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

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.

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.

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

Illustration of a Sequential Process

Illustration of a Parallel Process

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 Applied Overhead 900 1,000 1,200

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.

6-1

How to calculate cost flows without WIP. 6-1 Journal entries showing the flow of costs

Discuss the Production Report

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: 6-2

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

Calculations: How to measure output and assign costs no beginning WIP. 6-3

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

Define the Two Methods ◙ Weighted Average Method: ◙ First-In, First-Out, FIFO Method:

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

How to measure output and assign cost, weighted average method.

List the five steps to prepare a production report.

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: 6-5

Physical flow schedule; Units to account for: Units accounted for: How to prepare a physical flow schedule. 6-5

Evaluate the Weighted Average Method

What happens when the application of manufacturing inputs are not uniform?

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

How to prepare a production report: weighted average method. Physical Flow Units to account for:Units accounted for: 6-6 Unit Information

Equivalent Units Costs to account for: Cost per equivalent unit How to prepare a production report: weighted average method. 6-6

Cost accounted for: How to prepare a production report: weighted average method. 6-6 Transferred Out EWIPTotal

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$

Current Costs: Materials $6,000 Conversion 1,600 Total $7,600 REQUIRED: Calculate steps 2-4 of the weighted average method. Step 2: How to calculate equivalent units, unit costs and value inventories with nonuniform inputs. 6-7

Step 3: Calculation of Unit costs Step 4: Valuation of EWIP and goods transferred out: How to calculate equivalent units, unit costs and value inventories with nonuniform inputs. 6-7

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

Calculation: How to calculate the physical flow schedule, equivalent units, & unit costs with transferred-in goods. 6-8

How to calculate the physical flow schedule, equivalent units, & unit costs with transferred-in goods. 6-8

How to calculate the physical flow schedule, equivalent units, & unit costs with transferred-in goods. 6-8