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Business 1
PA S S K E Y
Computation of how each segment of the process should compute cost of goods transferred out and the cost of goods
remaining in work-in-process (inventory) is the central product costing issue in process costing environments. Five
steps are normally followed to resolve this issue:
1. Summarize the flow of physical units (beginning with the Production Report).
2. Calculate "equivalent unit" output.
3. Accumulate the total costs to be accounted for (Production Report).
4. Calculate the unit costs based on total costs and equivalent units.
5. Apply the average costs to the units completed and the units remaining in ending work-in-process inventory.
PA S S K E Y
The determination of the components of inventory cost can be confusing; however, with the use of the
"BASE" mnemonic, it all gets a little easier! The following shows how the components "fit" together with
the flow of activity:
Inventory: Raw Materials Inventory: Work-in-Process Inventory: Finished Goods
E X A M P L E P R O D U C T I O N R E P O R T I L L U S T R AT E D
Quantities
Charged to dept:
Transferred in 20,000
Costs
Charged to dept:
B. Equivalent Units
Costs must be attached to the completed units as well as to the units that are partially
complete at the end of each period. This calculation is made by taking into account the
partially completed units and by making use of equivalent units.
PA S S K E Y
Accounting for the physical flow of units is an important step in process costing. Remember, however,
that the pure physical flow of units will be different from the equivalent units of production.
EXAMPLE
10,000 actual units of DM, DL, or OH in process that are 75% complete would represent 7,500 equivalent
units of (DM, DL, or OH) production.
PA S S K E Y
Equivalent units of production may be computed using either First In First Out (FIFO) or weighted-
average assumptions. The FIFO approach specifically accounts for work to be completed, while
the weighted-average approach blends the units as follows:
1. Weighted-average (2 steps)
a. Units completed XXX
b. Ending WIP % completed + XXX
Equivalent units
XXX
2. FIFO (3 steps)
a. Beginning WIP % to be completed XXX
b. Units completedBeginning WIP + XXX
c. Ending WIP % completed + XXX
Equivalent units
XXX
PA S S K E Y
Cost per equivalent unit is computed by dividing total costs by equivalent units. FIFO anticipates
using only current costs, while the weighted-average approach uses both beginning inventory and
current costs as follows:
1. Weighted-average
Weighted- Beginning cost + Current cost
=
average Equivalent units
2. FIFO
Current cost only
FIFO =
Equivalent units
EXAMPLe
The following problem illustrates process costing using both the FIFO and weighted-average approaches. Note that separate
unit costs for materials and conversion (direct labor and manufacturing overhead) must be determined.
Comprehensive Example
Process Costing Under FIFO and Weighted-Average
May 20X1
FACT PATTERN
Percent
Complete Materials Conversion Total
1 Units in process, May 1
Materials 100% 4,000
Conversion 40% 4,000
2 Units started and completed in May
Materials 100% 10,000
Conversion 100% 10,000
3 Units in process, May 31
Materials 100% 2,000
Conversion 80% 2,000
4 Costs associated with May 1 WIP
Materials $ 1,000 $ 1,000
Conversion $ 3,000 3,000
5 Costs associated with May production
Materials $24,000 24,000
Conversion $49,000 49,000
6 Total Costs $77,000
Requirements
Complete a Production Report for Units and Costs
Complete Equivalent Units using FIFO and Weighted-Average
Complete Unit Cost of Production using FIFO and Weighted-Average
E X A M P L e ( continued )
Costs
4 Costs in WIP, May 1 $ 1,000 $ 3,000 $ 1,000 $ 3,000
5 Costs during May 24,000 49,000 24,000 49,000
Total costs charged to department $25,000 $52,000 $25,000 $52,000