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Systems Design: Process Costing
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 costs.
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.
Differences Between Job-Order and Process Costing
Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs having different production requirements are worked on each period.
Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.
Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.
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.
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
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.
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
Processing Departments
Any unit 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 be a processing department must be homogeneoushomogeneous. .
Products in a process costing environment Products in a process costing environment typically flow in a sequence from one departmenttypically flow in a sequence from one department
to another.to another.
Learning Objective 1
Record the flow of materials, labor, and overhead through a
process costing system.
Comparing Job-Order and Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Work inProcess
Direct Materials
Direct Materials
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
Comparing Job-Order and Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
JobsJobsJobsJobs
Costs are traced andapplied to individualjobs in a job-order
cost system.
Costs are traced andapplied to individualjobs in a job-order
cost system.Direct
MaterialsDirect
Materials
Comparing Job-Order and Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
ProcessingDepartmentProcessingDepartment
Costs are traced and applied to departments
in a process cost system.
Costs are traced and applied to departments
in a process cost system.
Direct Materials
Direct Materials
T-Account and Journal Entry Views of Process 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.
Raw Materials
Process Cost Flows: The Flow of Raw Materials (in T-account form)
Work in Process Department B
Work in Process Department A
•DirectMaterials
•Direct Materials
•Direct Materials
Process Cost Flows: The Flow of Raw Materials (in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
Process Cost Flows: The Flow of Labor Costs (in T-account form)
Work in Process Department B
Work in Process Department A
Salaries and Wages Payable
•Direct Materials
•Direct Materials
•Direct Labor
•Direct Labor •Direct
Labor
Process Costing: The Flow of Labor Costs (in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
Process Cost Flows: The Flow of Manufacturing Overhead Costs (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
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form)
Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (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
DepartmentA
DepartmentA
DepartmentB
DepartmentB
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form)
Finished Goods
Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (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
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form)
Finished Goods
Cost of Goods Sold
Process Cost Flows: Transfers from Finished Goods to COGS (in T-account 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
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record the transfer of finished
goods inventory to cost of goods
sold.
Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form)
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. These partially
completed units complicate the determination of a department’s output for a given period and the unit cost
that should be assigned to that output.
Equivalent Units – The Basic Idea
Two half completed products are equivalent to one complete product.
Two half completed products are equivalent to one complete product.
So, 10,000 units 70% completeare equivalent to 7,000 complete units.
So, 10,000 units 70% completeare equivalent to 7,000 complete units.
+ = 1
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
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
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
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 10,000 units + (5,000 units × 0.30) = 11,500 equivalent units
Quick Check
Calculating Equivalent Units
Equivalent units can be calculatedEquivalent units can be calculatedtwo ways:two ways:
The First-In, First-Out Method – The First-In, First-Out Method – FIFO isFIFO is covered in the appendix to this chapter. covered in the appendix to this chapter.
The Weighted-Average Method – The Weighted-Average Method – This method This method will be covered in the main portion of the chapter. will be covered in the main portion of the chapter.
Equivalent units can be calculatedEquivalent units can be calculatedtwo ways:two ways:
The First-In, First-Out Method – The First-In, First-Out Method – FIFO isFIFO is covered in the appendix to this chapter. covered in the appendix to this chapter.
The Weighted-Average Method – The Weighted-Average Method – This method This method will be covered in the main portion of the chapter. will be covered in the main portion of the chapter.
Learning Objective 2
Compute the equivalent Compute the equivalent units of production using units of production using
the weighted-average the weighted-average method.method.
Equivalent Units of ProductionWeighted-Average Method
The weighted-average method . . .
1. Makes no distinction between work done in prior or current periods.
2. Blends together units and costs from prior and current periods.
3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.
The weighted-average method . . .
1. Makes no distinction between work done in prior or current periods.
2. Blends together units and costs from prior and current periods.
3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.
Treatment of Direct Labor
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
DirectMaterials
Type of Product Cost
Do
llar
Am
ou
nt
DirectLabor
ManufacturingOverhead
Treatment of Direct Labor
Type of Product Cost
Do
llar
Am
ou
nt Conversion Direct labor and
manufacturing overhead may be
combined into one classification
of product cost called
conversion costs.
Direct labor and manufacturing
overhead may be combined into
one classification of product
cost called conversion costs.
DirectMaterials
DirectLabor
DirectLabor
ManufacturingOverhead
Weighted-Average – An Example
Smith Company reported the following activity in the Assembly Department for the month of June:
Percent Completed
Units 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%
The first step in calculating the equivalent units is to identify the units completed and transferred out of
Assembly Department in June (5,400 units)
Weighted-Average – An Example
Materials Conversion
Units completed and transferredout of the Department in June 5,400 5,400
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 adding this to the 5,400 units from
step one.
Weighted-Average – An Example
Materials Conversion
Units completed and transferredout of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
Equivalent units of Production inthe Department during June 5,940
Weighted-Average – An Example
Materials Conversion
Units completed and transferredout of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production inthe Department 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 adding this to the 5,400 units from step one.
Materials Conversion
Units completed and transferredout of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production inthe Department during June 5,940 5,670
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Weighted-Average – An Example
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 – An Example
MaterialsMaterials
5,400 Units Completed 540 Equivalent Units 900 × 60%
5,940 Equivalent units of production
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 – An Example
ConversionConversion
Learning Objective 3
Compute the cost per Compute the cost per equivalent unit using the equivalent unit using the
weighted-average method.weighted-average method.
Beginning Work in Process Inventory: 400 units
Materials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete
Compute and Apply Costs
Compute and Apply Costs
The formula for computing the cost per equivalent unit is:
Cost perequivalent
unit
=
Cost of beginningWork in Process
Inventory Cost added during
the period
Equivalent units of production
+
Here is a schedule with the cost and equivalent unit information.
Compute and Apply Costs
TotalCost Materials Conversion
Cost to be accounted for: Work in process, June 1 10,039$ 6,119$ 3,920$ Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
TotalCost Materials Conversion
Cost to be accounted for: Work in process, June 1 10,039$ 6,119$ 3,920$ Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
Cost per equivalent unit 21.00$ 15.00$
Compute and Apply Costs
Here is a schedule with the cost and equivalent unit information.
$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00$85,050 ÷ 5,670 units = $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00Cost per equivalent unit = $21.00 + $15.00 = $36.00
Learning Objective 4
Assign costs to units using Assign costs to units using the weighted-average the weighted-average
method.method.
Applying Costs
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
Applying Costs
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
Applying Costs
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400 Cost per equivalent unit 21.00$ 15.00$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400 Cost per equivalent unit 21.00$ 15.00$ Cost of units transferred out 113,400$ 81,000$ 194,400$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
Learning Objective 5
Prepare a cost Prepare a cost reconciliation report.reconciliation report.
Reconciling Costs
Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$
Assembly DepartmentCost Reconciliation
Reconciling Costs
Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$
Cost accounted for as follows: Cost of ending Work in Process Inventory 15,390$ Cost of units transferred out 194,400 Total cost accounted for 209,790$
Assembly DepartmentCost Reconciliation
Operation Costing
Operation cost is a hybrid of job-order and Operation cost is a hybrid of job-order and process costing because it possesses attributes process costing because it possesses attributes
of both approachesof both approaches
Operation costing is Operation costing is commonly used when commonly used when
batches of many different batches of many different products pass through the products pass through the
same processing same processing department.department.
Operation costing is Operation costing is commonly used when commonly used when
batches of many different batches of many different products pass through the products pass through the
same processing same processing department.department.
FIFO Method
Appendix 4A
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more accurate than 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.inventory are treated.
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.inventory are treated.
Learning Objective 6
Compute the equivalent Compute the equivalent units of production using units of production using
the FIFO method.the FIFO method.
Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Here is information concerning the Assembly Department
for the month of June.
Percent Completed
Units 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%
Equivalent Units – FIFO Method
Step 1Step 1: Determine equivalent units needed to complete beginning Work in Process Inventory.
Materials Conversion
To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Equivalent Units – FIFO Method
Step 2Step 2: Determine units started and completed during the period.
Materials Conversion
To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
Equivalent Units – FIFO Method
Step 3Step 3: Add the equivalent units in ending Work in Process Inventory.
Materials Conversion
To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
Ending Work in Process
Materials: 900 units × 60% complete 540 Conversion: 900 units × 30% complete 270
Equivalent units of production 5,820 5,610
BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
MaterialsMaterialsMaterialsMaterials
5,100 Units Completed 540 Equivalent Units
900 × 60%
5,820 Equivalent units of production
180 Equivalent Units300 × 60%
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
ConversionConversionConversionConversion
5,100 Units Completed 270 Equivalent Units
900 × 30%
5,610 Equivalent units of production
240 Equivalent Units300 × 80%
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.
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.
Learning Objective 7
Compute the cost per Compute the cost per equivalent unit using the equivalent unit using the
FIFO method.FIFO method.
Beginning work in process: 400 units
Materials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending work in process 900 unitsMaterials: 60% completeConversion: 30% complete
Cost per Equivalent Unit - FIFOLet’s revisit the Smith Company Assembly Department for the month of June to prepare our production report.
Cost per Equivalent Unit - FIFO
The formula for computing the cost per equivalent unit under FIFO method is:
Cost per Equivalent Unit - FIFO
TotalCost Materials Conversion
Cost added in June 199,751$ 118,621$ 81,130$
Equivalent units 5,820 5,610
Cost per equivalent unit 20.3816$ 14.4617$
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$118,600 ÷ 5,820$118,600 ÷ 5,820 $81,130 ÷ 5,610$81,130 ÷ 5,610
Learning Objective 8
Assign costs to units using Assign costs to units using the FIFO method.the FIFO method.
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270
Assembly DepartmentCost of Ending WIP Inventory
Applying Costs - FIFO
Step 1Step 1: Record the equivalent units of production in ending Work in Process Inventory.
900 units × 60%900 units × 60% 900 units × 30%900 units × 30%
Applying Costs - FIFO
Step 2Step 2: Record the cost per equivalent unit.
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 20.3816$ 14.4617$
Assembly DepartmentCost of Ending WIP Inventory
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 20.3816$ 14.4617$ Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$
Assembly DepartmentCost of Ending WIP Inventory
Applying Costs - FIFO
Step 3Step 3: Compute the cost of ending Work in Process Inventory.
540 × $20.3816540 × $20.3816 270 × 14.4617270 × 14.4617
Cost of Units Transferred Out
Step 1Step 1: Record the cost in beginning Work in Process Inventory.
Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$
Assembly DepartmentCost of Units Transferred Out in June
Cost of Units Transferred OutStep 2Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,668$ 3,471$ 7,139
Assembly DepartmentCost of Units Transferred Out in June
Cost of Units Transferred OutStep 3Step 3: Compute the cost of units started and completed this
period.
Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,668$ 3,471$ 7,139 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701
Assembly DepartmentCost of Units Transferred Out in June
Cost of Units Transferred Out
Step 4Step 4: Compute the total cost of units transferred out.
Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,668$ 3,471$ 7,139 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,879$
Assembly DepartmentCost of Units Transferred Out in June
Learning Objective 9
Prepare a cost reconciliation report
using the FIFO method..
Reconciling Costs
Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$
Assembly DepartmentCost Reconciliation for June
Reconciling Costs
Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$
Cost accounted for as follows: Cost of ending Work in Process Inventory 14,911$ Cost of units transferred out 194,879 Total cost accounted for 209,790$
Assembly DepartmentCost Reconciliation for June
A Comparison of Costing Methods
In a lean production environment, FIFO and weighted-average methods yield similar
unit costs.
In a lean production environment, FIFO and weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is superior to weighted-average because it
does not mix costs of the current period with costs of the prior period.
When considering cost control, FIFO is superior to weighted-average because it
does not mix costs of the current period with costs of the prior period.
Service Department Allocations
Appendix 4B
Operating Departments
An operating department carries out the central purpose of the organization
An operating department carries out the central purpose of the organization
The Surgery Department
at Mount Sinai
Hospital.
The Surgery Department
at Mount Sinai
Hospital.
A Production Department
at Mitsubishi.
A Production Department
at Mitsubishi.
The Geography Department
at the University of Washington.
The Geography Department
at the University of Washington.
Service Departments
Service departments do not directly engage in operating activities.
Service departments do not directly engage in operating activities.
The Accounting Department at Macy’s.
The Accounting Department at Macy’s.
The Human Resources Department
at Walgreens.
The Human Resources Department
at Walgreens.
Interdepartmental Services
ServiceDepartment
OperatingDepartment
Costs of the service department become overhead costs to
the operating department
Allocation Approaches
Reciprocal Services
ServiceDepartment 1
ServiceDepartment 2
When service departments provide
services to each other we call them
reciprocal services.
Learning Objective 10
Allocate service Allocate service department costs to department costs to
operating departments operating departments using the direct method.using the direct method.
Direct Method
Service Department(Cafeteria)
Service Department(Custodial)
Operating Department(Machining)
Operating Department(Assembly)
Direct Method – An Example
Service Department Allocation Base
Cafeteria Number of employeesCustodial Square feet occupied
Direct Method – An Example
How much of the Cafeteria and Custodial costs should be allocated to each operating department
using the direct method of cost allocation?
Direct Method – An Example
Allocation base: Number of employees Allocation base: Number of employees
Direct Method – An Example
Allocation base: Number of employees
$360,000 ×30
20 + 30= $216,000
Direct Method – An Example
Allocation base: Square feet occupied Allocation base: Square feet occupied
$90,000 ×25,000
25,000 + 50,000 = $30,000
Direct Method – An Example
Allocation base: Square feet occupied Allocation base: Square feet occupied
Learning Objective 11
To allocate service To allocate service department costs to department costs to
operating departments operating departments using the step-down using the step-down
method.method.
Operating Department(Machining)
Operating Department(Assembly)
Step-Down Method
Once a servicedepartment’s costs
are allocated, other service
department costsare not allocated
back to it.
Service Department(Cafeteria)
Service Department(Custodial)
There are three key points to understand regarding the step-down method: In both the direct and step-down methods, any
amount of the allocation base attributable to the
service department whose cost is being allocated is
always ignored.
Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored.
Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.
Step-Down Method
Service Department Allocation Base
Cafeteria Number of employeesCustodial Square feet occupied
We will use the same data used in the direct method example.
Step-Down Method – An Example
Allocate Cafeteria costs first sinceit provides more service than Custodial.
Allocate Cafeteria costs first sinceit provides more service than Custodial.
Step-Down Method – An Example
$360,000 ×10
10 + 20 + 30= $60,000
Allocation base: Number of employees Allocation base: Number of employees
Step-Down Method – An Example
$360,000 ×20
10 + 20 + 30= $120,000
Allocation base: Number of employees Allocation base: Number of employees
Step-Down Method – An Example
$360,000 ×30
10 + 20 + 30= $180,000
Allocation base: Number of employees Allocation base: Number of employees
Step-Down Method – An Example
New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria.
Step-Down Method – An Example
$150,000 ×25,000
25,000 + 50,000 = $50,000
Allocation base: Square feet occupied Allocation base: Square feet occupied
Step-Down Method – An Example
$150,000 ×50,000
25,000 + 50,000 = $100,000
Allocation base: Square feet occupied Allocation base: Square feet occupied
Step-Down Method – An Example
Reciprocal Method
Interdepartmentalservices are given
full recognitionrather than partialrecognition as withthe step method.
Service Department(Cafeteria)
Service Department(Custodial)
Operating Department(Machining)
Operating Department(Assembly)
Because of its mathematical complexity, the reciprocal method is rarely used.
Because of its mathematical complexity, the reciprocal method is rarely used.
Quick Check Datafor Direct and Step-Down Methods
Allocation bases:Business school administration costs (ADMIN): Number of employees
Business Administration computer services (BACS): Number of personal computers
The direct method of allocation is used.
Quick Check
How much cost will be allocated from Administration to Accounting?a. $ 36,000b. $144,000c. $180,000d. $ 27,000
How much cost will be allocated from Administration to Accounting?
a. $ 36,000b. $144,000c. $180,000d. $ 27,000
Quick Check
$180,000 ×20
20 + 80= $36,000
Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500
Quick Check
Quick Check Data
Allocation bases:Business school administration costs (ADMIN): Number of employees
Business administration computer services (BACS): Number of personal computers
Allocation bases:Business school administration costs (ADMIN): Number of employees
Business administration computer services (BACS): Number of personal computers
The step method of allocation is used.
Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333
Quick Check
End of Chapter 4
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