CHAPTER 6

Systems Design:
Process Costing

Prepared by
Shannon Butler,
CPA, CA
Carleton University

© 2018 McGraw-Hill Education

 Comparison of Job-Order
and Process Costing
• Both systems assign material, labour, 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.
© 2018 McGraw-Hill Education 2
 Differences Between Job-
Order and Process Costing
Exhibit 6-1 Job-Order Costing
1. Many different jobs are worked on
during each period, with each job
having different production
requirements.
2. Costs are accumulated by
individual job, regardless of the
accounting period during which the
work is done.
3. The job cost sheet is the key
document controlling the
accumulation of costs by a job.
4. Unit costs are computed by job on
the job cost sheet.
© 2018 McGraw-Hill Education
Process Costing
1. A single product is produced
either on a continuous basis or in
long production runs. All units of
product are identical.
2. Costs are accumulated by
department, during an accounting
period.
3. The department production report
is the key document showing the
accumulation and disposition of
costs by a department.
4. Unit costs are computed by
department on the department
production report.
3
 Quick Check 

Process costing is used for products that

are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.

© 2018 McGraw-Hill Education 4

 Quick Check 

Process costing is used for products that

are:
Answer:
b. Similar and produced continuously.

© 2018 McGraw-Hill Education 5

 Processing Departments
Any unit in an organization where materials,
labour, 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.

© 2018 McGraw-Hill Education 6

 Sequential Processing
Departments
Exhibit 6-2

© 2018 McGraw-Hill Education 7

 Comparing Job-Order and
Process Costing
Direct
Materials

Work in Finished
Direct Labour
Process Goods

Manufacturing Cost of
Overhead Goods
Sold

© 2018 McGraw-Hill Education 8

 Comparing Job-Order and
Process Costing
Costs are traced and
applied to individual
Direct jobs in a job-order
Materials cost system.

Finished
Direct Labour Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold

© 2018 McGraw-Hill Education 9

 Comparing Job-Order and
Process Costing
Costs are traced and
applied to departments
Direct
in a process cost
Materials
system.

Direct Labour
Processing Finished
Department Goods

Manufacturing Cost of
Overhead Goods
Sold

© 2018 McGraw-Hill Education 10

 T-Account Model of Process
Costing Flows
Exhibit 6-3

© 2018 McGraw-Hill Education 11

 T-Account and Journal Entry
Views of Cost Flows

For purposes of this example, assume

there are two processing departments –
Departments A and B.
We will use T-accounts and journal
entries.

© 2018 McGraw-Hill Education 12

 The Flow of Raw Materials

Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B
•Direct
Materials

© 2018 McGraw-Hill Education 13

 The Flow of Raw Materials

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process – Department A XXX
Work in Process – Department B XXX
Raw Materials XXX
To record the use of direct material.

© 2018 McGraw-Hill Education 14

 The Flow of Labour Costs

Salaries and Work in Process

Wages Payable Department A
•Direct
•Direct Materials
Labour •Direct
Labour

Work in Process
Department B
•Direct
Materials
•Direct
Labour

© 2018 McGraw-Hill Education 15

 The Flow of Labour Costs

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process – Department A XXX
Work in Process – Department B XXX
Salaries and Wages Payable XXX
To record direct labour costs.

© 2018 McGraw-Hill Education 16

 The Flow of Manufacturing
Overhead Costs
Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labour
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labour
•Applied
© 2018 McGraw-Hill Education Overhead 17
 The Flow of Manufacturing
Overhead Costs

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process – Department A XXX
Work in Process – Department B XXX
Manufacturing Overhead XXX
To apply overhead to departments.

© 2018 McGraw-Hill Education 18

Completing the Cost Flows: Transfers
from WIP-Dept. A to WIP-Dept. B

Work in Process Work in Process

Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labour Labour
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A

© 2018 McGraw-Hill Education 19

 Completing the Cost Flows: Transfers
from WIP-Dept. A to WIP-Dept. B

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process – Department B XXX
Work in Process – Department A XXX
To record the transfer of goods from
Department A to Department B.

© 2018 McGraw-Hill Education 20

Completing the Cost Flows: Transfers
from WIP-Dept. B to Finished Goods

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labour
•Applied
Overhead
•Transferred
from Dept. A

© 2018 McGraw-Hill Education 21

 Completing the Cost Flows: Transfers
from WIP-Dept. B to Finished Goods

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Finished Goods XXX
Work in Process – Department B XXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.

© 2018 McGraw-Hill Education 22

 Completing the Cost Flows: Transfers
from Finished Goods to COGS

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labour
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold

•Cost of
Goods
Sold

© 2018 McGraw-Hill Education 23

 Completing the Cost Flows: Transfers
from Finished Goods to COGS

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Accounts Receivable XXX
Sales XXX
To record sales on account.

Cost of Goods Sold XXX

Finished Goods XXX
To record cost of goods sold.

© 2018 McGraw-Hill Education 24

 Equivalent Units of Production

Equivalent units are the product of the

number of partially completed units and
the percentage completion of those units.

= Number of partially completed units x

Percentage completion

We need to calculate equivalent units

because a department usually has some
partially completed units in its beginning and
ending inventory.
© 2018 McGraw-Hill Education 25
Equivalent Units – The Basic Idea

Two half completed products are

equivalent to one complete product.

+ = 1

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.
© 2018 McGraw-Hill Education 26
 Quick Check 
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
© 2018 McGraw-Hill Education 27
 Quick Check 
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
Answer:
10,000 units + (5,000 units × 0.30)
b. 11,500 = 11,500 equivalent units

© 2018 McGraw-Hill Education 28

 Treatment of Direct Labour
Direct
Materials
Direct labour
costs
Dollar Amount

Manufacturing may be small

Overhead
in comparison to
Direct other product
Labour costs in process
cost systems.
Type of Product Cost

© 2018 McGraw-Hill Education 29

 Treatment of Direct Labour

Direct
Materials
Direct labour and
Conversion
manufacturing
Dollar Amount

Direct overhead may be

Labour
combined into
Direct Manufacturing one classification
Labour Overhead of product cost
called conversion
costs.
Type of Product Cost

© 2018 McGraw-Hill Education 30

 Calculating Equivalent Units

Equivalent units can be calculated two

ways:
The First-In, First-Out Method – FIFO is
covered in the appendix to this chapter.

The Weighted-Average Method – This

method will be covered in the main portion of
the chapter.

© 2018 McGraw-Hill Education 31

 Weighted-Average Method

The weighted-average method . . .

• Makes no distinction between work done in prior
or current periods.
• Blends together units and costs from prior and
current periods.
• Equivalent units of production = units
transferred to the next department or to finished
goods + Equivalent units in ending work in
process inventory.

© 2018 McGraw-Hill Education 32

 Weighted-Average Example

Tropic Breeze reported the following activity

in Electrics and Testing Department for the
month of May:
Percent Completed
Electrics and Testing Department Units Materials Conversion
Beginning work in process 200 55% 30%

Units started into production in May 5,000

Units completed during May and 4,800 100% 100%

transferred to the next department

Ending work in process 400 40% 25%

© 2018 McGraw-Hill Education 33

 Weighted-Average Example
Two equivalent unit figures must be computed –
one for materials and one for conversion.
Exhibit 6-4 Materials Conversion
Units transferred to the next department 4,800 4,800
Work in process, May 31:
400 units × 40% complete with 160
respect to materials
400 units × 25% complete with 100
respect to conversion
Equivalent units of production 4,960 4,900

© 2018 McGraw-Hill Education 34

 Visual Perspective of
Equivalent Units of Production
Exhibit 6-5

© 2018 McGraw-Hill Education 35

 Compute and Apply Costs

The formula for computing the cost per

equivalent unit is :

Cost of beginning
Cost per
work in process + Cost added during
equivalent =
inventory the period
unit
Equivalent units of
production

© 2018 McGraw-Hill Education 36

 Compute and Apply Costs
Electrics and Testing Department
Costs per Equivalent Unit
Materials Conversion
Cost of beginning work in process
inventory $ 9,600 $ 5,575
Costs added during the period 368,600 350,900
Total cost (a) $378,200 $356,475
Equivalent units of production (see the
computations in Exhibit 6–4) (b) 4,960 4,900
Cost per equivalent unit (a) ÷ (b) $ 76.25 $ 72.75

© 2018 McGraw-Hill Education 37

 Applying Costs – Weighted-
Average Method
Electrics and Testing Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 38

 Applying Costs – Weighted-
Average Method
Electrics and Testing Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 39

 Applying Costs – Weighted-
Average Method
Electrics and Testing Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 40

 Computing the Cost of Units
Transferred Out
Electrics and Testing Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 41

 Computing the Cost of Units
Transferred Out
Electrics and Testing Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 42

 Computing the Cost of Units
Transferred Out
Electrics and Testing Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 43

 Cost Reconciliation

Electrics and Testing Department

Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory $ 15,175
Costs added to production during the period 719,500
Total cost to be accounted for $ 734,675

Cost accounted for as follows:

Cost of ending work in process inventory $ 19,475
Cost of units transferred out 715,200
Total cost accounted for $ 734,675

© 2018 McGraw-Hill Education 44

 Cost Reconciliation

Electrics and Testing Department

Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory $ 15,175
Costs added to production during the period 719,500
Total cost to be accounted for $ 734,675

Cost accounted for as follows:

Cost of ending work in process inventory $ 19,475
Cost of units transferred out 715,200
Total cost accounted for $ 734,675

© 2018 McGraw-Hill Education 45

 Operation Costing
Operation costing is a hybrid of job-order
and process costing because it possesses
attributes of both approaches.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Material Costs charged Conversion costs

to batches as in assigned to batches
job-order costing. as in process costing.

Operation costing is commonly used when batches of many

different products pass through the same processing department.
© 2018 McGraw-Hill Education 46
Appendix 6A
FIFO Method

© 2018 McGraw-Hill Education 47

 FIFO Method

The FIFO method (generally considered

more accurate that the weighted-average
method) differs from the weighted-average
method in two ways:
1. The computation of equivalent units.
2. The way in which the costs of beginning
inventory are treated in the cost
reconciliation report.

© 2018 McGraw-Hill Education 48

 Equivalent Units – FIFO
Method
FIFO Method
(a separate calculation is made for each cost category
in each processing department)
Equivalent units of production = Equivalent units to complete beginning
work in process inventory*
+ Units started and completed during the
period
+ Equivalent units in ending work in process
inventory

Equivalent units of production = Units transferred out

+ Equivalent units in ending work in process
inventory
− Equivalent units in beginning work in
process inventory
© 2018 McGraw-Hill Education 49
 Equivalent Units – FIFO
Method
Let’s revisit the Tropic Breeze example. Assume the
following activity is reported in Electrics and Testing
Department for May:
Percent Completed
Shaping and Milling Department Units Materials Conversion
Beginning work in process 200 55% 30%

Units started into production in May 5,000

Units completed during May and 4,800 100% 100%

transferred to the next department

Ending work in process 400 40% 25%

© 2018 McGraw-Hill Education 50

 Equivalent Units – FIFO
Method
Step 1: Determine equivalent units needed to
complete beginning inventory.
Materials Conversion
To complete beginning work in process:
Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160
Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840

© 2018 McGraw-Hill Education 51

 Equivalent Units – FIFO
Method
Step 2: Determine units started and completed
during the period.
Materials Conversion
To complete beginning work in process:
Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160
Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840

© 2018 McGraw-Hill Education 52

 Equivalent Units – FIFO
Method
Step 3: Add the equivalent units in ending work
in process inventory.
Materials Conversion
To complete beginning work in process:
Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160
Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840

© 2018 McGraw-Hill Education 53

Exhibit 6A-2

© 2018 McGraw-Hill Education 54

 Equivalent Units:
Weighted Average vs. FIFO
As shown below, the equivalent units in beginning
inventory are subtracted from the equivalent units of
production per the weighted-average method to obtain
the equivalent units of production under the FIFO method.

Materials Conversion
Equivalent units - weighted average method 4,960 4,900
Less equivalent units in beginning inventory:
200 units × 55% 110
200 units × 30% 60
Equivalent units - FIFO method 4,850 4,840

© 2018 McGraw-Hill Education 55

 Production Report – FIFO Method
Let’s revisit the Tropic Breeze Fans Electrics and Testing
Department for the Month of May to prepare our production report.
Beginning work in process: 200 units

Materials: 55% complete $ 9,600

Conversion: 30% complete 5,575

Production started during May 5,000 units

Production completed during May 4,800 units

Costs added to production in May

Materials cost $ 368,600
Conversion cost 350,900

Ending work in process 400 units

Materials: 40% complete
Conversion: 25% complete
© 2018 McGraw-Hill Education 56
 Cost per Equivalent Unit -
FIFO

The formula for computing the cost per

equivalent unit under FIFO method is as
follows:
Cost per Cost added during the period
equivalent =
unit Equivalent units of production

© 2018 McGraw-Hill Education 57

 Cost per Equivalent Unit -
FIFO

Total
Cost Materials Conversion
Costs added in the Shaping
and Milling Department $ 719,500 $ 368,600 $ 350,900
Equivalent units 4,850 4,840
Cost per equivalent unit $ 76.00 $ 72.50
Total cost per equivalent unit = $76.00 + $72.50 = $148.50

© 2018 McGraw-Hill Education 58

 Applying Costs - FIFO
Record the equivalent units of production in
ending work in process inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 59

 Applying Costs - FIFO

Record the cost per equivalent unit.

Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.00 $ 72.50
Cost of ending work in process inventory $ 12,160 $ 7,250 $ 19,410

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 60

 Applying Costs - FIFO
Compute the cost of ending work in process
inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.00 $ 72.50
Cost of ending work in process inventory $ 12,160 $ 7,250 $ 19,410

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200

© 2018 McGraw-Hill Education 61

 Cost of Units Transferred Out
Record the cost in beginning work in process
inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 9,600 $ 5,575 $ 15,175
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost per equivalent unit $ 76.00 $ 72.50
Cost to complete beginning WIP $ 6,840 $ 10,150 $ 16,990
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost per equivalent unit $ 76.00 $ 72.50
Cost of units started and completed in May $ 349,600 $ 333,500 $ 683,100
Cost of units transferred out $ 715,265

© 2018 McGraw-Hill Education 62

 Cost of Units Transferred Out
Compute the cost to complete the units in
beginning work in process inventory.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 9,600 $ 5,575 $ 15,175
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost per equivalent unit $ 76.00 $ 72.50
Cost to complete beginning WIP $ 6,840 $ 10,150 $ 16,990
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost per equivalent unit $ 76.00 $ 72.50
Cost of units started and completed in May $ 349,600 $ 333,500 $ 683,100
Cost of units transferred out $ 715,265

© 2018 McGraw-Hill Education 63

 Cost of Units Transferred Out
Compute the cost of units started and
completed this period.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 9,600 $ 5,575 $ 15,175
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost per equivalent unit $ 76.00 $ 72.50
Cost to complete beginning WIP $ 6,840 $ 10,150 $ 16,990
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost per equivalent unit $ 76.00 $ 72.50
Cost of units started and completed in May $ 349,600 $ 333,500 $ 683,100
Cost of units transferred out $ 715,265

© 2018 McGraw-Hill Education 64

 Cost of Units Transferred Out
Compute the total cost of units transferred
out.
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 9,600 $ 5,575 $ 15,175
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost per equivalent unit $ 76.00 $ 72.50
Cost to complete beginning WIP $ 6,840 $ 10,150 $ 16,990
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost per equivalent unit $ 76.00 $ 72.50
Cost of units started and completed in May $ 349,600 $ 333,500 $ 683,100
Cost of units transferred out $ 715,265

© 2018 McGraw-Hill Education 65

 Reconciling Costs

Shaping and Milling Department

Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory $ 15,175
Costs added to production during the period 719,500
Total cost to be accounted for $ 734,675

Cost accounted for as follows:

Cost of ending work in process inventory $ 19,475
Cost of units transferred out 715,200
Total cost accounted for $ 734,675

© 2018 McGraw-Hill Education 66

 Reconciling Costs

Shaping and Milling Department

Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory $ 15,175
Costs added to production during the period 719,500
Total cost to be accounted for $ 734,675

Cost accounted for as follows:

Cost of ending work in process inventory $ 19,410
Cost of units transferred out 715,265
Total cost accounted for $ 734,675

© 2018 McGraw-Hill Education 67

 A Comparison of Costing
Methods

In a lean production environment, FIFO and

weighted-average methods yield similar
unit costs.

When considering cost control, FIFO is

superior to weighted-average because it
does not mix costs of the current period with
costs of the prior period.

© 2018 McGraw-Hill Education 68

 COMPARISON OF PROCESS COSTING METHODS
Weighted Average
1. Equivalent units of production are
calculated at the end of each period
by adding together the completed
units transferred out and the
equivalent units in ending work in
process inventory.
2. Cost per equivalent unit is
calculated by adding the cost of
beginning work in process inventory
and the costs added during the
period and dividing the total by the
equivalent units of production (i.e.,
taking the weighted average).
3. Total cost for the period is
calculated as the cost per equivalent
unit times the equivalent units of
production.
© 2018 McGraw-Hill Education
FIFO
1. Equivalent units of production are
calculated at the end of each period
by adding together the completed
units transferred out and the
equivalent units in ending work in
process inventory less equivalent
units in beginning work in process
inventory.
2. Cost per equivalent unit is
calculated by dividing the costs
added during the period by the
equivalent units of production.
3. Total cost for the period is
calculated as the cost per equivalent
unit times the equivalent units of
production.
69
 Appendix 6B

Shrinkage and Lost Units

© 2018 McGraw-Hill Education 70

 Shrinkage and Lost Units
• The material presented in Chapter 6 assumes that
units that are in process at the end of the period are
either completed or waiting to be complete.
• However, in reality, units can disappear because of
evaporation, losses, or rejection. This can be
considered a normal part of the processing or it may
be abnormal.
• Abnormal losses can be thought of as costs akin to
unusual losses studies in financial accounting.
• Normal losses are normal costs of operating the
process department.
© 2018 McGraw-Hill Education 71
 Shrinkage and Lost Units

• Two accounting treatments are prevalent for normal

losses.
• One, the amount of the loss can be charged to a
specific loss account.
• Two, the amount of the loss could be spread over all
of the good units from the period.
• If the loss is truly abnormal and significant then the
loss should be assigned to the unusual section of the
income statement.

© 2018 McGraw-Hill Education 72