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CHAPTER # 02 REVIEW Atef Abuelaish

Job Order Costing and Analysis
Chapter 02 Job Order Costing and Analysis Atef Abuelaish

Cost Accounting Systems
Process Costing Job Costing Chapter 3 Used for production of large, unique, or high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job. The two basic types of cost accounting systems are job order costing and process costing. Many companies produce products individually designed to meet the needs of a specific customer. Each customized product is manufactured separately and its production is called job order production. Process operations, also called process manufacturing or process production, is the mass production of products in a continuous flow of steps. Unlike job order production, where every product differs depending on customer needs, process operations are designed to mass-produce large quantities of identical products. C 1 Atef Abuelaish

Job Order Production This slide lists important features of job order and process operations. Both types of operations are used by manufacturers and also by service companies. Movies made by Walt Disney and financial audits done by KPMG are examples of job order service operations. Order processing in large mail-order firms like L.L. Bean is an example of a process service operation. C 1 Atef Abuelaish

Job Order Cost Documents
The primary document for tracking the costs associated with a given job is the job cost sheet. A major aim of a job order costing system is to determine the cost of producing each job or job lot. In the case of a job lot, the system also aims to compute the cost per unit. The accounting system must include separate records for each job to accomplish this, and it must capture information about costs incurred and charge these costs to each job. A job cost sheet is a separate record maintained for each job. C 2 Atef Abuelaish

Job Cost Sheet This slide shows a job cost sheet for Road Warriors. This job cost sheet identifies the customer, the job number assigned, the product, and key dates. Only product costs are recorded on job cost sheets. Direct materials and direct labor costs actually incurred on the job are immediately recorded on this sheet. Estimated overhead costs are included on job cost sheets, through a process we discuss later in the chapter. When each job is complete, the supervisor enters the date of completion, records any remarks, and signs the sheet. The balance in the Work in Process Inventory account at any point in time is the sum of the costs on job cost sheets for all jobs that are not yet complete. The balance in the Finished Goods Inventory account at any point in time is the sum of the costs on job cost sheets for all jobs that are complete and awaiting sale. The balance in Cost of Goods Sold is the sum of all job sheets for jobs that have been sold and delivered to the customer. Managers use job cost sheets to monitor costs incurred to date and to predict and control costs for each job. In the next section we use Road Warriors’ production and sales activity for March to illustrate job order costing and the use of job cost sheets. C 2 Atef Abuelaish

Materials Cost Flows and Documents
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Materials Ledger Card P 1
This slide shows a materials ledger card for one type of material received and issued by Road Warriors. The card identifies the item as alarm system wiring and shows the item’s stock number, its location in the storeroom, information about the maximum and minimum quantities that should be available, and the reorder quantity. For example, two units of alarm system wiring were purchased on March 4, 2015, as evidenced by receiving report C After this purchase the company has three units of alarm system wiring on hand. Materials ledger cards would also be updated for each of the other materials purchased. P 1 Atef Abuelaish

Materials Requisition
When materials are needed in production, a production manager prepares a materials requisition and sends it to the materials manager. For direct materials, the requisition shows the job number, the type of material, the quantity needed, and the signature of the manager authorized to make the requisition. This slide shows the materials requisition for alarm system wiring for Job B15. For requisitions of indirect materials, which cannot be traced to individual jobs, the “Job No.” line in the requisition form might read, “For General Factory Use.” P 1 Atef Abuelaish

Materials Requisition
Requisitions are often accumulated and recorded in one journal entry. The frequency of entries depends on the job, the industry, and management procedures. In this example, Road Warriors records materials requisitions at the end of each week. These materials requisitions are shown here. The use of direct materials for the week (including alarm system wiring for Job B15) yields the entry shown. This entry is posted both to general ledger accounts and to subsidiary records. Posting to subsidiary records includes debits to job cost sheets and credits to materials ledger cards. Review what you have learned in the following NEED-TO-KNOW Slide. P 1 Atef Abuelaish

NEED-TO-KNOW A manufacturing company purchased $1,200 of materials (on account) for use in production. The company used $200 of direct materials on Job 1 and $350 of direct materials on Job 2. Prepare journal entries to record the above transactions. General Journal Debit Credit Purchase Raw Materials Inventory 1,200 Accounts Payable 1,200 Use - DM Work in Process Inventory 550 Raw Materials Inventory 550 Raw Materials Inventory Work in Process Inventory Beg. Inv. XXX Beg. Inv. Purchases 1,200 Direct Materials 550 Direct Material 550 Direct Labor Factory OH A manufacturing company purchased $1,200 of materials (on account) for use in production. The company used $200 of direct materials on Job 1 and $350 of direct materials on Job 2. Prepare journal entries to record the above transactions. The journal entry to record the purchase of materials on account is a debit to Raw Materials Inventory, $1,200, and a credit to Accounts payable. The journal entry to record the use of direct materials on the jobs is a debit to Work in Process Inventory for the total, $550, and a credit to Raw Materials Inventory. $200 of direct materials was charged to Job 1 and $350 of direct materials was charged to Job 2. The job sheets act as a subsidiary ledger to Work in Process Inventory, the control account. Job 1 Job 2 Direct Materials 200 Direct Materials 350 Direct Labor Direct Labor Factory OH Factory OH P 1 Atef Abuelaish

Labor Cost Flows and Documents
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Labor Cost Flows Labor is the next manufacturing cost to account for. This slide shows that factory labor costs are classified as either direct or indirect. Direct labor costs flow to individual job cost sheets. P 2 Atef Abuelaish

Labor Time Ticket This slide shows a time ticket reporting the time a Road Warrior employee spent working on Job B15. The employee’s supervisor signed the ticket to confirm its accuracy. The hourly rate and total labor cost are computed after the time ticket is turned in. P 2 Atef Abuelaish

Labor Time Ticket Direct labor—traceable to specific jobs
Job B $ 1,000 Job B 800 Job B 1,100 Job B 700 Job B 600 Total direct labor $4,200 Indirect labor Total $ 5,300 Time tickets are often accumulated and recorded in one journal entry. The frequency of these entries varies across companies. In this example, Road Warriors journalizes direct labor monthly. During March, Road Warriors’ factory payroll costs total $5,300. Of this amount, $4,200 can be traced directly to jobs, and the remaining $1,100 is classified as indirect labor, as shown here. The entry shown records direct labor for the month, based on all the direct labor time tickets for the month. Review what you have learned in the following NEED-TO-KNOW Slide. P 2 Atef Abuelaish

NEED-TO-KNOW A manufacturing company used $5,400 of direct labor in production activities in May. Of this amount, $3,100 of direct labor was used on Job A1 and $2,300 of direct labor was used on Job A2. Prepare the journal entry to record direct labor used. General Journal Debit Credit Work in Process Inventory 5,400 Factory Wages Payable 5,400 Work in Process Inventory Factory Wages Payable Beginning Inv. Direct Materials 5,400 Direct Labor 5,400 Factory OH A manufacturing company used $5,400 of direct labor in production activities in May. Of this amount, $3,100 of direct labor was used on Job A1 and $2,300 of direct labor was used on Job A2. Prepare the journal entry to record direct labor used. The journal entry for direct labor is a debit to Work in Process Inventory, $5,400, and a credit to the liability account, Factory Wages Payable. $3,100 of direct labor was charged to Job A1, and $2,300 of direct labor is charged to Job A2. The job sheets act as subsidiary ledgers to the control account, Work in Process. Total direct labor charged to the job sheets will always agree with the total charged to Work in Process. Job A1 Job A2 Direct Materials Direct Materials Direct Labor 3,100 Direct Labor 2,300 Factory OH Factory OH P 2 Atef Abuelaish

Overhead Cost Flows and Documents
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Overhead Cost Flows and Predetermined Overhead Rate
We turn now to overhead costs. Unlike direct materials and direct labor, overhead costs cannot be traced directly to individual jobs. Instead, the accounting for overhead costs follows the four-step process shown in this slide. Overhead accounting requires managers to first estimate what total overhead costs will be for the coming period. We cannot wait until the end of a period to allocate overhead to jobs, because a job order costing system uses perpetual inventory records that require up-to-date costs. This estimated overhead cost, even if it is not exactly precise, is needed to estimate a job’s total costs before its completion. Such estimated costs are useful for managers in many decisions, including setting prices and identifying costs that are out of control. At the end of the year, the company adjusts its estimated overhead to the actual amount of overhead incurred for that year, and then considers whether to change its predetermined overhead rate for the next year. P 3 Atef Abuelaish

1/2) Predetermined Overhead Rate
Road Warriors uses a predetermined overhead rate (POHR) based on direct labor cost to apply overhead to jobs. Being able to estimate overhead in advance requires a predetermined overhead rate, also called predetermined overhead allocation (or application) rate. The predetermined overhead rate requires an estimate of total overhead cost and an allocation factor such as total direct labor cost before the start of the period. This slide shows the usual formula for computing a predetermined overhead rate (estimates are commonly based on annual amounts). This rate is used during the period to allocate estimated overhead to jobs. Some companies use multiple activity (allocation) bases and multiple predetermined overhead rates for different types of products and services. To illustrate, Road Warriors applies (also termed allocates, assigns, or charges) overhead by linking it to direct labor. At the start of the current year, management estimates total direct labor costs of $125,000 and total overhead costs of $200,000. Using these estimates, management computes its predetermined overhead rate as 160% of direct labor cost ($200,000 / $125,000). P 3 Atef Abuelaish

Predetermined Overhead Rate
Earlier we showed that Road Warriors used $4,200 of direct labor in March. We then use the predetermined overhead rate of 160% to allocate $6,720 (equal to $4,200 x 1.60) of overhead. The entry to record this allocation is shown. Then, overhead is allocated to each individual job based on the amount of the activity base that job used (in this example, direct labor). This slide shows these calculations for Road Warriors’ March production activity. Review what you have learned in the following NEED-TO-KNOW Slide. P 3 Atef Abuelaish

NEED-TO-KNOW A manufacturing company estimates it will incur $240,000 of overhead costs in the next year. The company allocates overhead using machine hours, and estimates it will use 1,600 machine hours in the next year. During the month of June, the company used 80 machine hours on Job 1 and 70 machine hours on Job 2. 1. Compute the predetermined overhead rate to be used to apply overhead during the year. Predetermined Overhead Rate = Estimated Overhead Costs $240,000 Estimated Activity Base 1,600 machine hours = $150 per machine hour 2. Determine how much overhead should be applied to Job 1 and to Job 2 for June. Machine Hours Used x Predetermined OH rate = OH Applied Job 1 80 hours x $150 per hour = $12,000 OH applied Job 2 70 hours x $150 per hour = $10,500 OH applied Total 150 hours x $150 per hour = $22,500 OH applied 3. Prepare the journal entry to record overhead applied for June. General Journal Debit Credit Work in Process Inventory 22,500 A manufacturing company estimates it will incur $240,000 of overhead costs in the next year. The company allocates overhead using machine hours, and estimates it will use 1,600 machine hours in the next year. During the month of June, the company used 80 machine hours on Job 1 and 70 machine hours on Job 2. 1. Compute the predetermined overhead rate to be used to apply overhead during the year. The predetermined overhead rate is calculated by taking the estimated overhead costs and dividing by the estimated activity base. This company has determined that machine hours drive the overhead costs; the base is the estimated machine hours used. $240,000 in estimated overhead costs divided by 1,600 machine hours is a predetermined overhead rate of $150 per machine hour. 2. Determine how much overhead should be applied to Job 1 and to Job 2 for June. Job 1 used a total of 80 machine hours. 80 machine hours multiplied by the predetermined overhead rate of $150 per hour is total overhead applied to Job 1 of $12,000. Job 2 used fewer machine hours. 70 machine hours multiplied by $150 per hour results in a lower amount of overhead applied, $10,500. The total for the month, 150 hours multiplied by $150 per hour, is a total of $22,500. 3. Prepare the journal entry to record overhead applied for June. Debit Work in Process Inventory for the total applied, $22,500, and credit Factory Overhead. Factory Overhead 22,500 P 3 Atef Abuelaish

3) Recording Actual Overhead
Indirect Material Indirect Labor Other Factory overhead includes all factory costs other than direct materials and direct labor. Two sources of overhead costs are indirect materials and indirect labor. These costs are recorded from materials requisition forms for indirect materials and from salary contracts or time tickets for indirect labor. Two other sources of overhead are (1) vouchers authorizing payment for factory items such as supplies or utilities and (2) adjusting journal entries for costs such as depreciation on factory assets. Factory overhead usually contains many different costs. These costs are recorded with debits to the Factory Overhead general ledger account, and with credits to various accounts. Next we show how to record journal entries for actual overhead costs. While journal entries for different types of overhead costs might be recorded with varying frequency, in our example we assume these entries are each made at the end of the month. P 3 Atef Abuelaish

Recording Indirect Materials Used
During March, Road Warriors incurred $550 of actual indirect materials costs, as supported by materials requisitions. The use of these indirect materials yields the following entry. This entry is posted to the general ledger accounts, Factory Overhead and Raw Materials Inventory, and is posted to Indirect Materials in the subsidiary factory overhead ledger. Note that unlike the recording of direct materials, actual indirect materials costs incurred are not immediately recorded in Work in Process Inventory and are not posted to job cost sheets. P 3 Atef Abuelaish

Recording Indirect Labor Used
During March, Road Warriors incurred $1,100 of actual indirect labor costs. These costs might be supported by time tickets for maintenance workers or by salary contracts for production supervisors. The use of this indirect labor yields the following entry. This entry is posted to the general ledger accounts, Factory Overhead and Factory Wages Payable, and is posted to Indirect Labor in the subsidiary factory overhead ledger. Note that unlike the recording of direct labor, actual indirect labor costs incurred are not recorded immediately in Work in Process Inventory and are not posted to job cost sheets. P 3 Atef Abuelaish

Recording Other Overhead Costs
During March, Road Warriors incurred $5,270 of actual other overhead costs. These costs could include items such as factory building rent, depreciation on the factory building, factory utilities, and other such costs indirectly related to production activities. These costs are recorded with debits to Factory Overhead and credits to other accounts such as Cash, Accounts Payable, Utilities Payable, and Accumulated Depreciation—Factory Equipment. The entry to record these other overhead costs for March is as follows. This entry is posted to the general ledger account, Factory Overhead, and is posted to separate accounts for each of the overhead items in the subsidiary factory overhead ledger. Note that actual overhead costs incurred are not recorded in Work in Process Inventory and are not posted to job cost sheets. Only applied overhead is recorded in Work in Process Inventory and posted to job cost sheets. Review what you have learned in the following NEED-TO-KNOW Slide. P 3 Atef Abuelaish

NEED-TO-KNOW A manufacturing company used $400 of indirect materials and $2,000 of indirect labor during the month. The company also incurred $1,200 of depreciation on factory equipment, $500 of depreciation on office equipment, and $300 of factory utilities. Prepare the journal entry to record actual factory overhead costs incurred during the month. General Journal Debit Credit Factory Overhead 3,900 Raw Materials Inventory 400 Factory Wages Payable 2,000 Accumulated Depreciation - Factory Equipment 1,200 Utilities Payable 300 Factory Overhead Actual OH Incurred OH Applied to Production Ind. Materials 400 Ind. Labor 2,000 Fact. Deprec. 1,200 A manufacturing company used $400 of indirect materials and $2,000 of indirect labor during the month. The company also incurred $1,200 of depreciation on factory equipment, $500 of depreciation on office equipment, and $300 of factory utilities. Prepare the journal entry to record actual factory overhead costs incurred during the month. The Factory Overhead account is debited for actual overhead incurred and credited for overhead applied to production. This journal entry is to record the actual factory overhead costs; we'll be debiting the Factory Overhead account. Indirect materials result in a debit to Factory Overhead and a credit to Raw Materials Inventory. Indirect labor is a debit to Factory Overhead and a credit to Factory Wages Payable. Depreciation on Factory Equipment is a debit to Factory Overhead, and a credit to Accumulated Depreciation - Factory Equipment. Factory utilities of $300 result in a debit to Factory Overhead and a credit to Utilities payable. Total actual Factory Overhead incurred is $3,900; the total debit to Factory Overhead. Note that the depreciation on office equipment is not a product cost; this is a period cost and will be expensed in the month incurred. Fact. Utilities 300 3,900 P 3 Atef Abuelaish

Summary of Cost Flows This slide shows that direct materials used, direct labor used, and factory overhead applied flow through the Work in Process Inventory and Finished Goods balance sheet accounts. The cost of goods manufactured (COGM) is computed and shown on the schedule of cost of goods manufactured. When goods are sold, their costs are transferred from Finished Goods Inventory to the income statement as cost of goods sold. Period costs do not impact inventory accounts. As a result, they do not impact cost of goods sold, and they are not reported on the schedule of cost of goods manufactured. They are reported on the income statement as operating expenses. . P 3 Atef Abuelaish

4) Adjusting Factory Overhead
The top graphic in this slide shows a Factory Overhead T-account. The company applies overhead (credits the Factory Overhead account) using a predetermined rate estimated at the beginning of the year. During the year, the company records actual overhead costs with debits to the Factory Overhead account. Exhibit shows what to do when, at year-end, actual overhead does not equal applied overhead. First, we determine whether the applied overhead is more or less than the actual overhead: When less overhead is applied than is actually incurred, the remaining debit balance in the Factory Overhead account is called underapplied overhead. When more overhead is applied than is actually incurred, the resulting credit balance in the Factory Overhead account is called overapplied overhead. When overhead is underapplied, it means that individual jobs have not been charged enough overhead during the year, and cost of goods sold for the year is too low. When overhead is overapplied, it means that jobs have been charged too much overhead during the year, and cost of goods sold is too high. In either case, a journal entry is needed to adjust Factory Overhead and Cost of Goods Sold. The bottom graphic summarizes this entry. P 3 Atef Abuelaish

Underapplied or Overapplied Overhead
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Underapplied or Overapplied Overhead
To illustrate, assume that Road Warriors applied $200,000 of overhead to jobs during This equals the amount of overhead that management estimated in advance for the year. We further assume that Road Warriors incurred a total of $200,480 of actual overhead costs during Thus, at the end of the year, the Factory Overhead account has a debit balance of $480. The $480 debit balance reflects manufacturing costs not assigned to jobs. This means that the balances in Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold do not include all production costs incurred. The required journal entry depends on whether the difference (under- or overapplied) is material. When the underapplied overhead amount is immaterial, it is closed to the Cost of Goods Sold account with the following adjusting entry. The $480 debit (increase) to Cost of Goods Sold reduces income by $480. After this entry, the Factory Overhead account has a zero balance. (When the underapplied or overapplied overhead is material, the amount is normally allocated to the Cost of Goods Sold, Finished Goods Inventory, and Work in Process Inventory accounts. This process is covered in advanced courses.) We treat overapplied overhead at the end of the period in the same way we treat underapplied overhead, except that we debit Factory Overhead and credit Cost of Goods Sold for the amount. Review what you have learned in the following NEED-TO-KNOW Slides. P 4 Atef Abuelaish

NEED-TO-KNOW A manufacturing company applied $300,000 of overhead to its jobs during the year. For the independent scenarios below, prepare the journal entry to adjust over- or underapplied overhead. Assume the adjustment amounts are not material. 1. Actual overhead costs incurred during the year equal $305,000. Factory Overhead Actual OH Incurred OH Applied to Production 305,000 300,000 Underapplied OH 5,000 General Journal Debit Credit Cost of Goods Sold 5,000 Factory Overhead 5,000 A manufacturing company applied $300,000 of overhead to its jobs during the year. For the independent scenarios below, prepare the journal entry to adjust over- or underapplied overhead. Assume the adjustment amounts are not material. In the first scenario, actual overhead costs incurred during the year equal $305,000. The Factory Overhead account is debited for actual overhead incurred and credited for overhead applied to production. In this scenario, actual overhead incurred is $305,000 but the amount applied to production is only $300,000. The Factory Overhead account has a debit balance of $5,000. Since the amount applied to production is less than the actual costs, this is referred to as an underapplied balance of $5,000. Each job produced during the period has been somewhat undercharged for overhead. This amount is not considered material however, so at the end of the period, we simply close the overhead balance to Cost of goods sold. Credit Factory Overhead, $5,000, and debit Cost of goods sold. P 4 Atef Abuelaish

NEED-TO-KNOW A manufacturing company applied $300,000 of overhead to its jobs during the year. For the independent scenarios below, prepare the journal entry to adjust over- or underapplied overhead. Assume the adjustment amounts are not material. 2. Actual overhead costs incurred during the year equal $298,500. Factory Overhead Actual OH Incurred OH Applied to Production 298,500 300,000 Overapplied 1,500 General Journal Debit Credit Factory Overhead 1,500 Cost of Goods Sold 1,500 Assume instead that actual overhead costs incurred during the year equal $298,500. The total amount applied to production remains at $300,000, but now the debits to Factory Overhead, actual overhead incurred, is only $298,500. The balance in the Factory Overhead account at the end of the period is a credit balance of $1,500. Since the amount of overhead applied to production exceeds the actual overhead incurred, this is referred to as an overapplied balance. To close the balance at the end of the period, assuming the amount is not material, we debit Factory Overhead, $1,500, and credit Cost of goods sold. P 4 Atef Abuelaish

Chapter 03 PROCESS Costing and Atef Abuelaish

PROCESS Costing and Analysis
Chapter 03 PROCESS Costing and Analysis Atef Abuelaish

Process Operations Atef Abuelaish

Process Operations Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product. Process operations involve the mass production of similar products in a continuous flow of sequential processes. A key feature of process operations is the high level of standardization needed if the system is to produce large volumes of products. Thus, process operations use a standardized process to make similar products; job order operations use a customized process to make unique products. C 1 Atef Abuelaish

Comparing Process and Job Order Costing Systems
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Comparing Job Order and Process Operations
Job Order Systems Custom orders Heterogeneous products Low production volume High product flexibility Low to medium standardization Process Systems Repetitive operations Homogeneous products High production volume Low product flexibility High standardization Both job order costing systems and process costing systems track direct materials, direct labor, and overhead costs. The measurement focus in a job order costing system is on the individual job or batch, whereas in a process costing system, it is on the individual process. Regardless of the measurement focus, we are ultimately interested in determining the cost per unit of product (or service) resulting from either system. While both measure costs per unit, these two accounting systems differ in terms of how they do so. A job order system measures cost per unit upon completion of a job, by dividing the total cost for that job by the number of units in that job. As we showed in the previous chapter, job cost sheets accumulate the costs for each job. In a job order system, the cost object is a job. A process costing system measures unit costs at the end of a period (for example, a month) by combining the costs per equivalent unit from each separate department. In process costing, the cost object is the process. A 1 Atef Abuelaish

Comparing Job Order and Process Operations
Job order costing often uses only one Work in Process Inventory account; the balance in this account agrees with the accumulated balances across all the job cost sheets for the jobs still in process. Process costing, however, uses separate Work in Process Inventory accounts for each department. When the production process is complete in process costing, the completed goods and the accumulated costs are transferred from the Work in Process Inventory account for the final department in the series of processes to the Finished Goods Inventory account. Review what you have learned in the following NEED-TO-KNOW Slide. A 1 Atef Abuelaish

NEED-TO-KNOW Complete the following table with either a yes or no regarding the attributes of job order and process costing systems. Job Order Process Use direct materials, direct labor, and overhead costs Yes Yes Use job cost sheets to accumulate costs Yes No Typically use several Work in Process Inventory accounts No Yes Yield a cost per unit of product Yes Yes Complete the following table with either a yes or no regarding the attributes of job order and process costing systems. Use direct materials, direct labor, and overhead costs. This is true for both job order and process costing systems. Use job cost sheets to accumulate costs. This is only true for job order costing; process costing does not use job sheets. Typically use several Work in Process Inventory accounts. This is not true for job order costing. Instead, the detail of the Work in Process is held on the various job cost sheets. Under process costing, it is very common to have several Work in Process Inventory accounts. And, both job order and process costing systems yield a cost per unit of product. A 1 Atef Abuelaish

Equivalent Units of Production
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Equivalent Units of Production (EUP)
EUP must be calculated for the Work in Process account. Companies with process operations typically end each period with inventories of both finished goods and work in process. A key idea in process costing is that of Equivalent Units of Production (EUP), a term that refers to the number of units that could have been started and completed given the costs incurred during the period. C 2 Atef Abuelaish

EUP for Materials and Conversion Costs
In many processes, the equivalent units of production for direct materials are not the same with respect to direct labor and overhead. For example, direct materials, like rubber for tennis ball cores, might enter production entirely at the beginning of a process; direct labor and overhead, in contrast, might be used continuously throughout the process. How does a manufacturer account for these timing differences? Again, by measuring equivalent units of production. For example, if all of the direct materials to produce 10,000 units have entered the production process, but those units have received only 20% of their direct labor and overhead costs, equivalent units would be computed as shown in this slide. C 2 Atef Abuelaish

Weighted Average versus FIFO
The weighted-average method combines units and costs across two periods in computing equivalent units. The FIFO method computes equivalent units based only on production activity in the current period. The objectives, concepts, and journal entries (but not amounts) are the same under the weighted-average and FIFO methods; the computations of equivalent units differ. While the FIFO method is generally considered to be more precise than the weighted-average method, it requires more calculations. Often, the differences between the two methods are not large. When using a just-in-time inventory system, these different methods will yield very similar results because inventories are immaterial. FIFO C 2 Atef Abuelaish

Process Costing Atef Abuelaish

Process Costing Illustration
GenX uses a weighted average cost flow system with the following four steps: Determine physical flow of units. Compute equivalent units of production. Compute cost per equivalent unit. Assign and reconcile costs. As with all situations involving inventory costs, we must choose a cost flow method. We will use the weighted average method for GenX. Process cost applications can be overwhelming if we do not use a well-planned approach. The four-step procedure will enable us to solve a process cost application in manageable parts. The four steps are: 1. Determine physical flow of units. 2. Compute equivalent units of production. 3. Compute cost per equivalent unit. 4. Assign and reconcile costs. C3 Atef Abuelaish

Overview of GenX Company’s Process Operation
The GenX Company produces an organic trail mix called FitMix. Its target customers are active people who are interested in fitness and the environment. GenX sells FitMix to wholesale distributors, who in turn sell it to retailers. FitMix is manufactured in a continuous, two-process operation (roasting and blending), shown in this slide. C 3 Atef Abuelaish

Process Operations – GenX
Here we see the units processed and the completion percentages. Take a minute to become familiar with these numbers before moving on to the cost information. Process costing applications include lots of numbers and in the first process (roasting department), GenX roasts, oils, and salts organically grown peanuts. These peanuts are then passed to the blending department, the second process. In the blending department, machine blends organic chocolate pieces and organic dried fruits with the peanuts from the first process. The blended mix is then inspected and packaged for delivery. In both departments, direct materials enter production at the beginning of the process, while conversion costs occur continuously throughout each department’s processing. Exhibit 3.5 presents production data (in units) for GenX’s roasting department. This exhibit includes the percentage of completion for both materials and conversion; for example, beginning work in process inventory is 100% complete with respect to materials but only 65% complete with respect to conversion. The bottom graphic represents production cost data for GenX’s roasting department. We will use the data to illustrate the four-step approach to process costing. C 3 Atef Abuelaish

Step 1: Determine Physical Flow of Units
A physical flow reconciliation is a report that reconciles (1) the physical units started in a period with (2) the physical units completed in that period. A physical flow reconciliation for GenX’s roasting department is shown in this slide for April. C 3 Atef Abuelaish

Step 2: Compute Equivalent Units of Production
The second step is to compute equivalent units of production for direct materials and conversion costs for April. Since direct materials and conversion costs typically enter a process at different rates, departments must compute equivalent units separately for direct materials and conversion costs. The top graphic shows the formula to compute equivalent units under the weighted-average method for both direct materials and conversion costs. For GenX’s roasting department, we must convert the 120,000 physical units measure to equivalent units based on how each input has been used. The roasting department fully completed its work on 100,000 units, and partially completed its work on 20,000 units. Equivalent units are computed by multiplying the number of units accounted for (from Step 1) by the percentage of completion for each input—see the second graphic. The first row of the second graphic reflects units transferred out in April. The roasting department entirely completed its work on the 100,000 units transferred out. These units have 100% of the materials and conversion required, or 100,000 equivalent units of each input (100,000 x 100%). GenX ended the month with 20,000 partially completed units. For direct materials, the units in ending work in process inventory include all materials required, so there are 20,000 equivalent units (20,000 x 100%) of materials in the unfinished physical units. Regarding conversion, the units in ending work in process inventory include 25% of the conversion required, which implies 5,000 equivalent units of conversion (20,000 x 25%). The final row reflects the total equivalent units of production, which is whole units of product that could have been manufactured with the amount of inputs used to create some complete and some incomplete units. For GenX, the amount of inputs used to produce 100,000 complete units and to start 20,000 additional units is equivalent to the amount of direct materials in 120,000 whole units and the amount of conversion in 105,000 whole units. Review what you have learned in the following NEED-TO-KNOW Slide. C 3 Atef Abuelaish

NEED-TO-KNOW A department began the month with 8,000 units in work in process inventory. These units were 100% complete with respect to direct materials and 40% complete with respect to conversion. During the month, the department started 56,000 units and completed 58,000 units. Ending work in process inventory includes 6,000 units, 100% complete with respect to direct materials and 70% complete with respect to conversion. Use the weighted-average method of process costing to: 1. Compute the department’s equivalent units of production for the month for direct materials. 64,000 2. Compute the department’s equivalent units of production for the month for conversion. 62,200 Work in Process Inventory - Units Beginning Units 8,000 Started 56,000 Total Units 64,000 Transferred out 58,000 Ending Units 6,000 Units Schedule (Physical Flow Reconciliation) Units in Beginning Inventory 8,000 Units completed and transferred out 58,000 Units Started 56,000 Units in Ending Inventory 6,000 Total Units to Account For 64,000 Total Units Accounted For 64,000 A department began the month with 8,000 units in work in process inventory. These units were 100% complete with respect to direct materials and 40% complete with respect to conversion. During the month, the department started 56,000 units and completed 58,000 units. Ending work in process inventory includes 6,000 units, 100% complete with respect to direct materials and 70% complete with respect to conversion. Use the weighted-average method of process costing to: 1. Compute the department’s equivalent units of production for the month for direct materials. 2. Compute the department’s equivalent units of production for the month for conversion. Before we do the calculations, I think it's really helpful to set up a T-account in terms of units. We had 8,000 units in beginning inventory and the department started an additional 56,000 units. There are 64,000 units to account for. By the end of the month, the department has completed and transferred out 58,000 units, leaving 6,000 units in ending inventory. This units T-account is very helpful to create the units schedule, the physical flow reconciliation. 8,000 units in beginning inventory plus 56,000 units started equals 64,000 units to account for. We account for the units by describing their location at the end of the period. By the end of the period, 58,000 units have been transferred out and 6,000 units remain in ending inventory. Total units accounted for, 64,000. Using the weighted average method of process costing, we focus on the condition of the units at the end of the period. To calculate the equivalent units of production, we take the physical units, 58,000 units that have been transferred out and 6,000 units in ending inventory, a total of 64,000, and we multiplied by the percentage of completion to calculate the equivalent units of production (abbreviated as EUP). Since the units have been transferred out, they must be 100% complete with respect to materials and 100% complete with respect to conversion; otherwise the subsequent department would have rejected those units! To calculate the equivalent units of production, we multiply the physical units by the percentage of completion. 58,000 units multiplied by 100% is 58,000 equivalent units of materials. 58,000 physical units that are 100% complete with respect to conversion is the equivalent of 58,000 units of production. The 6,000 units in ending inventory are 100% complete with respect to materials; 6,000 units multiplied by 100% is 6,000 equivalent units of materials. The ending inventory units are only 70% complete with respect to conversion; 6,000 units multiplied by 70% is 4,200 equivalent units of production. The 64,000 units represent 64,000 equivalent units of materials and 62,200 equivalent units of conversion. % Completion EUP Physical Units Materials Conversion Materials Conversion Transferred out 58,000 100% 100% 58,000 58,000 Ending Inventory 6,000 100% 70% 6,000 4,200 Total units 64,000 64,000 62,200 C 3 Atef Abuelaish

Step 3: Compute Cost per Equivalent Unit
Under the weighted-average method, the computation of EUP does not separate the units in beginning inventory from those started this period, as shown above. Similarly, the weighted average method combines the costs of beginning work in process inventory with the costs incurred in the current period. This total cost is then divided by the equivalent units of production (from Step 2), to compute the average cost per equivalent unit. This process is illustrated in this slide. For direct materials, the cost averages $3.00 per EUP. For conversion, the cost per equivalent unit averages $4.62 per unit. C 3 Atef Abuelaish

Step 4: Assign and Reconcile Costs
The EUP from Step 2 and the cost per EUP from Step 3 are used in Step 4 to assign costs to units that the roasting department completed and transferred to the blending department (100,000 units), and (b) units that remain in process in the roasting department (20,000 units). This is illustrated in this slide. Cost of Units Completed and Transferred - The 100,000 units completed and transferred to the blending department required 100,000 EUP of direct materials and 100,000 EUP of conversion. Thus, we assign $300,000 (100,000 EUP x $3.00 per EUP) of direct materials cost to those units. Similarly, we assign $462,000 (100,000 EUP x $4.62 per EUP) of conversion to those units. The total cost of the 100,000 completed and transferred units is $762,000 ($300,000 + $462,000) and their average cost per unit is $7.62 ($762,000 / 100,000 units). Cost of Units for Ending Work in Process - There are 20,000 incomplete units in work in process inventory at period-end. For direct materials, those units have 20,000 EUP of material (from Step 2) at a cost of $3.00 per EUP (from Step 3), which yields the materials cost of work in process inventory of $60,000 (20,000 EUP x $3.00 per EUP). For conversion, the in-process units reflect 5,000 EUP (from Step 2). Using the $4.62 conversion cost per EUP (from Step 3) we obtain conversion costs for in-process inventory of $23,100 (5,000 EUP x $4.62 per EUP). Total cost of work in process inventory at period-end is $83,100 ($60,000 + $23,100). Review what you have learned in the following NEED-TO-KNOW Slide. C 3 Atef Abuelaish

NEED-TO-KNOW A department began the month with conversion costs of $65,000 in its beginning work in process inventory. During the month, the department incurred $55,000 of conversion costs. Equivalent units of production for conversion for the month was 15,000 units. The department completed and transferred 12,000 units to the next department. 1. Compute the department’s cost per equivalent unit for conversion for the month. $8.00 2. Compute the department’s conversion cost of units transferred to the next department for the month. $96,000 Work in Process Inventory Beginning Inventory 65,000 DL and OH 55,000 120,000 Transferred out 96,000 Ending Inventory 24,000 EUP Cost Allocated Conversion per EUP Cost Transferred out 12,000 $8.00 $96,000 Ending Inventory 3,000 $8.00 24,000 Total units 15,000 $120,000 A department began the month with conversion costs of $65,000 in its beginning work in process inventory. During the month, the department incurred $55,000 of conversion costs. Equivalent units of production for conversion for the month was 15,000 units. The department completed and transferred 12,000 units to the next department. 1. Compute the department’s cost per equivalent unit for conversion for the month. To calculate the cost per equivalent unit, we take the cumulative costs and divide by the total equivalent units of production. The cumulative costs include the beginning inventory cost of $65,000 plus the current month's cost of $55,000, a total of $120,000. When we divide by the total equivalent units of production, 15,000 equivalent units of conversion, the cost per equivalent unit of conversion is $8. 2. Compute the department’s conversion cost of units transferred to the next department for the month. Of the total 15,000 equivalent units of conversion, 12,000 units have been transferred out. 12,000 equivalent units of production multiplied by $8 per unit is a total allocated cost of $96,000. The remaining 3,000 equivalent units of production relate to the ending inventory, 3,000 equivalent units of production multiplied by $8 per unit is an allocated cost of $24,000. All $120,000 has been allocated. $96,000 of the conversion costs have been transferred out, with $24,000 of conversion costs remaining in ending inventory. Cost per Equivalent Unit Cumulative Costs $120,000 Total EUP 15,000 $8.00 per equivalent unit of conversion C 3 Atef Abuelaish

Process Cost Summary An important managerial accounting report for a process costing system is the process cost summary (also called production report), which is prepared separately for each process or production department. Three reasons for the summary are to (1) help department managers control and monitor their departments, (2) help factory managers evaluate department managers’ performances, and (3) provide cost information for financial statements. A process cost summary achieves these purposes by describing the costs charged to each department, reporting the equivalent units of production achieved by each department, and determining the costs assigned to each department’s output. C 3 Atef Abuelaish

Cost Data For GenX This slide presents cost data for GenX. Roasting department costs are from earlier slides. We use these data next to show the journal entries in a process costing system. C 3 Atef Abuelaish

Accounting for Materials Costs
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Accounting for Material Costs
The summary entry for receipts of raw materials in April follows (dates in journal entries are omitted because they are summary entries, often reflecting two or more transactions or events). The entry to record the use of direct materials by GenX’s production departments in April follows. These direct materials costs flow into each department’s separate Work in Process Inventory account. The last entry records the cost of indirect materials used by GenX in April. P 1 Atef Abuelaish

Accounting for Labor Costs
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Accounting for Labor Costs
The first entry then records direct labor used. These direct labor costs flow into each department’s separate Work in Process Inventory account. The second entry records these indirect labor costs. After GenX posts these entries for direct and indirect labor, the Factory Payroll Payable account has a balance of $432,510 ($354,160 + $78,350). The final entry shows the payment of this total payroll. After this entry, the Factory Payroll Payable account has a zero balance. P 2 Atef Abuelaish

Accounting for Factory Overhead
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Accounting for Factory Overhead
The first entry records these other overhead costs for April. GenX records its applied overhead with the second entry. Review what you have learned in the following NEED-TO-KNOW Slides. P 3 Atef Abuelaish

NEED-TO-KNOW Tower Mfg. estimates it will incur $200,000 of total overhead costs during the year. Tower allocates overhead based on machine hours; it estimates it will use a total of 10,000 machine hours during the year. During February, the assembly department of Tower Mfg. uses 375 machine hours. In addition, Tower incurred actual overhead costs as follows during February: indirect materials, $1,800; indirect labor, $5,700; depreciation on factory equipment, $8,000; factory utilities, $500. 1. Compute the company’s predetermined overhead rate for the year. $20 per machine hour Predetermined Overhead Rate = Estimated Overhead Costs $200,000 Estimated Activity Base 10,000 machine hours = $20 per machine hour Machine Hours Used x Predetermined OH rate = OH Applied Assembly Dept. 375 hours x $20 per hour = $7,500 OH applied Factory Overhead Actual OH Incurred OH Applied to Production Tower Mfg. estimates it will incur $200,000 of total overhead costs during the year. Tower allocates overhead based on machine hours; it estimates it will use a total of 10,000 machine hours during the year. During February, the assembly department of Tower Mfg. uses 375 machine hours. In addition, Tower incurred actual overhead costs as follows during February: indirect materials, $1,800; indirect labor, $5,700; depreciation on factory equipment, $8,000; factory utilities, $500. 1. Compute the company’s predetermined overhead rate for the year. The predetermined overhead rate is calculated by taking the estimated overhead costs and dividing by the estimated activity base. $200,000 in estimated overhead costs divided by 10,000 machine hours is a predetermined overhead rate of $20 per machine hour. The predetermined overhead rate is used to assign overhead costs to production. During February, the assembly department used 375 machine hours. For each machine hour used, the production will be charged with $20 of overhead. The total amount of overhead applied to the units produced during February is $7,500. The Factory Overhead account is debited for the actual overhead costs incurred, and credited for the overhead applied to production. P 3 Atef Abuelaish

NEED-TO-KNOW Tower Mfg. estimates it will incur $200,000 of total overhead costs during the year. Tower allocates overhead based on machine hours; it estimates it will use a total of 10,000 machine hours during the year. During February, the assembly department of Tower Mfg. uses 375 machine hours. In addition, Tower incurred actual overhead costs as follows during February: indirect materials, $1,800; indirect labor, $5,700; depreciation on factory equipment, $8,000; factory utilities, $500. 2. Prepare journal entries to record (a) overhead applied for the assembly department for the month and (b) actual overhead costs used during the month. General Journal Debit Credit a) Work in Process Inventory 7,500 Factory Overhead (375 machine hours x $20 per MH) 7,500 b) Factory Overhead 16,000 Raw Materials Inventory 1,800 Factory Wages Payable 5,700 Accumulated Depreciation - Factory Equipment 8,000 Utilities Payable 500 The journal entry to apply overhead to the assembly department for the month is a debit to Work in Process Inventory, $7,500, and a credit to Factory Overhead. The Factory Overhead account is credited for $7,500. The journal entry to record actual overhead costs used during the month will result in debits to the Factory Overhead account. Indirect materials result in a debit to Factory Overhead and a credit to Raw Materials Inventory. Indirect labor costs are debits to Factory Overhead and credits to Factory Wages Payable. Depreciation on factory equipment results in a debit to Factory Overhead and a credit to Accumulated Depreciation - Factory Equipment. And factory utilities result in debits to Factory Overhead and credits to Utilities Payable. The total actual overhead incurred is $16,000. For the month of February, actual overhead costs incurred exceed the amount of overhead applied. This results in an underapplied balance of $8,500. Factory Overhead Actual OH Incurred OH Applied to Production Ind. Materials 1,800 Ind. Labor 5,700 Fact. Deprec. 8,000 Fact. Utilities 500 16,000 7,500 Underapplied 8,500 P 3 Atef Abuelaish

Accounting for Transfers across Departments
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Accounting for Transfers
The process cost summary for the roasting department shows that the 100,000 units transferred to the blending department are assigned a cost of $762,000. The entry to record this transfer is shown first. At the end of the month, the blending department transferred 97,000 completed units, with a related cost of $1,262,940, to finished goods. The entry to record this transfer is shown second. Assume that GenX sold 106,000 units of FitMix this period, and that its beginning finished goods inventory was 26,000 units with a cost of $338,520. Also assume that its ending finished goods inventory consists of 20,000 units at a cost of $260,400. Using this information, cost of goods sold is computed as $1,341,060. The summary entry to record cost of goods sold for this period is shown last. P 4 Atef Abuelaish

Trends in Process Operations
Process design Just-in-time production Customer orientation Automation Services Recent trends in process operations include: Process design - Management concerns with production efficiency can lead companies to entirely reorganize production processes. For example, instead of producing different types of computers in a series of departments, a separate work center for each computer can be established in one department. The process cost system is then changed to account for each work center’s costs. Just-in-time production - Companies are increasingly adopting just-in-time techniques. With a just-in-time inventory system, inventory levels can be minimal. If raw materials are not ordered or received until needed, a Raw Materials Inventory account might be unnecessary. Instead, materials cost is immediately debited to the goods in process inventory account. Similarly, a finished goods inventory account may not be needed. Instead, cost of finished goods may be immediately debited to the cost of goods sold account. Automation - Advances in technology increasingly enable companies to automate their production processes. This allows them to reduce direct labor costs. Reflecting this, some companies focus on conversion costs per equivalent unit, which is the combined costs of direct labor and factory overhead per equivalent unit. Continuous Processing - In some companies, materials move continuously through the manufacturing process. Pepsi Bottling uses a process in which inventory moves continuously through the system. In these cases, a materials consumption report summarizes the materials used and replaces materials requisitions. Services - Service-based businesses are increasingly prevalent. For routine, standardized services like oil changes and simple tax returns, computing costs based on the process is simpler and more useful than a cost per individual job. Customer orientation - Focus on customer orientation also leads to improved processes. A manufacturer of control devices improved quality and reduced production time by forming teams to study processes and suggest improvements. Oregon Ice Cream Company studied customer tastes to develop a more pleasing ice cream texture. Continuous Processing P 4 Atef Abuelaish

Global View As part of a series of global environmental goals, Anheuser-Busch InBev set targets to reduce its water usage. The company uses massive amounts of water in beer production and in its cleaning and cooling processes. To meet these goals, the company followed recent trends in process operations. These included extensive redesign of production processes and the use of advanced technology to increase efficiency at wastewater treatment plants. As a result water usage decreased by almost 37 percent in its global operations. As part of a series of global environmental goals, Anheuser-Busch InBev set targets to reduce its water usage. The company uses massive amounts of water in beer production and in its cleaning and cooling processes. To meet these goals, the company followed recent trends in process operations. These included extensive redesign of production processes and the use of advanced technology to increase efficiency at wastewater treatment plants. As a result water usage decreased by almost 37 percent in its global operations Atef Abuelaish

FIFO Method of Process Costing
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Appendix 3A: FIFO Method of Process Costing
In computing cost per equivalent unit, the FIFO method ignores the cost of beginning work in process inventory. Instead, FIFO uses only the costs incurred in the current period. This slide shows selected information from GenX’s roasting department for the month of April. Accounting for a department’s activity for a period includes four steps: (1) determine physical flow, (2) compute equivalent units, (3) compute cost per equivalent unit, and (4) determine cost assignment and reconciliation. The same GenX data for April will also be used to illustrate the FIFO method. C 4 Atef Abuelaish

Determine Physical Flow of Units
A physical flow reconciliation is a report that reconciles (1) the physical units started in a period with (2) the physical units completed in that period. The physical flow reconciliation for GenX’s roasting department is shown in this slide for April. C 4 Atef Abuelaish

Compute Equivalent Units of Production
In computing the equivalent units of production, the roasting department must consider these three distinct groups of units: Units in beginning work in process inventory (30,000). Units started and completed during the month (70,000). Units in ending work in process inventory (20,000). GenX’s roasting department then computes equivalent units of production under FIFO as shown in this slide. We compute EUP for each of the three distinct groups of units, and sum them to find total EUP. Review what you have learned in the following NEED-TO-KNOW Slide. * Units completed this period 100,000 Less units in beginning goods in process 30,000 Units started and completed this period 70,000 C 4 Atef Abuelaish

NEED-TO-KNOW A department began the month with 50,000 units in work in process inventory. These units were 60% complete with respect to direct materials and 40% complete with respect to conversion. During the month, the department started 286,000 units; 220,000 of these units were completed during the month. The Remaining 66,000 units are in ending work in process inventory, 80% complete with respect to direct materials and 30% complete with respect to conversion. Use the FIFO method of process costing to: 1. Compute the department’s equivalent units of production for the month for direct materials. 292,800 2. Compute the department’s equivalent units of production for the month for conversion. 269,800 Work in Process Inventory - Units Beginning Units 50,000 Beginning Units 50,000 Started 286,000 Started and Completed 220,000 Total units 336,000 Transferred out 270,000 Ending Units 66,000 Units Schedule (Physical Flow Reconciliation) Units in Beginning Inventory 50,000 Units completed and transferred out 270,000 Units Started 286,000 Units in Ending Inventory 66,000 Total Units to Account For 336,000 Total Units Accounted For 336,000 A department began the month with 50,000 units in work in process inventory. These units were 60% complete with respect to direct materials and 40% complete with respect to conversion. During the month, the department started 286,000 units; 220,000 of these units were completed during the month. The remaining 66,000 units are in ending work in process inventory, 80% complete with respect to direct materials and 30% complete with respect to conversion. Use the FIFO method of process costing to: 1. Compute the department’s equivalent units of production for the month for direct materials. 2. Compute the department’s equivalent units of production for the month for conversion. The department began the month with 50,000 units in inventory. They started an additional 286,000 units, for a total of 336,000 units to account for. At the end of the month, there are 66,000 units which remain in ending inventory; the remaining 270,000 units must have been transferred out. Under the FIFO method, we assume that the first items in are the first items out. The 270,000 units transferred out consist of the 50,000 units from beginning inventory and 220,000 of the units that were started in the current month. We can use the work in process units T-account to create the units schedule, the physical flow reconciliation. 50,000 units in beginning inventory plus 286,000 units started equals 336,000 units to account for. We account for the 336,000 units by describing their location at the end of the month; 270,000 units have been transferred out, and 66,000 units remain in ending inventory. Total units accounted for, 336,000. To calculate the equivalent units of production, we take the total of 336,000 units, and then describe the type of work that was done in the current month. The first order of business, at the beginning of the month, was to finish the beginning inventory; 50,000 units. Once the 50,000 units were finished, they started, and were able to complete, 220,000 units. And, toward the end of the month, they were able to start (but not finish) the 66,000 units in ending inventory. Typically, the most error-prone calculation is in the number of units started and completed. Another way to calculate this amount is to take the total of 336,000 units, and subtract the 116,000 units in beginning and ending inventory; 220,000 units are started and completed. We then multiply by the percentage work done in the current month. The 50,000 units in beginning inventory had 60% of the materials work and 40% of conversion work added in the prior month. To finish these units, then, we take the difference between 100% and the amount of work done in the prior month. 100%-60% equals 40% of the materials work added in the current month. 100%-40% equals 60% of the conversion work added in the current month. Units that are started and completed received 100% of the materials and conversion effort. And the units in ending inventory are 80% complete with respect to materials and 30% complete with respect to conversion. This is the amount of work done in the current month. To calculate the equivalent units of production, we multiply the number of physical units by the percentage of work done in the current month. 50,000 units multiplied by 40% is 20,000 equivalent units of materials. 220,000 multiplied by 100% is 220,000 equivalent units of materials, and 66,000 units multiplied by 80% is 52,800 units. Total equivalent units of materials is 292,800. We repeat the process for conversion. 50,000 units multiplied by 60% is 30,000 equivalent units of production. 220,000 multiplied by 100% is 220,000, and 66,000 units multiplied by 30% is 19,800. Total equivalent units of production, 269,800. Physical Units % Done in Current Month EUP Materials Conversion Materials Conversion Finish Beginning Inventory 50,000 40% 60% 20,000 30,000 Start and Complete 220,000 100% 100% 220,000 220,000 Start Ending Inventory 66,000 80% 30% 52,800 19,800 Total units 336,000 292,800 269,800 C 4 Atef Abuelaish

 Compute Cost Per Equivalent Unit – FIFO
To compute cost per equivalent unit, we take the direct materials and conversion costs added in April and divide by the equivalent units of production from Step 2. This slide illustrates these computations. It is essential to compute costs per equivalent unit for each input because production inputs are added at different times in the process. The FIFO method computes the cost per equivalent unit based solely on this period’s EUP and costs (unlike the weighted-average method, which adds in the costs of the beginning work in process inventory). Review what you have learned in the following NEED-TO-KNOW Slide. C 4 Atef Abuelaish

NEED-TO-KNOW A department started the month with beginning work in process inventory of $130,000 ($90,000 for direct materials and $40,000 for conversion). During the month, the department incurred additional direct materials costs of $700,000 and conversion costs of $500,000. Assume that, using the FIFO method, equivalent units for the month were computed as 250,000 for materials and 200,000 for conversion. 1. Compute the department’s cost per equivalent unit of production for the month for direct materials. 2. Compute the department’s cost per equivalent unit of production for the month for conversion. Cost per Equivalent Unit of Direct Materials: Direct Material costs added in the current month $700,000 Equivalent units of Production - Current Month 250,000 $2.80 per equivalent unit of direct materials Cost per Equivalent Unit of Conversion: Conversion costs added in the current month $500,000 A department started the month with beginning work in process inventory of $130,000 ($90,000 for direct materials and $40,000 for conversion). During the month, the department incurred additional direct materials costs of $700,000 and conversion costs of $500, Assume that, using the FIFO method, equivalent units for the month were computed as 250,000 for materials and 200,000 for conversion. 1. Compute the department’s cost per equivalent unit of production for the month for direct materials. 2. Compute the department’s cost per equivalent unit of production for the month for conversion. Using the FIFO method, cost per equivalent unit of production is calculated by taking the cost added in the current month and dividing by the equivalent units of production. The cost per equivalent unit of direct materials is calculated by taking the direct material costs added in the current month and dividing by the equivalent units of production; materials work done in the current month. $700,000 divided by 250,000 equivalent units of materials is a cost of $2.80 per equivalent unit of direct materials. To calculate the cost per equivalent unit of conversion, we take the conversion costs added in the current month and divide by the equivalent units of production. $500,000 divided by 200,000 equivalent units is a cost of $2.50 per equivalent unit of conversion. Notice that the costs of beginning Work in Process Inventory are not included in the calculation of cost per equivalent unit when using the FIFO method. Equivalent units of Production - Current Month 200,000 $2.50 per equivalent unit of conversion C 4 Atef Abuelaish

Assign and Reconcile Costs
We reconcile the costs accounted for in Step 3 to the costs that production was charged for as shown in this slide. C 4 Atef Abuelaish

Happiness is having all homework up to date
Homework assignment Using Connect – 10 Questions for 60 Points for Chapter 03. Complete the “Connect Orientation” at Connect web site for 10 points, before 02/14/2017. Prepare chapter 4 “Activity-Based Costing and Analysis.” for meeting on 02/16. Prepare chapters 13, 1, and 2 for revisions and EXAM # 01 on 02/14/2017 meeting in class . Happiness is having all homework up to date Atef Abuelaish

Thank you and See You Next Week at the Same Time, Take Care
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