trans Out $ 4,400 $ 7,520 $ 10,920 How to calculate cost flows without WIP. 6-1

10. How to calculate cost flows without WIP. 6-1 WIP Encapsulating 4,400 WIP Bottling 4,400 WIP Bottling 7,520 WIP Encapsulating 7,520 Finished Goods10,920 WIP 10,920 Journal entries showing the flow of costs

11. Discuss the Production Report ◙ Provides information about the physical units processed in a department and costs associated with these units ◙ Broken down into two main sections 1.Units Section 2.Costs Section ◙ Units section has two main subdivisions 1.Units to Account For 2.Units Accounted For ◙ Costs section has two main subdivisions 1.Cost to Account For 2.Cost Accounted For

12. How to calculate equivalent units of production: no beginning WIP. In November 2,000 units were completed, 800 units remained in ending work in process (EWIP) and are 40% complete. REQUIRED: Calculate November equivalent units. Calculation: Completed 2,000 x 100% = 2,000 equivalent units EWIP 800 x 40% = 320 equivalent units Total 2,320 equivalent units 6-2

13. Manufacturing costs for the period, $23,000; units transferred out 2,000; units in ending work in process 1,200 (25% complete). REQUIRED: 1. Calculate the unit costs. 2. Calculate the cost of goods transferred out and cost of ending work in process. How to measure output and assign costs no beginning WIP. 6-3

14. Calculations: 1.Equivalents Units (EU) Units Completed2,000 EWIP (1,200 X 25%) 300 2,300 Cost Assignment: Cost per EU =$23,000 / 2,300 = = $10 per EU 2.Cost of goods transferred out = $10 per EU x 2,000 EU = $20,000 Cost of EWIP = $10 per EU x 300 EU = $3,000 How to measure output and assign costs no beginning WIP. 6-3

15. What are the two methods of treating beginning work in process?

16. Define the Two Methods ◙ Weighted Average Method: Combines beginning inventory costs with current period costs to allocate to all units completed and EWIP. ◙ First-In, First-Out, FIFO Method: Leaves beginning inventory costs with BWIP. It allocates current period costs to BWIP, Units Started & Completed and EWIP based on work completed during that time period.

17. How to measure output and assign cost, weighted average method. Production: Units in BWIP, August 1, 75% complete 40,000 gal. Units completed & transferred out 100,00 gal. Units in EWIP, August 31, 25% complete 20,000 gal. Costs: BWIP, August 1,$7,050 Costs added during July 10,125 REQUIRED: 1.Calculate an output measure for August. 2.Assign costs to units transferred out and ending work in process using the weighted average method. 6-4

18. 1.Equivalent units: BWIP 40,000 Units started& completed60,000 Units Completed & transferred out 100,000 EWIP, (25% Complete x 20,000) 5,000 105,000 2. Cost Assignment: Costs for August: BWIP $ 7,050 August Costs 20,250 Total Manufacturing Costs $27,300 Cost per unit = $27,300 / 105,000 = $0.26 Transferred out ($0.26 x 100,000) $26,000 EWIP ($0.26 x 5,000) 1,300 Total Cost Assigned $27,300 6-4 How to measure output and assign cost, weighted average method.

19. List the five steps to prepare a production report. 1.Physical flow analysis 2.Calculation of equivalent units 3.Computation of unit cost 4.Valuation of inventories 1.Goods transferred out 2.Ending work in process 5.Cost reconciliation

20. How to prepare a physical flow schedule. Production: Units in BWIP, August 1, 75% complete, 40,000 gal. Units completed & transferred out 100,000 gal. Units in EWIP, August 31, 25% complete, 20,000 gal. REQUIRED: Prepare a physical flow schedule Calculation: Units started & completed = Units completed – BWIP = 100,000 – 40,000 = 60,000 Units started = Units started & completed + EWIP = 60,000 + 20,000 = 80,000 6-5

21. Physical flow schedule; Units to account for: Units in BWIP (75% complete) 40,000 Units started during the period 80,000 Total units to account for 120,000 Units accounted for: Units completed and transferred out: Started and completed 60,000 From BWIP 40,000 100,000 Units in EWIP (25% complete) 20,000 Total units accounted for 120,000 How to prepare a physical flow schedule. 6-5

22. Evaluate the Weighted Average Method ◙ Its greatest benefit is its simplicity ◙ All equivalent units are treated the same ◙ Primary disadvantage is that it gives up some accuracy ◙ If prices are relatively stable, it is relatively stable ◙ If greater accuracy is desired then use FIFO

23. What happens when the application of manufacturing inputs are not uniform? ◙ A separate equivalent unit must be calculated for DM, DL and Overhead ◙ Cost must be kept track of separately for DM, DL, and Overhead ◙ Cost per equivalent unit must be calculated for each manufacturing input (DM, DL, Overhead) ◙ Cost must be applied to units transferred out & in EWIP by each manufacturing input separately

24. How to prepare a production report: weighted average method. Steps 1-5 of the Healthblend example use the August information. REQUIRED: Prepare a production report. Calculations: Heading Below Healthblend Company Picking Department Production Report for August 2007 (Weighted Average Method) 6-5

25. How to prepare a production report: weighted average method. Physical Flow Units to account for: Units in BWIP40,000 Units started80,000 Total units to account for 120,000 Units accounted for: Units completed 100,000 Units in EWIP 20,000 Total units accounted for 120,000 6-6 Unit Information

26. Equivalent Units Units completed 100,000 Units in EWIP (20,000 x 25%) 5,000 Total Equivalent Units 105,000 Costs to account for: BWIP$ 7,050 Incurred during the period 20,250 Total costs to account for$27,300 Cost per equivalent unit$0.26 ($27,300 / 105,000) How to prepare a production report: weighted average method. 6-6

27. Cost accounted for: Goods transferred out ($0.26 x 100,000) $26,000 $26,000 Goods in EWIP ($0.26 x 5,000) 0$1,300 1,300 Total costs accounted for $26,000 $,1300 $27,300 How to prepare a production report: weighted average method. 6-6 Transferred Out EWIPTotal

28. How to calculate equivalent units, unit costs and value inventories with nonuniform inputs. The Picking Department of Healthblend has the following information for October Production: Units in process, 10/1, 50% complete5,000 Units completed & transferred out 30,000 Units in process, 10/31, 40% complete 10,000 Costs: WIP 10/1: Materials$ 800 Conversion 100 Total$ 900 6-7

29. Current Costs: Materials $6,000 Conversion 1,600 Total $7,600 REQUIRED: Calculate steps 2-4 of the weighted average method. Step 2: Materials Conversion Units Completed 30,000 30,000 Add: units in EWIP x % complete 10,000 x 100% 10,000 0 10,000 x 40% 0 4,000 Equivalent units (EU) of output 40,000 34,000 How to calculate equivalent units, unit costs and value inventories with nonuniform inputs. 6-7

30. Step 3: Calculation of Unit costs CostsMaterialsConversion BWIP $ 800 $ 100 Current Period 6,000 1,600 Total Cost $6,800 $1,700 Divide by EU of Output (Step 2) 40,000 34,000 Total Unit Costs $ 0.17 $ 0.05 Step 4: Valuation of EWIP and goods transferred out: Cost of EWIP is as follows: Materials: $0.17 x 10,000$1,700 Conversion: $0.05 x 4,000 200 Total cost$1,900 Valuation of goods transferred out $0.22 X 30,000 = $6,600 How to calculate equivalent units, unit costs and value inventories with nonuniform inputs. 6-7

31. How to calculate the physical flow schedule, equivalent units, & unit costs with transferred-in goods. For November, Healthblend’s encapsulating department had 30,000 units in beginning inventory (with transferred-in costs of $6,000) and completed 140,000 units during the month. Further the picking department completed and transferred out 120,000 units at a cost of $26,400 in October. REQUIRED: 1.Prepare a physical flow schedule with transferred-in goods. 2.Calculate equivalent units for the transferred-in category. 3.Calculate the unit cost for the transferred-in category. 6-8

32. Calculation: 1.In constructing a physical flow for the encapsulating department, its dependence on the picking department must be considered: Units to account for: Units in BWIP 30,000 Units transferred in during October120,000 Total units to account for150,000 Units accounted for: Units completed & transferred out Started & completed110,000 From BWIP 30,000 Units in EWIP 10,000 Total units accounted for150,000 How to calculate the physical flow schedule, equivalent units, & unit costs with transferred-in goods. 6-8

33. 2. Equivalent units for the transferred in category only: Transferred in: Units completed140,000 Add: Units in EWIP X % complete (10,000 x 100%)* 10,000 Equivalent units of output150,000 *Remember EWIP is 100% complete with respect to transferred in costs, not to the costs in the encapsulating department How to calculate the physical flow schedule, equivalent units, & unit costs with transferred-in goods. 6-8

34. 3. To find the unit cost for the transferred in category, we add the cost of the units transferred in from picking in October to the transferred in cost in BWIP and divide by transferred in equivalent units: Unit cost (transferred in category) = ($26,400 + $6,000) / 150,000 = $32,400 / 150,000 = $0.216 How to calculate the physical flow schedule, equivalent units, & unit costs with transferred-in goods. 6-8