Examples of Managerial Accounting

Seventh Edition

Chapter 6
Process Costing

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 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
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 6A) Prepare a departmental production report
using the FIFO method

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Characteristics of Process Manufacturing

• Each product within a product line passing through the

processes would receive similar ‘‘doses’’ of materials,
labor, and overhead costs
• Process costing works well whenever relatively
homogeneous products pass through a series of
processes and receive similar amounts of
manufacturing costs

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 Types of Processes (1 of 2)
• Sequential processing requires that units pass
through one process before they can be worked on in
the next process in the sequence

• Parallel processing is another processing pattern that

requires two or more sequential processes to produce a
finished good
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 Types of Processes (2 of 2)
• Partially completed units (e.g., two subcomponents)
can be worked on simultaneously in different
processes and then brought together in a final process
for completion

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 Here’s How It’s Used: IN YOUR
LIFE (1 of 8)
Example of Sequential and Parallel Process
The local chapter of Beta Alpha Psi has decided to have a
bake sale to raise money for a homeless shelter. John
Henderson, a member of the honor organization, agrees
to bake two dozen cupcakes (for the first time in his life!).
Because this is his first time, he searches the Internet for
information about making cupcakes. He finds a good
recipe on foodnetwork.com and realizes that there are
three sequential processes to follow. First, there is a
mixing process to create the batter.

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 Here’s How It’s Used: IN YOUR
LIFE (2 of 8)
In this process, butter, sugar, eggs, flour, baking soda,
baking powder, and vanilla extract are all blended (in the
proper proportions) in a food processor. Next, while
pulsing, milk is added down the funnel of the processor to
create a smooth dropping consistency.
The second process is baking. For this process, two 12-
bin muffin tins are lined with muffin papers. The oven is
preheated to 400 degrees. Next, the batter from mixing is
poured into the two muffin tins and baked for 15 to 20
minutes. The final step in this process is cooling.

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 Here’s How It’s Used: IN YOUR
LIFE (3 of 8)
First, John removes the muffin tins from the oven and
allows them to cool on the rack for a few minutes. Then he
removes the cupcakes from the tins and allows them to
cool in their papers. The cupcakes are then ready for the
final process: icing and boxing.
In this final process, icing is spread over each cupcake
and four iced cupcakes are placed in a small white box
with a lid. The cupcakes will be sold for $2.50 per box at
the bake sale. However, while the cupcakes are baking,
John discovers that he forgot to buy icing.

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 Here’s How It’s Used: IN YOUR
LIFE (4 of 8)
He is relieved to find out that he can actually make the
icing (using information from the same website that
provided the cupcake recipe). It requires a fourth process
that is independent of or parallel to baking. Thus, while the
cupcakes are baking, John makes a white icing by
whipping egg whites and confectioner’s sugar and adding
some lemon juice to create the right consistency. The icing
becomes a material added at the beginning of the boxing
process.

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 Here’s How It’s Used: IN YOUR
LIFE (5 of 8)
Equivalent Units of Homework
On Monday morning, Kelly Jackson received a homework
assignment due on Friday. It consisted of completing 12
exercises in her calculus class, three exercises for each of
four sections in the current chapter. Before working the
exercises, she must first read and study the section
material and then test her understanding by working the
section’s review exercises. She believes that the study
time, the time for review exercises, and the time to work
the assigned exercises are all about the
same.

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 Here’s How It’s Used: IN YOUR
LIFE (6 of 8)
Thus, once a section is read and studied, one-third of the
labor input to produce a finished exercise is done. When
the review exercise is complete, two-thirds of the labor
input needed to produce a finished exercise is complete.
By Tuesday night, Kelly had read and studied the first two
sections, worked the review exercises for those sections,
and completed all the assigned exercises for section 1. By
Wednesday night, she had read all four sections, worked
all review exercises, and completed the assigned
exercises for the first two sections.

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 Here’s How It’s Used: IN YOUR
LIFE (7 of 8)
Kelly wants to know her homework output for both
Tuesday and Wednesday. She is convinced that it is more
than simply the homework exercises actually completed.
For Tuesday, her output (measured by equivalent units of
assigned exercise) would be three completed exercises
plus two [(2/3) × 3] equivalent exercises, for a total of five
equivalent exercises. For Wednesday night, her
homework output measure in equivalent units would be six
completed units plus four equivalent exercises [(2/3) × 6],
yielding a total of ten equivalent exercises.

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 Here’s How It’s Used: IN YOUR
LIFE (8 of 8)
Unfortunately for Kelly if she did no further work, the
professor would only give her credit for the six fully
completed exercises and not the 10 equivalent exercises!
However, using equivalent units does help her measure
and understand her degree of progress—and she only
has two equivalent units of output to complete as of
Wednesday night (that sounds a lot better than six more
exercises). Moreover, a partially completed unit in the
business world can’t be sold until it’s finished (just as
homework can’t be graded until it’s finished!).

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 What’s In Common?

• Regardless of which processing pattern exists within a

firm, all units produced share a common property
– Units are homogeneous and subjected to the same
operations for a given process and each unit produced in
a period should receive the same unit cost
• Understanding how unit costs are computed requires
an understanding of the manufacturing cost flows that
take place in a process-costing firm

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 How Costs Flow through the Accounts in
Process Costing (1 of 4)
• The manufacturing cost flows for a process-costing
system are the same as those for a job-order system
• As raw materials are purchased, the cost of these
materials flows into a raw materials inventory account
• Similarly, raw materials, direct labor, and applied
overhead costs flow into a work-in-process (WIP)
account

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 How Costs Flow through the Accounts in
Process Costing (2 of 4)
• When goods are completed, the cost of the completed
goods is transferred from WIP to the finished goods
account
• As goods are sold, the cost of the finished goods is
transferred to the cost of goods sold account
• The journal entries generally parallel those described in
a job-order costing system

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 How Costs Flow through the Accounts in
Process Costing (3 of 4)
• Although job-order and process cost flows are
generally similar, some differences exist
• In process costing, each producing department has
its own WIP account
• As goods are completed in one department, they are
transferred to the next department
• The costs attached to the goods transferred out are
also transferred to the next department

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How Costs Flow through the Accounts in
Process Costing (4 of 4)

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 Example 6.1: How to Account for Cost
Flows Without Work-in-Process Inventories
(1 of 3)
Suppose that Healthblend decides to produce 2,000 bottles
of multivitamins with the following costs. (there is no
beginning or ending work in process for each department):

Mixing Encapsulating Bottling

Department Department Department

Direct materials $1,700 $1,000 $800

Direct labor 50 60 300

Applied overhead 450 500 600

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 Example 6.1: How to Account for Cost
Flows Without Work-in-Process Inventories
(2 of 3)
Required:
1. Calculate the costs transferred out of each department.
2. Prepare journal entries that reflect these cost transfers.
Solution:
1.

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 Example 6.1: How to Account for Cost
Flows Without Work-in-Process Inventories
(3 of 3)
2.
Mixing Encapsulating Bottling
Department Department Department

Work in Process (Encapsulating) 2,200

Work in Process (Mixing) 2,200
Work in Process (Bottling) 3,760
Work in Process (Encapsulating) 3,760
Finished Goods 5,460
Work in Process (Bottling) 5,460

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 Accumulating Costs in the Production
Report (1 of 2)
• In process costing, costs are accumulated by
department for a period of time
• The production report is the document that
summarizes the manufacturing activity that takes place
in a process department for a given period of time
• A production report contains information on costs
transferred in from prior departments as well as costs
added in the department such as direct materials,
direct labor, and overhead
• Similar to the job-order cost sheet, it is a subsidiary
to the WIP account

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 Accumulating Costs in the Production
Report (2 of 2)
• A production report traces the flow of units through a
department, identifies the costs charged to the department,
shows the computation of unit costs, and reveals the
disposition of the department’s costs for the reporting period
• Unit information section: The unit information section has
two major subdivisions:
– units to account for
– units accounted for
• Cost information section: The cost information section has
two major subdivisions:
– costs to account for
– costs accounted for

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 Service and Manufacturing Firms

• Any product or service that is basically homogeneous

and repetitively produced can take advantage of a
process-costing approach
• Let’s look at three possibilities: services, manufacturing
firms with a just-in-time (JIT) orientation, and traditional
manufacturing firms

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 Service Firms and Process Costing

• It is possible for firms engaged in service production to

have WIP inventories
– For example, an accounting firm can have a batch of tax
returns that are partially completed
• Process costing for services is relatively simple
• The total costs for the period are divided by the number
of services provided to compute unit cost:

Total Costs for the Period

Unit Costs 
Number of Services Provided

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 Manufacturing Firms Using JIT (1 of 2)

• Manufacturing firms may also operate without significant

WIP inventories
• Firms that have adopted a JIT approach try to reduce
WIP inventories to very low levels
• JIT firms usually structure their manufacturing so that
process costing can be used to determine product costs

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 Manufacturing Firms Using JIT (2 of 2)

• In many JIT firms, work cells are created that produce

a product or subassembly from start to finish
• Costs are collected by cell for a period of time, and
output for the cell is measured for the same period
• Unit costs are computed by dividing the costs of the
period by output of the period:

Total Costs for the Period

Unit Costs 
Total Output of the Period

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 Traditional Manufacturing Firms

• Traditional manufacturing firms may have significant

beginning and ending WIP inventories
• This causes complications in process costing due to
several factors such as the presence of beginning and
ending WIP inventories
• Also, different approaches to the treatment of beginning
inventory cost

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The Impact of Work-In-Process Inventories
on Process Costing (1 of 3)
• The computation of unit cost for the work performed during a
period is a key part of the production report
• This unit cost is needed both to compute the cost of goods
transferred out of a department and to value ending work-in-
process (EWIP) inventory
• Calculating the unit cost is easy—just divide total cost by the
number of units produced
• However, the presence of WIP inventories causes two problems:
– Defining the units produced can be difficult, given that some units
produced during a period are complete, while those in ending
inventory are not. This is handled through the concept of equivalent
units of production

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The Impact of Work-In-Process Inventories
on Process Costing (2 of 3)
• The computation of unit cost for the work performed during a
period is a key part of the production report
• This unit cost is needed both to compute the cost of goods
transferred out of a department and to value ending work-in-
process (EWIP) inventory
• Calculating the unit cost is easy—just divide total cost by the
number of units produced
• However, the presence of WIP inventories causes two problems:
– Defining the units produced can be difficult, given that some units
produced during a period are complete, while those in ending
inventory are not. This is handled through the concept of equivalent
units of production

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The Impact of Work-In-Process Inventories
on Process Costing (3 of 3)
• How should the costs and work of beginning work-in-
process (BWIP) inventory be treated? Should they be
counted with the current period work and costs or
treated separately? Two methods have been
developed to solve this problem: the weighted average
method and the FIFO method

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 Equivalent Units of Production (1 of 3)

• By definition, EWIP is not complete

• A unit completed and transferred out during the period is
not identical (or equivalent) to one in EWIP inventory,
and the cost attached to the two units should not be the
same
• In computing the unit cost, the output of the period must
be defined, a significant issue for process costing

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 Equivalent Units of Production (2 of 3)

• A measure that satisfies this objective is called

equivalent units of output
• Equivalent units of output are the complete units that
could have been produced given the total amount of
manufacturing effort expended for the period under
consideration
• Determining equivalent units of output for transferred-
out units is easy; a unit would not be transferred out
unless it was complete

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 Equivalent Units of Production (3 of 3)

• Every transferred-out unit is an equivalent unit

• Units remaining in EWIP inventory, however, are not
complete
• Someone in production must “eyeball” EWIP to estimate
its degree of completion

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Example 6.2: How to Calculate Equivalent
Units of Production with No Beginning
Work in Process (1 of 2)

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Example 6.2: How to Calculate Equivalent
Units of Production with No Beginning
Work in Process (2 of 2)
Assume that a department has the following data for October:
1,000 units completed; 600 units, 25% complete
Required:
Calculate the equivalent units for October.
Solution:

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 Ethical Decisions and Estimating
Completeness
• Estimating the degree of completion is an act that
requires judgment and ethical behavior
• Overestimating the degree of completion will increase
the equivalent units of output and decrease per-unit
costs
• This outcome would cause an increase in both income
(cost of goods sold will be less) and in assets (WIP
cost will increase)
• Deliberately overestimating the degree of completion
would clearly be in violation of ethical professional
practice

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Example 6.3: How to Measure Output and Assign
Costs: No Beginning Work in Process (1 of 2)
For the month of October, Department A incurred
manufacturing costs of $11,500; units transferred out,
1,000; units in EWIP, 600 (25% complete).
Required:
1. Calculate the unit cost.
2. Calculate the cost of goods transferred out and the cost
of EWIP.

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Example 6.3: How to Measure Output and
Assign Costs: No Beginning Work in
Process (2 of 2)
Solution:
1.
Units completed 1,000
Units in EWIP  25%  600  0.25  150
Equivalent units 1,150
Total Cost
Cost per Equivalent Unit 
Equivalent Units
$11,500
Cost per Equivalent Unit   $10
1,150 units
2. Cost of Goods Transferre d Out  $10 per unit  1,000 equivalent units  $10,000
Cost of EWIP  $10 per unit  150 equivalent units  $1,500

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Two Methods of Treating Beginning Work-
in-Process Inventory
• In computing a current-period unit cost for a
department, two approaches have evolved for dealing
with the prior-period output and prior-period costs
found in BWIP:
– The weighted average costing method
– The FIFO costing method

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 The Weighted Average Costing Method
• The weighted average costing method combines
beginning inventory costs and work done with current-
period costs and work to calculate this period’s unit
cost
• The costs and work carried over from the prior period
are counted as if they belong to the current period
• Beginning inventory work and costs are pooled with
current work and costs, and an average unit cost is
computed and applied to both units transferred out and
units remaining in ending inventory

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 The FIFO Costing Method (1 of 2)
• The FIFO costing method separates work and costs
of the equivalent units in beginning inventory from
work and costs of the equivalent units produced during
the current period
• Only current work and costs are used to calculate this
period’s unit cost
• It is assumed that units from beginning inventory are
completed first and transferred out
• The costs of these units include the costs of the work
done in the prior period as well as the current period
costs necessary to complete the units

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 The FIFO Costing Method (2 of 2)
• Units started in the current period are divided into two
categories:
– units started and completed and
– units started but not finished (EWIP)
• Units in both of these categories are valued using the
current period’s cost per equivalent unit

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 An Important Point
• If product costs do not change from period to period, or
if there is no BWIP inventory, the FIFO and weighted
average methods yield the same results

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 Weighted Average Costing (1 of 2)
• The weighted average costing method treats beginning
inventory costs and the accompanying equivalent
output as if they belong to the current period
• This is done for costs by adding the manufacturing
costs in BWIP to the manufacturing costs incurred
during the current period

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 Weighted Average Costing (2 of 2)
• The total cost is treated as if it were the current
period’s total manufacturing cost
• Similarly, beginning inventory output and current
period output are merged in the calculation of
equivalent units
• Under the weighted average method, equivalent units
of output are computed by adding units completed to
equivalent units in EWIP

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Example 6.4: How to Measure Output and Assign
Costs: Weighted Average Method (1 of 4)
Heathblend’s mixing department had the following data for
the month of July:
Production:
Units in process, July 1, 75% complete 20,000 gallons
Units completed and transferred out 50,000 gallons
Units in process, July 31, 25% complete 10,000 gallons
Costs:
Work in process, July 1 $ 3,525
Costs added during July $10,125

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Example 6.4: How to Measure Output and Assign
Costs: Weighted Average Method (2 of 4)
Required:
1. Calculate an output measure for July.
2. Assign costs to units transferred out and EWIP using the
weighted average method.

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Example 6.4: How to Measure Output and
Assign Costs: Weighted Average Method
(3 of 4)
Solution:

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Example 6.4: How to Measure Output and
Assign Costs: Weighted Average Method
(4 of 4)
2.

Cost/Equivalent Units = $13,650/52,500 units = $0.26 cost

per equivalent unit
Transferred out ($0.26 × 50,000) $13,000

EWIP ($0.26 × 2,500) 650

Total cost assigned $13,650

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 Five Steps in Preparing a Production
Report
• The production report is subsidiary to the WIP account
for a department
• The following five steps describe the general pattern of
a process-costing production report:
1. Physical flow analysis
2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation of inventories (goods transferred out and
EWIP)
5. Cost reconciliation

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 Step 1: Physical Flow Analysis (1 of 2)
• The Physical flow schedule provides an analysis of the
physical flow of units
• The purpose of the schedule is to trace the physical
units of production
• Physical units are not equivalent units
– They are units that may be in any stage of completion
– The physical flow schedule traces the units in process
regardless of their stage of completion

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 Step 1: Physical Flow Analysis (2 of 2)
• It has two parts:
– units to account for and
– units accounted for
• Two calculations are often very helpful to construct a
physical flow schedule:
Units Started and Completed = Total Units Completed –
Units in BWIP
Units Started = Units Started and Completed + Units in
EWIP
• “Total units to account for” must equal the “Total units
accounted for”

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 Example 6.5: How to Prepare a Physical
Flow Schedule (1 of 2)
Heathblend’s mixing department had the following data for
the month of July:
Production:
Units in process, July 1, 75% complete 20,000 gallons
Units completed and transferred out 50,000 gallons
Units in process, July 31, 25% complete 10,000 gallons
Required:
Prepare a physical flow schedule.

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 Example 6.5: How to Prepare a Physical
Flow Schedule (2 of 2)
Solution:
Units Started and Completed = Units Completed – Units in
BWIP = 50,000 – 20,000 = 30,000
Units Started = Units Started and Completed + Units in
EWIP = 30,000 + 10,000 = 40,000

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 Step 2: Calculation of Equivalent Units
(1 of 3)
• The weighted average method treats beginning
inventory units as if they were started and completed
during the current period
• Because of this, the equivalent unit schedule shown in
Step 2 shows only the total units completed
• There is no need to show whether the units completed
are from the month in question (July) or from BWIP as
was done by Example 6-4

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 Step 3: Computation of Unit Cost
• The weighted average method rolls back and includes
the manufacturing costs associated with the units in
BWIP and counts these costs as if they belong to
month in question (July)
Total Manufacturing Costs for July = BWIP, July + Costs
Added in July
Unit Cost = Total Costs/Equivalent Units for July
• Manufacturing costs are carried over from the prior
period and treated as if they were current period costs

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 Step 4: Valuation of Inventories
• Example 6.4 also showed how to value goods
transferred out and EWIP
• Units completed (from Step 1), equivalent units in
EWIP (from Step 2), and the unit cost (from Step 3)
are all needed to value both goods transferred out and
EWIP

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 Step 5: Cost Reconciliation (1 of 2)
• Finally, the cost reconciliation checks to see if the
costs to account for are exactly assigned to inventories
• Remember, the total costs assigned to goods
transferred out and to EWIP must agree with the total
costs in BWIP and the manufacturing costs incurred
during the current period

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Example 6.6: How to Prepare a Production
Report: Weighted Average Method (1 of 2)
Refer to Steps 1 to 5 of the Healthblend Company example.
Required:
Prepare a production report.
Solution:

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Example 6.6: How to Prepare a Production
Report: Weighted Average Method (2 of 2)

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 Here’s How It’s Used:
MANUFACTURING FIRM (1 of 5)
Estimating the Degree of Completion
You are the cost accounting manager for a plant that
produces riding lawn mowers. The plant manager receives
a bonus at the end of each quarter if the plant’s income
meets or exceeds the quarter’s budgeted income. The
plant had no work in process at the beginning of the
quarter; however, it had 2,500 partially completed units at
the end of the quarter. During the quarter, 4,000 units
were completed and sold. Manufacturing costs for the
quarter totaled $2,750,000. The production line
supervisors estimated that the units in process

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 Here’s How It’s Used:
MANUFACTURING FIRM (2 of 5)
at the end of the quarter were 40% finished. Using this
initial estimate, the income for the quarter was $190,000
less than the quarter’s budgeted profit. After seeing this
tentative result, the plant manager approaches you and
argues that the degree of the completion is
underestimated and that it should be 60% and not 40%.
He explains that he personally examined the partially
completed work and that 60% is his best guess. He would
prefer that this new estimate be used.
What effect does the estimated degree of completion
have on the quarter’s income? Should you use the
new estimate?
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 Here’s How It’s Used: MANUFACTURING
FIRM (3 of 5)
Measure Equation 40% Degree of 60% Degree of
Completion Completion
Total Equivalent Units = Units Completed + 4,000 + (0.40 × 2,500) = 4,000 + (0.60 × 2,500) =
equivalent
units Units in EWIP × Fraction Complete) 5,000 equivalent units 5,500 equivalent units

Unit cost Unit Cost = Total Cost/Equivalent Units $2,750,000/5,000 = $550 $2,750,000/5,500 = $500

Cost of Cost of Goods Sold = Units Sold × Unit Cost 4,000 × $550 = $2,200,000 4,000 × $500 = $2,000,000
goods sold

Compared to the 40% estimate, the 60% estimate increases

income by $200,000.
Whether or not, as the cost accounting manager, you would feel
comfortable using the new estimate depends on several factors.
First, is the 60% estimate better than the 40% estimate?

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 Here’s How It’s Used:
MANUFACTURING FIRM (4 of 5)
(Suppose the line supervisors insist that their estimate is
correct.) Second, does the plant manager regularly
participate in estimating degree of completion? If not, what
are the motives for doing so this time? Answers to these
questions are important. The estimate by the plant
manager allows income to increase by a sufficient amount
to qualify him for a bonus. If evidence favors the 40%
estimate and the plant manager’s motive is the bonus,
then an ethical dilemma exists. In this case, you would
need to follow the organization’s established policies on
the resolution of such conflicts.

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 Here’s How It’s Used:
MANUFACTURING FIRM (5 of 5)
Estimating the degree of completion is a vital and
important part of process costing and needs to be
done with care and honesty.

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 Evaluation of the Weighted Average
Method (1 of 2)
Advantages
• Unit cost computations are simplified
• Units in BWIP are treated as those of the current period
and all equivalent units belong to the same category to
calculate unit costs
Disadvantages
• Inaccuracies in computing unit costs for current-period
output and for units in BWIP

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 Evaluation of the Weighted Average
Method (2 of 2)
• If the unit cost in a process is stable from one period to
the next, the weighted average method is accurate
• If the price of manufacturing inputs increases from one
period to the next, the unit cost of current output is
understated, and the unit cost of BWIP units is
overstated

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 Multiple Inputs and Multiple
Departments
• Accounting for production under process costing gets
complicated because of
– nonuniform application of manufacturing inputs and
– presence of multiple processing departments

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 Nonuniform Application of
Manufacturing Inputs (1 of 3)
• Assuming uniform application of conversion costs
(direct labor and overhead) is not unreasonable
• Direct labor input is usually needed throughout the
process, and overhead is normally assigned on the
basis of direct labor hours
• Direct materials are not as likely to be applied
uniformly
• In many instances, materials are added either at the
beginning or the end of the process

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 Nonuniform Application of
Manufacturing Inputs (2 of 3)
• Different percentage completion figures for
manufacturing inputs pose a problem for the
calculation of equivalent units, unit cost, and valuation
of EWIP (steps 2-4)
• If materials are added at the beginning or end of a
process, then there will be different completion
percentages for materials and conversion costs.
• Conversion costs are added uniformly and materials
are added at discrete points in the production process

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 Nonuniform Application of
Manufacturing Inputs (3 of 3)
• Assuming conversion is less than 100% at a given point in
time, then materials added at the beginning are 100%
complete, and materials added at the end are 0% complete
• Equivalent units are calculated for each type of input, and a
unit cost is then calculated for each input
• Calculating the unit cost for each category also requires that
costs be accounted for by input category
• The unit cost is the sum of the input category unit costs
• Valuation of goods transferred out uses the unit cost,
whereas valuation of EWIP uses input category unit costs

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Example 6.7: How to Calculate Equivalent
Units, Unit Costs, and Valuing Inventories
with Nonuniform Inputs (1 of 4)
The mixing department of Healthblend has the following data for
September:

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Example 6.7: How to Calculate Equivalent Units, Unit Costs,
and Valuing Inventories with Nonuniform Inputs (2 of 4)

Required:
Calculate Steps 2 through 4 using the weighted average
method.
Solution:
1. Step 2: Calculation of equivalent units, nonuniform
application:

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 Example 6.7: How to Calculate Equivalent
Units, Unit Costs, and Valuing Inventories
with Nonuniform Inputs (3 of 4)

2. Step 3: Calculation of unit costs:

Unit Materials Cost = ($1,600 + $12,000)/80,000 = $0.17
Unit Conversion Cost = ($200 + $3,200)/68,000 = $0.05
Total Unit Cost = Unit Materials Cost + Unit Conversion Cost
= $0.17 + $0.05
= $0.22 per completed unit

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Example 6.7: How to Calculate Equivalent Units, Unit
Costs, and Valuing Inventories with Nonuniform Inputs
(4 of 4)

3. Step 4: Valuation of EWIP and goods transferred out:

The cost of EWIP is as follows:

Materials: $0.17 × 20,000 $3,400

Conversion: $0.05 × 8,000 400
Total cost $3,800

Valuation of Goods Transferred Out:

Cost of Goods Transferred Out = $0.22 × 60,000 = $13,200

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 Production Report: Weighted Average
Method (1 of 2)
Applying manufacturing inputs at different stages of a
process poses no serious problems, though it requires more
effort

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Production Report: Weighted Average
Method (2 of 2)

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 Transferred-In Goods (1 of 3)
• In process manufacturing, some departments receive
partially completed goods from prior departments
• In dealing with transferred-in goods, three important
points should be remembered
– The cost of this material is the cost of the goods
transferred out as computed in the prior department

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 Transferred-In Goods (2 of 3)
• The units started in the subsequent department
correspond to the units transferred out from the prior
department (assuming that there is a one-to-one
relationship between the output measures of both
departments)
• Goods transferred in from a prior department
represent a material added at the beginning of the
process for the department receiving the goods

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 Transferred-In Goods (3 of 3)
• Transferred-in material is treated as a separate material
category for calculating equivalent units
• Thus, the department receiving transferred-in goods
would have three input categories:
– one for the transferred-in materials
– one for materials added
– one for conversion costs

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Example 6.8: How to Calculate the Physical Flow Schedule,
Equivalent Units, and Unit Costs with Transferred-In Goods
(1 of 5)
For September, Healthblend’s encapsulating department had
15,000 units in beginning inventory (with transferred-in costs of
$3,000) and completed 70,000 units during the month. Further,
the mixing department completed and transferred out 60,000
units at a cost of $13,200 in September.
Required:
1. Prepare a physical flow schedule with transferred-in goods.
2. Calculate equivalent units for the transferred-in category.
3. Calculate unit cost for the transferred-in category.

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Example 6.8: How to Calculate the Physical Flow Schedule,
Equivalent Units, and Unit Costs with Transferred-In Goods
(2 of 5)
Solution:
1. In constructing a physical flow schedule for the
encapsulating department, its dependence on the mixing
department must be considered:

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Example 6.8: How to Calculate the Physical Flow
Schedule, Equivalent Units, and Unit Costs with
Transferred-In Goods (3 of 5)

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Example 6.8: How to Calculate the Physical
Flow Schedule, Equivalent Units, and Unit
Costs with Transferred-In Goods (4 of 5)
2. Equivalent units for the transferred-in category only:

Transferred in:
Units completed 70,000
Add: Units in EWIP× Fraction 5,000
Complete (5,000×100%)*
Equivalent units of output 75,000

*Remember that the EWIP is 100% complete with respect

to transferred-in costs, not to all costs of the encapsulating
department.

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Example 6.8: How to Calculate the Physical Flow Schedule,
Equivalent Units, and Unit Costs with Transferred-In Goods
(5 of 5)
3. To find the unit cost for the transferred-in category, we
add the cost of the units transferred in from mixing in
September to the transferred-in costs in BWIP and divide
by transferred-in equivalent units:
Unit Cost (Transferred-In Category) = ($13,200 +
$3,000)/75,000 units
= $16,200/75,000 units = $0.216

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Appendix 6A: Production Report- First-In,
First-Out Costing
• Under the FIFO costing method, the equivalent units
and manufacturing costs in BWIP are excluded from
the current period unit cost calculation
• This method recognizes that the work and costs
carried over from the prior period legitimately belong
to that period

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Evaluation of the Weighted Average Method
FIFO
• More Accurate: If changes occur in the prices of the
manufacturing inputs from one period to the next
• Better cost control
• Better pricing decisions
Weighted Average
• Most firms use this method due to simplicity
• FIFO has little advantage over weighted average, if unit
costs are calculated for short periods

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 First-In, First-Out Method (1 of 2)
• Since FIFO excludes prior-period work and costs, it is
necessary to create two categories of completed units:
– BWIP units (FIFO assumes that units in BWIP are
completed first, before any new units are started)
– Units started and completed during the current period
• These two categories of completed units are needed in
the FIFO method so that each category can be costed
correctly

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 First-In, First-Out Method (2 of 2)
• For the units started and completed, the unit cost is
obtained by dividing total current manufacturing costs
by the current period equivalent output
• For the BWIP units, the total associated manufacturing
costs are the sum of the prior period costs plus the
costs incurred in the current period to finish the units

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Example 6.9: How to Calculate Output and Cost
Assignments: First-In, First-Out Method (1 of 4)
In July, Healthblend had the following results:
Production:
Units in process, July 1, 75% complete 20,000 gallons
Units completed and transferred out 50,000 gallons
Units in process, July 31, 25% complete 10,000 gallons
Costs:
Work in process, July 1 $ 3,525
Costs added during July $ 10,125

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Example 6.9: How to Calculate Output and Cost
Assignments: First-In, First-Out Method (2 of 4)
Required:
1. Calculate the output measure for July.
2. Assign costs to units transferred out and EWIP using the
FIFO method.
Solution:
1.

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Example 6.9: How to Calculate Output and
Cost Assignments: First-In, First-Out
Method (3 of 4)

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Example 6.9: How to Calculate Output and
Cost Assignments: First-In, First-Out
Method (4 of 4)
2. Costs for July:

Cost per unit = $10,125/37,500 units = $0.27

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 Step 1: Physical Flow Schedule
The purpose of Step 1 is to trace the physical units of
production. As with the weighted average method, in the
FIFO method, a physical flow schedule is prepared. This
schedule is identical for both methods

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 Step 2: Calculation of Equivalent Units
(2 of 3)
• From the equivalent unit computation, one difference
between weighted average and FIFO becomes
immediately apparent
• Under FIFO, the equivalent units in BWIP (work done in
the prior period) are not counted as part of the total
equivalent work
• Only the equivalent work to be completed this period is
counted

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 Step 2: Calculation of Equivalent Units
(3 of 3)
• In this example the percentage of work done in the prior
period is 75%, the percentage left to be completed this
period is 25%, or an equivalent of 5,000 additional units
of work
• The effect of excluding prior period effort is to produce
the current period equivalent output
• Under FIFO, equivalent units are 37,500 units – all
current period output

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 Step 3: Computation of Unit Cost (2 of 2)

• The additional manufacturing costs incurred in the

current period are $10,125
• Thus, the current period unit manufacturing cost is
$10,125/37,500, or $0.27
• Notice that the costs of beginning inventory are
excluded from this calculation
• Only current period manufacturing costs are used

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 Step 4: Valuation of Inventories (1 of 2)

• Example 6.9 shows FIFO values for EWIP and goods

transferred out
• Since all equivalent units in ending work in process are
current period units, the cost of EWIP is simply $0.27 ×
2,500, or $675, the same value that the weighted
average method would produce
• When it comes to valuing goods transferred out, a
significant difference emerges between the weighted
average method and FIFO

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 Step 4: Valuation of Inventories (2 of 2)

• Under weighted average, the cost of goods transferred

out is simply the unit cost times the units completed
• Under FIFO there are two categories of completed units:
– Units started and completed
– Units from beginning inventory
• The cost of each category must be calculated separately
and then summed to obtain the total cost of goods
transferred out

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 Step 5: Cost Reconciliation (2 of 2)

• In Step 5, the costs assigned to production are

reconciled to the total manufacturing costs to account for
• With the completion of Step 5, the production report can
be prepared

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 The Production Report

• A production report has two sections:

– a unit information section
– a cost information section
• The unit information section presents the physical flow
schedule and the equivalent units schedule.
• The cost information section has two major subdivisions:
– costs to account for
– costs accounted for
 The first cost subdivision includes the calculation of the unit
cost, and the second subdivision includes the valuation of
goods transferred out and EWIP

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 Example 6.10: How to Prepare a
Production Report: First-In, First-Out
Method (1 of 2)
Refer to the five steps for the Healthblend Company.
Required:
Prepare a production report for July 2017 (FIFO method).
Solution:

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 Example 6.10: How to Prepare a
Production Report: First-In, First-Out
Method (2 of 2)

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