Professional Documents
Culture Documents
Chapter 17
ACCT 3270
Fall 2016
Jay K.
Baker,
MSFS, MBA,
CPA, CFP
Process-Costing
Systems
Distinct, identifiable
units of a product
or service
Masses of identical
or similar units of a
product or service
Examples:
Custom-made
machines,
houses
Examples:
Food,
chemical processing
17-2
Process Costing
Process costing is a system where the unit
cost of a product or service is obtained by
assigning total costs to many identical or
similar units.
Each unit receives the same or similar
amounts of direct materials costs, direct
labor costs, and manufacturing overhead.
Unit costs are computed by dividing total
costs incurred by the number of units of
output from the production process.
More on job-vs-process-costing
17-4
A1
17-5
Process-Costing Assumptions
Process-costing systems separate costs into
cost categories according to when costs are
introduced into the process.
Direct materials are added at the beginning of
the production process, or at the start of work
in a subsequent department down the assembly
line.
Conversion costs are added equally along the
production process.
17-6
17-7
17-8
Quick Check
Serile Pharma places 900 units in production during the month
of January. All 900 units are completed during the month. It had
no opening inventory. Direct material costs added during
January was $81,000 and conversion costs added during
January was $9,000.What is the total cost per unit of the
product produced during January?
A) $100
B) $90
C) $80
D) $10
Total cost per unit = [($81,000 + $9,000) / 900] = $100
17-9
1710
Equivalent Units
2.
1711
1712
1713
1714
Quick Check
In a process-costing system, the calculation of equivalent units
is used for calculating ________.
A) the dollar amount of sales affected during the period
B) the dollar amount of the cost of goods sold for the
accounting period
C) the dollar price earned for a particular job
D) the dollar amount of revenue for the period including the
revenue estimated to be received from the sale of equivalent
units
1715
Quick Check
Charlie Chairs Inc., manufactures plastic moldings for car seats. Its costing system utilizes two cost categories, direct materials and
conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of
production. Conversion costs are allocated evenly throughout production.
Data for Department A for February 2015 are:
Work in process, beginning inventory, 40% converted
200 units
100 units
$150,000
Conversion costs
$200,000
$600,000
$425,000
What is the unit cost per equivalent unit of beginning inventory in Department A?
A) $750
B) $1,750
C) $2,800
D) $3,250
$
2,500
$3,250
1716
Quick Check
When a Bakery transfers goods from the Mixing Department to the
Baking Department, the accounting entry is ________.
A) Work in Process Mixing Department
Work in Process Baking Department
B) Work in Process Baking Department
Accounts Payable
C) Work in Process Baking Department
Work in Process Mixing Department
D) Work in Process Mixing Department
Accounts Payable
1717
Quick Check
The purpose of the equivalent-unit computation is to ________.
A) convert completed units into the amount of partially
completed output units that could be made with that quantity
of input
B) assist the business in determining the cost assigned to
ending inventory and work-in-process inventory
C) predict the future production capabilities of the organization
D) satisfy the GAAP requirements which requires all partially
completed goods to be reported as equivalent-units
1718
Weighted-Average
Process-Costing Method
LO 17 4 Use the weighted average method and first-in,
first-out (FIFO) method of process costing.
1719
Weighted-Average
Process-Costing Method
1720
1721
1722
2.
1723
Quick Check
A production department's output for the most recent month consisted of 10,000
units completed and transferred to the next stage of production and 10,000 units in
ending Work in Process inventory. The units in ending Work in Process inventory
were 50% complete with respect to both direct materials and conversion costs.
There were 1,000 units in beginning Work in Process inventory, and they were 70%
complete with respect to both direct materials and conversion costs. Calculate the
equivalent units of production for the month, assuming the company uses the
weighted average method.
A. 10,000 units.
B. 10,300 units.
C. 15,000 units.
D. 15,300 units.
E. 10,700 units.
Feedback:
Units completed and transferred to next stage
Units in ending Work in Process inventory (10,000 * 50% complete)
10,000 units
5,000 units
15,000 units
1724
Quick Check
Luker Corporation uses a process costing system. The company had
$160,500 of beginning Finished Goods Inventory on October 1. It
transferred in $837,000 of goods completed during the period. The
ending Finished Goods Inventory balance on October 31 was
$158,200. The entry to account for the cost of goods sold in October
is:
A. Debit Cost of Goods Sold $837,000; credit Finished Goods Inventory $837,000.
B. Debit Cost of Goods Sold $839,300; credit Work in Process Inventory $839,300.
C. Debit Finished Goods Inventory $837,000; credit Work in Process Inventory $837,000.
D. Debit Finished Goods Inventory $158,200; credit Cost of Goods Sold $158,200.
E. Debit Cost of Goods Sold $839,300; credit Finished Goods Inventory $839,300.
Feedback: Cost of Goods Sold = Beginning FG + cost of goods manufactured Ending FG
160,500 + 837,000 158,200 = $839,300
1725
1.
Compounding
Department
2.
Coating
Department
3.
Cutting and
Packaging
Department
Warehouse
1726
a
b
20,000a
92,000
112,000
96,000
16,000b
112,000
1727
Transferred out
Work-in-process, March 31
Total work
a
Physical
units
Equivalent units
Materials
Conversion
96,000
16,000a
96,000
16,000
112,000
96,000
4,800
100,800
1728
Work-in-process costs
Work (EU)
Work-in-process EU*
Current period EU
Weighted
average:
FIFO:
Work-in-process costs
Work-in-process EU
1729
First-in, First-Out
Process-Costing Method
1730
First-in, First-Out
Process-Costing Method
1731
1732
1733
2.
1734
Quick Check
A company uses the FIFO method for inventory costing. At the beginning
of a period, the production department had 20,000 units in beginning
Work in Process inventory which were 40% complete; the department
completed and transferred 165,000 units. At the end of the period, 22,000
units were in the ending Work in Process inventory and are 75% complete.
Compute the number of equivalent units produced by the department.
A. 181,500.
B. 165,000.
C. 173,500.
D. 145,000.
E. 187,000.
Equivalent Units
Units to complete BGIP
Started and completed
Units in EGIP
Equivalent units
20,000 * 60%
145,000 * 100%
22,000 *75%
12,000
145,000
16,500
173,500
1735
1736
Managers use information from processcosting systems to make pricing and productmix decisions and understand how well a
firms processes are performing.
FIFO provides managers with information
about changes in the costs per unit from one
period to the next.
In a period of rising prices, the weightedaverage method will decrease taxes because
cost of goods sold will be higher and operating
income lower.
J. Keith Baker 2016
1737
1738
Dealing with the norm that most processcosting systems have two or more
departments or processes in the production
cycle.
How to assigns these costs as units move
from department to department and their
related costs are also transferred by journal
entries.
1739
Now lets look at the Data for the Testing Department as follows:
1740
Transferred-In Costs
Are costs incurred in previous departments
that are carried forward as the products cost
when it moves to a subsequent process in
the production cycle.
Also called previous department costs.
Journal entries are made to mirror the
progress in production from department to
department.
Transferred-in costs are treated as if they are
a separate type of direct material added at
the beginning of the process.
1741
1742
1743
1744
1745
2.
3.
1746
5.
1747
20,000a
92,000
112,000
96,000
16,000b
112,000
1748
Transferred out
Work-in-process, March 31
Total work
Physical
units
Equivalent units
Materials Conversion
96,000
16,000
96,000
16,000a
112,000
96,000
4,800b
100,800
1749
Materials
costs
Conversion
costs
1750
Materials
costs
Conversion
costs
112,000 100,800
$ 0.90 $
2.20
1751
Transferred out:
Equivalent units
Cost per equivalent unit
Cost assigned
Work-in-process, March 31
Equivalent units
Cost per equivalent unit
Cost assigned
Total cost assigned
Materials
costs
Conversion
costs
96,000
96,000
$
0.90 $
2.20
$297,600 $ 86,400 $211,200
16,000
4,800
$
0.90 $
2.20
24,960
14,400
10,560
$322,560 $100,800 $221,760
1752
Quick Check
The Swivel Chair Company manufacturers a standard recliner. During February, the firm's
Assembly Department started production of 145,000 chairs. During the month, the firm
completed 175,000 chairs and transferred them to the Finishing Department. The firm
ended the month with 18,000 chairs in ending inventory. All direct materials costs are added
at the beginning of the production cycle. Weighted-average costing is used by Swivel.
How many chairs were in inventory at the beginning of the month? Conversion costs are
incurred uniformly over the production cycle.
A) 8,000 chairs
B) 18,000 chairs
C) 38,000 chairs
D) 48,000 chairs
1753
Quick Check
The Swivel Chair Company manufacturers a standard recliner. During February,
the firm's Assembly Department started production of 145,000 chairs. During the
month, the firm completed 175,000 chairs and transferred them to the Finishing
Department. The firm ended the month with 18,000 chairs in ending inventory. All
direct materials costs are added at the beginning of the production cycle.
Weighted-average costing is used by Swivel.
What were the equivalent units for materials for February?
A) 193,000 chairs
B) 173,000 chairs
C) 163,000 chairs
D) 153,000 chairs
Equivalent units for materials = 18,000 units (ending units) + 175,000 units
(completed and transferred) = 193,000 units.
1754
Quick Check
The Swivel Chair Company manufacturers a standard recliner. During February, the firm's
Assembly Department started production of 145,000 chairs. During the month, the firm
completed 175,000 chairs and transferred them to the Finishing Department. The firm
ended the month with 18,000 chairs in ending inventory. All direct materials costs are added
at the beginning of the production cycle. Weighted-average costing is used by Swivel.
What were the equivalent units for conversion costs for February if the beginning inventory
was 70% complete as to conversion costs and the ending inventory was 40% complete as to
conversion costs?
A) 182,200
B) 152,200
C) 172,200
D) 162,200
Equivalent units for conversion costs for February = 175,000 units + 7,200
equivalent units = 182,200 units
1755
Quick Check
A major advantage of using the FIFO process-costing method is
that ________.
A) FIFO makes the unit cost calculations simpler
B) in contrast with the weighted-average method, FIFO is
considered GAAP
C) FIFO provides managers with information about changes in
the costs per unit from one period to the next
D) in the period of rising prices, it leads to lower operating
income and lower tax payments, saving the company cash and
increasing the company's value
1756
Quick Check
Transferred-in costs are treated as if they are ________.
A) conversion costs added at the beginning of the process
B) costs of beginning inventory added at the beginning of the
process
C) direct labor costs added at the beginning of the process
D) a separate direct material added at the beginning of the
process
1757
1758
1759
Operation-costing system
1760
Quick Check
Weighted-average method, equivalent units. Consider
the following data for the assembly division of Fenton
Watches, Inc.: The assembly division uses the weightedaverage method of process costing.
1761
STEP 2: Compute
Output in
Equivalent Units
Quick Check
Weighted-average
method,
assigning
costs
For the data in used previously, summarize total costs to
account for, calculate cost per equivalent unit for direct
materials and conversion costs, and assign total costs to
units completed (and transferred out) and to units in ending
work in process.
STEP 3:
Summarize
Total Costs to
Account For
STEP 4:
Compute Cost
per Equivalent
Unit
STEP 5: Assign
Total Costs to
Units Completed
and to Units in
Ending Work in
Process
1763
Quick Check
FIFO method, equivalent units. Suppose the assembly division
at Fenton Watches, Inc., uses the FIFO method of process
costing instead of the weighted-average method. Compute
equivalent units for direct materials and conversion costs.
Show physical units in the first column of your schedule.
STEP 1:
Summarize
Output in
Physical
Units
STEP 2:
Compute
Equivalent
Units done
in current
period
J. Keith Baker 2016
1764
Quick Check
Managers find operation costing useful in cost management
because it ________.
A) often results in profit maximization
B) results in cost minimization
C) focuses on control of physical processes of a given
production system
D) uses job costing to account for the conversion costs and
process costing for the material and customizable components
1765
Quick Check
Which of the following companies is likely to use a hybridcosting system?
A) Best Fit Corp., which manufactures pharmaceuticals
B) Rida Corp., which processes and sells, after import, a single
variant of Turkish marble to real estate companies
C) Fast run, which sells a limited range of televisions, which go
through similar manufacturing process
D) Karoline Corp., which manufactures and sells a single
model of cap
1766
Quick Check
Pitt Enterprises manufactures jeans. All materials are introduced at the beginning of the manufacturing process in the Cutting
Department. Conversion costs are incurred uniformly throughout the manufacturing process. As the cutting of material is completed, the
pieces are immediately transferred to the Sewing Department. Information for the Cutting Department for the month of May follows.
Work in Process, May 1 (50,000 units, 100% complete for direct materials, 40% complete with respect to direct labor and overhead;
includes $70,500 of direct material cost; $34,050 of conversion costs).
Units started in May
225,000
200,000
Work in Process, May 31 (75,000 units, 100% complete for direct materials; 20% complete for conversion costs).
Costs incurred in May
Direct materials
$342,000
Conversion costs
$352,950
If Pitt Enterprises uses the FIFO method of process costing, compute the equivalent units for materials and conversion costs respectively
for May.
A. 225,000; 225,000.
B. 200,000; 195,000
C. 275,000; 200,000
D. 225,000; 195,000
E. 200,000; 200,000
1767
Quick Check
Pitt Enterprises manufactures jeans. All materials are introduced at the beginning of the manufacturing
process in the Cutting Department. Conversion costs are incurred uniformly throughout the manufacturing
process. As the cutting of material is completed, the pieces are immediately transferred to the Sewing
Department. Information for the Cutting Department for the month of May follows.
Work in Process, May 1 (50,000 units, 100% complete for direct materials, 40% complete with respect to
direct labor and overhead; includes $70,500 of direct material cost; $34,050 of conversion costs).
Units started in May
225,000
200,000
Work in Process, May 31 (75,000 units, 100% complete for direct materials; 20% complete for conversion
costs).
Costs incurred in May
Direct materials
$342,000
Conversion costs
$352,950
If Pitt Enterprises uses the FIFO method of process costing, compute the equivalent units for materials and
conversion costs respectively for May.
All 50,000 units in beginning Work in Process were already 100% complete with respect to direct materials. The
information indicates 225,000 units were begun during May. Since direct materials are added at the beginning of the
process, those units were 100% complete with respect to direct materials by the end of May. Therefore, the equivalent
units of production for direct materials for May was 225,000. The 50,000 units in beginning Work in Process were only
40% complete with respect to conversion costs. Therefore, the remaining 60% or 30,000 units were completed in May as
far as conversion costs are concerned. The information also indicates that 200,000 units were completed during May.
That means that another 150,000 units were started and completed during May and were 100% complete with respect to
conversion costs (200,000 50,000). Finally, there were 75,000 units in ending Work in Process inventory and those
units were 20% complete with respect to conversion costs. 75,000 units * 20% = 15,000 units. Therefore, the total
equivalent units of production for conversion costs during May were 30,000 + 150,000 + 15,000 = 195,000.
1768
End of Chapter 17
1769