6-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

ProcessProcessCostingCosting

66

PowerPresentation® prepared by PowerPresentation® prepared by

David J. McConomy, Queen’s UniversityDavid J. McConomy, Queen’s University

6-2Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Learning ObjectivesLearning Objectives

Describe the basic characteristics and

cost flows associated with process

manufacturing.

Define equivalent units and explain their

role in process costing.

6-3Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Objectives (continued)Learning Objectives (continued)

Prepare a departmental production report using the weighted average method.

Explain how process costing is affected by nonuniform application of manufacturing inputs and the existence of multiple processing departments.

6-4Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Learning Objectives (continued)Learning Objectives (continued)

Prepare a departmental production report

using the FIFO method. (Appendix)

6-5Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Comparison of Job-Order andComparison of Job-Order andProcess CostingProcess Costing

Job-Order Costing Process Costing

1. Wide variety of distinct 1. Homogeneous products

products

2. Cost accumulated by job 2. Costs accumulated by

process or department

3. Unit cost computed by 3. Unit cost computed by

dividing total job costs dividing process costs of

by units produced on that the period by the units

job produced in the period

6-6Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Homogeneous units pass through a series of similar processes.

Each unit in each process receives a similar dose of manufacturing costs.

Manufacturing costs are accumulated for a process for a given period of time.

Characteristics of Process CostingCharacteristics of Process Costing

6-7Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Characteristics of Process Costing Characteristics of Process Costing (continued)(continued)

Manufacturing cost flows and the associated journal entries are generally similar to job-order costing.

The departmental production report is the key document for tracking manufacturing activity and costs.

Unit costs are computed by dividing the departmental costs of the period by the output for the period.

6-8Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

UnitsStarted

Work inProcess

Units inEWIP

Units Completed

Units inBWIP

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 UnitsThe Concept of Equivalent Units

6-9Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

The Concept of Equivalent Units The Concept of Equivalent Units (continued)(continued)

Equivalent Units Calculation: Direct Materials Conversion CostsUnits Completed 9,500 9,500Ending WIP Inventory 500 750Total Units Processed *10,000 *10,250Less beginning WIP Inventory 200 600Units 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)

6-10Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

A Cost AnalysisA Cost Analysis

Cost ofUnits Started

Work inProcess

Costs addedto EWIP

Cost of Units Completed

Cost addedto 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

6-11Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Steps for Preparing aSteps for Preparing aProduction ReportProduction 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

6-12Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Weighted Average CostingWeighted Average Costing

Step 1- Physical Flow Analysis

Units to account for: Units accounted for: Units, BWIP 20,000 Units, Completed 50,000 Units, Started 40,000 Units, EWIP 10,000

Total 60,000 Total 60,000

===== =====

6-13Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Weighted Average Costing (continued)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

=====

6-14Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Weighted Average Costing (continued)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

=======

6-15Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Weighted Average Costing (continued)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

========

6-16Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Weighted Average Costing (continued)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

=======

6-17Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Nonuniform Inputs: ExampleNonuniform Inputs: Example

Materials are added at the beginning of the process.

Units in process, Sept 1, 50% complete 10,000

Units started in September 70,000

Units completed and transferred out 60,000

Units in process, Sept 30, 40% complete 20,000

Costs: BWIP Cost Current Cost

Materials $1,600 $12,000

Conversion Costs 200 3,200

6-18Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(continued)

Step 1 - Physical Flow Analysis:

Units to account for:

Units, BWIP 10,000

Units started 70,000

Total 80,000

=====

Units accounted for:

Units completed 60,000

Units, EWIP 20,000

Total 80,000

=====

6-19Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(continued)

Step 2 - Calculation of Equivalent units (Weighted Average):

MaterialsConversion

Units completed 60,00060,000

EWIP 20,000 8,000

Total Equivalent Units 80,00068,000

==========

6-20Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(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

6-21Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(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 =======

6-22Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(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======

6-23Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

FIFO CostingFIFO Costing

Step 1- Physical Flow Analysis

Units to account for: Units accounted for: Units, BWIP 20,000 Units, Completed 50,000 Units, Started 40,000 Units, EWIP 10,000

Total 60,000 Total 60,000

===== =====

6-24Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

FIFO Costing (continued)FIFO Costing (continued)

Step 2 - Calculation of Equivalent Units

Units

Units started and completed 30,000

Units in Beginning WIP x fraction to be completed 5,000

Units in Ending WIP x fraction 2,500

Total Equivalent Units 37,500

=====

6-25Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

FIFO Costing (continued)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

=======

6-26Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

FIFO Costing (continued)FIFO Costing (continued)

Step 4 - Valuation of Inventories

Trans. Out EWIPTotal

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

======= =============

6-27Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

FIFO Costing (continued)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

=======