Management

Accounting: The
Cornerstone for
Business Decisions

Process Costing

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

 Learning Objectives
1. Describe the basic characteristics and
cost flows associated with process
manufacturing.
2. Define equivalent units and explain
their role in process costing. Explain
the differences between the weighted
average method and the FIFO method
of accounting for process costs.
 Learning Objectives
3. Prepare a departmental production
report using the weighted average
method.
4. Explain how nonuniform inputs and
multiple processing departments affect
process costing.
5. (Appendix) Prepare a departmental
production report using the FIFO
method.
 Match Definitions
Sequential Two or more sequential processes
are required to produce a finished
Process
product

A document that summarizes the

Parallel manufacturing activity that takes
Process place in a process, department or
activity for a given period of time

Units must pass through a given

Production process before they can be worked
Report on in a later process
Illustration of a Sequential
Process
Illustration of a Parallel
Process
 How to calculate cost flows
6-1 without Work in Process (WIP).

Healthblend decides to bottle 4,000 units of

multivitamins with the following costs.

Picking Encapsulating Bottling

Direct
Materials $ 3,400 $ 2,000 $ 1,600
Direct
Labor 100 120 600
Applied
Overhead 900 1,000 1,200
 How to calculate cost
6-1 flows without WIP.
REQUIRED:
1. Calculate the costs transferred out of
each department.
2. Prepare journal entries that reflect these
cost transfers.
Calculation: Appears on the following
slides
 How to calculate cost
6-1 flows without WIP.
 How to calculate cost
6-1 flows without WIP.
Journal entries showing the flow of costs
Discuss the Production Report
 How to calculate equivalent units
6-2 of production: no beginning WIP.

In November 2,000 units were completed,

800 units remained in ending work in
process (EWIP) and are 40% complete.
REQUIRED: Calculate November
equivalent units.
Calculation:
 How to measure output and assign
6-3 costs no beginning WIP.

Manufacturing costs for the period, $23,000; units

transferred out 2,000; units in ending work in
process 1,200 (25% complete).
REQUIRED:
1. Calculate the unit costs.
2. Calculate the cost of goods transferred out and
cost of ending work in process.
 How to measure output and
6-3 assign costs no beginning WIP.
Calculations:
What are the two methods of
treating beginning work in
process?
 Define the Two Methods
◙Weighted Average Method:

◙First-In, First-Out, FIFO Method:

 How to measure output and assign
6-4 cost, weighted average method.
Production:
Units in BWIP, August 1, 75% complete 40,000 gal.
Units completed & transferred out 100,00 gal.
Units in EWIP, August 31, 25% complete 20,000 gal.
Costs:
BWIP, August 1, $7,050
Costs added during July 10,125
REQUIRED:
1. Calculate an output measure for August.
2. Assign costs to units transferred out and ending
work in process using the weighted average
method.
 How to measure output and assign
6-4 cost, weighted average method.
List the five steps to prepare
a production report.
 How to prepare a physical
6-5 flow schedule.
Production:
Units in BWIP, August 1, 75% complete, 40,000 gal.
Units completed & transferred out 100,000 gal.
Units in EWIP, August 31, 25% complete, 20,000 gal.
REQUIRED: Prepare a physical flow schedule
Calculation:
 How to prepare a physical
6-5 flow schedule.
Physical flow schedule;
Units to account for:

Units accounted for:

Evaluate the Weighted
Average Method
 What happens when the
application of manufacturing
inputs are not uniform?
 How to prepare a production
6-5 report: weighted average method.

Steps 1-5 of the Healthblend example use

the August information.
REQUIRED: Prepare a production report.
Calculations: Heading Below
Healthblend Company
Picking Department
Production Report for August 2007
(Weighted Average Method)
 How to prepare a production report:
6-6 weighted average method.

Unit Information
Physical Flow
Units to account for: Units accounted for:
 How to prepare a production
6-6 report: weighted average method.
Equivalent Units

Costs to account for:

Cost per equivalent unit

 How to prepare a production
6-6 report: weighted average method.
Transferred EWIP Total
Out

Cost accounted for:

 How to calculate equivalent units,
unit costs and value inventories
6-7 with nonuniform inputs.
The Picking Department of Healthblend has the following
information for October
Production:
Units in process, 10/1, 50% complete 5,000
Units completed & transferred out 30,000
Units in process, 10/31, 40% complete 10,000
Costs:
WIP 10/1:
Materials $ 800
Conversion 100
Total $ 900
 How to calculate equivalent units,
unit costs and value inventories
6-7 with nonuniform inputs.
Current Costs:
Materials $6,000
Conversion 1,600
Total $7,600
REQUIRED: Calculate steps 2-4 of the weighted average
method.
Step 2:
 How to calculate equivalent units,
unit costs and value inventories
6-7 with nonuniform inputs.
Step 3: Calculation of Unit costs

Step 4: Valuation of EWIP and goods transferred out:

 How to calculate the physical flow
schedule, equivalent units, & unit
6-8 costs with transferred-in goods.
For November, Healthblend’s encapsulating department
had 30,000 units in beginning inventory (with
transferred-in costs of $6,000) and completed 140,000
units during the month. Further the picking
department completed and transferred out 120,000
units at a cost of $26,400 in October.
REQUIRED:
1. Prepare a physical flow schedule with transferred-in
goods.
2. Calculate equivalent units for the transferred-in
category.
3. Calculate the unit cost for the transferred-in category.
 How to calculate the physical flow
schedule, equivalent units, & unit
6-8 costs with transferred-in goods.
Calculation:
 How to calculate the physical flow
schedule, equivalent units, & unit
6-8 costs with transferred-in goods.
 How to calculate the physical flow
schedule, equivalent units, & unit
6-8 costs with transferred-in goods.