MCC Managerial Accounting 2270 Chapter 4 & Appendix 4A

What are the four steps of Weighted-average method of process costing?

1. Compute the equivalent units of production 2.Compute the cost per equivalent unit. 3.Assign costs to units 4.Prepare a cost reconciliation report

Cost per Equivalent Unit equation (FIFO)

= ( Cost added during the period) / (Equivalent units of production)

What is Operation Costing?

Operation costing is a hybrid system of costing that includes characteristics of both job-order and process costing. It is used in situations where products have some common characteristics and some individual characteristics.

What materials and conversion completion percentages will be included in the computation of equivalent units of production for Weighted average method?

The departments ending WIP inventories.

Equation worth remembering

Units in beginning WIP inventory + Units started into production or transferred in = Units in ending WIP inventory + Units completed and transferred out

FIFO vs Weighted-average method

Weighted average method blends together the equivalent units already in the beginning inventory with the work performed in the current period where as FIFO method isolates the equivalent units of production that are due to work performed during the current period.

Conversion Cost

direct labor cost plus manufacturing overhead cost

What materials and conversion completion percentages will be included in the computation of equivalent units of production for FIFO process costing method?

Both Beginning and ending Work in Process inventories are converted to equivalent units. For beginning: equivalent units represent the work done to complete the units For ending: equivalent units represent the work done to bring the units to a stage of partial completion at the end of the period.

How are Job-order costing and process costing similar?

Both systems assign materials, labor, and manufacturing overhead to products and provide a mechanism for computing unit product costs. Both systems use the same basic manufacturing accounts, including manufacturing overhead, raw materials, WIP, and Finished goods The flow of costs through the manufacturing accounts is practically the same in both systems

Why is cost accumulation simpler in a process costing system than it is in a job-order costing system?

Cost accumulation is simpler in a process costing system because in a process costing system, instead of having to assign cots to hundreds of different jobs, costs are assigned to only a few processing departments.

Formula for calculating equivalent units of production

Equivalent units of production = Units transferred to the next department or to finished goods + equivalent units in ending work in process inventory

What method of process costing is generally considered more accurate?

FIFO

What is Process costing? What type of companies would use it?

Process costing is a costing method most commonly used by industries that convert raw materials into homogeneous products, such as bricks, soda, or paper, on a continuous basis.

Assume that a company has two processing departments - Mixing followed by Firing. Prepare a journal entry to show a transfer of work in process from the Mixing Department to the Firing Department.

Work-in-Process Firing XXX (debit) Work-in-Process Mixing XXX (credit)

How many Work in Process accounts are maintained in a company that uses process costing?

In companies that use process costing a separate Work in Process account is maintained for EACH processing department.

What is meant by the term " equivalent units of production" when the weighted-average method is used?

In the weighted-average method, the equivalent units of production for a department is the number of completed units transferred to the next department (or finished goods) plus the equivalent units in the department's ending work in process inventory. Total Costs = Cost of ending WIP inventory + Cost of units transferred out

How are Job-order costing and Process costing different?

Job order: Jobs are different & unique Process: Single product; Identical Job order: Costs accumulated by individual jobs Process: Costs accumulated by departments Job order: Unit costs are computed by job on the job cost sheet Process: Unit costs are computed by department

Equation for computing the equivalent units of production under the FIFO method. ( a separate calculation is made for each cost category in each processing department).

= (Equivalent units TO complete beginning work in process inventory) + (Units started and completed during the period) + (Equivalent units in ending WIP inventory) Equivalent units to complete beginning work in process inventory = Units in beginning WIP inventory * (100% - % completion of beginning WIP inventory) or = (Units transferred out) + (Equivalent units in ending WIP inventory) - (Equivalent units in beginning WIP inventory)

Cost Reconciliation Report: Costs accounted for

= Cost of ending WIP inventory + Cost of units transferred out

Total cost of units transferred out (FIFO)

= Costs in beginning WIP inventory + Cost to complete the units in beginning WIP inventory + Cost of units started and completed in period

Calculating total cost of units transferred out

=(# of units transferred out * (Cost per equivalent unit A + Cost per equivalent unit B))

What is the FIFO method?

A process costing method that calculates unit costs based solely on the costs and outputs form the current period.

What is a Processing Department?

A processing department is an organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product. Example: Potato Chip Factory (not limited to 3) Department A: Potato Prep Department B: Cooking Department C: Inspecting/packaging

Process Costing Computations: Three Key Concepts

1. Calculating departmental unit costs by using the weighted average method or the FIFO method 2. Each department needs to calculate a separate unit cost for each type of manufacturing cost that it incurs. 3. Quantifying each department's number of units produced during a period. Partially completed units are translated into an equivalent number of fully completed units.

With FIFO, the Costs per equivalent unit are used to value...

1.) The equivalent units needed to complete beginning WIP inventory 2.)The Equivalent units in ending WIP inventory 3.) The units that were started and completed during the period.

Cost per equivalent unit equation (Weighted Average)

= (Cost of beginning WIP inventory + Costs added during period) / Equivalent units of production In other words... =(Cost of beginning WIP inventory + Costs added during period) / Step 1

What is an example of a company that would use Operation Costing to determine product costs?

A shoe maker. Shoes have common characteristics in that all styles involve cutting and sewing that can be done on a repetitive basis, using the same equipment and following the same procedures. Shoes also have individual characteristics-some are made of expensive leathers and others may be made using inexpensive synthetic materials.

How are partially completed units translated into an equivalent number of fully completed units?

Equivalent units = (# of partially completed units) * (% completion)