Companies that use hybrid costing system

3 Process Costing

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Learning Objectives

After studying Chapter 3, you will be able to:

• Differentiate among job and process cost systems.

• Understand the basic characteristics of modified and hybrid cost systems.

• Recognize the fundamental aspects of a job cost system.

• Describe the cost elements and cost flows in a process cost system.

• Compute the equivalent units of production and unit costs using FIFO.

• Prepare and use cost of production reports.

• Explain the impact that JIT inventory systems have on process cost accounting.

• Compute the equivalent units of production and unit costs using the weighted average method.

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Chapter Outline

3.1 Overview of Job and Process Costing Environment Materials, Labor, and Overhead Costs Focal Point for Cost Accumulation

3.2 Modified and Hybrid Systems

3.3 The Job Cost System

3.4 The Cost Elements in a Process Cost System Materials Conversion Costs Cost Flows

3.5 The Equivalent Unit Concept Unit Costs Flow of Physical Units Stage of Completion Timing of Inputs Computational Steps

3.6 Cost of Production Report Management’s Use of Cost of Production Reports Ethical Considerations

3.7 Simplifications of JIT and Automation

3.8 Weighted Average Cost Method Weighted Average Computational Steps Cost of Production Report

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Section 3.1 Overview of Job and Process Costing

Where There’s a Will, There’s a Way of Costing

When Stan Stein, an attorney, founded U Will It, he envisioned an enterprise involving the mass production of routine wills with standard wording and little variation. Because he kept his fees low and had clever advertising, his first two years were very successful. Stein was preparing wills for clients throughout Ohio.

Periodically, Stein was approached by clients who wished to have more specialized and complex wills prepared. Stein was reluctant to accept these jobs because his practice was near full capacity. Moreover, because these specialized wills required considerable research, client conferences, and other demands made by the clients, Stein did not feel his current practice was amenable to the preparation of specialized wills. Therefore, he would routinely turn down these requests.

One day, Stein decided to invest his growing profits into a new venture that would be oriented to preparing specialized wills. One of Stein’s many concerns was how he would determine the costs of these customized jobs. He knew that the process costing system used for his current firm would not be suitable for his new venture.

This chapter discusses how to determine the costs of products produced in a process cost environment as well as products produced in a job cost environment. Although we focus on manufactured products, the concepts presented are applicable in service organizations, as was just indicated in the above vignette.

3.1 Overview of Job and Process Costing A job cost system identifies costs with individual jobs or products. A separate tracking of costs is associated with each job or product. The costs accumulated for a job in process can be determined at any point in time by referring to the job order cost sheet.

A process cost system identifies costs with individual departments for an interval of time, such as one month. Costs are not charged to specific units or orders as work is performed, but unit costs are based on costs incurred during a time period and on the volume of output during the same period. The unit cost of a final product will be the sum of all costs allocated to the product by each department that worked on it.

Several other characteristics distinguish job costing from process costing, as discussed below. Figure 3.1 at the end of this section summarizes these differences.

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Section 3.1 Overview of Job and Process Costing

Environment Job costing is most appropriate in environments where jobs or products are different from one another. These jobs use different types or amounts of materials, labor, and overhead. Examples include building construction, defense contracting, consulting engagements, and printing shops.

Process costing is most appropriate in an environment where products are mass produced or result from continuous processing. Each unit going through the same process is identical to other units. Examples include candy, soft drinks, clothing, chemicals, and most processed foods. In addition, individual operations can be suitable for process costing if every prod- uct passing through the operation has the same work performed on it. For instance, various models of televisions and DVD players on an assembly line may have the same operations performed during the assembly process.

In a job cost environment, sales orders usually precede production. Production is for a spe- cific order. In a process cost environment, however, production usually precedes sales. Goods are produced for anticipated sales.

Materials, Labor, and Overhead Costs A process cost environment will generally use materials that are standard. In a job cost set- ting, materials requirements are often unique to each job, and sometimes even the types of materials needed are unknown. Hence, process cost companies usually have larger invento- ries of materials.

Tasks in a process cost environment are generally routine. Less-skilled labor is usually needed than in a job cost environment, where workers need to perform a greater variety of tasks because of the different types of jobs. Automation is found more often in process cost settings. Therefore, the proportion of overhead cost in the total product cost will generally be higher than for job cost settings.

Focal Point for Cost Accumulation In process cost systems, we identify materials, labor, and overhead costs with specific depart- ments or operating centers. This differs from job cost systems, which identify costs with spe- cific batches or customer orders. In this chapter, the term department will be used as a generic term and will cover the traditional concepts of department, operating or work center, opera- tion, task, activity center, and responsibility center. As a result of charging costs to depart- ments, few detailed records are needed with process costing.

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Section 3.2 Modified and Hybrid Systems

3.2 Modified and Hybrid Systems Classifying an accounting system as a job cost or process cost system is often not easy. This is especially true when companies have a wide variety of products and processes. Modifications and adaptations are made to the accounting system to meet the needs of specific situations. These result in systems we categorize as modified cost systems and hybrid cost systems.

A modified cost system has one or more elements of cost using job costing, while the other cost elements use process costing. For example, a manufacturer of shoes will make different sizes and styles and use different grades of leather. However, the operations of cutting and sewing the leather and attaching the heels and soles are essentially the same for each shoe. Consequently, the manufacturer can group the shoes by sizes, styles, and grades of leather, and treat the costing of materials using job costing. Then, the labor and factory overhead costs for the operations can use a process cost system.

Figure 3.1: Comparison of job costing and process costing

PRODUCT SIMILARITY

Job costing Process costing

TIMING

MATERIALS

LABOR

OVERHEAD

COST IDENTIFICATION

Products/jobs differ from one another

Products are all alike

Salesorders precede production

Production precedes sales; goods produced for anticipated sales

Unique materials for each product/job

Standard materials for all products

Variety of tasks are preformed due to different types of products/jobs

Production tasks are routine due to similarity of products

Relatively low degree of automation, so overhead costs are generally not a high portion of total cost

Often highly automated production, so overhead costs are generally a high portion of total cost

Costs indentified with specific batches or customer orders

Costs identified with departments or operating centers

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Section 3.4 The Cost Elements in a Process Cost System

A hybrid cost system exists where one type of cost system (job costing or process costing) is used for one phase of the production process, and another system is used for a subsequent phase. For example, in manufacturing cars, the various parts, subassemblies, engines, trans- missions, and so forth may be produced where a job cost system is used. In assembly, every car, regardless of model, has the same assembly operations performed. Therefore, the labor and factory overhead costs of the assembly operations may be accounted for using a process cost system. Hybrid cost systems can involve various sequences of job and process costing, depending on the particular production process.

Operation costing is a term often used to refer to modified or hybrid cost systems. Except in the simplest of cases, pure job costing or process costing does not exist. There is usually some modification. Managers need to understand their own organization’s cost system in order to evaluate the cost information generated by that system. The remainder of this chapter pro- vides detailed discussions of job cost and process cost systems.

3.3 The Job Cost System The job cost system accumulates separately the costs of materials, labor, and overhead for each job, whether a job of one unit or a job of many units. Every job is assigned a number, which is used for accumulating the costs of that job. Daily, weekly, or monthly cost summaries for each job are generated. These summaries are referred to as job, work, or production orders. The file of production orders in process constitutes a subsidiary ledger in support of the work in process account in the general ledger.

Whereas a job cost system accumulates costs by jobs, a process cost system accumulates costs by departments. This, and other differences, changes the approach to determining unit costs in a process cost environment. However, as outlined in the remaining sections of this chapter, many of the product cost concepts of Chapter 2 apply as well to process costing.

3.4 The Cost Elements in a Process Cost System The cost elements in a process cost system depend on whether the organization is a manufac- turing or service organization. A manufacturer typically has more detailed costs; therefore, we focus on manufacturing firms in the following sections. We will discuss the two major ele- ments of manufacturing costs in a process cost system: materials and conversion costs.

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Section 3.4 The Cost Elements in a Process Cost System

Materials Materials are requisitioned for use in a specific department, and the materials costs are accu- mulated by the department for a specific time period. Although materials can be added in any department, they are often issued from the storeroom to the first operating department in the process. The concept of accounting for materials costs does not depend on whether materi- als are added in the first department or in subsequent departments. Distinguishing between direct materials and indirect materials is not considered critical to obtain accurate unit costs.

Two major differences in accumulating materials costs between the job cost system and the process cost system should be noted. Materials costs are identified first with departments and then assigned to individual units in a process cost system. Materials costs bypass depart- ments and are charged directly to specific jobs in a job cost system. In process costing, materi- als costs are accumulated for a period of time and averaged over all units receiving materials during the period. This averaging of costs is broader in a process cost system than in a job cost system, where costs would be averaged only over the batch of units comprising a particular job.

Conversion Costs Labor and overhead costs are incurred to convert materials into a finished product; hence, labor and overhead costs are called conversion costs. Because labor and overhead often enter the process at the same time, we combine them for illustrations throughout the chapter. This assumes that overhead is applied to production using direct labor hours or dollars. Where another cost driver is used, we separate the two cost elements.

Labor cost is measured monthly, by department, and without identifying specific orders. Labor time tickets may be used for payroll accounting, but are not needed to measure the time to complete a single order because each unit of product in a process cost setting is pre- sumed to take the same amount of time. Like materials, little emphasis is placed on distin- guishing precisely between direct labor and indirect labor.

Overhead costs are accumulated by department. Typically, we record them in a departmen- tal overhead control ledger by type of cost (e.g., depreciation, utilities). Overhead costs are charged to production through predetermined overhead rates for each department. In most of our illustrations, overhead appears to be actual overhead. However, the costs represent charges based on predetermined overhead rates under a normal cost system. Since normal costing was discussed in Chapter 2, we will not repeat the coverage here. We assume that overhead is accumulated and applied using departmental rates.

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Section 3.4 The Cost Elements in a Process Cost System

Cost Flows In a process system, a product may flow through several operations before completion. For example, production of cellular phones may start in a fabricating operation, as shown in Fig- ure 3.2.

Both the physical units and costs will be identified for the fabricating operation over a period of time, such as a month. When the inner components of the phones are completed in the fab- ricating operation, the units with their costs are transferred by automated guided vehicles to the next operation—in this case, the molding operation where the casings are formed. Addi- tional costs will be incurred and accounted for in the molding operation. At the completion of the molding operation, the units and accumulated costs of preceding operations will be transferred to the last operation in this example, the finishing operation.

Figure 3.2: Flow of units and costs in a process manufacturing system

Department B, Molding

Operation

Department C, Finishing Operation

Finished Goods Inventory

Cost of Goods Sold

Department A, Fabricating Operation

Start units. Add costs.

Transfer units and costs to Dept. B.

Add Dept. B costs.

Transfer units and costs to Dept. C.

Add Dept. C costs.

Transfer units and costs to Finished Goods Inventory.

Record the cost of goods sold.

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Section 3.4 The Cost Elements in a Process Cost System

Figure 3.3: Flow of units and costs for subassembly components

Department B, Molding

Operation

Department C, Finishing Operation

Finished Goods Inventory

Cost of Goods Sold

Department A, Fabricating Operation

Department X, Soldering Operation

Transfer units and costs to Dept. C.

Department W, Forming

Operation

Start units. Add costs.

Transfer units and costs to Dept. B.

Add Dept. B costs.

Start subassembly units and costs.

Transfer units and costs to Dept. X.

Add Dept. X costs.

Transfer units and costs to Dept. C.

Add Dept. C costs.

Transfer units and costs to Finished Goods Inventory.

Record the cost of goods sold.

Main Production Line Subassembly Production Line

Because costs need to be identified with departments, a process cost system normally involves accounting transfers between departmental work in process inventory accounts. Each depart- ment has its own work in process account; when goods are completed in one department, their costs are transferred to the work in process account of the next department.

In some types of operations, a subassembly may be produced on a separate production line for addition to the product at a later stage. For example, assume that the main production line for computer keyboards extends from Department A (Fabricating) to Department C (Fin- ishing). A subassembly line, consisting of Departments W (Forming) and X (Soldering), uses numerically controlled machines to produce a component that converts physical measures like velocity and pressure into digital form. These components are brought into the main line in Department C. A diagram showing the flow of units and costs for this example appears in Figure 3.3.

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Section 3.5 The Equivalent Unit Concept

3.5 The Equivalent Unit Concept A primary goal of any cost accounting system is to identify product costs for determining end- ing inventories of work in process and finished goods and for establishing the cost of goods sold amount. Costs are attached to units in inventories whether the units are wholly or par- tially completed. The mechanism for tracing costs to units is a unit cost.

Unit Costs When calculating unit costs, we typically think of a formula similar to the following:

Unit cost = Total costs

Units produced or work done

Applying this formula to the typical process cost situation is complicated by two major fac- tors: (1) the stage of completion of units in work in process inventories, and (2) the different points in time that materials and conversion costs enter a departmental process. We will dis- cuss point (2) in more detail later in the chapter.

The number of units completed is not a good measure for determining an appropriate unit cost when there are partially completed units in beginning or ending inventories. Conse- quently, an equivalent unit must be identified. Equivalent units represent the theoretical number of units that could have been produced had the resources been applied to units that were started and completed during the period. We can also think of equivalent units as rep- resenting the actual work done on the physical units. For instance, two physical units 50% complete represent the equivalent of one unit 100% complete.

Flow of Physical Units For each department, the flow of physical units can be viewed as follows:

Units in beginning work in process inventory + Units of product started during the period = Units completed and transferred out + Units in ending work in process inventory

This relationship among physical units is also shown in Figure 3.4. As diagrammed, the num- ber of units started and completed during the period can be computed two ways:

Units completed and transferred out – Units in beginning work in process inventory = Units started and completed

or

Units of product started during the period – Units in ending work in process inventory = Units started and completed

Knowing where all units are in a production process is an important starting point for cal- culating unit costs. Figure 3.4 represents the location and flow of physical units through a production process for a given time period.

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Section 3.5 The Equivalent Unit Concept

Stage of Completion In a process cost system, the units in the beginning and ending inventories are usually at different stages of completion. The stage of completion is the average percentage of work completed on a unit of product at any point in time. For a department, it is useful to identify three distinct groupings of products when computing equivalent units:

1. Partially completed units in the beginning inventory that are completed during the current period. The work to complete these units is represented by 100% less the stage of completion when the period started. We generally assume a first-in, first-out flow, which will be explained in more detail later in this chapter.

2. Units started and completed during the period. The work completed is represented by 100%.

3. Partially completed units at the end of the period. The work completed is represented by the percentage of completion at the end of the period.

When all three of these groups are summed, the result is equivalent units of output for this time period—the work done by the workers in this department. This is the number of units that could have been produced if all production were started and completed during the period, assuming no beginning or ending work in process inventories.

For example, the Norwich Post Office has a sorting department. On March 1, 15,000 units were in process and were 60% completed. During March, the department started work on 200,000 units. On March 31, 20,000 units were in process and were 30% completed. From our flow of physical units formula, we calculate the number of units completed as follows:

Figure 3.4: Relationship among physical units within a department

Units Completed and Transferred Out

Units in beginning

work in process

inventory

Units started and completed

during the period

Units in ending

work in process

inventory

Units Started During the Period

Units in beginning inventory 15,000

 + Units started during period 200,000

 − Units in ending inventory (20,000)

Units completed and transferred 195,000

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Section 3.5 The Equivalent Unit Concept

Next, we compute the units started and completed using both methods described previously:

Current period work to complete beginning inventory [15,000 × (100% − 60%)] 6,000

 + Units started and completed (180,000 units × 100%) 180,000

 + Current period work in ending inventory (20,000 units × 30%) 6,000

Equivalent units of output (work done during the period) 192,000

or

Units completed and transferred 195,000

 − Units in beginning inventory (15,000)

Units started and completed 180,000

Units started during period 200,000

 – Units in ending inventory (20,000)

Units started and completed 180,000

We now have the three groups of units and their stages of completion, which are necessary to find the number of equivalent units. The calculation for the equivalent units of output for the period is as follows:

Timing of Inputs Materials, labor, and overhead are the inputs to the production process. These inputs may enter at different points during the process. The most common situation is for materials to enter at the beginning of a departmental process and for labor and overhead to be added continuously throughout the process. Consequently, it is possible for some units in process to have all of their materials added but only part of the labor and overhead. In other processes, the materials may be added continuously or at the end of the process. For our purposes, unless otherwise stated, presume that materials are added at the beginning of the process, and labor and overhead enter the process together and are added continuously or evenly throughout the process.

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Section 3.5 The Equivalent Unit Concept

To calculate unit costs when inputs have different timing for entering a process, we need to calculate the equivalent units for each cost input. Therefore, one equivalent unit computa- tion is for materials; another computation is for conversion costs. The computational steps developed in the next section will show how separate equivalent units quantities are used to establish unit costs.

Computational Steps Tracing physical units to a department and accounting for those units are generally cleri- cal functions. Likewise, the identification of the costs charged to a department is a relatively simple function. However, distributing the costs to work completed and ending inventories requires an understanding of several steps. These steps are:

1. Determine flow of physical units. 2. Calculate equivalent units. 3. Compute unit costs. 4. Distribute total costs to units. 5. Reconcile the costs.

The last step checks whether the four previous steps were completed accurately. This step veri- fies that the total costs distributed to the units equal the total costs charged to the department. Each of these steps will be presented in detail as part of developing a cost of production report.

We assume a first-in, first-out (FIFO) cost method in progressing through the five compu- tational steps. The beginning inventory is completed before new units are completed. Costs incurred flow in the same manner. Most companies using process costing use the FIFO cost method. Another frequently used method, the weighted average cost method, is discussed later in this chapter.

Under FIFO, the older units and costs are transferred out first, and the more current units and costs are transferred out next. Only the most recent costs are held as ending inventory. With the FIFO cost method, the equivalent units of output are literally the units that could have been completed if all efforts during the period were devoted to starting and completing units, allowing no partially completed units. Usually, however, some units will be in a stage of partial completion at both the beginning and at the end of the month. The beginning work in process units are completed during the month, and a start has been made on the units in ending work in process.

To illustrate the computational steps, consider the current plant of Shirts Unlimited. Sweat- shirts are produced in three departments: Cutting, Sewing, and Finishing. Our illustration will focus on the Cutting Department. All cloth material enters production at the beginning of the Cutting Department operations. The cloth is cut there. Both materials and conversion costs are incurred in the Cutting Department. Its activity for May is summarized as follows:

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Section 3.5 The Equivalent Unit Concept

Step 1: Determine Flow of Physical Units. Determining the flow of physical units for a department involves identifying the units in the beginning inventory, the units started and completed during the period, and the units in the ending inventory. These are whole units; stage of completion is not an issue here. For the Cutting Department of Shirts Unlimited, we have:

Units in beginning work in process 4,000

Units started and completed: (12,000 – 2,000 or 14,000 – 4,000) 10,000

Units in ending work in process 2,000

Total units 16,000

Work in process, May 1:

 Units 4,000

Stage of completion:

 Materials 100%

 Conversion costs 40%

Costs:

 Materials $400,000

 Conversion costs 80,000

 Beginning inventory total cost $480,000

Units started 12,000

Units completed and transferred 14,000

Current period costs:

 Materials $1,200,000

 Conversion costs 650,000

 Total costs added $1,850,000

Work in process, May 31:

Units 2,000

Stage of completion:

 Materials 100%

 Conversion costs 30%

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Section 3.5 The Equivalent Unit Concept

Step 2: Calculate Equivalent Units. Equivalent units are computed by multiplying physical units by the percentage of work completed on them. For our example, using the units started and completed method, we have the following calculations:

Materials Conversion

Current period work to complete beginning inventory:

 4,000 × (100% − 100%) 0

 4,000 × (100% − 40%) 2,400

Units started and completed in May:

 10,000 × 100% 10,000 10,000

May’s work in ending inventory:

 2,000 × 100% 2,000

 2,000 × 30%       600

Equivalent units (work done during May) 12,000 13,000

Materials Conversion Total

Beginning inventory $400,000 $80,000 $480,000

May’s costs 1,200,000 650,000 1,850,000

Total costs $1,600,000 $730,000 $2,330,000

Note that in deriving the 2,400 equivalent units to complete the beginning inventory for con- version costs, we multiply the 4,000 physical units by 60% (100% – 40%) because the units were already 40% complete and another 60% of work is needed in the current period to complete those units.

Step 3: Compute Unit Costs. We begin this step by itemizing the costs for which the Cutting Department will be held accountable.

The unit costs for materials and conversion costs are calculated from the current month’s costs and equivalent units. Last month’s costs and equivalent units of work are included in the beginning inventory amount and will be treated separately. Using May’s costs and the equivalent units from above, the costs for May are divided by the equivalent units for May to obtain unit costs:

Unit Costs for May:

Unit cost for materials = $1,200,000 / 12,000 = $100

Unit cost for conversion = $650,000 / 13,000 = $50

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Section 3.5 The Equivalent Unit Concept

The beginning work in process cost provides useful information for managers. These dollars represent costs from the prior period—in this case, the previous month. Thus, unit cost infor- mation about the beginning inventory is obtained by dividing the beginning inventory costs by the prior period work (i.e., equivalent units) in the beginning inventory:

April’s Unit Costs in May’s Beginning Inventory:

Unit cost for materials = $400,000 / 4,000 = $100

Unit cost for conversion = $80,000 / 1,600 = $50

These unit costs are identical to those for the current period, although such a case will not occur very often.

Step 4: Distribute Total Costs to Units. We next show the distribution of costs to units using the unit costs and equivalent units derived earlier.

Costs Accounted for: Materials Conversion Total

Completed and transferred to Sewing:

Work in Process, May 1:

Prior period costs $400,000 $80,000 $480,000

May:

 Equivalent units 0 2,400

 Times costs per unit $100 $50

 Costs $0 $120,000 $120,000

Completed cost of beginning inventory $400,000 $200,000 $600,000

Started and Completed:

 Units 10,000 10,000

 Times cost per unit $100 $50

 Costs $1,000,000 $500,000 $1,500,000

Total cost of completed and transferred units $1,400,000 $700,000 $2,100,000

Work in Process, May 31:

 Equivalent units 2,000 600

 Times cost per unit $100 $50

 Costs $200,000 $30,000 $230,000

Total costs accounted for $1,600,000 $730,000 $2,330,000

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Section 3.6 Cost of Production Report

Note the sequence of computations. First, the old costs in the beginning work in process are listed. Then, we compute the cost to complete the beginning work in process in the current period. Next, we calculate the costs associated with units started and completed. The sum of all of these costs is the cost of goods completed and transferred out. This is also called the cost of goods manufactured. Finally, we determine the costs of the work done on the units still in process on May 31.

Often the unit cost calculations result in the need to round to some decimal place. The more decimal places used, the less the rounding error in total dollars assigned to units completed and units in ending inventory. If rounding errors occur, it is customary to adjust the costs assigned to units completed to compensate for the rounding error.

Step 5: Reconcile the Costs. This final step in the computational process is really a check to ensure that all department costs are charged to units completed and units in the ending inven- tory. As shown in Step 3, the total costs charged to the Cutting Department are $2,330,000. After distributing the costs to the units completed and units in the ending inventory, the sum should also equal $2,330,000. This is confirmed by the total costs accounted for in Step 4. This check shows that materials and conversion costs charged to the department have indeed been distributed to all units.

3.6 Cost of Production Report The five computational steps provide all of the calculations needed to prepare a cost of pro- duction report for May. This report, which presents information about units, costs charged to the department, and how the costs are accounted for, is shown in Figure 3.5.

In T-account form, the transactions reflected in the cost of production report would be sum- marized as shown in Figure 3.6.

We use the same procedures to determine costs for subsequent departments in the process- ing operation. In departments after the first, however, unit costs must be combined with the accumulated costs of work done in earlier departments. For example, if operations cover 10 departments, Department 10 would obtain a unit cost for the total work done in all preceding nine departments and calculate a unit cost for its own work.

Management’s Use of Cost of Production Reports Internal accounting reports often serve only to attach dollars to the events about which man- agers already know. For example, managers know about volumes, inefficiencies, and scrap, but they do not know the costs related to them. However, the information provided by a cost of production report can be used by managers in several different ways.

When unit costs for materials and conversion costs change from one period to the next, a manager should ask why. Why is a materials price higher or lower? What causes conversion costs to change? The manager has to find the answers to ensure that the numbers reported represent reality and are accurate. Sometimes managers intuitively know the numbers are either correct or incorrect because of their experiences.

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Section 3.6 Cost of Production Report

Physical

Units

4,000

Shirts Unlimited Cutting Department

Cost of Production Report for the Month of May

Materials Equivalent

Units

Conversion Equivalent

UnitsUnits:

Beginning work in process:

Prior Month

4,000 × 100%

4,000 × 40%

May’s work:

4,000 × (100% – 100%)

4,000 × (100% – 40%)

Units started and completed:

10,000 × 100%

Ending work in process

2,000 × 100%

2,000 × 30%

Total units

Equivalent units of output

10,000

2,000

16,000

$ 400,000

4,000

$ 100

$1,200,000

12,000

$ 100

$1,600,000

4,000

10,000

2,000

12,000

$ 80,000

1,600

$ 50

$650,000

13,000

$ 50

$730,000

1,600

10,000

600

13,000

$ 480,000

$1,850,000

$2,330,000

Materials Conversion Total Costs Charged to Department:

Beginning work in process:

Costs

Divided by equivalent units

Cost per unit

May’s production:

Costs

Divided by equivalent units

Cost per unit

Total costs charged

0 2,400

Costs Accounted for:

Completed and transferred to Sewing:

Prior period costs

May: Equivalent units

Times cost per unit

Costs

Completed cost of beginning

inventory

Started and completed:

Units

Times cost per unit

Costs

Total cost of completed and transferred units

Work in process, May 31:

Equivalent units

Times cost per unit

Costs

Total costs accounted for

$ 400,000

0

$ 100

$ 0

$ 400,000

10,000

$ 100

$1,000,000

$1,400,000

2,000

$ 100

$ 200,000

$1,600,000

$ 80,000

2,400

$ 50

$120,000

$200,000

10,000

$ 50

$500,000

$700,000

600

$ 50

$ 30,000

$730,000

$ 480,000

$ 120,000

$ 600,000

$1,500,000

$2,100,000

$ 230,000

$2,330,000

Materials Conversion Total

Shirts Unlimited Cutting Department

Cost of Production Report for the Month of May

Figure 3.5: Cost of production report for Cutting Department (FIFO method)

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Section 3.6 Cost of Production Report

Cost of production reports for several periods in succession can show trends. Here certain questions arise. Are inventories bouncing around, or are they stable? Why? Why are unit costs steadily moving up, or why are they erratic? Are we changing the mix of workers as reflected in labor cost changes? These and many other questions help managers understand their working environment and the company’s focus much better.

Ethical Considerations As with all financial reports, production reports can easily be manipulated. Estimating the stage of completion of the work in process is an area particularly susceptible to manipulation by production managers. These estimates are very subjective. Two reasons explain why man- agers might be motivated to overestimate the stage of completion. First is pressure to meet production quotas of units or equivalent units produced. A second reason relates to minimiz- ing unit costs. A higher estimate for the degree of completion of the work in process inventory results in a greater number of equivalent units of output for the period. This, in turn, gener- ates a lower cost per equivalent unit. Notice, however, that any overestimate in one period results in an opposite impact in the following period. Management accountants, nevertheless, need to be aware that temptations to overestimate the stage of completion may exist.

Beg. Inventory

Materials

Conversion

End. Inventory

480,000

1,200,000

650,000

230,000

Completed 2,100,000 Transferred in 2,100,000

Work in Process — Cutting Work in Process — Sewing

Figure 3.6: Flow of cost from Cutting Department to Sewing Department

Contemporary Practice 3.1: Process Costing at a Consumer Packaged Goods Company

A journal article describes process costing at a consumer packaged goods company as follows: “Production volume that’s in process at the end of the reporting period is estimated based on the standard cost per unit multiplied by a percentage-complete standard. A study is conducted periodically that analyzes the level of work-in-process over time. Results indicate that work-in-process tends to be, on average, 75% complete. The company uses this percentage (75%) of the inputs placed into production for the period as the volume standard to apply to work-in-process inventory for reporting purposes.” (Dosch & Wilson, 2010, p. 43)

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Section 3.8 Weighted Average Cost Method

3.7 Simplifications of JIT and Automation For companies adopting a just-in-time (JIT) philosophy, the expectation is to reduce or eliminate inventories. If a company implements JIT throughout its operations, the final departments in the process finish the products just in time to be shipped; parts, components, and subassemblies are manufactured just in time to meet the final department’s needs; and so on, back through the process. Even in the beginning, materials are received just in time to enter the appropriate department.

JIT can significantly simplify accounting for a process cost system. Partially completed units within each department will be kept as low as possible. Thus, little difference exists between units completed and work done during the period. Consequently, the costs incurred during the period are largely tied to goods completed. As a result, unit costs are more accurate in a JIT environment because they are less influenced by stage of completion estimates. This is true of automated factories as a whole, since they tend to have fairly uniform amounts of beginning and ending work in process inventories. Thus, work done during the period will be approximately equal to the number of units completed during the period.

In addition, little need exists to transfer costs from one department to the next. The costs of the period can be recorded directly to the cost of goods sold account. Process costs per unit can still be computed, but on a daily or weekly basis. The unit costs will be calculated using units produced, rather than equivalent units. Further aspects of JIT product costing are dis- cussed in Chapter 4.

In JIT factories, certain departments remain idle until their outputs are needed by the next department. This may cause a particular department to appear inefficient in one period and very efficient in another. Therefore, evaluations of managers and costs in JIT plants need to consider the flow of production and who controls decisions of what and when to produce.

Many managers believe that a system truly operating under JIT will have no inventories and, therefore, no need for a process cost system. Because the process flow time is not zero, some items are always in production in a partially completed stage. Process costing becomes greatly simplified in such a setting, but it is not eliminated.

3.8 Weighted Average Cost Method An alternative to the first-in, first-out cost method for calculating equivalent units is the weighted average cost method. This method averages the beginning work in process inven- tory (last period’s costs) and the current production (this period’s costs). The method assumes that the started and completed units for the period are the units completed and transferred out (regardless of when the units were started). In computing unit costs, equivalent units are calculated as the sum of (1) the units completed during the period, and (2) the ending work in process inventory multiplied by its stage of completion. Whereas the equivalent units for the FIFO unit cost represent only work done during the current period, equivalent units for the weighted average method represent all units completed during this period (including work already done in the beginning work in process) plus any work done on ending work in process units.

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Section 3.8 Weighted Average Cost Method

The weighted average cost method is easier and simpler than FIFO because it does not require tracking the costs in the beginning inventory separately from those costs added during the current period. It is justified on the basis of convenience and simplicity. One can argue that a process which produces identical or similar units should generate the same unit costs from one month to the next. In addition, if beginning and ending inventories do not differ signifi- cantly from period to period, the costs per unit are relatively stable. However, the weighted average method commingles costs and production efforts of two time periods. The resulting product costs do not match production management’s measures of inputs and outputs. Thus, many managers view the extra effort for FIFO as worthwhile.

Weighted Average Computational Steps We apply the same computational steps to the weighted average cost method that we used for the FIFO cost method. A slight difference occurs in the “Costs Accounted for” section of the cost of production report. In this section, costs are distributed to units completed and units in the ending inventory. The weighted average cost method will usually have different unit costs from FIFO.

We continue the example of Shirts Unlimited that we explored earlier in the chapter. For the Cutting Department, we prepared the cost of production report using the FIFO cost method. Now, we apply the weighted average cost method to the data.

Step 1: Determine Flow of Physical Units. Determining the flow of physical units for a department is the same as for the FIFO method:

Units in beginning work in process 4,000

Units started and completed: (12,000 – 2,000 or 14,000 – 4,000) 10,000

Units in ending work in process 2,000

Total units 16,000

Step 2: Calculate Equivalent Units. The weighted average method computes unit costs by aggregating costs to date (for the completed units and ending work in process) and dividing these by work done to date. Thus, to obtain the equivalent units of work done to date on the completed units and ending work in process, we need only consider the 14,000 units com- pleted (4,000 + 10,000) and the 2,000 units in ending work in process. For our example, we would have the following calculation:

Materials Conversion

Units completed: 14,000 × 100% 14,000 14,000

Ending inventory:

 2,000 × 100% 2,000

 2,000 × 30% 600

Equivalent units of work done to date 16,000 14,600

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Section 3.8 Weighted Average Cost Method

Step 3: Compute Unit Costs. The unit costs for materials and conversion costs are calculated from the total costs and the equivalent units. The costs for which the Cutting Department will be held accountable are:

Costs Charged to Dept. Materials Conversion Total

Beginning inventory $400,000 $80,000 $480,000

Current month 1,200,000 650,000 1,850,000

Total costs $1,600,000 $730,000 $2,330,000

We calculate unit costs by using the equivalent units from above and dividing them into the total costs:

Unit Costs for May:

Unit cost for materials = $1,600,000 / 16,000 = $100

Unit cost for conversion = $730,000 / 14,600 = $50

These unit costs are identical to those calculated using the FIFO cost method because April’s unit costs were the same as those for May. Usually, some difference will occur in the numbers, but generally not a significant one.

Step 4: Distribute Total Costs to Units. The distribution of costs using the unit costs from Step 3 is as follows:

Costs Charged to Dept. Materials Conversion Total

Completed and transferred to Sewing:

 Units 14,000 14,000

 Multiplied by cost per unit $100 $50

 Costs $1,400,000 $700,000 $2,100,000

Work in process, May 31:

 Equivalent units 2,000 600

 Multiplied by cost per unit $100 $50

 Costs $200,000 $30,000 $230,000

Total costs accounted for $1,600,000 $730,000 $2,330,000

Step 5: Reconcile the Costs. As shown in Step 3, the total costs charged to the Cutting Depart- ment are $2,330,000. After distributing the costs to the units completed and units in the end- ing inventory, the sum of that distribution should equal $2,330,000. This is confirmed by the total costs accounted for in Step 4.

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Section 3.8 Weighted Average Cost Method

Cost of Production Report The five computational steps provide all of the calculations needed to prepare a cost of pro- duction report for May. The report prepared under the weighted average cost method appears in Figure 3.7.

Figure 3.7: Cost of production report for Cutting Department (weighted average method)

Physical

Units

Shirts Unlimited Cutting Department

Cost of Production Report for the Month of May

Material Equivalent

Units

Conversion Equivalent

UnitsUnits:

Units completed:

14,000 × 100%

Ending work in process:

2,000 × 100%

2,000 × 30%

Total units

Equivalent units of work to date

14,000

2,000

16,000

14,000

2,000

16,000

14,000

600

14,600

Materials Conversion Total

Materials Conversion Total

Prior period cost

Current month costs

Total per unit

Divided by equivalent units

Cost per unit

$ 400,000

1,200,000

$1,600,000

16,000

$ 100

$ 80,000

650,000

$730,000

14,600

$ 50

$ 480,000

1,850,000

$2,330,000

Costs Charged to Department:

Costs Accounted for:

Completed and transferred to Sewing:

Units

Times cost per unit

Costs

Work in process, May 31:

Equivalent units

Times cost per unit

Costs

Total costs accounted for

14,000

$ 100

$1,400,000

2,000

$ 100

$ 200,000

$1,600,000

$2,100,000

$ 230,000

14,000

$ 50

$700,000

600

$ 50

$ 30,000

$730,000 $2,330,000

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Summary & Resources

Summary & Resources

Chapter Summary In a job cost environment, costs are identified with specific batches or customer orders. In a process cost environment, products are continuously manufactured through a series of departments. Physical units and costs are identified with the departments. Unit costs are used in tracing the costs through the various departments and to the finished goods inven- tory account.

Because manufacturing situations will vary from one company to another, modifications and adaptations to the cost accounting system must be made. Modified and hybrid cost systems are common. A modified cost system will have some elements of cost using job costs and other elements of cost using process costs. A hybrid cost system will have one department on a job cost basis and another department on a process cost basis.

Unit costs in a process cost system are computed by dividing the appropriate current costs by the related equivalent units. The inventory costing method used is the first-in, first-out method. This assumes the beginning inventory is completed before new units are completed. Costs incurred are assumed to flow in the same manner. The cost of production report sum- marizes the costs charged to departments and how the costs are distributed between com- pleted units and ending work in process.

Changes taking place in the manufacturing environment have an impact on a process cost system. Some changes, such as JIT, can simplify the calculation of unit costs.

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Summary & Resources

cost of production report A report that presents information about units, costs charged to the department, and how the costs are accounted for.

equivalent units The theoretical number of units that could have been produced had the resources been applied to units that were started and completed during the period.

first-in, first-out (FIFO) cost method A process costing method that presumes the beginning inventory is completed before new units are completed.

hybrid cost system One type of cost system is used for one phase of the production process, and another system is used for a subsequent phase.

job cost system A cost system that sepa- rately tracks costs associated with each job or product.

job order A cost summary for each job.

just-in-time (JIT) philosophy An inven- tory management approach that seeks to minimize or eliminate inventories.

modified cost system A cost system that has one or more elements of cost using job costing, while the other cost elements use process costing.

operation costing Usage of a modified or hybrid cost system.

process cost system Identification of costs with individual departments for an interval of time; unit costs of a final product are the sum of all costs assigned to the product by each department that worked on it.

production order A cost summary for each job.

stage of completion Average percentage of work completed on a unit of product at any point in time.

weighted average cost method A process costing method that averages the costs of the beginning work in process inventory and the current production.

work order A cost summary for each job.

Key Terms

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Summary & Resources

Problem for Review Irene Carol Fisheries raises cutthroat trout for local restaurants and uses a FIFO process cost system. The fish represent materials. The process involves three ponds: raising, growing, and fattening. Fingerlings are grown after hatching in the raising pond. At a specified point, the fingerlings are moved to the growing pond, where they mature. After maturing, the fish are transferred to the fattening pond. The growing pond had 5,000 fingerlings on April 1 that were 10% complete for the growing pond. During the month, an additional 30,000 fingerlings were put into the pond. By the end of April, 28,000 fish had been moved to the fattening pond. The fingerlings remaining in the growing pond were 30% complete.

Questions:

1. Determine the equivalent units for fingerlings. 2. Determine the equivalent units for conversion costs.

Solution:

1. Equivalent units for fingerlings:

Physical flow:

 Beginning inventory 5,000

 Add units started during month 30,000

 Available 35,000

 Minus units completed (28,000)

 Ending inventory 7,000

Started and completed:

 Units completed 28,000

Minus beginning inventory (5,000)

 Units started and completed 23,000

or

 Units started 30,000

Minus ending inventory (7,000)

 Units started and completed 23,000

Equivalent units for fingerlings:

To complete beginning inventory: 5,000 × (100% − 100%) 0

 Units started and completed: 23,000 × 100% 23,000

 Ending inventory: 7,000 × 100% 7,000

 Equivalent units 30,000

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Summary & Resources

2. Equivalent units for conversion costs:

To complete beginning inventory: 5,000 × (100% − 10%) 4,500

Units started and complete: 23,000 × 100% 23,000

Ending inventory: 7,000 × 30% 2,100

 Equivalent units 29,600

Questions for Review and Discussion

1. Distinguish between a job cost system and a process cost system as to the timing of sales versus production.

2. What is the focal point for cost accumulation in a process cost system? 3. Distinguish between a modified cost system and a hybrid cost system. 4. What is the purpose of a job, work, or production order? 5. List the five computational steps necessary to account for costs in a process cost

system. 6. Explain how equivalent units are computed under the FIFO method of process

costing. 7. How are the unit costs computed under the FIFO method of process costing? 8. Why are equivalent units for materials usually different from equivalent units for

conversion costs? 9. What accounting report is the major document for a process cost system?

10. How can one check to ensure that cost distribution to completed units and ending inventory has been done properly?

11. How can management use a cost of production report? 12. Which aspect of determining unit costs in a process cost system is particularly sus-

ceptible to manipulation by production managers? 13. Explain how a just-in-time environment can simplify a process cost system. 14. What is the distinction between equivalent units under the FIFO method and equiva-

lent units under the weighted average method? 15. Under what circumstances will both FIFO and weighted average yield the same

equivalent units? 16. On a cost of production report, the costs of units completed and transferred out are

treated one way under the FIFO method and a different way under the weighted average method. Explain this difference.

Exercises

3-1. Physical Flow. Rolnick’s Protective Coating Service specializes in providing protective coating for eyeglasses. The company’s work in process inventory in Operation 1 on July 1 was 2,500 units. During July, 72,000 units were completed in Operation 1 and transferred to Operation 2. The ending work in process inventory in Operation 1 was 3,500 units.

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Summary & Resources

Questions:

1. Compute the number of units started during July. 2. Compute the number of units started and completed. 3. Why is the stage of completion for the work in process inventories irrelevant for

these computations?

3-2. Costs of Finished Units and Work in Process. Henry’s Dry Cleaners uses a FIFO process cost system. Its work in process on December 1 consisted of 8,000 gar- ments, which were 20% complete; $12,800 in processing costs were incurred last month for these garments.

During December, 82,000 garments were started and 78,000 were completed. Pro- cessing costs during December amounted to $245,225. The ending work in process was 80% complete.

Question:

Determine the cost of the finished garments and the cost of the ending work in process.

3-3. Cost of Completed Units. Blair Products of Wellington, New Zealand, produces a kiwi fruit drink and uses a FIFO process cost system. The units and equivalent units (in liters), as well as unit costs, for the Initial Mix Department are as follows:

Materials Conversion

Equivalent units in beginning work in process 6,000 1,200

Units started and completed 40,000 40,000

Equivalent units in ending work in process 3,000 1,800

Unit costs NZ$0.10 NZ$0.20

Questions:

1. Compute the current period costs for: a. Materials. b. Conversion costs.

2. If the beginning work in process inventory was valued at NZ$12,600, what would be the cost of units completed?

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Summary & Resources

3-4. Conversion Costs. The Fabrication Department is the first stage of Hiller Company’s production process. Conversion costs in beginning work in process for this depart- ment were 70% complete, and in the ending work in process they were 40% com- plete. Hiller Company uses a FIFO process cost system. Conversion costs data in the Fabrication Department for January are as follows:

Units Conversion

Costs

Work in process at January 1 28,000 $ 51,000

Units started and costs incurred during January 153,000 $293,000

Units completed and transferred to next department during January 131,000

Questions:

1. What was the conversion cost of work in process in the Fabrication Department at January 31?

2. What were the conversion costs per equivalent unit last month and this month, respectively?

3-5. Distribution of Total Cost and Ethics. There were 5,000 units in process in the Cutting Department of Grossman & Marcus, Inc., at the beginning of February. These units had materials and conversion costs of $48,000 and were 60% complete for conversion costs. Materials are added at the beginning of the process. During Febru- ary, 60,000 units were started. The ending inventory for the month totaled 8,000 units, 25% complete for conversion costs. The unit cost calculation shows $4 for materials and $8 for conversion costs. A FIFO process cost system is used.

Questions:

1. Compute the cost of units completed and transferred to the next department. 2. Compute the cost of units in the ending inventory for the month. 3. Why might the production manager wish to inflate the estimate of the degree of

completion of the ending inventory from 25% to 50%? Support your answer with computations.

3-6. Unit Costs in a Bank. Chittenden Bank of Columbus, Ohio, processes checks in its Check Clearing Department. No materials costs are incurred in this department. On June 1, 4,000 checks in process were 25% complete with an associated processing cost of $200. During June, 100,000 checks were started in process. By the end of June, 70,000 checks had been started and completed. The direct processing costs in June amounted to $18,000. On June 30, the checks in process were one-third complete.

Question:

Assuming a FIFO process cost system, calculate equivalent units and the unit cost of work done during June.

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Summary & Resources

3-7. Cost Distribution. Koniver Products manufactures a vitamin product and uses a FIFO process cost system. On July 1, it had 8,000 units in process that were 25% complete for conversion costs. Materials (a coating) are added at the end of the process. The cost of the beginning work in process was $1,800. July conversion costs were $36,000, and the materials costs were $17,000. Koniver Products started and completed 60,000 units in July. The work in process inventory on July 31 of 10,000 units was 60% complete.

Questions:

1. What was the total cost of work transferred to the finished goods inventory in July? 2. Determine the cost of work in process inventory on July 31.

3-8. Equivalent Units—FIFO and Weighted Average. Schroeder’s Photo Lab began the month with 6,000 items in inventory, which averaged 50% complete for materials and 40% complete for conversion costs. At the end of the month, there were 7,000 items in inventory, which averaged 60% complete for materials and 30% complete for conversion costs. During the month, 65,000 items were completed.

Questions:

1. Using the FIFO method, determine the appropriate numbers of equivalent units needed to compute unit costs for materials and for conversion costs.

2. Using the weighted average method, determine the appropriate numbers of equiva- lent units needed to compute unit costs for materials and for conversion costs.

3-9. Conversion Costs—Weighted Average Cost Method. Abe’s Vineyards grows grapes; after sorting and crating them, it sells the crates of grapes to Madelyn’s Win- ery. On December 1, Abe’s Vineyards had 10,000 pounds of grapes that were 40% complete for conversion costs. The conversion costs in the beginning work in pro- cess inventory were $20,000. In December, 150,000 pounds of grapes were started in process. Conversion costs in December amounted to $790,000. On December 31, 20,000 pounds of grapes were 40% complete for conversion costs. A weighted aver- age process cost system is used.

Questions:

1. Compute the equivalent units (pounds). 2. Determine the conversion costs per pound.

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Summary & Resources

3-10. Cost Distribution—Weighted Average Cost Method. Amy Dee’s Beef Processing Company (“Let us meat your needs”) had work in process at the beginning and end of the year as follows:

Percentage of Completion

Direct Materials Processing Costs

January 1 – 3,000 pounds 40% 10%

December 31 – 2,000 pounds 80% 40%

The company completed 41,000 pounds of finished products during the year. Costs incurred during the year were: direct materials, $242,600; processing costs, $456,200. Work in process at January 1 was carried at a cost of $16,600 (direct materials, $13,000; processing costs, $8,900).

Questions:

1. Compute the cost of ending work in process using the weighted average method. 2. Compute the cost of finished products using the weighted average method.

3-11. Total Costs—FIFO and Weighted Average. Lefkove, Inc. manufactures staplers. Materials are added at the beginning of the process; conversion costs are incurred uniformly. Beginning work in process consisted of 6,000 staplers. These units were 65% complete. During the period, the company began working on an additional 87,000 staplers, and finished the period with 9,000 staplers that were 30% com- plete in ending work in process.

Costs attached to beginning inventory were $7,500 for materials and $9,500 for conversion costs. Costs added during the period were $74,000 for materials and $22,000 for conversion.

Questions:

1. Compute the cost of finished products and the cost of ending work in process using the FIFO method.

2. Compute the cost of finished products and the cost of ending work in process using the weighted-average method.

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Summary & Resources

3-12. Unit Costs—FIFO and Weighted Average. Craig’s Diaper Service, located in a medium-sized city in California, is the lone remaining company that cleans cloth dia- pers in that city. The company currently uses a FIFO method of process costing and has arrived at a unit cost of $0.65. Harold Solomon, the owner, wonders what the unit cost would be with the weighted average method. He has obtained the following information from his accountant:

Equivalent units for the weighted average method 4,780

Equivalent units for FIFO method 5,000

Costs in beginning work in process $800

Question:

Compute the unit cost for the weighted average method.

Problems 3-13. Cost of Production Report. McKemie Robotics, a subsidiary of U.S.-based Kutner

Robotics located in Dublin, Ireland, manufactures a small robot that looks like a leprechaun and can be moved by remote control. It can be used as a novelty to serve food and drinks to guests; and, with a special attachment, it can vacuum the carpet.

The materials are all added at the beginning of the Assembly Operation (the first operation). Labor and overhead are added during the month. Data for the month of July in the Assembly Operation are as follows:

Units

Work in process, July 1 35,000

Units started in process 250,000

Costs (in U.S. Dollars)

Work in process, July 1:

 Materials $240,000

 Labor and overhead 80,000

July costs:

 Materials $3,500,000

 Labor and overhead 1,457,280

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Summary & Resources

The inventory of work in process on July 1 was complete as to materials but only 25% complete as to labor and overhead. On July 31, the inventory consisted of 20,000 units that were 40% complete with respect to labor and overhead.

Question:

Using FIFO, prepare a cost of production report for the Assembly Operation for the month of July.

3-14. Cost of Production Report and Ethics. The Lipseyville Municipality uses a FIFO process cost system to compute water purification costs. All materials (chemicals) are added at the beginning of the purification process. Data for the month of May are given as follows (units are kiloliters of water):

Units

Work in process, May 1 5,000

Units started in process 120,000

Costs

Work in process, May 1:

 Materials $15,000

 Labor and overhead 2,500

May’s costs:

 Materials $360,000

 Labor and overhead 232,000

The beginning work in process was 20% complete for labor and overhead. During the month, 115,000 units were completed, and 10,000 units that were 20% complete as to labor and overhead were in process at May 31.

Questions:

1. Prepare a cost of production report for the month of May. 2. Explain how management might use this cost of production report. 3. What might motivate the production manager to inflate the estimate of the degree of

completion of the ending work in process from 20% to 40%? Support your answer with computations.

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3-15. Explanations About a Cost of Production Report. Daniel S. Tryker’s Painting Ser- vice receives a continuous flow of clear light bulbs from various manufacturers who want their bulbs painted—typically yellow or black. A partial production report, using FIFO, for the month of May is as follows for Department 1 (units are packages of eight bulbs):

Physical Units:

Work in process, May 1 (40% complete) 500

Started and completed 1,700

Work in process, May 31 (50% complete) 300

Total units 2,500

Costs Charged to Department:

Work in process, May 1 $ 800.00

Production costs, May 9,020.00

Total costs charged $9,820.00

Costs Accounted for:

Transferred to Department 2:

Work in process, May 1 $ 800.00

Cost to complete work in process, May 1 1,258.60

Started and completed 7,132.09

$9,190.69

Work in process, May 31 629.30

Total costs accounted for $9,819.99*

*Difference caused by rounding.

Questions:

1. Explain what the above partial cost of production report shows about the quantity flow and the cost flow.

2. Explain why equivalent units are preferred to total units produced in determining costs of units completed and units in ending inventory.

3. What additional information can this report give a manager? 4. Calculate how many units were completed during the month of May.

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3-16. Cost of Production Report—Several Months. David Jared Industries is a bottling company that purchases orange juice from growers in Florida and bottles the juice in one-gallon plastic containers for sale to grocery stores. Only in its second year of operations, the company’s accounting system is evolving and has not been fully formalized. A chief accountant, Alan Neal, has been hired to bring order to the paper shuffling. In the process, Neal has gathered data to prepare FIFO cost of produc- tion reports for Activity Center A for the first three months of the current fiscal year (April, May, and June). This information is as follows:

April May June

Gallons:

 Beginning inventory 10,000 ? ?

 Started in production 80,000 65,000 70,000

 Completed 70,000 60,000 ?

 Ending inventory ? ? 20,000

Stage of completion:

 Beginning inventory 60% 30% 70%

 Ending inventory 30% 70% 40%

Cost data:

Beginning inventory:

 Materials $ 10,000 ? ?

 Conversion costs 20,000 ? ?

Current period:

 Materials $ 80,000 $ 66,000 $ 70,000

 Conversion costs 170,000 142,000 156,000

Materials (orange juice) are added at the beginning of Activity Center A. Conversion costs flow uniformly throughout the process.

Questions:

1. Compute the physical flows of units (gallons) for each of the three months. 2. Prepare a cost of production report for each of the three months. Round unit costs to

four decimal places and total dollars to the nearest dollar. 3. Analyze the cost of production reports for each month, and comment on production

stability and unit costs for materials and conversion costs.

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3-17. Analysis of a Work in Process Account. Garber Pharmaceutical Company manu- factures a tablet for allergy sufferers and uses a FIFO process cost system. All ingredients are added at the beginning of the Blending Operation. Conversion costs flow uniformly throughout the process. Tableting and Coating are operations down- stream from Blending. Information on the Blending Operation for October is as follows:

Work in Process – Blending Operation

October 1, balance (100,000 units, 40% complete for conversion costs)

$ 151,760 Completed and transferred to Tableting:

Direct materials added (1,000,000 units) $1,310,000 Units – ?

Direct labor costs ? Costs – ?

Factory overhead (applied at 180% of direct labor cost)

$396,000

October 31, balance (200,000 units, 70% complete for conversion costs)

?

The October 1 balance consists of the following cost elements:

Direct materials $128,000

Direct labor 8,800

Factory overhead 14,960

 Total costs $151,760

Questions:

1. Compute the amount of direct labor cost for the period. 2. Calculate the unit costs for direct materials, direct labor, and factory overhead for the

current month (October). Direct labor and factory overhead should be separate; do not combine them into one figure.

3. Calculate the unit costs for direct materials, direct labor, and factory overhead in the inventory at the beginning of October.

4. Compare the unit costs computed in Parts (2) and (3). Explain what information this comparison gives to a manager.

3-18. Work in Process Costs—FIFO and Weighted Average. The following data pertain to the Claims Processing Department of Smilgoff Insurance Company, which does not incur any direct materials costs:

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Work in process, May 1:

 Units (claims) 3,200

 Conversion costs (10% complete) $6,900

Units (claims) started in May 13,500

May’s conversion costs $285,000

Work in process, May 31:

 Units (claims) 1,900

 Stage of completion for conversion costs 60%

Questions:

1. Using the FIFO method, compute the cost of the May 31 work in process. 2. Using the weighted average method, compute the cost of the May 31 work in process.

3-19. Finished Goods and Work in Process Costs—Weighted Average. The following information is available for the Assembly Department of Lerman Enterprises for August:

Units Costs

Work in process, August 1 (70% complete) 5,000

Direct materials $ 6,000

Direct labor 3,000

Manufacturing overhead 4,000

Total work in process, August 1 $13,000

Started in production during August 20,000

Costs added:

Direct materials $29,000

Direct labor 8,000

Manufacturing overhead 10,000

Total costs added during August $47,000

Work in process, August 31 (80% complete) 3,000

Materials are added at the beginning of the process.

Questions:

1. Compute the total cost of goods transferred out using the weighted average method. 2. Compute the total cost of ending work in process using the weighted average method.

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3-20. Work in Process—FIFO and Weighted Average. The Division of Corporate Taxa- tion processes corporate tax returns for a state located in the northeastern United States. Processing costs for this agency were 70% complete as to the beginning work in process and 60% complete as to the ending work in process. Information on pro- cessing costs for the month of August is as follows:

Number of Returns

Processing Costs

Work in process at August 1 8,000 $ 95,000

Returns started and costs incurred during August 45,000 $666,000

Returns completed during August 49,000

Questions:

1. Using the FIFO method, what amount of processing cost was in work in process at August 31?

2. Using the weighted average method, what amount of processing cost was in work in process at August 31?

3-21. Cost of Finished Units—FIFO and Weighted Average. The Department of Motor Vehicles processes auto tag applications. All materials costs (i.e., tags) are completed when processing begins. The following information was obtained by the controller, Arthur Kurtz, for October:

The October 1 work in process had 5,000 applications (40% completed) and the fol- lowing costs:

Direct materials $2,700

Direct labor 16,880

Overhead 31,400

During October, 11,000 applications were completed, and the following costs were incurred:

Direct materials $5,200

Direct labor 95,775

Overhead 159,925

On October 31, there were 2,400 partially processed applications on hand (80% completed).

Questions:

1. Using the FIFO method, determine the cost of completed applications. 2. Using the weighted average method, determine the cost of completed applications.

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Case: Wyncote Pipelines

Wyncote Pipelines, Inc., is a liquid petroleum pipeline transportation company. The line running from Corpus Christi to Kansas City is a 30-inch, high-pressure line that moves product at an average of 8 miles per hour. A filled line contains 28 million barrels of product, which travel an average of 192 miles per day. The line speed can be increased safely to about 280 miles per day or slowed to almost a stop. The line can be filled to capacity or be partially empty. Over certain segments, the line moves faster than elsewhere as more product is placed in and taken out. The line carries various products, including crude oil of varying weights, home heating oil, and numerous other petroleum products.

As a transportation company, Wyncote Pipelines does not own the products transported. Instead, it is paid a fee for its services based on moving 10,000 barrels (420,000 gallons) of product one mile. The variable cost of running the line is for the 30 pumping stations along the line: the higher the traffic, the higher the fuel cost for pumping. The other cost of running the line is overhead cost, which relates to line maintenance. One unit is considered to be moving 10,000 barrels of product one mile.