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Process Costing Sample

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									      Cost Management
Measuring, Monitoring, and Motivating Performance


                   Chapter 6
               Process Costing




                  Chapter 6: Process Costing        Slide # 1
                Chapter 6: Process Costing

Learning objectives
•   Q1: How are costs assigned to mass-produced products?
•   Q2: What are equivalent units & how do they relate to the
    production process?
•   Q3: How is the weighted average method used in process
    costing?
•   Q4: How is the FIFO method used in process costing?
•   Q5: What alternative methods are used for mass production?
•   Q6: How is process costing performed for multiple production
    departments?
•   Q7: How are spoilage costs handled in process costing?
•   Q8: What are the uses and limitations of process cost
    information?
                           Chapter 6: Process Costing              Slide # 2
      Q1: Job Costing versus Process Costing

• Job costing is best used when products can be
  distinguished from one another.


• Process costing is best used when similar products
  are mass produced.


• In many companies, hybrid costing systems are
  used that include characteristics of both job and
  process costing.


                     Chapter 6: Process Costing       Slide # 3
 Q1: Job Costing versus Process Costing

                 Job Costing                      Process Costing

Operations         Discrete                         Continuous


Product          Fewer units                        Many units


Units         Readily identifiable                   Fungible


                                                    Processing
Cost object      Job or batch
                                                    department
                                                  Same as the # of
# of WIP
                     One                             processing
accounts
                                                    departments

                     Chapter 6: Process Costing                      Slide # 4
        Q1: Job Order versus Process Costing

           JOB ORDER COSTING (if all materials are direct)
 Raw Materials Inv Control WIP Inv Control               FG Inv Control
   BI                    BI                             BI
   DM        DM          DM Used
                                    CGM                 CGM        CGS
   Purch     Used        DL
                         Overhead
   EI                     EI                            EI

           PROCESS COSTING (if all materials are direct)
Raw Materials Inv WIP Inv Dep’t 1          WIP Inv Dep’t 2     FG Inventory
BI               BI                       BI                  BI
DM               DM Used    To            DM Used             CGM
      DM Used                                                            CGS
Purch DM Used ConCosts Dep’t              ConCosts CGM
                             2            Tr-in Costs
EI                EI                        EI                EI
                           Chapter 6: Process Costing                     Slide # 5
Q1: Steps for Preparing a Process Costing Report:

1. Summarize total costs to account for.

2. Summarize total physical and equivalent units.

3. Compute cost per equivalent unit.

4. Account for cost of units completed and cost of
    ending WIP.




                      Chapter 6: Process Costing     Slide # 6
   Q1: Process Costing with all Units Completed

Riker Co. had June costs for Department 1 as follows:
   DM      $60,000
   CC       30,000
           $90,000
There were no units in beginning or ending WIP inventory in June.
During June Department 1 started 45,000 units, and all 45,000
were completed in June. What is the manufacturing cost/unit?

     WIP Inventory - Units                       WIP Inventory - $
        0                                          0
     45,000     45,000                          90,000    90,000
        0                                          0
The manufacturing cost/unit is $90,000/45,000 units = $2/unit


                          Chapter 6: Process Costing                 Slide # 7
Q1: Process Costing with Some Units Completed

Suppose instead that 30,000 units were completed in June. Can
you compute the manufacturing cost/unit? If not, what
information do you need?
 WIP Inventory - Units                       WIP Inventory - $
   0                                          0
 45,000     45,000                          90,000    90,000
   0                                          0




                         Chapter 6: Process Costing              Slide # 8
          Q2: The Concept of Equivalent Units

 In order to value partially complete units of inventory, we
 measure units in equivalent whole units rather than actual units.
Suppose that 30,000 units were completed in June, and the units in
ending WIP were 1/3 complete. What is the manufacturing cost/unit?
    WIP Inventory - Units                       WIP Inventory - $
       0                                          0
    45,000     30,000                          90,000
    15,000
   The 15,000 units taken to 1/3 completion are counted as 5,000
equivalent whole units, or 5,000 equivalent units of production (EUP).




                            Chapter 6: Process Costing              Slide # 9
          Q2: The Concept of Equivalent Units

Using the cost/EUP of $2.57143 from the prior slide, compute the costs
attached to the 30,000 completed units and the costs attached to the
15,000 units in ending WIP inventory.

    WIP Inventory - Units                       WIP Inventory - $
       0                                         0
    45,000     30,000                          90,000
    15,000




                             Chapter 6: Process Costing                  Slide # 10
              Q2-Q4: Equivalent Units &
              Process Costing Methods

• Equivalent Units: Approximation of the number of
  whole units of output that could have been
  produced from the actual effort expended.
• Includes units
   • started last period and finished this period
   • started and finished this period
   • started this period and not finished.
• When there is beginning Work In Process
  inventory, there are two different methods of
  computing EUP.
   • The weighted average method and FIFO method

                         Chapter 6: Process Costing   Slide # 11
        Q2-Q4: Three Categories of Units

In process costing we categorize units according to the time
               period(s) they were produced.

   Prior month         Current month                   Next month



    BI units: The units in                    EI units: The units in
 beginning Work in process                  ending Work in process
 inventory were worked on                  inventory are started (we
   in prior month and (we                    assume) in the current
    assume) they will be                    month and (we assume)
  completed in the current                 they will be completed in
            month.                                next month.
                        Chapter 6: Process Costing                     Slide # 12
        Q2-Q4: Three Categories of Units

In process costing we categorize units according to the time
               period(s) they were produced.

   Prior months         Current month                Next month



    S&C units: Any units that are started in the current
     month and are totally complete by month end are
           called started & completed units.




                        Chapter 6: Process Costing                Slide # 13
              Q2-Q4: Summarizing the
             Physical Flow of Production
The number of S&C units can be computed as the number of
      units transferred out less the number of BI units.
   For example, suppose a department had 5,000 units in
beginning WIP and started 50,000 units this month. If 35,000
  units were completed, what is the number of S&C units?

   WIP Inventory - Units
    5,000                                 BI units         5,000
   50,000     35,000                      S&C units       30,000
   20,000                                 Completed units 35,000




                        Chapter 6: Process Costing                 Slide # 14
      Q2-Q4: Two Process Costing Methods

The weighted average and FIFO methods of process costing
methods compute EUP differently.

   Prior months       Current month                 Next month



   The weighted average                  This means that under the
 (WA) method gives credit                 WA method, the EUP for
 for work performed in the                BI units and S&C units is
  current & prior months.                 the same as the physical
                                           number of units in each
                                                   category.

                       Chapter 6: Process Costing                     Slide # 15
      Q2-Q4: Two Process Costing Methods

The weighted average and FIFO methods of process costing
methods compute EUP differently.

   Prior months       Current month                 Next month



   The weighted average                  The EUP for EI units and
 (WA) method gives credit                 is based on the stage of
 for work performed in the               completion of the EI units
  current & prior months.                 – only the portion of the
                                         work done in the current
                                              month is included.

                       Chapter 6: Process Costing                     Slide # 16
      Q2-Q4: Two Process Costing Methods

The weighted average and FIFO methods of process costing
methods compute EUP differently.

   Prior months       Current month                 Next month



       The FIFO method gives credit only for work
            performed in the current month.

This means that the EUP for BI
     units is based on the
   completion of these units
   during the current month.

                       Chapter 6: Process Costing                Slide # 17
      Q2-Q4: Two Process Costing Methods

The weighted average and FIFO methods of process costing
methods compute EUP differently.

   Prior months      Current month                 Next month



       The FIFO method gives credit only for work
            performed in the current month.

                      The EUP for EI units and is based on
                     the stage of completion of the EI units
                      – only the portion of the work done in
                         the current month is included.

                      Chapter 6: Process Costing                Slide # 18
   Q2-Q4: Equivalent Units of Production Example

 In July, Rita Corp. had 30,000 units in beginning WIP that were 60%
 complete and 20,000 units in ending WIP that were 80% complete. There
 were 100,000 units completed and transferred to FG inventory. Compute
 EUP for July using both the weighted average and FIFO methods.


First, summarize the physical flow of the units and compute S&C.

          WIP Inventory - Units
                                                  BI units        30,000
             30,000                               S&C units       70,000
              90,00 100,000
                                                  Completed units100,000
                  0
             20,000




                             Chapter 6: Process Costing                    Slide # 19
  Q2-Q4: Equivalent Units of Production Example

In July, Rita Corp. had 30,000 units in beginning WIP that were 60%
complete and 20,000 units in ending WIP that were 80% complete. There
were 100,000 units completed and transferred to FG inventory. Compute
EUP for July using both the weighted average and FIFO methods.

            Then, convert the physical units to EUP.
 WIP Inventory - Units
                          BI units        30,000
   30,000                 S&C units       70,000
    90,00 100,000
                          Completed units
        0
   20,000

                          Comp-       Start FIFO WA Total
                     BI   lete BI S&C  EI   EUP EUP Units
   Physical units
   Equiv units
                            Chapter 6: Process Costing             Slide # 20
               Q2-Q4: Equivalent Units &
               Process Costing Methods
• The prior slides simplified the computation of EUP
  • 20,000 units started and taken to 80% completion is
    equivalent to 16,000 whole units only if costs are incurred
    evenly.
  • We usually assume that conversion costs are incurred
    evenly throughout production, but direct materials costs
    may not be incurred evenly.
  • Direct materials costs may be incurred at the beginning of
    processing or in some other uneven manner.

  • Separate EUP computations are done for DM & CC.



                         Chapter 6: Process Costing            Slide # 21
            Q2-Q4: Separate EUP for DM & CC

You are given the information below about the physical flow of the units in
Department 1. The BI units were 25% complete and the EI units were 40%
complete. Compute EUP for DM and CC if DM costs are incurred evenly
throughout production.

WIP Inventory - Units
                         BI units         5,000
    5,000                S&C units       12,000
   20,000 17,000         Completed units 17,000
    8,000

                             Comp-      Start FIFO WA Total
                       BI   lete BI S&C  EI   EUP EUP Units
      Physical units
      Equiv units
       DM
       CC

                              Chapter 6: Process Costing                Slide # 22
            Q2-Q4: Separate EUP for DM & CC

You are given the information below about the physical flow of the units in
Department 1. The BI units were 25% complete and the EI units were 40%
complete. Compute EUP for DM and CC if DM costs are incurred at the
beginning of production.

WIP Inventory - Units
                         BI units         5,000
    5,000                S&C units       12,000
   20,000 17,000         Completed units 17,000
    8,000

                             Comp-      Start FIFO WA Total
                       BI   lete BI S&C  EI   EUP EUP Units
      Physical units 5,000       12,000 8,000               25,000
      Equiv units
       DM
       CC            1,250 3,750 12,000 3,200 20,200 18,950

                              Chapter 6: Process Costing                Slide # 23
           Q2-Q4: Separate EUP for DM & CC

Use the same information from the prior slide; recall that the BI units were
25% complete and the EI units were 40% complete. Compute EUP for DM
and CC if 20% of DM costs are incurred at the beginning of processing and
the rest of the DM costs are incurred when the units pass the 60% stage of
completion.

            20% of DM added last mo. when units were started.
 80% of DM added this mo. when units passed 60% stage of completion.
    20% of DM added this mo. when units were started; the rest will be
                           added next mo.
                              Comp-      Start FIFO WA Total
                       BI    lete BI S&C  EI   EUP EUP Units
      Physical units 5,000       12,000 8,000               25,000
      Equiv units
       DM
       CC            1,250 3,750 12,000 3,200 18,950 20,200

                              Chapter 6: Process Costing                 Slide # 24
         Q2-Q4: Cost per Equivalent Unit

• The EUP calculations provide the denominator in
  the cost/EUP computation.
• A cost/EUP is computed for each cost category.

• The WA and FIFO methods use different
  numerators in the cost/EUP computation.
 • The numerator for the WA cost/EUP includes current
   costs plus the costs included in BI.

 • The numerator for the FIFO cost/EUP includes only
   current costs.



                       Chapter 6: Process Costing       Slide # 25
         Q3&4: Process Costing Example, no BI

You are given the information below about May’s production and costs
for Slocik Co. The units in ending WIP were 1/3 complete. Direct
materials are added at the beginning of processing. What is the
manufacturing cost per EUP under both methods?

     WIP Inventory - Units          WIP Inventory - $
       0                                 0
              30,000             DM65,250
     45,000                      CC 28,000
     15,000


          First, compute the EUP for DM & CC.



                             Chapter 6: Process Costing         Slide # 26
   Q3&4: Process Costing Example, no BI

 WIP Inventory - Units                 WIP Inventory - $
   0                                        0
          30,000                    DM65,250
 45,000                             CC 28,000
15,000
          When there is no BI, WA and FIFO
           , and hence the same costs/EUP.

                           Comp-      Start FIFO WA Total
                 BI       lete BI S&C  EI   EUP EUP Units
Physical units        0             30,000 15,000          45,000
Equiv units
 DM
 CC

                           Chapter 6: Process Costing               Slide # 27
     Q3&4: Process Costing Example, no BI

   WIP Inventory - Units           WIP Inventory - $
     0                                  0
            30,000              DM65,250
   45,000                       CC 28,000
   15,000

   Now, compute the costs/EUP for DM & CC.


DM cost/EUP = $65,250/45,000 EUP = $1.45/EUP
CC/EUP         = $28,000/35,000 EUP = 0.80/EUP
Total manufacturing cost/EUP                        $2.25/EUP

                       Chapter 6: Process Costing               Slide # 28
       Q3&4: Process Costing Example, no BI

The last step is a process cost report that breaks the “total
costs to account for” into:
 • the portion that is assigned to the completed units, and
 • the portion that is assigned to the units in ending
   WIP inventory



         WIP Inventory - Units              WIP Inventory - $
           0                                     0
                                         DM65,250       $ assigned to
                  30,000
                                                      completed units
         45,000                          CC 28,000
         15,000                          $ assigned
                                         to EI units

                          Chapter 6: Process Costing                Slide # 29
        Q3&4: Process Costing Example, no BI

                           FIFO & WA are the same when BI = 0
                       Computation           Units            Costs
BI
Cost to complete BI
  DM
  CC
  Total costs added
Total cost of BI
S&C
Total costs tr'd out
EI:
  DM
  CC
Total EI costs
Total acctd for




                            Chapter 6: Process Costing                Slide # 30
       Q3&4: Process Costing Example, with BI

Colors R Us, Inc. uses a process costing system for its sole processing
department. There were 6,200 units in beginning WIP inventory for
February and 57,500 units were started in February. The beginning WIP
units were 60% complete and the 5,000 units in ending WIP were 45%
complete. All materials are added at the start of processing. Compute the
EUP for DM and CC using both methods.


  First, compute the # of units started & completed:
       WIP Inventory - Units
        6,200                          BI units         6,200
       57,500     58,700               S&C units       52,500
                                       Completed units 58,700
        5,000


                              Chapter 6: Process Costing               Slide # 31
   Q3&4: Process Costing Example, with BI
WIP Inventory - Units
 6,200                BI units         6,200
57,500 58,700         S&C units       52,500
                      Completed units 58,700
 5,000
Now, compute the EUP for DM & CC (recall that BI & EI
were 60% & 45% complete, respectively, and all DM are
          added at the start of processing).

                         Comp-      Start FIFO WA Total
                   BI   lete BI S&C  EI   EUP EUP Units
  Physical units
  Equiv units
   DM
   CC

                         Chapter 6: Process Costing       Slide # 32
       Q3&4: Process Costing Example, with BI

Beginning WIP inventory was valued at $42,896 [DM costs of $12,850
plus CC of $30,046]. During February Colors incurred DM costs of
$178,250, and CC of $274,704. Compute the cost of the goods
transferred out the the costs assigned to ending WIP inventory for
February, using both methods.
   WIP Inventory - $                       The EUP from the prior slide:
BI 42,896                                                       WA       FIFO
DM 178,250                                       Equiv units    EUP      EUP
CC 274,704                                        DM           63,700   57,500
                                                  CC           60,950   57,230
  Under FIFO, the numerator includes only current costs:
       DM cost/EUP = $191,100/63,700 EUP = $3.00/EUP
       CC/EUP       = $307,750/60,950 EUP = 5.00/EUP
       Total manufacturing cost/EUP         $8.00/EUP
                          Chapter 6: Process Costing                         Slide # 33
       Q3&4: Process Costing Example, with BI

Beginning WIP inventory was valued at $42,896 [DM costs of $12,850
plus CC of $30,046]. During February Colors incurred DM costs of
$178,250, and CC of $274,704. Compute the cost of the goods
transferred out the the costs assigned to ending WIP inventory for
February, using both methods.
   WIP Inventory - $                       The EUP from the prior slide:
BI 42,896                                                       WA       FIFO
DM 178,250                                       Equiv units    EUP      EUP
CC 274,704                                        DM           63,700   57,500
                                                  CC           60,950   57,230
  Under WA, the numerator includes BI and current costs:
       DM cost/EUP = $191,100/63,700 EUP = $3.00/EUP
       CC/EUP       = $307,750/60,950 EUP = 5.00/EUP
       Total manufacturing cost/EUP         $8.00/EUP
                          Chapter 6: Process Costing                         Slide # 34
      Q3&4: Process Costing Example, with BI

The last step is a process cost report that breaks the “total
costs to account for” into:
 • the portion that is assigned to the completed units, and
 • the portion that is assigned to the units in ending
   WIP inventory



         WIP Inventory - Units             WIP Inventory - $
          6,200                            42,896
                                       DM 178,250      $ assigned to
                  58,700
                                                     completed units
         57,500                        CC 274,704
          5,000                          $ assigned
                                         to EI units

                          Chapter 6: Process Costing               Slide # 35
       Q3&4: Process Costing Example, with BI

                      FIFO                                Weighted Average
          Computation   Units         Costs         Computation Units     Costs
BI
Cost to compl BI
  DM
  CC
  Total costs added
Total cost of BI
S&C
Total costs tr'd out
EI:
  DM
  CC
Total EI costs
Total acctd for


                                Chapter 6: Process Costing                        Slide # 36
     Q6: Accounting for Transferred-in Costs

• “Transferred-in costs” (TI) is merely another cost
  category like DM or CC
• All processing departments except the first will
  account for TI costs
• When preparing a process cost report for a
  department with TI costs:
  • Compute EUP for TI costs; all TI costs are incurred at the
    start of processing
  • Compute cost/EUP for TI costs

  • Assign TI costs to EI units
                         Chapter 6: Process Costing         Slide # 37
      Q6: Process Costing Example, with TI Costs
Crusher Drugs manufactures a pain medication in a two-process cycle. In
Department 2, direct materials are added as follows: 20% are added at the
beginning of processing, and the rest at the 60% stage. There were 5,000
units in Dep’t 2’s beginning WIP inventory that were 40% complete, and
20,000 units were transferred in to Dep’t 2 in May. The Dep’t 2 ending WIP
inventory of 6,000 units was 55% complete. Compute the May EUP for all
cost categories for Department 2 using both methods.

   First, compute the # of units started & completed:
    Dep’t 2 WIP Inventory - Units
         5,000                    BI units         5,000
       20,000     19,000          S&C units       14,000
                                  Completed units 19,000
         6,000


                              Chapter 6: Process Costing                Slide # 38
      Q6: Process Costing Example, with TI Costs
Dep’t 2WIP Inventory - Units
      5,000                 BI units         5,000
     20,000 19,000          S&C units       14,000
                            Completed units 19,000
     6,000
  Now, compute the EUP for DM & CC (recall that BI & EI were 40% &
55% complete, respectively; 20% of DM costs are incurred at the start of
        processing, and the rest are incurred at the 60% stage).

                            Comp-                     Start   FIFO   WA    Total
                       BI   lete BI S&C                EI     EUP    EUP   Units
      Physical units
      Equiv units
       DM
       CC
       TI
                              Chapter 6: Process Costing                       Slide # 39
       Q6: Process Costing Example, with TI Costs

 You are given the cost information below. Compute the cost per EUP
 under both methods.
                           DM               CC                 TI           Total
Work in process, May 1    $7,297.50        $3,860.50         $19,250.00    $30,408.00
Costs added in May        72,240.00        31,262.00         112,000.00    215,502.00
Total                    $79,537.50       $35,122.50        $131,250.00   $245,910.00

  Under WA, the numerator includes BI and current costs:
        DM cost/EUP = $79,537.50/20,200 EUP = $3.9375/EUP
        CC/EUP      = $35,122.50/22,300 EUP = 1.5750/EUP
        TI cost/EUP = $131,250/25,000 EUP = 5.2500/EUP
        Total manufacturing cost/EUP                         $10.7625/EUP



                               Chapter 6: Process Costing                       Slide # 40
       Q6: Process Costing Example, with TI Costs

 You are given the cost information below. Compute the cost per EUP
 under both methods.
                           DM               CC                 TI           Total
Work in process, May 1    $7,297.50        $3,860.50         $19,250.00    $30,408.00
Costs added in May        72,240.00        31,262.00         112,000.00    215,502.00
Total                    $79,537.50       $35,122.50        $131,250.00   $245,910.00

  Under FIFO, the numerator includes only current costs:
        DM cost/EUP = $79,537.50/20,200 EUP = $3.9375/EUP
        CC/EUP      = $35,122.50/22,300 EUP = 1.5750/EUP
        TI cost/EUP = $131,250/25,000 EUP = 5.2500/EUP
        Total manufacturing cost/EUP                         $10.7625/EUP

 Next, complete the process cost report using both methods….
                               Chapter 6: Process Costing                       Slide # 41
     Q6: Process Costing Example, with TI Costs
                      FIFO                                     Weighted Average
          Computation    Units         Costs              Computation  Units    Costs
BI
Cost to compl BI
  DM
  CC
  TI
  Total costs added
Total cost of BI
S&C
Total costs tr'd out
EI:
  DM
  CC
  TI
Total EI costs
Total acctd for
                                 Chapter 6: Process Costing                       Slide # 42
 Q7: Accounting for Spoilage in Process Costing

• Costs of normal spoilage are absorbed by
  the good units transferred out.

• Costs of abnormal spoilage are charged to a
  Loss from abnormal spoilage account.

• Costs attach to spoilage depending on when
  spoilage is detected.


                   Chapter 6: Process Costing   Slide # 43
         Q7: Process Costing & Spoilage Example
Hollidaze makes molded plastic party decorations. In June, there were 800
units in beginning WIP inventory that were 40% complete and the 500 units in
ending WIP were 30% complete. The company completed 3,000 units in
June, but 200 of these were defective and were discarded. The defective
units are located upon inspection before transfer to finished goods. It was
determined that 50 of these defective units should be considered normal
spoilage. The remaining spoilage occurred because of a rare machine
malfunction and should be considered abnormal spoilage. All direct materials
are added at the beginning of processing. Compute the June EUP for DM
and CC using both methods.
        First, compute the # of units started & completed:
      WIP Inventory - Units
           800              BI units                         800
                  3,000     S&C units                      2,200
                            Completed units                3,000
           500
                              Chapter 6: Process Costing               Slide # 44
       Q7: Process Costing & Spoilage Example
WIP Inventory - Units                         Now, compute the EUP for
     800                BI units          800 DM & CC (recall that BI &
   2,700 3,000          S&C units       2,200    EI were 40% & 30%
                        Completed units 3,000 complete, respectively; DM
     500                                       costs are incurred at the
                                                 start of processing).

Notice that there is now a column for spoiled units in the schedule.


                     Comp-                 Start        FIFO   WA    Total   Sp'd
               BI   lete BI S&C             EI          EUP    EUP   Units   Units
 Phys units
 Equiv units
  DM
  CC


                               Chapter 6: Process Costing                        Slide # 45
        Q7: Process Costing & Spoilage Example

You are given the cost information below. Compute the cost per EUP
under both methods.
                                  DM                 CC     Total
       Work in process, June     $2,735             $1,302 $4,037
       Costs added in June       $8,640             $5,943 $14,583
       Total                    $11,375             $7,245 $18,620

 Under WA, the numerator includes BI and current costs:
      DM cost/EUP = $11,375/3,500 EUP = $   3 .25/EUP
      CC/EUP      = $7,245/3,150 EUP = 2.30      /EUP
      Total manufacturing cost/EUP                       $    5.55/EUP




                           Chapter 6: Process Costing                    Slide # 46
        Q7: Process Costing & Spoilage Example

You are given the cost information below. Compute the cost per EUP
under both methods.
                                  DM                 CC     Total
       Work in process, June     $2,735             $1,302 $4,037
       Costs added in June       $8,640             $5,943 $14,583
       Total                    $11,375             $7,245 $18,620

 Under FIFO, the numerator includes only current costs:
      DM cost/EUP = $11,375/3,500 EUP                   =    $3.25/EUP
      CC/EUP      = $7,245/3,150 EUP                    =     2.30/EUP
      Total manufacturing cost/EUP                           $5.55/EUP


 Next, complete the process cost report using both methods….

                           Chapter 6: Process Costing                    Slide # 47
       Q7: Process Costing & Spoilage Example
                    FIFO                             Weighted Average
        Computation Units       Costs          Computation Units      Costs
BI
Cost to compl BI
  DM
  CC
  Total costs added
Total cost of BI
Normal spoilage
Good units S&C
Total costs tr'd out
Abnormal spoilage
EI:
  DM
  CC
Total EI costs
Total acctd for
                            Chapter 6: Process Costing                        Slide # 48
Q8: What are the Uses and Limitations of Process
              Cost Information?
 • Process cost information is generally not useful for
   many short-term decisions because unavoidable
   fixed costs are allocated to the products.

 • Estimates as to the stage of processing when DM
   costs or CC are incurred may be inaccurate.

 • All units in beginning and ending WIP inventories
   are most likely not at the same stages of completion
   at the beginning and end of the periods; the
   percentage of completion used in the calculation of
   EUP is just an estimate.


                        Chapter 6: Process Costing        Slide # 49
               Relevant Question in Sample Quiz 2
The Swiss Clock Shop manufactures clocks on a highly automated assembly line. Its costing system uses
    two cost categories, direct materials and conversion costs. Each product must pass through the
    Assembly Department and the Testing Department. Direct materials are added at the beginning of the
    production process. Conversion costs are allocated evenly throughout production. Swiss Clock Shop
    uses weighted-average costing.
Data for the Assembly Department for June 20X5 are:
    Work in process, beginning inventory       250 units
    Direct materials (100% complete)
    Conversion costs (50% complete)
    Units started during June                  800 units
    Work in process, ending inventory:         150 units
    Direct materials (100% complete)
    Conversion costs (75% complete)
Costs for June 20X5:
    Work in process, beginning inventory:
    Direct materials                           $180,000
    Conversion costs                           $270,000
    Direct materials costs added during June $1,000,000
    Conversion costs added during June         $1,000,000
4. What are the equivalent units for direct materials and conversion costs, respectively, for June?
a. 962 units; 990 units                                   b.          1,200.5 units; 1,160.64 units
c. 1,050 units; 1,012.5 units                             d.          1,050 units; 1,050 units




                                         Chapter 6: Process Costing                                Slide # 50
           Relevant Question in Sample Quiz 2
5. Ampco Disk Company operates a computer disk manufacturing plant.
   Direct materials are added at the end of the process. The following data
   were for August 20X5:
   Work in process, beginning inventory           100,000 units
   Transferred-in costs (100% complete)
   Direct materials (0% complete)
   Conversion costs (90% complete)
   Transferred in during current period           300,000 units
   Completed and transferred out                  250,000 units
   Work in process, ending inventory              50,000
   Transferred-in costs (100% complete)
   Direct materials (0% complete)
   Conversion costs (65% complete)
   Calculate equivalent units for conversion costs using the FIFO method.

a. 300,000 units                                b.         292,500 units
c. 350,000 units                                d.         401,500 units

                              Chapter 6: Process Costing                   Slide # 51
       Relevant Question in Sample Exam 2

7. Process costing is most likely to be used by which
   of the following companies?
a. Construction company that builds custom homes
b. Shipyard
c. Manufacturer of metal folding chairs
d. Producer of special order furniture




                      Chapter 6: Process Costing    Slide # 52
           Relevant Question in Sample Exam 2
The Swiss Clock Shop manufactures clocks on a highly automated assembly line.
   Its costing system uses two cost categories, direct materials and conversion
   costs. Each product must pass through the Assembly Department and the
   Testing Department. Direct materials are added at the beginning of the
   production process. Conversion costs are allocated evenly throughout
   production. Swiss Clock Shop uses weighted-average costing.
Data for the Assembly Department for June 20X5 are:
   Work in process, beginning inventory      250 units
   Direct materials (100% complete)
   Conversion costs (50% complete)
   Units started during June                           800 units
   Work in process, ending inventory:                  150 units
   Direct materials (100% complete)
   Conversion costs (75% complete)
Costs for June 20X5:
   Work in process, beginning inventory:
   Direct materials                                               $180,000
   Conversion costs                                     $270,000
   Direct materials costs added during June            $1,000,000
   Conversion costs added during June                           $1,000,000

                                Chapter 6: Process Costing                   Slide # 53
        Relevant Question in Sample Exam 2

8. What is the conversion cost per equivalent unit in June?
a. $1,730.20
b. $1,579.14
c. $1,254.32
d. $1,890.35
9. What amount of direct materials costs and conversion costs
   are assigned to the ending Work-in-Process account for
   June?
a. $283,552.50 and $101,956.64
b. $236,850 and $126,450.50
c. $168,571.50 and $141,111.00
d. $259,530 and $188,148.00


                        Chapter 6: Process Costing         Slide # 54
          Relevant Question in Sample Exam 2
10.      Weighty Steel processes a single type of steel. For the current
   period the following information is given:
                                  Units Material Costs Conversion Costs
Beginning Inventory                3,000          $4,500           $5,400
Started During the Current Period 20,000          32,000           78,200
Ending Inventory                   2,500
   All materials are added at the beginning of the production process. The
   beginning inventory was 40% complete as to conversion, while the
   ending inventory was 30% completed for conversion purposes.
   Weighty uses the weighted-average costing method.
   What is the total cost assigned to the units completed and transferred
   this period?
a. $107,010
b. $109,440
c. $120,100
d. $113,160



                              Chapter 6: Process Costing               Slide # 55
       Relevant Question in Sample Exam 2
The Rest-a-Lot chair company manufacturers a standard recliner.
During February, the firm's Assembly Department started production of
75,000 chairs. During the month, the firm completed 80,000 chairs, and
transferred them to the Finishing Department. The firm ended the month
with 10,000 chairs in ending inventory. There were 15,000 chairs in
beginning inventory. All direct materials costs are added at the
beginning of the production cycle and conversion costs are added
uniformly throughout the production process. The FIFO method of
process costing is used by Rest-a-Lot. Beginning work in process was
30% complete as to conversion costs, while ending work in process was
80% complete as to conversion costs.
Beginning inventory:
     Direct materials          $24,000
     Conversion costs          $35,000
Manufacturing costs added during the accounting period:
     Direct materials          $168,000
     Conversion costs          $278,000



                          Chapter 6: Process Costing               Slide # 56
         Relevant Question in Sample Exam 2

11.    What is the amount of direct materials cost assigned to
   ending work-in-process inventory at the end of February?
a. $22,400
b. $19,200
c. $22,500
d. $25,600
12.    What is the cost of the goods transferred out during
   February?
a. $417,750
b. $505,000
c. $476,750
d. $455,968


                         Chapter 6: Process Costing         Slide # 57

								
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