11th Edition

Chapter 4

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 Systems Design:
Process Costing

Chapter Four

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Similarities Between Job-Order and Process
Costing

• Both systems assign material, labor and

overhead costs to products and they provide a
mechanism for computing unit product cost.
• 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Differences Between Job-Order and Process
Costing

• Process costing is used when a single product is produced on

a continuing basis or for a long period of time. Job-order
costing is used when many different jobs are worked on each
period.
• Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by individual
jobs.
• Process costing systems use department production reports to
accumulate costs. Job-order costing systems use job cost
sheets to accumulate costs.
• Process costing systems compute unit costs by department.
Job-order costing systems compute unit costs by job.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 What is a Processing Department?

Any location in an organization where materials,

labor 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Sequential vs. Parallel Processing

Sequential processing means that units

flow in a sequence from one
department to another.

Parallel processing is used when

after a point, some units go through
different processing departments
than others. For example, a
petroleum refinery separates crude
oil into products like gasoline, jet
fuel, and heating oil.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Comparing Job-Order
and Process Costing

Direct
Materials

Work in Finished
Direct Labor
Proces Goods
s

Manufacturing Cost of
Overhead Goods
Sold
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Comparing Job-Order
and Process Costing

Costs are traced and

applied to individual
Direct jobs in a job-order
Materials cost system.

Finished
Direct Labor Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Comparing Job-Order
and Process Costing

Costs are traced and

applied to departments
Direct in a process cost
Materials system.

Processing Finished
Direct Labor
Department Goods

Manufacturing Cost of
Overhead Goods
Sold
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Cost Flows
(in T-account form)

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

Work in Process
Department B
•Direct
Materials

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 Process Cost Flows
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Cost Flows
(in T-account form)

Work in Process
Department A
Wages Payable
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Costing
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Cost Flows
(in T-account form)

Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Process Costing
(In journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Cost Flows
(in T-account form)

Work in Process Work in Process

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

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Costing
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Cost Flows
(in T-account form)

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

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Costing
(in journal entry form)

GENERAL JOURNAL Page 4

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

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Cost Flows
(in journal entry form)

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

•Cost of
Goods
Sold

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Costing
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX
To record cost of goods sold.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Equivalent Units of Production

Equivalent units are the product of the number of

partially completed units and the percentage
completion of those units.

We need to calculate equivalent units because a

department usually has some partially completed units
in its beginning and ending inventory.
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 Equivalent Units – The Basic Idea

Two half completed products are

equivalent to one completed product.

+ = 1

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 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
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 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
10,000 units + (5,000 units × 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Equivalent Units of Production
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.

Cost per Costs for the period

equivalent = Equivalent units of production
unit for the period

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Costing and Direct Labor

Direct
Materials Direct labor costs
may be small
in comparison to
Dollar Amount

Overhead other product

costs in process
Direct cost systems.
Labor

Type of Product Cost

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Process Costing and Direct Labor

Direct
Materials Direct labor costs
Conversion
may be small
in comparison to
Dollar Amount

other product
costs in process
cost systems.

Type of Product Cost

Direct labor and manufacturing overhead may be
combined into one product cost called conversion.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Weighted-Average Example

Smith Company reported the following activity in

Department A for the month of June:

Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Weighted-Average Example

The first step in calculating the equivalent units is

to identify the units completed and transferred
out of Department A in June (5,400 units)

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Weighted-Average Example

The second step is to identify the equivalent units of

production in ending work in process with respect to
materials for the month (540 units) and add this to the
5,400 units from step one.
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540

Equivalent units of Production in

Department A during June 5,940

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Weighted-Average Example

The third step is to identify the equivalent units of

production in ending work in process with respect to
conversion for the month (270 units) and add this to the
5,400 units from step one.
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Weighted-Average Example

Equivalent units of production always equals:

Units completed and transferred
+ Equivalent units remaining in work in process

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Weighted-Average Example

Materials 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

5,400 Units Completed

540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Weighted-Average Example

Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

5,400 Units Completed

900 × 30%
270 Equivalent Units
5,670 Equivalent units
of production
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Production Report – Weighted-Average

Production Report
A quantity schedule
showing the flow of units
Section 1 and the computation of
equivalent units.

A computation of
Section 2 cost per equivalent unit.

Section 3

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Production Report

Production Report

Section 1

Section 2
 Cost Reconciliation
section shows the
reconciliation of all cost
Section 3 flows into and out of the
department during the
period.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Production Report Example

Assume that Double Diamond Skis uses the

weighted-average method of process costing to
determine unit costs in it Shaping and Milling
Department.

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 Production Report Example

Work in process, May 1: 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

Work in process, May 31 400 units

Materials: 40% complete
Conversion: 25% complete

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160

5,200 4,960

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Step 2: Calculating the Costs Per Equivalent
Unit

To calculate the cost per equivalent

unit for the period:

Cost per Costs for the period

equivalent = Equivalent units of production
unit for the period

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Production Report Example

Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Production Report Example

Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25

$378,200 ÷ 4,960 units = $76.25

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Production Report Example

Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25 $ 72.75
Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 ÷ 4,900 units = $72.75

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Production Report Example

Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Production Report Example

Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

4,800 units @ $149.00
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Production Report Example

Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

160 units @ $76.25
Cost Materials
100 units @ Conversion
$72.75
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 12,200 160
Conversion 7,275 100
Total work in process, May 31 19,475 All costs
Total cost accounted for $ 734,675 accounted for

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 FIFO Method

Appendix 4A

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 FIFO vs. Weighted-Average 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.

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Equivalent Units – FIFO Method

Let’s revisit the Smith Company example.

Assume the following activity is reported in
Department A for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Equivalent Units – FIFO Method

Step 1: Determine the number of units completed and

transferred out of Department A in June.

Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Equivalent Units – FIFO Method

Step 2: Add the equivalent units of production in ending

work in process inventory (540 units for material and 270
units for conversion) to the units completed and transferred
our during June.
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Equivalent Units – FIFO Method

Step 3: Subtract the equivalent units in beginning work in process

inventory (120 units for materials and 60 units for conversion) from the
sum of the units completed and transferred out and the equivalent
units in ending work in process inventory.

Materials Conversion
Equivalent units or Production in
Department A during June 5,940 5,670
Equivalent units in beginning inventory
300 units × 40% 120
300 units × 20% 60
Equivalent units of Production in
Department A during June 5,820 5,610

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 Equivalent Units – FIFO Method

Materials 6,000 Units Started

Beginning Ending
Work in Process 5,400 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

Material
Units completed and transferred out 5,400
Equivalent units in ending WIP inventory 540
Equivalent units in beginning WIP inventory (120)
Equivalent units of production 5,820
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Equivalent Units – FIFO Method

Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,400 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

Conversion
Units completed and transferred out 5,400
Equivalent units in ending WIP inventory 270
Equivalent units in beginning WIP inventory (60)
Equivalent units of production 5,610

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

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 5,940 5,670
Less equivalent units in beginning inventory:
300 units × 40% 120
300 units × 20% 60
Equivalent units - FIFO method 5,820 5,610

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

 The Production Report - FIFO Method

Let’s revisit the Double Diamond Skis Shaping and Milling

Department for the Month of May to prepare our production report.
Work in process, May 1: 200 units

Materials: 55% complete $ 9,600

Conversion: 30% complete 5,575
$15, 175

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
Work in process, May 31 400 units
Materials: 40% complete
Conversion: 25% complete
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 The Production Report - FIFO Method

Step 1: Prepare the quantity schedule and compute

equivalent units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 The Production Report - FIFO Method

Step 2: Calculate the equivalent units of material and conversion

that were transferred from beginning work in process to the next
department.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 The Production Report - FIFO Method

Step 3: Determine the number of units started and

completed during the period.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 The Production Report - FIFO Method

Step 4: Calculate the equivalent units of material and

conversion that are in ending work in process inventory.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 The Production Report - FIFO Method

Step 5: Calculate the total equivalent units for

materials and conversion.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Cost per Equivalent Unit

Notice that the costs of beginning work in process

inventory of $15,175, is not broken down by
materials and conversion components

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 368,600 $ 350,900

Equivalent units 4,960 4,900

Cost per equivalent unit $ 74.31 $ 71.61
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Cost per Equivalent Unit

We divide the costs added in the Shipping and

Milling Department by the number of equivalent
unit for materials.
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 368,600 $ 350,900

Equivalent units 4,850 4,900

Cost per equivalent unit $ 76.00 $ 71.61
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Cost per Equivalent Unit

We follow the same procedure for conversion and

add the two equivalent unit costs to get the total cost
per equivalent unit.
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 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
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Cost Reconciliation

Step 1: Calculate the total cost from beginning

inventory transferred to the next department.

Total Equivalent Units

Cost Materials Conversion
Work in process, May 1: $ 15,175
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31:

Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410
Total cost accounted for $ 734,675
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Cost Reconciliation

Step 2: Calculate the cost of units started and

completed during the period.
4,600 units × $148.50
Total Equivalent Units
Cost Materials Conversion
Work in process, May 1: $ 15,175
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31:

Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410
Total cost accounted for $ 734,675
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 Cost Reconciliation

Step 3: Calculate the costs in ending working in process

inventory and the sum of the cost accounted for.

Total Equivalent Units

Cost Materials Conversion
Work in process, May 1: $ 15,175
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31:

Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410 All costs
Total cost accounted for $ 734,675 accounted for
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
 End of Chapter 4

McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.