OLD MAN ACC Chapter 3

What is an equivalent unit?

Measure used to convert partially completed units into the equivalent of a full unit. It is how many units we would have made if we had made each unit one at a time rather than working on each one simultaneously.

Who uses process costing?

Process costing is used by companies that produce homogeneous products or services, or those that are produced through a series of standardized processes.

What is a production report? What is its purpose? How many reports are there?

provides information about the number of units and manufacturing costs that flow through a production process during an accounting period. It is used to determine how much manufacturing cost to transfer out of Work in Process Inventory and into the next processing department (or Finished Goods Inventory if it is the last production process) and to value any units that are in process at the end of the accounting period. A separate production report is prepared for each major production process on either a monthly or a quarterly basis.

Transferred-in cost

represents the manufacturing cost that is transferred from one production process to another

With WAC, we don't care when units were _____, only when _____

started; finished

Fundamentally, FIFO assumes that...

the units in process at the beginning of the period are completed first, before the units started during the current period.

7 things that can be asked about units in process costing system

1-5: use these two equations to answer any questions about BB, units started, e/b, units completed, and units worked on during period. BB + Unit started = units worked on during period Units completed + e/b = units worked on during period 6. How many units would have been finished if worked on one at a time this period: The smallest number of total equivalent units under one of the cost columns in step 2 (so if total equivalent units with all DM cost applied was 100,000 but total equivalent units with all conversion cost applied was only 50,000, then we would only have finished 50,000 units). 7. How many units were started and completed this period? Use these two equations Units completed - beginning balance of units in WIP = units started and completed Units started - e/b of units in WIP = units started and completed

5 steps of a production report

1. Reconcile the number of physical units 2. Convert physical units into equivalent units. 3. Calculate cost per equivalent unit. 4. Reconcile the total cost of Work in Process Inventory. 5. Prepare a production report.

How to find total cost per equivalent unit

Add the DM cost per equivalent unit to the conversion cost per equivalent unit (and, if there are more than these two costs, add them as well).

Does process costing require keeping track of separate jobs? Why or why not?

Because each product or service that results from the standardized process is virtually the same, firms that use process costing don't need to keep a separate cost record for each unit produced or customer served. Instead, they keep track of the total cost of each major process and then spread (average) the total cost over the number of units produced or customers served.

Trade-off between FIFO and WAC

Either method is acceptable for financial reporting (GAAP), but there are trade-offs in terms of simplicity and accuracy of reporting. The weighted-average method is simpler and more commonly used in the real world, but the FIFO method gives more precise attention to the physical flow of units and thus may be more accurate.

FIFO method of process costing Costs considered Units costs are spread over Units that cost per equivalent units is applied to

FIFO considers 3 costs when calculating cost per equivalent unit (HOWEVER when calculating total cost of direct materials and conversion costs moved out of wip, it also considered the cost put into BB from laster period) The cost needed to finish the units in the beginning balance The costs applied to units started and completed during this period The costs applied to units partially finished that will make up the ending balance from this period. Unlike with WAC, this means that we are only considering the costs to FINISH the units in beginning balance, not the total cost of the units in BB. This means we ONLY CONSIDERING CURRENT PERIOD COSTS. AND we must use equivalent units for the beginning balance as well as the ending balance when calculating cost per equivalent unit FIFO spreads these 3 costs over: The equivalent units in the beginning balance The units started and completed this period The equivalent units in the ending balance When calculating cost, we apply our cost per equivalent unit to the equivalent units in the BB, the units started and completed this period, and the equivalent units in the ending balance from this period.

2. How to convert physical units into equivalent units (FIFO)

FIFO looks at the costs needed to complete the beginning inventory this period, the costs needed to start and finish the units started and finished this period, and the costs needed to partially complete the ending units. This means we are only looking at current period costs and that we must find equivalent units for BEGINNING units AND ending units. The percentage used to calculate equivalent units for beginning units will be whatever percentage is needed to bring the units to 100% complete (so if the inventory was previously 70% done with DM, it needs 30% more of it's DM cost). The percentage used to calculate equivalent units for ending units will be whatever percentage they were completed this period.

1. How to reconcile the number of physical units (WAC)

First, determine how many physical units the company worked on during the period: BB WIP + Units started = X units worked on during period Second, use this information to find the number of units completed. We know that BB WIP + Units started = X. The e/b of WIP + units completed must also equal X. So, we have BB WIP + units stared = X AND e/b WIP + units completed = X So we can solve for any of the 4 variables given the other 3.

When do FIFO and WAC differ significantly?

If production or manufacturing costs fluctuate from period to period and the company maintains significant levels of Work in Process Inventory.

What do we always assume with the WAC method?

It doesn't matter when we started the units, only when we finished them. We consider the costs from last period for the beginning units when calculating average cost per equivalent unit. So, if there is a dramatic change in production costs from period to period, the WAC method may throw off the cost per equivalent unit for this period.

1. How to reconcile the number of physical units (FIFO)

Same as WAC to find beginning balance, units started, units completed, ending balance of units in WIP, and total units worked on: BB WIP + units stared = total units worked on during period = e/b WIP + units completed e/b WIP + units completed = X Under the FIFO method, we must also determine how many units were both started and completed during the current period. The number of units that were both started and completed during the current period can be computed in one of two ways: Units completed - beginning balance of units in WIP = units started and completed Units started - e/b of units in WIP = units started and completed

5. How to prepare a production report.

The final step in process costing is to summarize the results of Steps 1 through 4 into a production report. This report provides a summary of what occurred in the production process during the accounting period. It includes information about the number of physical units (Step 1), number of equivalent units (Step 2), cost per equivalent unit (Step 3), and a reconciliation of the cost of Work in Process Inventory (Step 4).

key difference between process costing and job order costing

The key difference is that manufacturing costs are accumulated by process rather than by job. This means that there are multiple work in progress accounts for each step in the costing process.

What determines the number of WIP accounts?

The number of separate processes in the manufacturing process

How to check your work from step 4

The total DM cost (for both units completed and e/b) should add up to the total DM cost used to calculate DM cost per equivalent unit in step 3 The total Conversion cost (for both units completed and e/b) should add up to the total Conversion cost used to calculate conversion cost per equivalent unit in step 3 Total DM cost + Total Conversion cost should also equal total cost of units completed and total cost of units in e/b

How many production reports are there?

There is a report for each individual process in the manufacturing process.

What does it mean if units are transferred?

They were moved to the next WIP account or to FG

3. How to calculate cost per equivalent unit (WAC)

To calculate cost per equivalent unit, we divide the total cost in each cost category (like DM or conversion) by the total number of equivalent units for these categories that we calculated in Step 2. This includes the cost of the units in beginning inventory plus the costs that were incurred during the current period. Doing this will give us the cost of direct materials per equivalent unit and the cost of conversion per equivalent unit. Added together, we will then get the total cost per equivalent unit.

3. How to calculate cost per equivalent unit (FIFO)

To calculate cost per equivalent unit, we divide the total costs FROM THIS PERIOD in each cost category (like DM or conversion) by the total number of equivalent units for these categories that we calculated in Step 2. This ONLY includes costs that were incurred during the current period. Doing this will give us the cost of direct materials per equivalent unit and the cost of conversion per equivalent unit. Added together, we will then get the total cost per equivalent unit.

4. How to reconcile the total cost of Work in Process Inventory (FIFO)

To determine the cost of the units IN BEGINNING INVENTORY, the cost of units completed, and the cost of the units in ending inventory, we multiply the number of equivalent units (from Step 2) by the cost per equivalent unit (Step 3) for both direct materials and conversion cost. If we have 2 cost categories (DM and conversion), then we will have SIX total costs to calculate. 1. Total DM costs for beginning units: Previous period DM costs + (DM cost per equivalent unit X # of equivalent units from beg. balance) = Total DM costs for beginning units 2. Total DM cost for units started and completed: Number of units started and completed X DM cost per equivalent unit = Total DM cost for units started and completed. 3. Total DM cost for e/b: Number of equivalent units with all DM applied in e/b X DM cost per equivalent unit = Total DM cost for e/b Repeat the same 3 steps for conversion costs. Adding together 1 and 2 both for DM AND conversion gives us the total value of goods transferred out of WIP. Adding 3 for DM with 3 for conversion gives us the total value of the ending balance left in WIP.

4. How to reconcile the total cost of Work in Process Inventory (WAC)

To determine the cost of the units completed and the cost of the units in ending inventory, we multiply the number of equivalent units (from Step 2) by the cost per equivalent unit (Step 3) for both direct materials and conversion cost. If we have 2 cost categories (DM and conversion), then we will have 4 total costs to calculate. 1. Total DM cost for units completed: Number of units completed X DM cost per equivalent unit = Total DM cost for units completed. 2. Total Conversion cost for units completed: Number of units completed X conversion cost per equivalent unit = Total conversion cost for units completed. 3. Total DM cost for e/b: Number of equivalent units with all DM applied in e/b X DM cost per equivalent unit = Total DM cost for e/b 4. Total Conversion cost for e/b: Number of equivalent units with all Conversion cost applied in e/b X Conversion cost per equivalent unit = Total Conversion cost for e/b Adding 1 and 2 gives us the total cost of goods transferred out of WIP into the next WIP or FG Adding 3 and 4 gives us the total cost of the ending balance left in the WIP account.

Weighted average cost method of process costing Costs considered Units costs are spread over Units that cost per equivalent units is applied to

WAC considers 4 costs: The costs from last period used to partially complete the units that are now our beginning balance in this period. The costs used to finish the units from last period The costs used to start and complete units this period The costs used to start but not complete units that will become the ending balance from this period WAC takes these costs and spreads them over: The units that were in beginning balance and completed this period (No equivalent units because we are considering ALL the costs to produce the units in BB, including the costs put in last period). The units started and completed this period The equivalent units resulting from the partially completed units in the ending balance from this period In this way, the WAC method averages the total cost of the units in beginning inventory (from start to finish) with the cost of the units started and completed during the period, and the cost of the equivalent units finished in the ending balance. When calculating cost, we apply our cost per equivalent unit to ALL the units in BB, ALL the units started and completed, and to ONLY the equivalent units in ending balance.

2. How to convert physical units into equivalent units (WAC)

WAC: Under the weighted-average method, the only partially completed units we need to deal with are the units in ending inventory. WAC takes the cost of the units in the beginning balance (so costs from last period) and combines them with the costs from this period which were used to finish units in BB, start and finish goods completed from this period, and partially complete goods in the ending balance from this period. Essentially, WAC assumes that all of the work (and cost) occurred during the current period. So, for WAC, 100% of the units completed during the period for each cost category (DM, conversion cost, etc.) will receive costs. Units in ending inventory will be only partially completed. Let's say for example they only have 60% of DM have been applied and 40% of conversion costs have been applied. This means that we will take 60% of the units in ending inventory and pretend they were completed for DM and 40% of the units in conversion cost and pretend they were completed. This will give us a number of units with all their DM completed for this stage in the manufacturing process (Units completed X 100% + ending balance X 60%) AND a different number for the number of units with all their conversion costs completed for this stage in the manufacturing process (Units completed X 100% + ending balance X 40%) In the next step, we use these numbers to determine how much it costs to produce each equivalent unit.