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Page 1: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

11th EditionChapter 4

Page 2: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Chapter Four

Systems Design:Process Costing

Page 3: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Similarities Between Job-Order and Process Costing

• Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost.

• Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.

• The flow of costs through the manufacturing accounts is basically the same in both systems.

Page 4: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Differences Between Job-Order and Process Costing

• Process costing is used when a single product is produced on Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order a continuing basis or for a long period of time. Job-order costing is used when many different jobs are worked on each costing is used when many different jobs are worked on each period.period.

• Process costing systems accumulate costs by department. Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual Job-order costing systems accumulated costs by individual jobs.jobs.

• Process costing systems use department production reports to Process costing systems use department production reports to accumulate costs. Job-order costing systems use job cost accumulate costs. Job-order costing systems use job cost sheets to accumulate costs.sheets to accumulate costs.

• Process costing systems compute unit costs by department. Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job.Job-order costing systems compute unit costs by job.

Page 5: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process costing is used for products that are:a. Different and produced continuously.b. Similar and produced continuously.c. Individual units produced to customer specifications.d. Purchased from vendors.

Quick Check

Page 6: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process costing is used for products that are:a. Different and produced continuously.b. Similar and produced continuously.c. Individual units produced to customer specifications.d. Purchased from vendors.

Quick Check

Page 7: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

What is a Processing Department?

Any location in an organization where materials, labor or overhead are added to the product.

The activities performed in a processingThe activities performed in a processingdepartment are department are performed uniformlyperformed uniformly on all on all

units of production. Furthermore, the output ofunits of production. Furthermore, the output ofa processing department must bea processing department must be

homogeneoushomogeneous..

Page 8: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Sequential vs. Parallel Processing

Sequential processing means that unitsSequential processing means that unitsflow in a sequence from oneflow in a sequence from one

department to another.department to another.

Parallel processing is used whenParallel processing is used whenafter a point, some units go throughafter a point, some units go throughdifferent processing departments different processing departments

than others. For example, athan others. For example, apetroleum refinery separates crudepetroleum refinery separates crude

oil into products like gasoline, jetoil into products like gasoline, jetfuel, and heating oil.fuel, and heating oil.

Page 9: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Comparing Job-Orderand Process Costing

FinishedGoods

Cost of GoodsSold

Work inProcess

Direct Materials

Direct Labor

ManufacturingOverhead

Page 10: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Comparing Job-Orderand Process Costing

FinishedGoods

Cost of GoodsSold

Direct Labor

ManufacturingOverhead

Jobs

Costs are traced andapplied to individualjobs in a job-order

cost system.Direct

Materials

Page 11: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Comparing Job-Orderand Process Costing

FinishedGoods

Cost of GoodsSold

Direct Labor

ManufacturingOverhead

ProcessingDepartment

Costs are traced and applied to departments

in a process cost system.

Direct Materials

Page 12: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

T-Account and Journal Entry Views of Cost Flows

For purposes of this example, assume there are two

processing departments – Departments A and B.

We will use T-accounts and journal entries.

Page 13: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Raw Materials

Process Cost Flows(in T-account form)

Work in Process Department B

Work in Process Department A

•DirectMaterials

•Direct Materials

•Direct Materials

Page 14: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Cost Flows(in journal entry form)

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department A XXXXXWork in Process - Department B XXXXX

Raw Materials XXXXXTo record the use of direct material.

Page 15: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Cost Flows(in T-account form)

Work in Process Department B

Work in Process Department A Wages Payable

•Direct Materials

•Direct Materials

•Direct Labor

•Direct Labor •Direct

Labor

Page 16: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Costing(in journal entry form)

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department A XXXXXWork in Process - Department B XXXXX

Salaries and Wages Payable XXXXXTo record direct labor costs.

Page 17: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Cost Flows(in T-account form)

Work in Process Department B

Work in Process Department A

Manufacturing Overhead

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•Direct Labor

•Direct Materials

•Direct Labor

•Direct Materials

•Actual Overhead

Page 18: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Costing(In journal entry form)

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department A XXXXXWork in Process - Department B XXXXX

Manufacturing Overhead XXXXXTo apply overhead to departments.

Page 19: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Cost Flows(in T-account form)

Work in Process Department B

Work in ProcessDepartment A

•Direct Materials

•Direct Labor

•AppliedOverhead

•Direct Materials

•Direct Labor

•AppliedOverhead

Transferred to Dept. B

•Transferred from Dept. A

Page 20: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Costing(in journal entry form)

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department B XXXXXWork in Process - Department A XXXXX

To record the transfer of goods fromDepartment A to Department B.

Page 21: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Finished Goods

Process Cost Flows(in T-account form)

Work in Process Department B

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of Goods

Manufactured

Page 22: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Costing(in journal entry form)

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Finished Goods XXXXXWork in Process - Department B XXXXX

To record the completion of goodsand their transfer from Department Bto finished goods inventory.

Page 23: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Finished Goods

Cost of Goods Sold

Process Cost Flows(in journal entry form)

Work in Process Department B

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of GoodsSold

•Cost of GoodsSold

•Cost of Goods

Manufactured

Page 24: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Costing(in journal entry form)

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Accounts Receivable XXXXXSales XXXXX

To record sales on account.

Cost of Goods Sold XXXXXFinished Goods XXXXX

To record cost of goods sold.

Page 25: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Equivalent Units of Production

Equivalent units are the product of the number of partially completed units and the percentage

completion of those units.

We need to calculate equivalent units because a department usually has some partially completed units

in its beginning and ending inventory.

Page 26: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Equivalent Units – The Basic Idea

Two half completed products are equivalent to one completed product.

So, 10,000 units 70% completeare equivalent to 7,000 complete units.

+ = 1

Page 27: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

Quick Check

Page 28: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

10,000 units + (5,000 units × 0.30) = 11,500 equivalent units

Quick Check

Page 29: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Calculating Equivalent Units

Equivalent units can be calculated two Equivalent units can be calculated two ways:ways:

The First-In, First-Out Method – The First-In, First-Out Method – FIFO is FIFO is covered in the appendix to this chapter.covered in the appendix to this chapter.

The Weighted-Average Method – The Weighted-Average Method – This This method will be covered in the main portion of the method will be covered in the main portion of the chapter.chapter.

Page 30: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Equivalent Units of ProductionWeighted-Average Method

Cost perequivalent

unit

=Costs for the period

Equivalent units of productionfor the period

The weighted-average method . . .

•Makes no distinction between work done in prior or current periods.

•Blends together units and costs from prior and current periods.

Page 31: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Costing and Direct Labor

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

DirectMaterials

Type of Product Cost

Dol

lar A

mou

nt

DirectLabor

Conversion

Page 32: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Process Costing and Direct Labor

Type of Product Cost

Dol

lar A

mou

nt

Conversion

Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may becombined into one product cost called combined into one product cost called conversionconversion..

DirectMaterials Direct labor costs

may be smallin comparison to

other productcosts in process

cost systems.

Page 33: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Weighted-Average Example

Smith Company reported the following activity in Department A for the month of June:

Percent CompletedUnits Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June

Work in process, June 30 900 60% 30%

Page 34: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

The first step in calculating the equivalent units is to identify the units completed and transferred

out of Department A in June (5,400 units)

Weighted-Average Example

Materials ConversionUnits completed and transferred out of Department A in June 5,400 5,400

Page 35: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

The second step is to identify the equivalent units of production in ending work in process with respect to

materials for the month (540 units) and add this to the 5,400 units from step one.

Weighted-Average Example

Materials ConversionUnits completed and transferred out of Department A in June 5,400 5,400 Work in process, June 30:

900 units × 60% 540

Equivalent units of Production in Department A during June 5,940

Page 36: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Weighted-Average Example

Materials ConversionUnits completed and transferred out of Department A in June 5,400 5,400 Work in process, June 30:

900 units × 60% 540 900 units × 30% 270 Equivalent units of Production in Department A during June 5,940 5,670

The third step is to identify the equivalent units of production in ending work in process with respect to

conversion for the month (270 units) and add this to the 5,400 units from step one.

Page 37: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Materials ConversionUnits completed and transferred out of Department A in June 5,400 5,400 Work in process, June 30:

900 units × 60% 540 900 units × 30% 270 Equivalent units of Production in Department A during June 5,940 5,670

Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process

Weighted-Average Example

Page 38: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

BeginningWork in Process

300 Units40% Complete

EndingWork in Process

900 Units60% Complete

6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed

Weighted-Average Example

Materials

5,400 Units Completed 540 Equivalent Units 900 × 60%5,940 Equivalent units of production

Page 39: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed

270 Equivalent Units 900 × 30%

5,670 Equivalent units of production

BeginningWork in Process

300 Units20% Complete

EndingWork in Process

900 Units30% Complete

Weighted-Average Example

Conversion

Page 40: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Production Report – Weighted-Average

A computation ofA computation ofcost per equivalent unit. cost per equivalent unit.

Section 1

Section 2

Section 3

Production Report A quantity schedule A quantity schedule showing the flow of units showing the flow of units and the computation of and the computation of

equivalent units.equivalent units.

Page 41: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Production Report

Cost Reconciliation section shows the reconciliation of all cost flows into and out of the department during the period.

Section 1

Section 2

Section 3

Production Report

Page 42: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Assume that Double Diamond Skis uses the weighted-average method of process costing to determine unit costs in it Shaping and Milling Department.

Production Report Example

Page 43: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Work in process, May 1: 200 units

Materials: 55% complete $ 9,600Conversion: 30% complete 5,575

Production started during May 5,000 unitsProduction completed during May 4,800

units

Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900

Work in process, May 31 400 unitsMaterials: 40% completeConversion: 25% complete

Production Report Example

Page 44: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Step1: Prepare Quantity Schedule with Equivalent Units.

Production Report Example

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400

Page 45: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Production Report Example

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160

5,200 4,960

Step1: Prepare Quantity Schedule with Equivalent Units.

Page 46: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Production Report Example

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100

5,200 4,960 4,900

Step1: Prepare Quantity Schedule with Equivalent Units.

Page 47: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Step 2: Calculating the Costs Per Equivalent Unit

To calculate the cost per equivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units of productionfor the period

Page 48: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Step 2: Compute the cost per equivalent unit.

Production Report Example

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900 Cost per equivalent unit

Page 49: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900 Cost per equivalent unit 76.25$

Production Report Example

Step 2: Compute the cost per equivalent unit.

$378,200 ÷ 4,960 units = $76.25

Page 50: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900 Cost per equivalent unit 76.25$ 72.75$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00

Production Report Example

$356,475 ÷ 4,900 units = $72.75$356,475 ÷ 4,900 units = $72.75

Step 2: Compute the cost per equivalent unit.

Page 51: Managerial Accounting Garrison Noreen Brewer Chapter 04

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Step 3: Prepare a Cost Reconciliation

Production Report Example

Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100 Total work in process, May 31Total cost accounted for

Page 52: Managerial Accounting Garrison Noreen Brewer Chapter 04

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Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100 Total work in process, May 31Total cost accounted for

4,800 units @ $149.00

Production Report Example

Step 3: Prepare a Cost Reconciliation

Page 53: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 12,200 160 Conversion 7,275 100 Total work in process, May 31 19,475 Total cost accounted for 734,675$

Production Report Example

160 units @ $76.25

Step 3: Prepare a Cost Reconciliation

All costs accounted for

100 units @ $72.75

Page 54: Managerial Accounting Garrison Noreen Brewer Chapter 04

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Operation Costing

Operation costing is a Operation costing is a hybrid hybrid of job-order of job-order and process costing because it and process costing because it

possesses attributes of both approaches.possesses attributes of both approaches.

Conversion costsassigned to batches

as in process costing.

Material Costs chargedto batches as in

job-order costing.

Job-orderCosting

ProcessCosting

Operation Costing(Products produced in batches)

Page 55: Managerial Accounting Garrison Noreen Brewer Chapter 04

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FIFO Method

Appendix 4A

Page 56: Managerial Accounting Garrison Noreen Brewer Chapter 04

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FIFO vs. Weighted-Average Method

The FIFO method (generally considered more accurate that the weighted-average method) differs from the weighted-average method in two ways:

1.1. The computation of equivalent units.The computation of equivalent units.

2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated in the cost inventory are treated in the cost reconciliation report.reconciliation report.

Page 57: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Equivalent Units – FIFO Method

Let’s revisit the Smith Company example. Assume the following activity is reported in Department A for the month of June:

Percent CompletedUnits Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June

Work in process, June 30 900 60% 30%

Page 58: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Equivalent Units – FIFO Method

Percent CompletedUnits Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June

Work in process, June 30 900 60% 30%

Step 1Step 1: Determine the number of units completed and transferred out of Department A in June.

Page 59: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Equivalent Units – FIFO Method

Materials Conversion

Units completed and transferred out of Department A in June 5,400 5,400 Work in process, June 30:

900 units × 60% 540 900 units × 30% 270

Equivalent units of Production in Department A during June 5,940 5,670

Step 2Step 2: Add the equivalent units of production in ending work in process inventory (540 units for material and 270

units for conversion) to the units completed and transferred our during June.

Page 60: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Equivalent Units – FIFO Method

Materials Conversion

Equivalent units or Production in Department A during June 5,940 5,670 Equivalent units in beginning inventory

300 units × 40% 120 300 units × 20% 60

Equivalent units of Production in Department A during June 5,820 5,610

Step 3Step 3: Subtract the equivalent units in beginning work in process inventory (120 units for materials and 60 units for conversion) from the

sum of the units completed and transferred out and the equivalent units in ending work in process inventory.

Page 61: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

BeginningWork in Process

300 Units40% Complete

EndingEndingWork in ProcessWork in Process

900 Units900 Units60% Complete60% Complete

6,000 Units Started

5,400 Units Startedand Completed

Equivalent Units – FIFO Method

Materials

Material Units completed and transferred out 5,400 Equivalent units in ending WIP inventory 540 Equivalent units in beginning WIP inventory (120) Equivalent units of production 5,820

Page 62: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

6,000 Units Started

5,400 Units Startedand Completed

BeginningWork in Process

300 Units20% Complete

EndingWork in Process

900 Units30% Complete

Equivalent Units – FIFO Method

Conversion

Conversion Units completed and transferred out 5,400 Equivalent units in ending WIP inventory 270 Equivalent units in beginning WIP inventory (60) Equivalent units of production 5,610

Page 63: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Equivalent Units: Weighted Average vs. FIFO

Materials ConversionEquivalent units - weighted average method 5,940 5,670Less equivalent units in beginning inventory: 300 units × 40% 120 300 units × 20% 60 Equivalent units - FIFO method 5,820 5,610

As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of production under

the FIFO method.

Page 64: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

The Production Report - FIFO Method

Let’s revisit the Double Diamond Skis Shaping and Milling Department for the Month of May to prepare our production report.

Work in process, May 1: 200 units

Materials: 55% complete $ 9,600Conversion: 30% complete 5,575

$15, 175

Production started during May 5,000 unitsProduction completed during May 4,800 units

Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900

Work in process, May 31 400 unitsMaterials: 40% completeConversion: 25% complete

Page 65: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

The Production Report - FIFO Method

Step 1Step 1: Prepare the quantity schedule and compute equivalent units.

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840

Page 66: Managerial Accounting Garrison Noreen Brewer Chapter 04

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The Production Report - FIFO Method

Step 2Step 2: Calculate the equivalent units of material and conversion that were transferred from beginning work in process to the next

department.

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840

Page 67: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

The Production Report - FIFO Method

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840

Step 3Step 3: Determine the number of units started and completed during the period.

Page 68: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

The Production Report - FIFO Method

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840

Step 4Step 4: Calculate the equivalent units of material and conversion that are in ending work in process inventory.

Page 69: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

The Production Report - FIFO Method

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent units Units accounted for as follows: Materials Conversion Beginning inventory: Materials 200 units × 45% 90 Conversion 200 units × 70% 140 Units started and completed 4,600 4,600 Ending inventory: Materials 400 units × 40% 160 Conversion 400 units × 25% 100 Total equivalent units 4,850 4,840

Step 5Step 5: Calculate the total equivalent units for materials and conversion.

Page 70: Managerial Accounting Garrison Noreen Brewer Chapter 04

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Cost per Equivalent Unit

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 368,600$ 350,900$

Equivalent units 4,960 4,900 Cost per equivalent unit 74.31$ 71.61$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00

Notice that the costs of beginning work in process inventory of $15,175, is notnot broken down by materials and conversion components

Page 71: Managerial Accounting Garrison Noreen Brewer Chapter 04

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Cost per Equivalent Unit

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 368,600$ 350,900$

Equivalent units 4,850 4,900 Cost per equivalent unit 76.00$ 71.61$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00

We divide the costs added in the Shipping and Milling Department by the number of equivalent unit for materials.

Page 72: Managerial Accounting Garrison Noreen Brewer Chapter 04

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Cost per Equivalent Unit

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 368,600$ 350,900$

Equivalent units 4,850 4,840 Cost per equivalent unit 76.00$ 72.50$ Total cost per equivalent unit = $76.00 + $72.50 = $148.50

We follow the same procedure for conversion and add the two equivalent unit costs to get the total cost per equivalent unit.

Page 73: Managerial Accounting Garrison Noreen Brewer Chapter 04

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Cost Reconciliation

Total Equivalent UnitsCost Materials Conversion

Work in process, May 1: 15,175$ Materials (90 × $76.00) 6,840 90 Conversion (140 × $72.50) 10,150 140 Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31: Materials (160 × $76.00) 12,160 160 Conversion (100 × $72.50) 7,250 100 Total 19,410 Total cost accounted for 734,675$

Step 1Step 1: Calculate the total cost from beginning inventory transferred to the next department.

Page 74: Managerial Accounting Garrison Noreen Brewer Chapter 04

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Cost Reconciliation

Total Equivalent UnitsCost Materials Conversion

Work in process, May 1: 15,175$ Materials (90 × $76.00) 6,840 90 Conversion (140 × $72.50) 10,150 140 Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31: Materials (160 × $76.00) 12,160 160 Conversion (100 × $72.50) 7,250 100 Total 19,410 Total cost accounted for 734,675$

4,600 units × $148.50

Step 2Step 2: Calculate the cost of units started and completed during the period.

Page 75: Managerial Accounting Garrison Noreen Brewer Chapter 04

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Total Equivalent UnitsCost Materials Conversion

Work in process, May 1: 15,175$ Materials (90 × $76.00) 6,840 90 Conversion (140 × $72.50) 10,150 140 Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31: Materials (160 × $76.00) 12,160 160 Conversion (100 × $72.50) 7,250 100 Total 19,410 Total cost accounted for 734,675$

Cost Reconciliation

All costs accounted for

Step 3Step 3: Calculate the costs in ending working in process inventory and the sum of the cost accounted for.

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End of Chapter 4