Chapter 5
Assume there was no beginning work in process inventory and the ending work in process inventory is 70% complete with respect to conversion costs. Under the weighted-average method, the number of equivalent units of production with respect to conversion costs would be:
less than the units started during the period.
All of the companies listed below are likely to use a Process Costing system to track inventoriable costs, except:
Custom home builder
Processing Departments
- Any unit or section in a factory where direct materials, and/or direct labor, and/or overhead are added to the product. - The activities performed in a processing department are performed uniformly on all units of production. - Furthermore, the output of a processing department must be homogeneous. - Products in a process costing environment typically flow in a sequence from one department to another.
Similarities Between Job-Order and Process Costing
- Both systems assign direct material, direct labor, and overhead costs to products and they provide a mechanism for computing unit product costs. - Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods. - The flow of costs through the manufacturing accounts is basically the same in both systems - though there are some key differences.
Calculating Equivalent Units (in Ending WIP)
- Equivalent units = Number of partially completed units x Percentage completion. - The equivalent units is the number of "whole" complete units that could have been obtained from the materials and effort that went into the partially complete units. - Example: You have two glasses of water that are half full (50%). Your equivalent full (whole) glasses of water is equal to 2 x 50% = 1 full glass of water
Process Costing Computations: Key Concepts - Overview
- In process costing, each department needs to calculate two numbers for financial reporting purposes—the cost of its ending work in process inventory and the cost of its completed units that were transferred to the next processing department (which is needed to calculate ending WIP). The key to deriving these two numbers is calculating cost per unit within each department.
Differences Between Job-Order and Process Costing: Job-Order Costing Characteristics
- Job-Order costing: 1. Many different UNIQUE jobs are worked on during each period, with each job having unique production requirements. 2. Costs are accumulated by individual job and tracked in its own WIP account. 3. Unit costs are computed by job on the job cost sheet. - Process costing: 1. A single product is produced either on a continuous basis or for long periods of time. All units of product are identical. 2. Costs are accumulated by processing department. So Each PROCESSING DEPARTMENT will have its own WIP Account. 3. Unit costs are computed by department. Costs flow from Processing Department to Processing Department until they are finished
Process Costing Computations: Three Key Concepts
- Key Concept #1: There are two methods for performing the computations, the weighted-average method and the FIFO method. - The weighted-average method of process costing calculates unit costs by combining costs and outputs from the current and prior periods. - The FIFO method of process costing, which will be covered in Chapter 5 Supplement (not covered in this course - Key Concept #2: Conversion Costs vs. DM - Direct labor costs are often small in comparison to the other product costs in process cost systems. Therefore, direct labor and manufacturing overhead are often combine into one classification of product cost called conversion costs. - Direct Materials and Conversion Costs will have their own separate calculations for each Department based on how costs are typically added during the period to each department. - Key Concept #3: Equivalent Units (in Ending WIP) and Equivalent Units of Production - Equivalent units (in Ending WIP) are the product of the number of partially completed units and the percentage completion of those units. -Equivalent Units of Production = Equivalent Units in Ending WIP + Completed and transferred out units. - Equivalent units of production need to be calculated in order calculate the COST PER EQUIVALENT UNIT in order to assign costs to the ending WIP and transferred out units.
Weighted Average Method
- Makes no distinction between beginning WIP inventory costs and costs added during the period when computing Cost per Equivalent Unit. - Steps of calculating COST TRANSFERRED to next WIP and COST of ENDING WIP. 1. Calculate the Equivalent Units of Production (for each WIP account, twice: once for conversion costs and once for DM). 1. EU of production = Eunits in ending WIP + completed and transferred out units 2. Calculate the COST PER EQUIVALENT UNIT (This lecture) 3. Multiply Cost per EU to units transferred out. Multiply Cost per EU to Eunits in Ending WIP.
Operation Costing: A Hybrid approach
- When Products have some individual characteristics and also some common characteristics (and are produced in BATCHES), a combination of Job Order and Process Costing is used: Operation Costing - Examples: Shoes, clothing, jewelry, food products (blueberry jam vs strawberry jam vs mixed berry jam, etc)
