AMA- Process Cost

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    PowerPoint Authors:

    Jon A. Booker, Ph.D., CPA, CIA

    Charles W. Caldwell, D.B.A., CMA

    Susan Coomer Galbreath, Ph.D., CPA

    Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

    Chapter 4System Design:

    Process Costing

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    Both systems assign material, labor andoverhead 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 FinishedGoods.

    The flow of costs through the manufacturingaccounts is basically the same in both systems.

    Similarities Between Job-Order

    and Process Costing

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    Process costing is used when a single product isproduced on a continuing basis or for a longperiod of time. Job-order costing is used whenmany different jobs are worked on each period.

    Process costing systems accumulate costs bydepartment. Job-order costing systems

    accumulate costs by individual jobs.

    Process costing systems compute unit costs bydepartment. Job-order costing systems compute

    unit costs by job on the job cost sheet.

    Differences Between Job-Order

    and Process Costing

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    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.

    Quick Check

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    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.

    Quick Check

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    Processing DepartmentsAny location in an organization where materials,

    labor, or overhead are added to the product.

    The activities performed in a processing

    department areperformed uniformlyon allunits of production. Furthermore, the output

    of a processing department must behomogeneous.

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    FinishedGoods

    Cost ofGoodsSold

    Work inProcess

    DirectMaterials

    Direct Labor

    ManufacturingOverhead

    Flow of Materials, Labor, and

    Overhead Costs

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    FinishedGoods

    Cost ofGoodsSold

    Direct Labor

    ManufacturingOverhead

    Jobs

    Costs are traced andapplied to individualjobs in a job-order

    cost system.

    DirectMaterials

    Flow of Materials, Labor, and

    Overhead Costs

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    FinishedGoods

    Cost ofGoodsSold

    Direct Labor

    ManufacturingOverhead

    ProcessingDepartment

    Costs are traced andapplied to departments

    in a process costsystem.

    DirectMaterials

    Flow of Materials, Labor, and

    Overhead Costs

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    For purposes of thisexample, assume there are

    two processing departments Departments A and B.

    We will use T-accounts andjournal entries.

    T-Account and Journal Entry

    Views of Process Cost Flows

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    Raw Materials

    Work in Process

    Department B

    Work in ProcessDepartment A

    DirectMaterials

    DirectMaterials

    DirectMaterials

    The Flow of Raw Materials

    (in T-Account form)

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    GENERAL JOURNAL Page 4

    Date Description

    Post.

    Ref. Debit Credit

    Work in Process - Department A XXXXX

    Work in Process - Department B XXXXX

    Raw Materials XXXXX

    To record the use of di rect m aterial.

    The Flow of Raw Materials

    (in journal entry form)

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    Work in Process

    Department B

    Work in ProcessDepartment ASalaries and

    Wages Payable

    DirectMaterials

    DirectMaterials

    DirectLabor

    Direct

    Labor DirectLabor

    The Flow of Labor Costs

    (in T-Account form)

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    GENERAL JOURNAL Page 4

    Date Description

    Post.

    Ref. Debit Credit

    Work in Process - Department A XXXXX

    Work in Process - Department B XXXXX

    Salaries and Wages Payable XXXXX

    To record di rect labo r co sts.

    The Flow of Labor Costs

    (in journal entry form)

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    Work in Process

    Department B

    Work in ProcessDepartment A

    ManufacturingOverhead

    OverheadApplied to

    Work inProcess

    AppliedOverhead

    AppliedOverhead

    DirectLabor

    DirectMaterials

    DirectLabor

    DirectMaterials

    ActualOverhead

    The Flow of Manufacturing Overhead Costs(in T-Account form)

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    GENERAL JOURNAL Page 4

    Date Description

    Post.

    Ref. Debit CreditWork in Process - Department A XXXXX

    Work in Process - Department B XXXXX

    Manufacturing Overhead XXXXX

    To appl y overh ead to d epartm ents.

    The Flow of Manufacturing Overhead Costs(in journal entry form)

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    Work in ProcessDepartment B

    Work in ProcessDepartment A

    DirectMaterialsDirectLabor

    AppliedOverhead

    Direct

    MaterialsDirectLabor

    AppliedOverhead

    Transferredto Dept. B

    Transferredfrom Dept. A

    Partially Completed Units Transferred(in T-Account form)

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    GENERAL JOURNAL Page 4

    Date Description

    Post.

    Ref. Debit CreditWork in Process - Department B XXXXX

    Work in Process - Department A XXXXX

    To recor d the transfer o f goo ds from

    Departm ent A to Departm ent B.

    Partially Completed Units Transferred(in journal entry form)

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    Finished GoodsWork in Process

    Department B

    Cost ofGoods

    Manufactured

    Direct

    MaterialsDirectLabor

    AppliedOverhead

    Transferredfrom Dept. A

    Cost ofGoods

    Manufactured

    Transfer of Cost of Completed Units(in T-Account form)

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    GENERAL JOURNAL Page 4

    Date Description

    Post.

    Ref. Debit CreditFinished Goods XXXXX

    Work in Process - Department B XXXXX

    To record the com p le ti on o f good s

    and th ei r t ransfer from Departm ent B

    to f in ished go od s inventory .

    Transfer of Cost of Completed Units(in journal entry form)

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    Finished Goods

    Cost of Goods Sold

    Work in ProcessDepartment B

    Cost of

    GoodsManufactured

    Direct

    MaterialsDirectLabor

    AppliedOverhead

    Transferredfrom Dept. A

    Cost ofGoodsSold

    Cost of

    GoodsSold

    Cost of

    GoodsManufactured

    Cost of Finished Goods Sold

    (in T-Account form)

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    GENERAL JOURNAL Page 4

    Date Description

    Post.

    Ref. Debit CreditCost of Goods Sold XXXXX

    Finished Goods XXXXX

    To record co st of goo ds so ld .

    Cost of Finished Goods Sold

    (in journal entry form)

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    Equivalent Units of Production

    Equivalent units are the product of the numberof partially completed units and the percentage

    of completion of those units.

    We need to calculate equivalent units because adepartment usually has some partially completed

    units in its beginning and ending inventory.

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    Two half completed products areequ ivalent toone completed product.

    So, 10,000 units 70% completeare equivalent to7,000 complete units.

    + = 1

    Equivalent Units The Basic Idea

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    For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process that are 30 percent

    complete. How many equivalent units ofproduction did Jones have for the period?

    a. 10,000

    b. 11,500c. 13,500

    d. 15,000

    Quick Check

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    For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process that are 30 percent

    complete. How many equivalent units ofproduction did Jones have for the period?

    a. 10,000

    b. 11,500c. 13,500

    d. 15,000

    10,000 units + (5,000 units 0.30)

    = 11,500 equivalent units

    Quick Check

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    Calculating Equivalent Units

    Equivalent units can be calculated twoways:

    The First-In, First-Out MethodFIFOis covered in the appendix available on the web.

    The Weighted-Average MethodThismethod will be covered in the main portion ofthe chapter.

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    Learning Objective 2

    Compute the equivalentunits of production using theweighted-average method.

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    The weighted-average method . . .

    Makes no distinction between work done inprior or current periods.

    Blends together units and costs from priorand current periods.

    Characteristics of the Weighted

    Average Method

    The equivalent units of production for adepartment are the number of units transferredto the next department (or Finished Goods) plusthe equivalent units in the departments ending

    Work in Process inventory.

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    Direct labor costsmay be small

    in comparison to

    other productcosts in processcosting systems.

    DirectMaterials

    Type of Product Cost

    DollarAmo

    unt

    DirectLabor

    Conversion

    Treatment of Direct Labor

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    Type of Product Cost

    DollarAmo

    unt Conversion

    Direct labor and manufacturing overhead may becombined into one product cost called convers ion.

    DirectMaterials

    Treatment of Direct Labor

    Direct labor costsmay be small

    in comparison to

    other productcosts in processcosting systems.

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    Smith Company reported the following activity inthe Assembly Department 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%

    Weighted-AverageAn Example

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    The first step in calculating the equivalent units is to identifythe units completed and transferred out of Assembly

    Department in June (5,400 units)

    Materials Conversion

    Units completed and transferred

    out of the Department in June 5,400 5,400

    Weighted-AverageAn Example

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    The second step is to identify the equivalent unitsofproduction in ending work in processwith respect to

    materialsfor the month (540 units) and adding this to the5,400 units from step one.

    Materials Conversion

    Units completed and transferred

    out of the Department in June 5,400 5,400

    Work in Process, June 30:

    900 units 60% 540

    Equivalent units of Production in

    the Department during June 5,940

    Weighted-AverageAn Example

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    Materials Conversion

    Units completed and transferred

    out of the Department in June 5,400 5,400

    Work in Process, June 30:

    900 units 60% 540

    900 units 30% 270

    Equivalent units of Production in

    the Department during June 5,940 5,670

    The third step is to identify the equivalent unitsof production inending Work in Processwith respect to conversion for the

    month (270 units) and adding this to the 5,400 units from stepone.

    Weighted-AverageAn Example

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    Materials Conversion

    Units completed and transferred

    out of the Department in June 5,400 5,400

    Work in Process, June 30:

    900 units 60% 540

    900 units 30% 270

    Equivalent units of Production in

    the Department during June 5,940 5,670

    Equivalent units of production alwaysequals:Units completed and transferred

    + Equivalent units remaining in Work in Process

    Weighted-AverageAn Example

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    EndingWork in Process900 Units

    60% Complete

    6,000 Units Started

    5,400 Units Completed

    5,100 Units Startedand Completed

    Materials

    5,400 Units Completed540 Equivalent Units 900 60%

    5,940 Equivalent units

    of production

    BeginningWork in Process

    300 Units40% Complete

    Weighted-AverageAn Example

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    6,000 Units Started

    5,400 Units Completed270 Equivalent Units

    900 30%

    5,670 Equivalent units

    of production

    BeginningWork in Process

    300 Units20%Complete

    EndingWork in Process900 Units

    30%Complete

    Conversion

    5,100 Units Startedand Completed

    Weighted-AverageAn Example

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    Learning Objective 3

    Compute the cost per equivalentunit using the weighted-averagemethod.

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    Beginning Work in Process Inventory: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920

    Production started during June 6,000 unitsProduction completed during June 5,400 units

    Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130

    Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete

    Compute and Apply Costs

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    The formula for computing the cost perequivalent unit is:

    Cost perequivalent

    unit=

    Cost of beginning

    Work in Process

    inventoryCost added during

    the period

    Equivalent units of production

    +

    Compute and Apply Costs

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    Here is a schedule with the cost and equivalentunit information.

    TotalCost Materials Conversion

    Cost to be accounted for:

    Work in Process, June 1 10,039$ 6,119$ 3,920$

    Cost added in Assembly 199,751 118,621 81,130

    Total cost 209,790$ 124,740$ 85,050$

    Equivalent units 5,940 5,670

    Compute and Apply Costs

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    TotalCost Materials Conversion

    Cost to be accounted for:

    Work in Process, June 1 10,039$ 6,119$ 3,920$

    Cost added in Assembly 199,751 118,621 81,130

    Total cost 209,790$ 124,740$ 85,050$

    Equivalent units 5,940 5,670

    Cost per equivalent unit 21.00$ 15.00$

    Here is a schedule with the cost and equivalentunit information.

    $124,740 5,940 units = $21.00 $85,050 5,670 units = $15.00

    Cost per equivalent unit = $21.00 + $15.00 = $36.00

    Compute and Apply Costs

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    Learning Objective 4

    Assign costs to units using theweighted-average method.

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    Applying Costs

    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270

    Assembly Department

    Cost of Ending WIP Inventory and Units Transferred Out

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    Applying Costs

    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$

    Assembly Department

    Cost of Ending WIP Inventory and Units Transferred Out

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    Applying Costs

    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$

    Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$

    Assembly Department

    Cost of Ending WIP Inventory and Units Transferred Out

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    Computing the Cost of Units

    Transferred Out

    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$

    Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$

    Units completed and transferred out:

    Units transferred 5,400 5,400

    Assembly Department

    Cost of Ending WIP Inventory and Units Transferred Out

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    Computing the Cost of Units

    Transferred Out

    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$

    Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$

    Units completed and transferred out:

    Units transferred 5,400 5,400

    Cost per equivalent unit 21.00$ 15.00$

    Assembly Department

    Cost of Ending WIP Inventory and Units Transferred Out

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    Computing the Cost of Units

    Transferred Out

    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270Cost per equivalent unit 21.00$ 15.00$

    Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$

    Units completed and transferred out:

    Units transferred 5,400 5,400

    Cost per equivalent unit 21.00$ 15.00$Cost of units transferred out 113,400$ 81,000$ 194,400$

    Assembly Department

    Cost of Ending WIP Inventory and Units Transferred Out

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    Learning Objective 5

    Prepare a costreconciliation report.

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    Reconciling Costs

    Costs to be accounted for:

    Cost of beginning Work in Process Inventory 10,039$

    Costs added to production during the period 199,751Total cost to be accounted for 209,790$

    Assembly Department

    Cost Reconciliation

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    Reconciling Costs

    Costs to be accounted for:

    Cost of beginning Work in Process Inventory 10,039$

    Costs added to production during the period 199,751Total cost to be accounted for 209,790$

    Cost accounted for as follows:

    Cost of ending Work in Process Inventory 15,390$Cost of units transferred out 194,400

    Total cost accounted for 209,790$

    Assembly Department

    Cost Reconciliation

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    PowerPoint Authors:

    Jon A. Booker, Ph.D., CPA, CIA

    Charles W. Caldwell, D.B.A., CMA

    Susan Coomer Galbreath, Ph.D., CPA

    Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

    Appendix 4AFIFO Method

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    FIFO vs. Weighted-Average Method

    The FIFO method (generally consideredmore accurate that the weighted-average

    method) differs from the weighted-averagemethod in two ways:

    1. The computation of equivalent units.2. The way in which the costs of beginning

    inventory are treated.

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    Learning Objective 6

    Compute the equivalentunits of production usingthe FIFO method.

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    Equivalent Units FIFO Method

    Lets revisit the Smith Company example. Here is information

    concerning the Assembly Department for the month ofJune.

    Percent CompletedUnits 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%

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    Equivalent Units FIFO Method

    Step 1: Determine equivalent units needed to completebeginning Work in Process inventory.

    Materials ConversionTo complete beginning Work in Process:

    Materials: 300 units (100% - 40%) 180

    Conversion: 300 units (100% - 20%) 240

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    Equivalent Units FIFO Method

    Step 2: Determine units started and completedduringthe period.

    Materials ConversionTo complete beginning Work in Process:

    Materials: 300 units (100% - 40%) 180

    Conversion: 300 units (100% - 20%) 240

    Units started and completed during June 5,100 5,100

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    Equivalent Units FIFO Method

    Step 3: Add the equivalent units in ending Work inProcess inventory.

    Materials ConversionTo complete beginning Work in Process:

    Materials: 300 units (100% - 40%) 180

    Conversion: 300 units (100% - 20%) 240

    Units started and completed during June 5,100 5,100Ending Work in Process:

    Materials: 900 units 60% complete 540

    Conversion: 900 units 30% complete 270

    Equivalent units of production 5,820 5,610

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    BeginningWork in Process

    300 Units40% Complete

    Ending

    Work in Process900 Units

    60% Complete

    6,000 Units Started

    5,100 Units Startedand Completed

    FIFO Example

    Materials

    5,100 Units Completed540 Equivalent Units

    900 60%

    5,820 Equivalent units

    of production

    180 Equivalent Units300 60%

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    BeginningWork in Process

    300 Units20% Complete

    Ending

    Work in Process900 Units

    30% Complete

    6,000 Units Started

    5,100 Units Startedand Completed

    FIFO Example

    Conversion

    5,100 Units Completed270 Equivalent Units

    900 30%

    5,610 Equivalent units

    of production

    240 Equivalent Units300 80%

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    Equivalent Units: Weighted-

    Average vs. FIFO

    Materials Conversion

    Equivalent units - weighted-average method 5,940 5,670

    Less equivalent units in beginning inventory:

    300 units 40% 120300 units 20% 60

    Equivalent units - FIFO method 5,820 5,610

    As shown below, the equivalent units in beginning inventory aresubtracted from the equivalent units of production per theweighted-average method to obtain the equivalent units of

    production under the FIFO method.

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    Learning Objective 7

    Compute the cost per equivalentunit using the FIFO method.

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    Beginning Work in Process: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920

    Production started during June 6,000 unitsProduction completed during June 5,400 units

    Costs added to production in June:

    Materials cost $ 118,621Conversion cost $ 81,130

    Ending Work in Process: 900 unitsMaterials: 60% completeConversion: 30% complete

    Cost per Equivalent Unit - FIFO

    Lets revisit the Smith Company Assembly Departmentfor the month of June to prepare our production report.

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    Cost per Equivalent Unit - FIFO

    The formula for computing the cost perequivalent unit under FIFO method is:

    Cost perequivalent

    unit=

    Cost added during the period

    Equivalent units of production

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    Cost per Equivalent Unit - FIFO

    Total

    Cost Materials Conversion

    Cost added in June 199,751$ 118,621$ 81,130$Equivalent units 5,820 5,610

    Cost per equivalent unit 20.3816$ 14.4617$

    Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

    $118,600 5,820 $81,130 5,610

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    Learning Objective 8

    Assign costs to unitsusing the FIFO method.

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    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270

    Assembly Department

    Cost of Ending WIP Inventory

    Applying Costs - FIFO

    Step 1: Record the equivalent units of production in endingWorkin Process inventory.

    900 units 60% 900 units 30%

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    Applying Costs - FIFO

    Step 2: Record the cost per equivalent unit.

    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270

    Cost per equivalent unit 20.3816$ 14.4617$

    Assembly Department

    Cost of Ending WIP Inventory

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    Materials Conversion Total

    Ending WIP inventory:

    Equivalent units 540 270

    Cost per equivalent unit 20.3816$ 14.4617$

    Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$

    Assembly Department

    Cost of Ending WIP Inventory

    Applying Costs - FIFO

    Step 3: Compute the cost of ending Work in Process inventory.

    540 $20.3816 270 14.4617

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    Cost of Units Transferred Out

    Step 1: Record the cost in beginningWork in Process inventory.

    Materials Conversion Total

    Cost of Units Transferred Out:Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$

    Assembly Department

    Cost of Units Transferred Out in June

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    Cost of Units Transferred Out

    Step 2: Compute the cost to complete the units in beginningWork in Process inventory.

    Materials Conversion Total

    Cost of Units Transferred Out:Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$

    Cost to complete beginning WIP

    Equivalent units to complete 180 240

    Cost per equivalent unit 20.3816$ 14.4617$

    Cost to complete beginning WIP 3,668$ 3,471$ 7,139

    Assembly Department

    Cost of Units Transferred Out in June

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    Cost of Units Transferred Out

    Step 3: Compute the cost of units started and completedthisperiod.

    Materials Conversion Total

    Cost of Units Transferred Out:Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$

    Cost to complete beginning WIP

    Equivalent units to complete 180 240

    Cost per equivalent unit 20.3816$ 14.4617$

    Cost to complete beginning WIP 3,668$ 3,471$ 7,139

    Cost of units started and completed:Units started and completed 5,100 5,100

    Cost per equivalent unit 20.3816$ 14.4617$

    Cost of units started and completed 103,946$ 73,755$ 177,701

    Assembly Department

    Cost of Units Transferred Out in June

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    Cost of Units Transferred Out

    Step 4: Compute the total cost ofunits transferred out.

    Materials Conversion Total

    Cost of Units Transferred Out:

    Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$

    Cost to complete beginning WIP

    Equivalent units to complete 180 240

    Cost per equivalent unit 20.3816$ 14.4617$

    Cost to complete beginning WIP 3,668$ 3,471$ 7,139

    Cost of units started and completed:Units started and completed 5,100 5,100

    Cost per equivalent unit 20.3816$ 14.4617$

    Cost of units started and completed 103,946$ 73,755$ 177,701

    Cost of Units Transferred Out 194,879$

    Assembly Department

    Cost of Units Transferred Out in June

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    Learning Objective 9

    Prepare a costreconciliation report

    using the FIFO method.

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    Reconciling Costs

    Costs to be accounted for:

    Cost of beginning Work in Process Inventory 10,039$

    Costs added to production during the period 199,751Total cost to be accounted for 209,790$

    Assembly Department

    Cost Reconciliation for June

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    Reconciling Costs

    Costs to be accounted for:

    Cost of beginning Work in Process Inventory 10,039$

    Costs added to production during the period 199,751Total cost to be accounted for 209,790$

    Cost accounted for as follows:

    Cost of ending Work in Process Inventory 14,911$

    Cost of units transferred out 194,879Total cost accounted for 209,790$

    Assembly Department

    Cost Reconciliation for June

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    A Comparison of Costing Methods

    In a lean production environment, FIFO andweighted-average methods yield similar

    unit costs.

    When considering cost control, FIFO issuperior to weighted-average because it

    does not mix costs of the current period withcosts of the prior period.

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    End of Chapter 4