ac 505 chapter 4 power point slides
TRANSCRIPT
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TCO F - Given appropriate financial data, compare and contrast job order andprocess costing systems (1) to value ending inventory and costs of goods sold for amanufacturing company and/or (2) to determine the cost of services rendered in aservice organization.
Key Concepts:Understand job order and process costing methods to value ending inventory andcosts of goods sold.Demonstrate the steps used to prepare a production report under FIFO and W/Acosting methods.Using given data, determine ending inventory and costs of goods sold for amanufacturing organization.Using given data, determine the cost of services rendered for a serviceorganization
Week 2
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2010 The McGraw-Hill Companies, Inc.
Systems Design: Process Costing
Chapter 4Managers need to assign costs to products to facilitate external financialreporting and internal decision making. This chapter illustrates anabsorption costing approach to calculating product costs known asprocess costing.
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Similarities Between Job-Order and ProcessCosting
Both systems assign material, labor and overheadcosts to products and they provide a mechanismfor computing unit product costs.
Both systems use the same manufacturingaccounts, including Manufacturing Overhead, RawMaterials, Work in Process, and Finished Goods.
The flow of costs through the manufacturingaccounts is basically the same in both systems.
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Differences Between Job-Order and ProcessCosting
Process costing is used when a single product isproduced on a continuing basis or for a long periodof time. Job-order costing is used when manydifferent jobs having different production
requirements are worked on each period.
Process costing systems accumulate costs bydepartment. Job-order costing systems accumulated
costs by individual jobs. Process costing systems compute unit costs by
department. Job-order costing systems compute unitcosts by job on the job cost sheet.
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McGraw-Hill/Irwin Slide 5
Process costing is used for productsthat are:
a. Different and produced continuously.b. Similar and produced continuously.
c. Individual units produced to customerspecifications.
d. Purchased from vendors.
Quick Check
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McGraw-Hill/Irwin Slide 6
Process costing is used for productsthat are:
a. Different and produced continuously.b. Similar and produced continuously.
c. Individual units produced to customerspecifications.
d. Purchased from vendors.
Quick Check
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Processing Departments
Any unit in an organization where materials, laboror overhead are added to the product.
The activities performed in a processing
department are performed uniformlyon allunits of production. Furthermore, the output ofa processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one departmentto another.
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Learning Objective 1
Record the flow ofmaterials, labor, and
overhead through aprocess costing system.
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Comparing Job-Order and Process Costing
Finished
Goods
Cost of
GoodsSold
Work inProcess
DirectMaterials
Direct Labor
Manufacturing
Overhead
Direct materials, direct labor andmanufacturing overhead are added to Work inProcess. When work in process is completed,the costs are transferred to Finished Goods.When finished goods are sold, the costs aretransferred to Cost of Goods Sold.
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Comparing Job-Order and Process Costing
FinishedGoods
Cost ofGoodsSold
Direct Labor
ManufacturingOverhead
Jobs
Costs are traced andapplied to individualjobs in a job-order
cost system.
DirectMaterials
There is a key fundamental difference between process and job-ordercosting systems. Job-order costing systems trace and apply
manufacturing costs to jobs. One Work in Process account is oftenused to accumulate costs for all jobs. The individual job cost sheetsserve as a subsidiary ledger.
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Comparing Job-Order and Process Costing
FinishedGoods
Cost ofGoodsSold
Direct Labor
ManufacturingOverhead
ProcessingDepartment
Costs are traced andapplied to departments
in a process costsystem.
DirectMaterials
In some companies there may be several processing departments that goods must pass through tobecome finished goods. A separate Work in Process account is maintained for each processingdepartment. Material, labor and overhead costs transferred from one departments Work in Process
account to another departments Work in Process account are called transferred-in costs.
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Raw Materials
Process Cost Flows: The Flow of RawMaterials (in T-account form)
Work in ProcessDepartment B
Work in ProcessDepartment A
DirectMaterials
DirectMaterials
DirectMaterials
Direct materials can be requisitioned for use in both DepartmentA and Department B. These direct materials are likely to bedifferent in nature. Direct material costs are debited to the
appropriate departmental Work in Process account dependingupon where the materials were added to the production process.
The Raw Materials Inventory account is credited for thecorresponding amounts.
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Process Cost Flows: The Flow of LaborCosts (in T-account form)
Work in ProcessDepartment B
Work in ProcessDepartment ASalaries andWages Payable
DirectMaterials
DirectMaterials
DirectLabor
DirectLabor Direct
Labor
Direct labor is transferred from the Salaries and Wages Payableaccount into the work in process account of Departments A and Bdepending upon where the individual employee worked. Directlabor costs are debited to the appropriate departmental Work inProcess account depending upon where the labor was added to theproduction process. Salaries and Wages Payable is credited for thecorresponding amounts.
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Process Costing: The Flow of Labor Costs(in journal entry form)
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 direct labor costs.
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Process Cost Flows: The Flow of ManufacturingOverhead Costs (in T-account form)
Work in ProcessDepartment B
Work in Process
Department A
ManufacturingOverhead
Overhead
Applied toWork inProcess
AppliedOverhead
AppliedOverhead
DirectLabor
DirectMaterials
DirectLabor
DirectMaterials
Actual
Overhead
Manufacturing overhead is applied to eachprocessing department based on a predeterminedrate for each department. The predetermined rate
does not have to be based on the same cost driverfor each processing department. Manufacturing
overhead costs are debited to the respectivedepartmental Work in Process accounts.
Manufacturing overhead is credited by thecorresponding amounts.
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GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department A XXXXXWork in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
Process Cost Flows: The Flow of ManufacturingOverhead Costs (in journal entry form)
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Process Cost Flows: Transfers fromWIP-Dept. A to WIP-Dept. B (in T-account form)
Work in ProcessDepartment B
Work in ProcessDepartment A
DirectMaterialsDirectLabor
AppliedOverhead
DirectMaterials
DirectLaborApplied
Overhead
Transferredto Dept. B
Transferredfrom Dept. A
DepartmentA
DepartmentB
The cost of units complete as to processing in Department A aretransferred into Department B for additional work. Department B
has incurred additional costs to work on units that were in processat the beginning of the period. The transferred-in costs from
Department A are added to the manufacturing costs incurred inDepartment B.
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GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department B XXXXXWork in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
Process Cost Flows: Transfers from WIP-Dept.A to WIP-Dept. B (in journal entry form)
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Finished Goods
Process Cost Flows: Transfers from WIP-Dept.B to Finished Goods (in T-account form)
Work in ProcessDepartment B
Cost of
GoodsManufactured
DirectMaterialsDirectLabor
AppliedOverhead
Transferred
from Dept. A
Cost of
GoodsManufactured
The transfer of completed goods fromWork in Process Department B intoFinished Goods Inventory. The costs
transferred represent the cost of goodmanufactured.
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GENERAL JOURNAL Page 4
Date Description
Post.
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.
Process Cost Flows: Transfers from WIP-Dept.B to Finished Goods (in journal entry form)
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McGraw-Hill/Irwin Slide 23
Finished Goods
Cost of Goods Sold
Process Cost Flows: Transfers from FinishedGoods to COGS (in T-account form)
Work in ProcessDepartment B
Cost ofGoods
Manufactured
DirectMaterialsDirect
LaborApplied
OverheadTransferredfrom Dept. A
Cost ofGoodsSold
Cost ofGoodsSold
Cost ofGoods
Manufactured
Once we sell finished goods, we debit Cost ofGoods Sold and credit Finished Goods Inventory.
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McGraw-Hill/Irwin Slide 24
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record the transfer of finished
goods inventory to cost of goods
sold.
Process Cost Flows: Transfers from FinishedGoods to COGS (in journal entry form)
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McGraw-Hill/Irwin Slide 25
Equivalent Units of Production
Equivalent units are the product of the number ofpartially completed units and the percentagecompletion of those units.
We need to calculate equivalent units because adepartment usually has some partially completed units
in its beginning and ending inventory. These partiallycompleted units complicate the determination of a
departments output for a given period and the unit cost
that should be assigned to that output.
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McGraw-Hill/Irwin Slide 26
Equivalent Units The Basic Idea
Two half completed products areequivalent toone complete product.
So, 10,000 units 70% completeare equivalent to7,000 complete units.
+ = 1
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McGraw-Hill/Irwin Slide 27
For the current period, Jones started 15,000units and completed 10,000 units, leaving 5,000units in process 30 percent complete. Howmany equivalent units of production did Joneshave for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check
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McGraw-Hill/Irwin Slide 28
For the current period, Jones started 15,000units and completed 10,000 units, leaving 5,000units in process 30 percent complete. Howmany equivalent units of production did Joneshave for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units 0.30)= 11,500 equivalent units
Quick Check
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McGraw-Hill/Irwin Slide 29
Calculating Equivalent Units
Equivalent units can be calculatedtwo ways:
The First-In, First-Out MethodFIFO iscovered in the appendix to this chapter.
The Weighted-Average MethodThis method
will be covered in the main portion of the chapter.
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Learning Objective 2
Compute the equivalentunits of production using
the weighted-averagemethod.
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Equivalent Units of ProductionWeighted-Average Method
The weighted-average method . . .1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior andcurrent periods.
3. Determines equivalent units of production for a
department by adding together the number ofunits transferred out plus the equivalent units inending Work in Process Inventory.
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McGraw-Hill/Irwin Slide 32
Treatment of Direct Labor
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
DirectMaterials
Type of Product Cost
DollarAmount
DirectLabor
Manufacturing
Overhead
In todays economy, direct labor costs
are becoming small when compared tomaterials and overhead costs.
Automation is one of the causes for thisshift.
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McGraw-Hill/Irwin Slide 33
Treatment of Direct Labor
Type of Product Cost
D
ollarAmou
nt Conversion
Direct labor andmanufacturing
overhead may becombined into
one classificationof product
cost calledconversion costs.
DirectMaterials
DirectLabor
DirectLabor
ManufacturingOverhead
As a consequence of the change in volume of direct laborcosts, many companies combine labor and overhead costsand refer to the total as conversion costs. That is, these are
the costs incurred to convert the direct materials into afinished good.
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McGraw-Hill/Irwin Slide 34
Weighted-Average An Example
Smith Company reported the following activity inthe Assembly Department for the month of June:
Percent Completed
Units Materials ConversionWork in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400of Department A during June
Work in process, June 30 900 60% 30%
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The first step in calculating the equivalent units is toidentify the units completed and transferred out of
Assembly Department in June (5,400 units)
Weighted-Average An Example
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
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McGraw-Hill/Irwin Slide 36
The second step is to identify the equivalent unitsof
production in ending work in processwith respect tomaterialsfor the month (540 units) and adding this to the
5,400 units from step one.
Weighted-Average An Example
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
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McGraw-Hill/Irwin Slide 37
Weighted-Average An Example
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 conversionfor the month
(270 units) and adding this to the 5,400 units from step one.
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McGraw-Hill/Irwin Slide 38
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-Average An Example
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McGraw-Hill/Irwin Slide 39
BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
Weighted-Average An Example
Materials
5,400 Units Completed540 Equivalent Units 900 60%
5,940 Equivalent unitsof production
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McGraw-Hill/Irwin Slide 40
6,000 Units Started
5,400 Units Completed
5,100 Units Started
and Completed
270 Equivalent Units900 30%
5,670 Equivalent unitsof production
BeginningWork in Process
300 Units20%Complete
EndingWork in Process
900 Units30%Complete
Weighted-Average An Example
Conversion
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McGraw-Hill/Irwin Slide 41
Learning Objective 3
Compute the cost perequivalent unit using the
weighted-average method.
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McGraw-Hill/Irwin Slide 42
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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McGraw-Hill/Irwin Slide 43
Compute and Apply Costs
The formula for computing the cost perequivalent unit is:
Cost perequivalent
unit=
Cost of beginning
Work in ProcessInventory
Cost added duringthe period
Equivalent units of production
+
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Here is a schedule with the cost and equivalentunit information.
Compute and Apply Costs
Total
Cost 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
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Total
Cost Materials ConversionCost 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$
Compute and Apply Costs
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 = $36.00
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McGraw-Hill/Irwin Slide 46
Learning Objective 4
Assign costs to units usingthe weighted-average
method.
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McGraw-Hill/Irwin Slide 47
Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Assembly DepartmentCost 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 540 270
Cost 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 DepartmentCost 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 540 270
Cost 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 DepartmentCost 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 199,751
Total cost to be accounted for 209,790$
Assembly DepartmentCost Reconciliation
Reconcile the costs. The first step is to record the cost ofbeginning Work in Process Inventory of $10,039. The second step
is to record the costs added to production during the period asshown of $199,751. The third step is to sum these two costs for a
total to be accounted for of $209,790.
Computing the costs accounted for: The first step is to record thei l d f di W k i P I
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McGraw-Hill/Irwin Slide 55
Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751
Total 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 194,400Total cost accounted for 209,790$
Assembly DepartmentCost Reconciliation
previously computed cost of ending Work in Process Inventory$15,390. The second step is to record the previously computedcost of units transferred out $194,400. The third step is to sumthese two costs for a total of $209,790. Notice the two totals agreeindicating that all costs have been accounted for.
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McGraw-Hill/Irwin Slide 56
Operation Costing
Operation cost is a hybrid of job-order andprocess costing because it possesses attributes
of both approaches
Operation costing iscommonly used when
batches of many differentproducts pass through the
same processingdepartment.
Operation costing is similar to job-order costing. For example,a shoe manufacturer may charge each batch of shoes for itsown specific material costs (e.g., shoes made with expensiveleather would be charged accordingly, as would shoes made
with inexpensive synthetic materials). It is also similar toprocess costing, the shoe manufacturer may accumulate thelabor and overhead costs by department and assign the sameconversion cost per unit to each shoe regardless of the shoe
style
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2010 The McGraw-Hill Companies, Inc.
FIFO Method
Appendix 4A
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FIFO vs. Weighted-Average Method
The FIFO method (generally considered moreaccurate than 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.
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Learning Objective 6
Compute the equivalentunits of production using
the FIFO method.
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Equivalent Units FIFO Method
Lets revisit the Smith Company example. Here isinformation concerning the Assembly Departmentfor 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 5,400of 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 Conversion
To complete beginning Work in Process:
Materials: 300 units (100% - 40%) 180
Conversion: 300 units (100% - 20%) 240
The first step in the accounting process is to determine the equivalent units needed to complete beginning Work inProcess Inventory (180 units for materials and 240 units for conversion). Recall that the units in beginning inventorywere 40% complete as to materials, so we must have to add 60% of the materials this month to complete the units.
As to conversion costs, the units in beginning inventory were 20% complete so we must incur 80% of the conversioncosts this month to complete the units.
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McGraw-Hill/Irwin Slide 62
Equivalent Units FIFO Method
Step 2: Determine units started and completedduringthe period.
Materials Conversion
To 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
The 5,100 units represent the total units completed and transferred out this month (5,400 units)less those units in beginning inventory (300). Remember, in FIFO we must keep track of the units
in beginning inventory, started this month, and ending inventory separately. The first units ininventory, beginning inventory, are the first units transferred out this month.
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McGraw-Hill/Irwin Slide 63
Equivalent Units FIFO Method
Step 3: Add the equivalent units in ending Work inProcess Inventory.
Materials Conversion
To 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
Ending 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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McGraw-Hill/Irwin Slide 64
BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,100 Units Started
and Completed
FIFO Example
Materials
5,100 Units Completed540 Equivalent Units
900 60%
5,820 Equivalent unitsof production
180 Equivalent Units300 60%
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BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
6,000 Units Started
5,100 Units Started
and Completed
FIFO Example
Conversion
5,100 Units Completed270 Equivalent Units
900 30%
5,610 Equivalent unitsof production
240 Equivalent Units300 80%
Equivalent Units: Weighted-Average vs.
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q g gFIFO
Materials Conversion
Equivalent units - weighted-average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units 40% 120
300 units 20% 60Equivalent 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.
The FIFO method removes the equivalent units that were already in beginning inventory from the equivalent units as defined usingthe weighted-average method. Thus, the FIFO method isolates the equivalent units due to work performed during the current
period. This can be illustrated using the Smith Company example.
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McGraw-Hill/Irwin Slide 67
Learning Objective 7
Compute the cost perequivalent unit using the
FIFO method.
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McGraw-Hill/Irwin Slide 68
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 JuneMaterials cost $ 118,621
Conversion cost $ 81,130
Ending work in process 900 unitsMaterials: 60% completeConversion: 30% complete
Cost per Equivalent Unit - FIFO
Lets revisit the Smith Company Assembly Department
for the month of June to prepare our production report.
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McGraw-Hill/Irwin Slide 69
Cost per Equivalent Unit - FIFO
The formula for computing the cost perequivalent unit under FIFO method is:
Cost per
equivalentunit
=
Cost added during the period
Equivalent units of production
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McGraw-Hill/Irwin Slide 70
Cost per Equivalent Unit - FIFO
Total
Cost Materials Conversion
Cost added in June 199,751$ 118,621$ 81,130$
Equivalent units 5,820 5,610Cost per equivalent unit 20.3816$ 14.4617$
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$118,600 5,820$81,130 5,610
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McGraw-Hill/Irwin Slide 71
Learning Objective 8
Assign costs to units using
the FIFO method.
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McGraw-Hill/Irwin Slide 72
Materials Conversion Total
Ending WIP inventory:Equivalent units 540 270
Assembly Department
Cost of Ending WIP Inventory
Applying Costs - FIFO
Step 1: Record the equivalent units of production in endingWorkin Process Inventory.
900 units 60% 900 units 30%
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McGraw-Hill/Irwin Slide 73
Applying Costs - FIFO
Step 2: Record the cost per equivalent unit.
Materials Conversion Total
Ending WIP inventory:Equivalent units 540 270
Cost per equivalent unit 20.3816$ 14.4617$
Assembly Department
Cost of Ending WIP Inventory
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McGraw-Hill/Irwin Slide 74
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 $20.3816 270 14.4617
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McGraw-Hill/Irwin Slide 75
Cost of Units Transferred Out
Step 1: Record the cost in beginningWork in Process Inventory.
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$
Assembly Department
Cost of Units Transferred Out in June
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McGraw-Hill/Irwin Slide 76
Cost of Units Transferred OutStep 2: Compute the cost to completethe units in beginning
Work 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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McGraw-Hill/Irwin Slide 77
Cost of Units Transferred OutStep 3: Compute the cost of units started and completedthis
period.
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 5,100Cost 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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McGraw-Hill/Irwin Slide 78
Cost of Units Transferred Out
Step 4: Compute the total cost of units 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 5,100Cost 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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McGraw-Hill/Irwin Slide 79
Learning Objective 9
Prepare a costreconciliation report
using the FIFO method.
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McGraw-Hill/Irwin Slide 80
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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McGraw-Hill/Irwin Slide 81
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 with
costs of the prior period.
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2010 The McGraw-Hill Companies, Inc.
Service Department Allocations
Appendix 4B
O
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McGraw-Hill/Irwin Slide 84
Operating Departments
Anoperating department carries outthe central purpose of the organization
The SurgeryDepartment
at MountSinai
Hospital.
AProductionDepartment
atMitsubishi.
TheGeographyDepartment
at the
University ofWashington.
S i D
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McGraw-Hill/Irwin Slide 85
Service Departments
Service departments do not directlyengage in operating activities.
TheAccountingDepartment
at Macys.
The HumanResourcesDepartment
at Walgreens.
I d l S i
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McGraw-Hill/Irwin Slide 86
Interdepartmental Services
ServiceDepartment
OperatingDepartment
Costs of the servicedepartment becomeoverhead costs to
the operatingdepartment
All i A h
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Allocation Approaches
DirectMethod
Step-DownMethod
ReciprocalMethod
R i l S i
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Reciprocal Services
ServiceDepartment 1
ServiceDepartment 2
When servicedepartments provideservices to each
other we call them
reciprocal services.
L i Obj ti 10
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McGraw-Hill/Irwin Slide 89
Learning Objective 10
Allocate servicedepartment costs to
operating departments
using the direct method.
Di t M th d
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McGraw-Hill/Irwin Slide 90
Direct Method
ServiceDepartment(Cafeteria)
ServiceDepartment(Custodial)
OperatingDepartment(Machining)
Operating
Department(Assembly)
Interactionsbetween servicedepartments are
ignored and allcosts are
allocated directlyto operatingdepartments.
Di t M th d A E l
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McGraw-Hill/Irwin Slide 91
Direct Method An Example
Service Department Allocation BaseCafeteria Number of employees
Custodial Square feet occupied
Di t M th d A E l
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McGraw-Hill/Irwin Slide 92
Direct Method An Example
How much of the Cafeteria and Custodial costsshould be allocated to each operating department
using the direct method of cost allocation?
Di t M th d A E l
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McGraw-Hill/Irwin Slide 93
Direct Method An Example
Allocation base: Number of employees
$360,000 2020 + 30
= $144,000
Direct Method An E ample
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McGraw-Hill/Irwin Slide 94
Direct Method An Example
Allocation base: Number of employees
$360,000 3020 + 30
= $216,000
Direct Method An Example
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McGraw-Hill/Irwin Slide 95
Direct Method An Example
Allocation base: Square feet occupied
$90,000 25,00025,000 + 50,000
= $30,000
Direct Method An Example
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McGraw-Hill/Irwin Slide 96
Direct Method An Example
Allocation base: Square feet occupied
50,00025,000 + 50,000
$90,000 = $60,000
Learning Objective 11
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McGraw-Hill/Irwin Slide 97
Learning Objective 11
To allocate servicedepartment costs to
operating departments
using the step-downmethod.
Step Down Method
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McGraw-Hill/Irwin Slide 98
OperatingDepartment(Machining)
Operating
Department(Assembly)
Step-Down Method
Once a servicedepartments costs
are allocated,other servicedepartment costsare not allocated
back to it.
ServiceDepartment(Cafeteria)
ServiceDepartment(Custodial)
Step Down Method
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McGraw-Hill/Irwin Slide 99
There are three key points to understand regarding
the step-down method:In both the direct and step-down methods, any
amount of the allocation base attributable to the
service department whose cost is being allocated is
always ignored.
Any amount of the allocation base that isattributable to a service department whose cost has
already been allocated is ignored. Each service department assigns its own costs to
operating departments plus the costs that havebeen allocated to it from other service departments.
Step-Down Method
Step Down Method An Example
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McGraw-Hill/Irwin Slide 100
Service Department Allocation Base
Cafeteria Number of employees
Custodial Square feet occupied
We will use the same data usedin the direct method example.
Step-Down Method An Example
Step Down Method An Example
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McGraw-Hill/Irwin Slide 101
Allocate Cafeteria costs first sinceit provides more service than Custodial.
Step-Down Method An Example
Step Down Method An Example
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McGraw-Hill/Irwin Slide 102
$360,000 1010 + 20 + 30
= $60,000
Allocation base: Number of employees
Step-Down Method An Example
Step Down Method An Example
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McGraw-Hill/Irwin Slide 103
$360,000 2010 + 20 + 30
= $120,000
Allocation base: Number of employees
Step-Down Method An Example
Step Down Method An Example
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McGraw-Hill/Irwin Slide 104
$360,000 3010 + 20 + 30
= $180,000
Allocation base: Number of employees
Step-Down Method An Example
Step-Down Method An Example
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McGraw-Hill/Irwin Slide 105
New total = $90,000 original Custodial costplus $60,000 allocated from the Cafeteria.
Step-Down Method An Example
Step-Down Method An Example
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McGraw-Hill/Irwin Slide 106
$150,000 25,00025,000 + 50,000
= $50,000
Allocation base: Square feet occupied
Step-Down Method An Example
Step-Down Method An Example
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McGraw-Hill/Irwin Slide 107
$150,000 50,00025,000 + 50,000
= $100,000
Allocation base: Square feet occupied
Step-Down Method An Example
Reciprocal Method
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McGraw-Hill/Irwin Slide 108
Reciprocal Method
Interdepartmentalservices are given
full recognition
rather than partialrecognition as withthe step method.
Service
Department(Cafeteria)
ServiceDepartment(Custodial)
Operating
Department(Machining)
OperatingDepartment(Assembly)
Because of its mathematical complexity,the reciprocal method is rarely used.
Quick Check Datafor Direct and Step-Down Methods
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for Direct and Step Down Methods
Allocation bases:
Business school administration costs (ADMIN):Number of employees
Business Administration computer services (BACS):Number of personal computers
The direct method of allocation is used.
Quick Check
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McGraw-Hill/Irwin Slide 110
Quick Check
How much cost will be allocated fromAdministration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000
Quick Check
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McGraw-Hill/Irwin Slide 111
How much cost will be allocated fromAdministration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000
Quick Check
$180,000 20
20 + 80= $36,000
Quick Check
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McGraw-Hill/Irwin Slide 112
Quick Check
How much total cost will be allocated fromADMIN and BACS combined to theAccounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500
Quick Check
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McGraw-Hill/Irwin Slide 113
How much total cost will be allocated fromADMIN and BACS combined to theAccounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500
Quick Check
$90,000 18
18 + 102= $13,500
Quick Check Data
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McGraw-Hill/Irwin Slide 114
Quick Check Data
Allocation bases:
Business school administration costs (ADMIN):Number of employees
Business administration computer services (BACS):Number of personal computers
The step method of allocation is used.
Quick Check
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McGraw-Hill/Irwin Slide 115
Quick Check
How much total cost will be allocated fromADMIN and BACS combined to theAccounting Department?
a. $35,250
b. $49,072c. $18,000
d. $26,333
Quick Check
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McGraw-Hill/Irwin Slide 116
How much total cost will be allocated fromADMIN and BACS combined to theAccounting Department?
a. $35,250
b. $49,072c. $18,000
d. $26,333
Quick Check
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