1. Chapter Six Process Costing
COPYRIGHT © 2012 Nelson Education Ltd.

2. Learning Objectives
Describe the basic characteristics and cost flows associated with process manufacturing
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
Prepare a departmental production report using the weighted average method
Explain how non-uniform inputs and multiple processing departments affect process costing
(Appendix) Prepare a departmental production report using the FIFO method

3. OBJECTIVE  1
Describe the basic characteristics and cost flows associated with process manufacturing

4. Characteristics of Process Manufacturing
Process costing works well whenever relatively homogeneous products pass through a series of processes and they receive similar amount of manufacturing costs
Example Industries:
Chemicals
Food
Tire manufacturers
Large manufacturing plants

5. Sequential processing
Types of Processes
Sequential processing
Requires that units pass through one process before they can be worked on in later processes
Parallel processing
Partially completed units can be worked on simultaneously in different processes and then brought together in a final process for completion

6. Raw Materials Cost Flow
Manufacturing cost flows are same as those for a job-order system
Raw Materials
As raw materials are purchased, cost of these materials flow into a raw materials account
Materials purchases

7. Cost Flows Into Work In Process
Finished Goods
Completed Goods
+ Materials
+ Completed Goods
+ Direct labour
+ Overhead
Completed goods are transferred out of Work-In-Process and into Finished Goods
Materials, labour and overhead flow into the Work-In-Process account

8. Cost Flows Into Work In Process
Finished Goods
Cost of Goods Sold
Sold Goods
+ Completed Goods
+ Sold Goods
Goods that are sold are transferred out of Finished Goods and into Cost of Goods Sold

9. Example: Cornerstone 6-1
How to Calculate Cost Flows Without Work-In-Process (WIP)
Information:
Healthblend produces 2,000 bottles of multivitamins with the following costs:
Picking Dept.
Encapsulating Dept.
Bottling Dept.
Direct materials
$1,700
$1,000
$800
Direct labour 50 60
300
Applied overhead
450
500
600
Required:
Calculate the costs transferred out of each department
Prepare journal entries that reflect these cost transfers

10. Costs Transferred Out Picking Dept. Encapsulating Dept. Bottling Dept.
Direct materials
$1,700
$1,000
$ 800
Direct labour 50 60
300
Applied overhead
450
500
600
Costs added
$2,200
$1,560
$1,700
Costs transferred in
2,200
3,760
Costs transferred out
$2,200
$3,760
$5,460

11. Journal Entries Work in Process (Encapsulating) $2,200
Work in Process (Picking)
$2,200
Work in Process (Bottling)
$3,760
Work in Process (Encapsulating)
$3,760
Finished Goods
$5,460
Work in Process (Bottling)
$5,460

12. Transferred-In Costs
Transferred-In Costs are costs transferred from a prior process to a subsequent process
From the viewpoint of the subsequent process, transferred-in costs are a type of raw material cost

13. Production Report Units to Account For Units Accounted For
Summary of manufacturing activity of a process department for a given period of time
Unit Information section
Cost Information section
Units to Account For
Units Accounted For
Unit Information Section has two major subdivisions

14. Production Report Costs to Account For Costs Accounted For
Unit Information section
Cost Information section
Costs to Account For
Costs Accounted For
Cost Information Section has two major subdivisions

15. OBJECTIVE  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

16. Equivalent Units Example
Assume that Department A had the following data for October:
Units in BWIP
---
Units completed
1,000
Units in EWIP (25% complete)
600
If we say 1000, we ignore the ending work in process.
1600? Then we ignore the fact that the units in ending work in process are only partially completed.
Total manufacturing costs
$11,500
What is the output for this department?
1000 units? 1600 units?

17. Equivalent Units of Output
Total number of complete units that could have been produced given the total manufacturing effort used during the period
Dilemma
Some units are physically complete
Some units are not complete
Dilemma
Some units are physically complete
called units completed
when complete, units are transferred out
Some units are not complete
remain in Work-In-Process
degree of completion must be determined
6-17

18. Example: Cornerstone 6-2
How to Calculate Equivalent Units of Production:
No Beginning Work-In-Process
Information:
October Data:
1,000 units
completed
600 units
25 percent complete
Required:
Calculate the equivalent units for October

19. Equivalent Units Equivalent Units Units Completed 1,000
Units in Ending WIP × 25% complete
150
1,150

20. Example: Cornerstone 6-3
How To Measure Output and Assign Costs: No Beginning Work-In-Process
Information:
Manufacturing Costs for the period
11,500
Units Transferred Out
1,000
Units in Ending Work In Process
(25% Complete)
600
Required:
Calculate the unit cost
Calculate the cost of goods transferred out and the cost of ending work-in-process (EWIP)

21. Calculating Unit Cost $10 Cost per equivalent unit Manufacturing costs=
Number of Equivalent Units
$11,500
Cost per equivalent unit =
1,150
Cost per equivalent unit =
$10

22. Cost of Goods Transferred Out
Units Transferred Out
Cost of goods transferred out
Unit Cost = ×
$10 ×
1,000 units
Cost of goods transferred out =
$10,000

23. Cost of Ending Work-In-Process (EWIP)
Unit Cost
Units in EWIP = ×
$10 ×
150
Cost of ending work in process =
$1,500
Things get more complicated if there are units in work-in-process at the beginning of the period

24. Beginning Work In Process
Work done on these beginning inventory units
Represents prior period costs
How should these costs figure into the computation of current period unit costs?
Weighted Average method
FIFO method

25. Weighted Average Method
Combines
Beginning inventory costs
Current period costs
Calculates Unit Cost for the period
By averaging
Unit cost is used to compute costs for:
Goods transferred out
Goods remaining in work-in-process

26. FIFO Method
Separates work and costs for the equivalent units in beginning inventory from work and costs of the equivalent units produced during the current period
Only current work and costs are used to calculate this period’s unit cost

27. OBJECTIVE  3
Prepare a departmental production report using the weighted average method

28. Preparing a Weighted Average Production Report
Step 1: Physical Flow Analysis
Trace the physical units of production
Two amounts are computed
Units Started and Completed
(Units Completed minus Units in BWIP)
Units Started
(Add Units Started and Completed plus EWIP)

29. Preparing a Weighted Average Production Report
Step 2: Calculation of Equivalent Units
Adding together
Units Completed
Units in Ending Work In Process × Fraction Complete
Beginning Inventory
Included in the units completed
Treats beginning inventory as if it was started and completed the current period

30. Preparing a Weighted Average Production Report
Step 3: Computation of Unit Cost
Manufacturing Costs ÷ Equivalent Unit
Costs include:
Prior period costs associated with beginning work-in-process
Current period manufacturing costs

31. Preparing a Weighted Average Production Report
Step 4: Valuation of Inventories
Computing cost of goods transferred out
Multiplying
Unit cost (computed in step #3)
Units completed (computed in step #1)
Computing cost of ending work in process
Equivalent units (computed in step #2)

32. Cornerstones 6-4, 6-5, and 6-6 will walk us through an example
Preparing a Weighted Average Production Report
Step 5: Cost Reconciliation
Checks to see if:
Costs to account for
Beginning Work In Process + Costs incurred during the period
Equal
Costs assigned to inventory
Transferred out + Ending Work-In-Process
Cornerstones 6-4, 6-5, and 6-6 will walk us through an example

33. Example: Cornerstone 6-4
How to Measure Output and Assign Costs: Weighted Average
Information:
Production:
Units in process, July 1, 75% complete
20,000 litres
Units completed and transferred out
50,000 litres
Units in process, July 31, 25% complete
10,000 litres
Costs:
Work in process, July 1
$3,525
Costs added during July
$10,125

34. Example Required: Calculate an output measure for July
Assign costs to units transferred out and ending work in process using the weighted average method

35. Measuring Output 50,000 units completed this period
Add Units in Beginning WIP to the Units Started and Completed
Started & Completed
BWIP
20,000 +
30,000
50,000 units completed this period

36. Measuring Output Add equivalent units in Ending WIP Units Completed
EWIP
50,000 +
10,000 units (25% complete)
50,000 +
2,500
52,500 equivalent units manufactured this period

37. Assigning Costs Compute Unit Cost Work in process, July 1 $ 3,525
$ 3,525
Costs added during July
10,125
Total costs assigned
$13,650
Unit cost =
$13,650/52,500 equivalent units
Unit cost
$0.26 per equivalent unit =

38. All the manufacturing costs have been assigned
Assigning Costs
Assign Costs to Units
Transferred Out (50,000 units × $0.26)
$13,000
Ending WIP (2,500 equiv. units × $0.26)
650
Total Costs Assigned
$13,650
All the manufacturing costs have been assigned

39. Example: Cornerstone 6-5
How to Prepare a Physical Flow Schedule
Information:
Production:
Units in process, July 1, 75% complete
20,000 litres
Units completed and transferred out
50,000 litres
Units in process, July 31, 25% complete
10,000 litres
Required:
Prepare a physical flow schedule

40. Physical Flow Schedule
Units to account for:
Units in beginning work in process (75% complete)
20,000
Units started during the period
This needs to be computed
6-40

41. Units Started and Completed
Units completed –
Units, BWIP =
Units started and completed =
50,000 –
20,000
Units started and completed =
30,000

42. Units started and completed= +
Units, EWIP
Units started =
30,000 +
10,000
Units started =
40,000

43. Physical Flow Schedule
Units to account for:
Units in beginning work in process (75% complete)
20,000
Units started during the period
40,000
Total units to account for
60,000

44. Physical Flow Schedule continued
Units accounted for:
Units completed and transferred out:
Started and completed
30,000
From beginning work in process
20,000
50,000
Units in ending work in process (25% complete)
10,000
Total units accounted for
60,000
All the units “to be accounted for” have been “accounted for”

45. Now we need to calculate the unit cost
Example
Calculation of Equivalent Units
Units completed
50,000
10,000 × 25%
Add: Units in ending work in process × fraction complete
2,500
Equivalent units of output
52,500
Now we need to calculate the unit cost
50,000:This is the beginning work in process + the started and completed units.
+2,500 = 52,500 (Now we need to calculate the unit cost)

46. Example Computation of Unit Cost Work in process, July 1 $ 3,525
$ 3,525
Costs added during July
10,125
Total manufacturing costs for July
$13,650
Unit cost =
$13,650/52,500
Unit cost =
$0.26 per equivalent unit

47. Example Cost Reconciliation
50,000 units × $0.26
Total manufacturing costs assigned to inventories are as follows:
Goods transferred out
$13,000
Goods in ending work in process
650
It reconciles!! Costs assigned = Costs to account for
Total costs accounted for
$13,650
2,500 units × $0.26

48. Example: Cornerstone 6-6
How to Prepare a Production Report: Weighted Average Method
Information:
Calculations in Cornerstones 6-4 & 6-5
Required:
Prepare a production report

49. Production Report for July 2011
Healthblend Company
Picking Department
Production Report for July 2011
Unit Information
Physical Flow
Units To Account For:
Units Accounted For:
Units in Beg. WIP
20,000
Units completed
50,000
Units started
40,000
Units in End. WIP
10,000
Total units to account for
Total units accounted for
60,000
60,000
Equivalent Units
Units completed
50,000
Units in EWIP
2,500
Total equivalent units
52,500

50. Production Report for July 2011
Healthblend Company
Picking Department
Production Report for July 2011
(Continued)
Cost Information
Costs to account for:
Beginning Work In Process
$ 3,525
Incurred during the period
10,125
Total costs to account for
$13,650
Cost per equivalent unit $

51. Production Report for July 2011
Healthblend Company
Picking Department
Production Report for July 2011
(Continued)
Transferred Out
Ending WIP
Total
Costs accounted for:
Goods transferred out
$13,000
---
$13,000
Goods in Ending WIP
---
$650
650
Total costs accounted for
$13,000
$650
$13,650

52. Evaluation of the Weighted Average Method
Major benefit of this method is the simplicity
Main disadvantage is reduced accuracy in computing unit costs
If greater accuracy is desired, a company should use the FIFO method to determine unit costs

53. OBJECTIVE  4
Explain how nonuniform inputs and multiple processing departments affect process costing

54. Nonuniform Application of Manufacturing Inputs
In the prior example
Materials, labour and overhead were applied uniformly throughout the process
But often materials is not added uniformly
Instead it is added at the beginning and ending of the process
This leads to separate completion percentages for materials and conversion costs
Separate equivalent units, unit costs and category costs are computed for materials and conversion costs

55. Example: Cornerstone 6-7
How to Calculate Equivalent Units, Unit Costs, and Value Inventories with Nonuniform Inputs
Information:
Production:
Units in process, Sept 1, 50% complete*
10,000
Units completed and transferred out
60,000
Units in process, Sept 30, 40% complete*
20,000
* Percentage complete as to conversion costs

56. Information continued:
Example
Information continued:
Costs:
Work in process, Sept 1:
Materials*
$ 1,600
Conversion costs
200
Total
$ 1,800
Current costs:
Materials*
$12,000
Conversion costs
3,200
Total
$15,200
* Materials are added at the beginning of the process

57. Example Required: Calculate equivalent units Calculate unit cost
Calculate the valuation of the inventories

58. Example Calculation of Equivalent Units Materials Conversion
Units completed
60,000
60,000
Add: Units in ending work in process × fraction complete
20,000
8,000
20,000 × 40% These units have 40% of their labour and overhead
20,000 × 100% Since these units have all their materials

59. Calculation of Equivalent Units
Example
Calculation of Equivalent Units
Materials
Conversion
Units completed
60,000
60,000
Add: Units in ending work in process × fraction complete
20,000
8,000
Equivalent units of output
80,000
68,000

60. Calculation of Unit Cost
Example
Calculation of Unit Cost
Unit materials cost =
($1,600 + $12,000)/80,000
Unit materials cost =
$0.17
Unit conversion cost =
($200 + $3,200)/68,000
Unit conversion cost =
$0.05
Total unit cost =
$ $0.05
Total unit cost =
$0.22

61. Valuation of Ending Work in Process and Goods Transferred Out
Example
Valuation of Ending Work in Process and Goods Transferred Out
Cost of ending work in process:
Materials $0.17 × 20,000
$3,400
Conversion $0.05 × 8,000
400
Total cost
$3,800
Valuation of goods transferred out:
Cost of goods transferred out
$13,200
$0.22 × 60,000

62. Multiple Departments
Some departments receive partially completed goods from prior departments
Usual approach is to treat transferred-in goods as a separate material category
Cost of this material is the cost of the goods transferred out as computed in the prior department

63. Example: Cornerstone 6-8
How to Calculate the Physical Flow Schedule, Equivalent Units, Unit Costs, and Transferred-In Goods
Information:
For September, Healthblend’s encapsulating dept had:
15,000 units in beginning inventory
With transferred-in costs of $3,000
70,000 units completed during the month
Picking department
Completed and transferred-out
60,000 units at a cost of $13,200

64. Example
Required:
Prepare a physical flow schedule with transferred-in goods
Calculate equivalent units for the transferred-in category
Calculate unit cost for the transferred-in category

65. Physical Flow Schedule
Example
Physical Flow Schedule
Units to account for:
Units in beginning work in process
15,000
Units transferred in during Sept.
60,000
Total units to account for
75,000
6-65

66. Physical Flow Schedule
Example
Physical Flow Schedule
Units accounted for:
Units completed and transferred out:
Started and completed
55,000
From beginning work in process
15,000
Units in ending work in process
5,000
Total units accounted for
75,000

67. Example Equivalent Units for the transferred-in category
Units completed
70,000
Add: Units in ending work in process × fraction complete
5,000 × 100% since these units have all their materials
5,000
Equivalent units of output
70,000

68. Example Calculation of Unit Cost for the Transferred-in Category=
($13,200 + $3,000)/75,000
Unit cost =
$16,200 / 75,000
Unit cost =
$0.216

69. Prepare a departmental production report using the FIFO method
OBJECTIVE  5
Appendix:
Prepare a departmental production report using the FIFO method

70. Production Report FIFO Costing
Separates the cost of BWIP from cost of current period
Review:
Cornerstone 6-9, How to calculate output and cost assignments: FIFO method, page 264; and
Cornerstone 6-10, How to prepare a production report: FIFO method, page 267
This leads to separate completion percentages for materials and conversion costs