1. 6-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Process Costing 6 PowerPresentation® prepared by David J. McConomy, Queen’s University

2. 6-2 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Learning Objectives l Describe the basic characteristics and cost flows associated with process manufacturing. l Define equivalent units and explain their role in process costing.

3. 6-3 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Learning Objectives (continued) l Prepare a departmental production report using the weighted average method. l Explain how process costing is affected by nonuniform application of manufacturing inputs and the existence of multiple processing departments.

4. 6-4 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Learning Objectives (continued) l Prepare a departmental production report using the FIFO method. (Appendix)

5. 6-5 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Comparison of Job-Order and Process Costing Job-Order CostingProcess Costing 1.Wide variety of distinct1.Homogeneous products products 2.Cost accumulated by job2.Costs accumulated by process or department 3.Unit cost computed by 3.Unit cost computed by dividing total job costs dividing process costs ofby units produced on that the period by the unitsjob produced in the period

6. 6-6 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. l Homogeneous units pass through a series of similar processes. l Each unit in each process receives a similar dose of manufacturing costs. l Manufacturing costs are accumulated for a process for a given period of time. Characteristics of Process Costing

7. 6-7 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Characteristics of Process Costing (continued) l Manufacturing cost flows and the associated journal entries are generally similar to job-order costing. l The departmental production report is the key document for tracking manufacturing activity and costs. l Unit costs are computed by dividing the departmental costs of the period by the output for the period.

8. 6-8 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Units Started Work in Process Units in EWIP Units Completed Units in BWIP 1,000 units - 20% of materials added; 60% of conversion costs added 10,000 units; 1,500 units - 33% of materials added; 50% of conversion costs added 9,500 units Units to account for = Units accounted for Units in BWIP + Units Started = Units in EWIP + Units Completed 1,000 + 10,000 = 1,500 + 9,500 The Concept of Equivalent Units The Concept of Equivalent Units

9. 6-9 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. The Concept of Equivalent Units (continued) Equivalent Units Calculation: Direct MaterialsConversion Costs Units Completed 9,5009,500 Ending WIP Inventory 500 750 Total Units Processed *10,000*10,250 Less beginning WIP Inventory 200 600 Units Processed This Period **9,800**9,650==== *Equivalent units for weighted average (total units worked on) ** Equivalent units for FIFO (units worked on this period)

10. 6-10 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. A Cost Analysis A Cost Analysis Cost of Units Started Work in Process Costs added to EWIP Cost of Units Completed Cost added to BWIP 1,000 units - $5,000 materials added; $10,000 conversion costs added 10,000 units; $23,000 material added; $120,175 conversion cost added 1,500 units - $8,000 materials added; $13,000 conversion costs added 9,500 units Costs to account for = Costs accounted for $158,175 = $158,175

11. 6-11 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Steps for Preparing a Production Report 1.Analysis of the flow of physical units 2.Calculation of equivalent units 3.Computation of unit cost 4.Valuation of inventories (goods transferred out and ending work in process) 5.Cost reconciliation

12. 6-12 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Weighted Average Costing Step 1- Physical Flow Analysis Units to account for:Units accounted for: Units, BWIP 20,000 Units, Completed50,000 Units, Started40,000 Units, EWIP10,000 Total60,000 Total60,000=====

13. 6-13 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Weighted Average Costing (continued) Step 2 - Calculation of Equivalent Units Units Completed 50,000 EWIP (10,000 @ 25%) 2,500 Total Equivalent Units 52,500 =====

14. 6-14 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Weighted Average Costing (continued) Step 3 - Computation of Unit Cost Costs Beginning WIP$ 3,525 Added this period 10,125 Total$ 13,650 Equivalent units  52,500 Unit cost $ 0.26 per equivalent unit =======

15. 6-15 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Weighted Average Costing (continued) Step 4 - Valuation of Inventories Goods Transferred out (50,000 x 0.26) $13,000 EWIP Materials (2,500 x $0.26) $ 650 $13,650 ========

16. 6-16 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Weighted Average Costing (continued) Step 5 - Cost Reconciliation: Costs to account for: BWIP$ 3,525 Cost added 10,125 $ 13,650 ====== Costs accounted for: Goods Transferred out$13,000 EWIP 650 $13,650 =======

17. 6-17 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Nonuniform Inputs: Example Materials are added at the beginning of the process. Units in process, Sept 1, 50% complete10,000 Units started in September70,000 Units completed and transferred out60,000 Units in process, Sept 30, 40% complete20,000 Costs:BWIP CostCurrent Cost Materials$1,600$12,000 Conversion Costs2003,200

18. 6-18 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Nonuniform Inputs: Example (continued) Step 1 - Physical Flow Analysis: Units to account for: Units, BWIP10,000 Units started 70,000 Total80,000 ===== Units accounted for: Units completed60,000 Units, EWIP 20,000 Total80,000 =====

19. 6-19 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Nonuniform Inputs: Example (continued) Step 2 -Calculation of Equivalent units (Weighted Average): MaterialsConversion Units completed60,00060,000 EWIP 20,000 8,000 Total Equivalent Units80,00068,000=====

20. 6-20 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Nonuniform Inputs: Example (continued) Step 3 - Unit Cost: Materials Conversion Total Beginning WIP $ 1,600 $ 200 $ 1,800 Costs Incurred 12,000 3,200 15,200 Total $13,600 $3,400 $17,000 Equivalent Units 80,000 68,000 Cost per equivalent unit $0.17 $0.05 $0.22

21. 6-21 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Nonuniform Inputs: Example (continued) Step 4 - Valuation of Inventories: Goods Transferred Out: $0.22 x 60,000 = $13,200 ======= ===== Ending Work in Process: ($0.17 x 20,000) + ($0.05 x 8000) = $ 3,800 =======

22. 6-22 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Nonuniform Inputs: Example (continued) Step 5 - Cost Reconciliation: Costs to account for: BWIP $ 1,800 Cost added 13,200 $17,000 ====== Costs accounted for: Goods transferred out$13,200 EWIP 3,800 $17,000 ======

23. 6-23 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. FIFO Costing Step 1- Physical Flow Analysis Units to account for:Units accounted for: Units, BWIP 20,000 Units, Completed50,000 Units, Started40,000 Units, EWIP10,000 Total60,000 Total60,000=====

24. 6-24 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. FIFO Costing (continued) Step 2 - Calculation of Equivalent Units Units Units started and completed 30,000 Units in Beginning WIP x fraction to be completed5,000 Units in Ending WIP x fraction 2,500 Total Equivalent Units 37,500 =====

25. 6-25 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. FIFO Costing (continued) Step 3 - Computation of Unit Cost Costs Beginning WIP N/A Added this period 10,125 Total$ 10,125 Added this period $ 10,125 Equivalent units  37,500 Unit cost$ 0.27 =======

26. 6-26 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. FIFO Costing (continued) Step 4 - Valuation of Inventories Trans. OutEWIPTotal Units in BWIP: From Prior Period$3,525---$3,525 From Current Period: (5,000 x $0.27)1,350---1,350 Units Started and Completed (30,000 x $0.27)8,100---8,100 Units in EWIP (2,500 x $0.27) --- 675 675 Total Costs accounted for$ 12,975$ 675$ 13,650 ====================

27. 6-27 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. FIFO Costing (continued) Step 5 - Cost Reconciliation: Cost to account for: BWIP$ 3,525 Cost added 10,125 $13,650 ====== Cost accounted for: Goods transferred out—Opening WIP$4,875 ---Started and Completed 8,100 EWIP 675 $13,650 =======