PROCESS COSTING (Hilton, Ronald W. Managerial Accounting)

After studying this chapter, you will be able to

1. COMPARISON OF JOB-ORDER COSTING AND PROCESS COSTING

2. EQUIVALENT UNITS: A KEY CONCEPT

3. PRODUCTION REPORTS

3.1. Illustration of Process Costing

Basic Data for Illustration

3.2. Weighted-Average Method of Process Costing

Chapter summary

Key terms

Appendix to Chapter 4

Process Costing in Sequential Production Departments

PROCESS COSTING (Hilton, Ronald W. Managerial Accounting)

After studying this chapter, you will be able to:

1 List and explain the similarities and important differences between job-order and process costing.

2 Prepare journal entries to record the flow of costs in a process-costing system with sequential production departments.

3 Prepare a table of equivalent units under weighted-average process costing.

4 Compute the cost per equivalent unit under the weighted-average method of process costing.

5 Analyze the total production costs for a department under the weighted-average method of process costing.

6 Prepare a departmental production report under weighted-average process costing.

7 Describe how an operation costing system accumulates and assigns the costs of direct-material and conversion activity in a batch manufacturing process.

8 After completing the appendix, prepare process-costing calculations for a sequential manufacturing process.

account.

1. COMPARISON OF JOB-ORDER COSTING AND PROCESS COSTING

Both product-costing systems have similar objectives: to accumulate total product costs and to assign those costs to each unit manufactured. A company that uses a job-costing system produces goods by order or in distinct batches, and the products tend to differ significantly from each other. With a process-costing system, a company works in a repetitive production environment, manufacturing a large number of like units in a continuous flow. Industries that use process costing include those involved with paper, petroleum, lumber, and chemicals. Costs in a job-order system are accumulated by job; in a process-costing system, the costs are accumulated by department or process. The flow of costs through general ledger accounts is similar in both systems: through Work in Process, to Finished Goods, to Cost of Goods Sold. In a sequential production operation, each department establishes its own Work-in-Process account.

Flow of Costs Exhibit 4-1 displays the flow of costs in two process-costing situations: one with a single production department and one with two production departments used in sequence. The same accounts are used in this process-costing illustration as were used in job-order costing. As the illustration shows, direct-material, direct-labor, and manufacturing-overhead costs are added to a Work- in-Process Inventory account. As goods are finished, costs are transferred to Finished- Goods Inventory. During the period when goods are sold, the product costs are transferred to Cost of Goods Sold. In the two-department case, when goods are finished in the first production department, costs accumulated in the Work-in-Process Inventory account for production department A are transferred to the Work-in-Process Inventory account for production department B.

 

 

Exhibit 4-1. Flow of Costs in Process Costing Systems

The journal entries for the case of two sequential production departments, as illustrated in Exhibit 4-1, are as follows. (The numbers used in the journal entries are assumed for the purpose of showing the form of the entries.)

1.As direct material and direct labor are used in production department A, these costs are added to the Work-in-Process Inventory account for department A. Overhead is applied using a predetermined overhead rate. The predetermined overhead rate is computed in the same way in job-order and process costing.

 

Work-in-Process Inventory: Production Department A

100,000

Raw-Material Inventory

50,000

Wages Payable

20,000

Manufacturing Overhead

30,000

 

 

2.When production department A completes its work on some units of product, these units are transferred to production department B. The costs assigned to these goods are transferred from the Work-in-Process Inventory account for department A to the Work-in-Process Inventory account for department B. In department B, the costs assigned to these partially completed products are called transferred-in costs.

Work-in-Process Inventory: Production Department B

80,000

Work-in-Process Inventory: Production Department A

80,000

  1. Direct material and direct labor are used in production department B, and manufacturing overhead is applied using a predetermined overhead rate.

Work-in-Process Inventory: Production Department B

75,000

Raw-Material Inventory

40,000

Wages Payable

15,000

Manufacturing Overhead

20,000

  1. Goods are completed in production department B and transferred to the finished- goods warehouse.

Finished-Goods inventory

130,000

Work-in-Process Inventory: Production Department B

130,000

  1. Goods are sold.

Cost of Goods Sold

125,000

Finished-Goods Inventory

125,000

 

Suppose there are 1,000 physical units in process at the end of an accounting period. Each of the physical units is 75 percent complete with respect to conversion (direct labor and manufacturing overhead). How much conversion activity has been applied to these partially completed units? Conversion activity occurs uniformly throughout the production process. Therefore, the amount of conversion activity required to do 75 percent of the con- version on 1,000 units is equivalent to the amount of conversion activity required to do all of the conversion on 750 units. This number is computed as follows:

 

(1,000 partially completed physical units in process) X (75% complete with respect to conversion) = 750

2. EQUIVALENT UNITS: A KEY CONCEPT

The term equivalent units is used in process costing to refer to the amount of manufacturing activity that has been applied to a batch of physical units. The I000 physical units in process represent 750 equivalent units of conversion activity.

The term equivalent units is also used to measure the amount of direct materials represented by the partially completed goods. Since direct materials are incorporated at the beginning of the production process, the 1,000 physical units represent 1,000 equivalent units of direct material (1,000 physical units X 100% complete with respect to direct materials).

The most important feature of process costing is that the costs of direct material and conversion are assigned to equivalent units rather than to physical units. For simplicity, suppose that the only production activity of the current accounting period was to start work on the 1,000 physical units and complete 75 percent of the required conversion activity. Assume that the costs incurred were $1,500 for conversion (direct labor and manufacturing overhead) and $5,000 for direct material. These costs would then be assigned as follows:

($1,500 conversion cost)/ (750 equivalent units of conversion) = $2.00 per equivalent unit for conversion

 

($5,000 direct-material cost)/ (1,000 equivalent units of direct material) = $5.00 per equivalent unit for direct material

This is a highly simplified example because there is no work-in-process inventory at the beginning of the accounting period and no goods were completed during the period. Nevertheless, it illustrates the important concept that under process costing, costs are assigned to equivalent units rather than physical units.

3. PRODUCTION REPORTS

Departmental production reports are completed to derive the preceding information (equivalent units, unit costs, as well as the cost of completed production , and the cost of the ending work-in-process inventory). Production reports may be compiled by using either the weighted-average method or the FIFO method. The text focuses on the weighted-average method because of its popularity in practice. Production reports have several sections, which are completed as follows:

(1) Analyze the physical flow of actual units.

(2) Calculate the equivalent units for the various direct materials and conversion.

(3) Calculate the cost per equivalent unit.

  1. Analyze the total costs to determine the cost of completed production and the cost of ending work-in-process inventory. Step 4 is accomplished by simply multiplying equivalent units (step 2) by the equivalent-unit costs (step 3).

 

3.1. Illustration of Process Costing

Basic Data for Illustration

The Wisconsin Division of MVP Sports Equipment Company manufactures baseball gloves in its Milwaukee plant. Two production departments are used in sequence: the Cutting Department and the Stitching Department. In the Cutting Department, direct material consisting of imitation leather is placed into production at the beginning of the process. Direct-labor and manufacturing overhead costs are incurred uniformly throughout the process. The material is rolled to make it softer and then cut into the pieces needed to produce baseball gloves. The predetermined overhead rate used in the Cutting Department is 125 percent of direct-labor cost.

Exhibit 4-4 presents a summary of the activity and costs in the Cutting Department during March. The direct-material and conversion costs listed in Exhibit 4-4 for the March I work in process consist of costs that were incurred during February. These costs were assigned to the units remaining in process at the end of February.

Based on the data in Exhibit 4-4, the Cutting Department's Work-in-Process Inventory account has the following balance on March 1:

Work-in-Process inventory: Cutting Department

March 1 balance 57,200

 

The following journal entry is made during March to add the costs of direct material, direct labor, and manufacturing overhead to Work-in-Process Inventory.

Work-in-Process inventory: Cutting Department

283,500

Raw-Material Inventory

90,000

Wages Payable

86,000

Manufacturing Overhead

107,500

 

Exhibit 4-4 . Basic Data for Illustration - Cutting Department

Work in process, March 1-20,000 units:

Direct material: 100% complete, cost of

$ 50,000*

Conversion: 10% complete, cost of

7,200*

Balance in work in process, March 1

57,200*

Units started during March

30,000 units

.Units completed during March and transferred out of the Cuffing Department

40,000 units

Work in process, March 31

10,000 units

Direct material: 100% complete

Conversion: 50% complete

Costs incurred during March:

Direct material

$ 90,000

Conversion costs:

Direct labor

$ 86,000

Applied manufacturing overhead

107,500+

Total conversion costs

$193,500

 

*These costs were incurred during the prior month, February.

+ (Predetermined overhead rate ) x (Direct labor cost) = 125% * $86,000 = $107,500

3.2. Weighted-Average Method of Process Costing

We now present the four steps used to prepare a departmental production report using weighted-average process costing.

 

Step 1: Analysis of Physical Flow of Units. The first step is to prepare a table summarizing the physical flow of production units during March. The table is shown in Exhibit 4-5 and reflects the following inventory formula.

 

(Physical units in beginning work in process) + (Physical units started) - (Physical units completed and transferred out) = (Physical units in ending work in process)

 

 

Step 2: Calculation of Equivalent Units. The second step in the process-costing procedure is to calculate the equivalent units of direct material and conversion activity. A table of equivalent units, displayed in Exhibit 4-6, is based on the table of physical flows prepared in step I (Exhibit 4-5). The 40,000 physical units that were completed and transferred out of the Cutting Department were 100 percent complete. Thus, they represent 40,000 equivalent units for both direct material and conversion. The 10,000 units in the ending work-in- process inventory are complete with respect to direct material, and they represent 10,000 equivalent units of direct material. However, they are only 50 percent complete with respect to conversion. Therefore, the ending work-in-process inventory represents 5,000 equivalent units of conversion activity (10,000 physical units X 50% complete).

As Exhibit 4-6 indicates, the total number of equivalent units is calculated:

 

(Equivalent units of activity in units completed and transferred out) + (Equivalent units of activity in ending work in process) = (Total equivalent units of activity)

 

Note that the total equivalent units of activity, for both direct material and conversion, exceeds the activity accomplished in the current period alone. Since only 30,000 physical product units were started during March and direct material is added at the beginning of the process, only 30,000 equivalent units of direct material were actually placed into production during March.

 

Exhibit 4-5. Step 1: Analysis of Physical Flow of Units - Cutting Department

Physical Units

Work in process, March 1

20,000

Units started during March

30,000

Total units to account for

50,000

Units completed and transferred out during March

40,000

Work in process, March 31

10,000

Total units accounted for

50,000

 

 

Exhibit 4-6. Step 2: Calculation of Equivalent Units - Cutting Department (Weighted-Average Method)

Physical Units

Percentage of Completion with Respect to Conversion

Equivalent Units

Direct Material

Conversion

Work in process, March 1

20,000

10%

Units started during March

30,000

Total units to account for

50,000

Units completed and transferred out during March

40,000

100%

40,000

40,000

Work in process, March 31

10,000

50%

10,000

5,000

Total units accounted for

50,000

Total equivalent units

50,000

45,000

 

 

However, the total number of equivalent units of direct material used for weighted-average process costing is 50,000 (see Exhibit 4-6). The other 20,000 equivalent units of direct material were actually entered into production during the preceding month. This is the key feature of the weighted- average method. The number of equivalent units of activity is calculated without making a distinction as to whether the activity occurred in the current accounting period or the preceding period.

 

 

Step 3: Computation of Unit Costs. The third step in the process-costing procedure, calculating the cost per equivalent unit for both direct material and conversion activity, is presented in Exhibit 4-7. The cost per equivalent unit for direct material is computed by dividing the total direct-material cost, including the cost of the beginning work in process and the cost incurred during March, by the total equivalent units (from step 2, Exhibit 4-6). An analogous procedure is used for conversion costs.

 

 

Step 4: Analysis of Total Costs. Now we can complete the process-costing procedure by determining the total cost to be transferred out of the Cutting Department's Work-in-Process Inventory account and into the Stitching Department's Work-in-Process Inventory account. Exhibit 4-8 provides the required calculations. For convenience, the computations in step 3 are repeated in Exhibit 4-8. At the bottom of Exhibit 4-8, a check is made to be sure that the total costs of $340,700 have been fully accounted for in the cost of goods completed and transferred out and the balance remaining in work-in-process inventory.

The calculations in Exhibit 4-8 are used as the basis for the following journal entry to transfer the cost of goods completed and transferred out to the Stitching Department.

Work-in-Process Inventory: Stitching Department

290,400

Work-in-Process Inventory: Cutting Department

290,400

 

 

On March 31, the Cutting Department's Work-in-Process Inventory account appears as follows. The March 31 balance in the account agrees with that calculated in Exhibit 4-8

Work-in-Process inventory: Cutting Department

March 1 balance

57,200

March cost of direct material, direct labor, and applied manufacturing overhead

283,500

290,400

Cost of goods completed and transferred out of Cutting Department

March 31 balance

50,300

 

Exhibit 4-7. Step 3: Computation of Unit Costs. - Cutting Department (Weighted-Average Method)

Direct Material

Conversion

Total

Work in process, March 1 (from Exhibit 4-4)

$ 50,000

$ 7,200

$ 57,200

Costs incurred during March (from Exhibit 4-4)

90,000

193,500

283,500

Total costs to account for

$140,000

$200,700

$340,700

Equivalent units (from step 2, Exhibit 4-6)

50,000

45,000

Costs per equivalent unit

$ 2.80

$ 4.46

$ 7.26

$140,000 /50,000

$200,700 /45,000

$2.80 + $4.46

 

 

Exhibit 4-8. Step 4:Analysis of Total Cost Cutting Department (Weighted-Average Method)

Cost of goods completed and transferred out of the Cutting Department during March:

(Number of units ) x ( Total cost per equivalent unit) = 40,000 x $7.26 = $290,400

Cost remaining in March 31 work-in-process inventory in the Cutting Department:

Direct material:

(Number of equivalent units of direct material)*(Cost per equivalent unit of direct material) = 10,000 x $2.80 = $ 28,000

Conversion:

(Number of equivalent units of conversion) * (Cost per equivalent unit of conversion) = 5,000 * $4.46 = 22,300

Total cost of March 31 work in process = $ 50,300

Check:

Cost of goods completed and transferred out

$ 290,400

Cost of March 31 work-in-process inventory

50,300

Total costs accounted for

$ 340,700

 

 

 

Departmental Production Report We have now completed all four steps necessary to prepare a production report for the Cutting Department. The report, which is displayed in Exhibit 4-9, simply combines the tables presented in Exhibits 4-6 and 4-8. The report provides a convenient summary of all of the process-costing calculations made under the weighted-average method.

Why is this process-costing method called the weighted-average method? Because the cost per equivalent unit for March, for both direct material and conversion activity, is computed as a weighted average of the costs incurred during two different accounting periods, February and March. To demonstrate this fact, we will focus on direct material. Since direct material is placed into production at the beginning of the process, the 20,000 physical units in the March I work in process already have their direct material. The direct-material cost per equivalent unit in the March I work in process is $2.50 ($50,000 - 20,000, from Exhibit 4-4). This cost was actually incurred in February.

In March, 30,000 physical units were entered into work in process and received their direct material. The direct-material cost incurred in March was $90,000. Thus, the direct-material cost per equivalent unit experienced in March was $3.00 ($90,000 + 30,000).

Under the weighted-average method of process costing, the cost per equivalent unit for direct material was calculated in Exhibit 4-7 to be $2.80. This $2.80 unit-cost figure is a weighted average, as the following calculation shows.

 

Exhibit 4-9. Production Report Production Report

Physical Units

Percentage of Completion with Respect to Conversion

Equivalent Units

Direct Material

Conversion

Work in process, March 1

20,000

10%

Units started during March

30,000

Total units to account for

50,000

Units completed and transferred out during March

40,000

100%

40,000

40,000

Work in process, March 31

10,000

50%

10,000

5,000

Total units accounted for

50,000

Total equivalent units

50,000

45,000

Direct Material

Conversion

Total

Work in process, March 1 (from Exhibit 4-4)

$ 50,000

$ 7,200

$ 57,200

Costs incurred during March (from Exhibit 4-4)

90,000

193,500

283,500

Total costs to account for

$140,000

$200,700

$340,700

Equivalent units (from step 2, Exhibit 4-6)

50,000

45,000

Costs per equivalent unit

$ 2.80

$ 4.46

$ 7.26

$140,000 /50,000

$200,700 /45,000

$2.80 + $4.46

 

Cost of goods completed and transferred out of the Cutting Department during March:

(Number of units ) x ( Total cost per equivalent unit) = 40,000 x $7.26 = $290,400

Cost remaining in March 31 work-in-process inventory in the Cutting Department:

Direct material:

(Number of equivalent units of direct material)*(Cost per equivalent unit of direct material) = 10,000 x $2.80 = $ 28,000

Conversion:

(Number of equivalent units of conversion) * (Cost per equivalent unit of conversion) = 5,000 * $4.46 = 22,300

Total cost of March 31 work in process = $ 50,300

Check:

Cost of goods completed and transferred out

$ 290,400

Cost of March 31 work-in-process inventory

50,300

Total costs accounted for

$ 340,700

 

 

$2.50 * (20,000 / 20,000 + 30,000) + $3.00 *(30,000 / (20,000 + 30,000) = $2.80

 

$2.50 - Direct-material cost per equivalent unit in February

(20,000 / 20,000 + 30,000) - Proportion of total equivalent units of direct material in the beginning work-in-process inventory

$3.00 - Direct-material cost per equivalent unit in March

30,000 / (20,000 + 30,000) - Proportion of total equivalent units of direct material added during March

$2.80 - Weighted-average cost per equivalent unit of direct material

The point of this demonstration is that under weighted-average process costing, unit- cost figures are weighted averages of costs incurred over two or more accounting periods.

Chapter summary

Process costing is used in production processes where relatively large numbers of nearly identical products are manufactured. The purpose of a process-costing system is the same as that of a job-order costing system-to accumulate costs and assign these costs to units of product. Product costs are needed for planning, cost control, decision making, and reporting to various outside organizations. The flow of costs in process-costing systems and job-order costing systems is the same. Costs of direct material, direct labor, and manufacturing overhead are added to a Work-in-Process Inventory account. Direct labor and manufacturing overhead are often combined into a single cost category termed conversion costs. When products are completed, the costs assigned to them are transferred either to Finished-Goods Inventory or to the next production department's Work-in-Process Inventory account. In sequential production processes, the cost of the goods transferred from one production department to another is called transferred-in cost. There are some important differences between job-order and process-costing systems. Chief among these is that job-order costing systems accumulate production costs by job or batch, whereas process-costing systems accumulate costs by department. Another important difference is the focus on equivalent units in process costing. An equivalent unit is a measure of the amount of productive input that has been applied to a fully or partially completed unit of product. In process costing, production costs per equivalent unit are calculated for direct-material and conversion costs. The key document in a process-costing system is the departmental production report, rather than the job-cost sheet used in job-order costing. There are four steps in preparing a departmental production report: (1) analyze the physical flow of units, (2) calculate the equivalent units, (3) compute the cost per equivalent unit, and (4) analyze the total costs of the department.

In the weighted-average method of process costing, the cost per equivalent unit, for each cost category, is a weighted average of (1) the costs assigned to the beginning work-in-process inventory and (2) the costs incurred during the current period.

Job-order and process costing represent the polar extremes of product-costing systems. Operation costing is a hybrid of these two methods. It is designed for production processes in which the direct material differs significantly among product lines but the conversion activities are essentially the same. Direct-material costs are accumulated by batches of products using job-order costing methods. Conversion costs are accumulated by production departments and are assigned to product units by process-costing methods.

Key terms

batch manufacturing - High-volume production of several product lines that differ in some important ways but are nearly identical in others.

 

departmental production report - The key document in a process-costing system. This report summarizes the physical flow of units, equivalent units of production, cost per equivalent unit, and analysis of total departmental costs.

 

equivalent unit - A measure of the amount of production effort applied to a physical unit of production. For example, a physical unit that is 50 percent completed represents one-half of an equivalent unit.

 

hybrid product-costing system - A system that incorporates features from two or more alternative product-costing systems, such as job-order and process costing.

 

operation costing - A hybrid of job-order and process costing. Direct material is accumulated by batch of products using job-order costing methods. Conversion costs are accumulated by department and assigned to product units by process-costing methods.

 

process-costing system - A product-costing system in which production costs are averaged over a large number of product units. Used by firms that produce large numbers of nearly identical products.

 

repetitive production - A production environment in which large numbers of identical or very similar products are manufactured in a continuous flow.

 

transferred-in costs - Costs assigned to partially completed products that are transferred into one production department from a prior department.

 

weighted-average method - A method of process costing in which the cost assigned to beginning work-in-process inventory is added to the current-period production costs. The cost per equivalent unit calculated under this process-costing method is a weighted average of the costs in the beginning work in process and the costs of the current period.

 

batch - продуктовая линия

batch manufacturing - крупносерийное, массовое производство с несколькими продуктовыми линиями, которые производят приблизительно одинаковую продукцию

departmental production report - основной документ в попроцессной системе калькулирования

equivalent units - условные единицы, (У.Е.)

hybrid product-costing system - гибридная система учета затрат на продукт, объединяющая черты двух или более альтернативных систем

operation costing - гибрид позаказного и попроцессного методов учета и калькулирования

process-costing systems - системы попроцессного калькулирования, в которых затраты обобщаются за период по производственным подразделениям безотносительно к изделиям

repetitive production environment - непрерывное производство с большим объемом одинаковых или очень похожих продуктов

transferred-in costs - затраты,распределенные на частично укомплектованные продукты, которые перемещаются из одного подразделения (передела, участка) в другое

unit - физические единицы

weighted-average method - метод средней взвешанной - метод оценки себестоимости готовой продукции (полуфабрикатов и НЗП)

Appendix to Chapter 4 (для любознательных)

Process Costing in Sequential Production Departments

In manufacturing operations with sequential production departments, the costs assigned to the units transferred out of one department remain assigned to those units as they enter the next department. In our illustration, the partially completed baseball gloves transferred out of the Cutting Department go next to the Stitching Department. There the cut-out pieces are stitched together. Since the cost of the thread used in the stitching is very small, it is treated as an indirect-material cost and included in manufacturing overhead, At the end of the process in the Stitching Department, rawhide lacing is woven through the fingers and along some edges of each baseball glove. The rawhide lacing is treated as a direct material.

The cost of goods completed and transferred out of the Cutting Department is transferred as shown below.

Work-in-Process inventory: Cutting Department

Direct material

Cost of goods completed and transferred out

Conversion:

Direct labor

Manufacturing overhead

 

 

Work-in-Process inventory: Stitching Department

Transferred- in costs

Direct material

Conversion:

Direct labor

Manufacturing overhead

 

As the T-accounts show, the Cutting Department has two cost elements: direct-material and conversion costs. However, the Stitching Department has three cost elements: direct-material, conversion, and transferred-in costs. Transferred-in costs are the costs assigned to the units transferred from the Cutting Department to the Stitching Department. Transferred-in costs are conceptually similar to direct-material costs. The only difference is that direct-material costs relate to raw materials, whereas transferred-in costs relate to partially completed products.

Exhibit 4-12 presents the basic data for our illustration of process costing in the Stitching Department. The March I work-in-process inventory in the department consists of 10,000 units that received some work in the Stitching Department during February but were not completed. The $61,000 of transferred-in costs in the March I work-in-process inventory are costs that were transferred into the Stitching Department's Work-in-Process Inventory account during February. Note that any partially completed baseball glove in the Stitching Department must have received all of its transferred-in input, or it would not have been transferred from the Cutting Department. The March I work-in-process inventory has not yet received any direct material in the Stitching Department, because the direct material (rawhide lacing) is not added until the end of the process.

As Exhibit 4-12 shows, 40,000 units were transferred into the Stitching Department during March. This agrees with Exhibit 4-4, which shows that 40,000 units were completed and transferred out of the Cutting Department during March. The Stitching Department completed 30,000 units during March and transferred them to finished-goods inventory. This left 20,000 units in the Stitching Department's March 31 work-in-process inventory.

Exhibit 4-12 shows that the costs incurred in the Stitching Department during March were $7,500 for direct material, $115,000 for direct labor, and $115,000 for applied manufacturing overhead. The predetermined overhead rate in the Stitching Department is 100 percent of direct-labor cost. Note that the predetermined overhead rates are different in the two production departments.

The March transferred-in cost in the Stitching Department is the cost of goods completed and transferred out of the Cutting Department. The amount shown in Exhibit 4-12, $290,400, comes from Exhibit 4-8.

 

Exhibit 4-12. Basic Data for illustration - Stitching Department

Work in process, March 1-10,000 units:

Transferred-in: 100% complete, cost of

$ 61,000*

Direct material: none

-0-

Conversion: 20% complete, cost of

7,600*

Balance in work in process, March 1

$ 68,600*

Units transferred in from Cutting Department during March

40,000 units

Units completed during March and transferred out to finished-goods inventory

30,000 units

Work in process, March 31

20,000 units

Transferred in: 100% complete

Direct material: none

Conversion: 90% complete

Costs incurred during March:

Transferred in from Cutting Department (assumes that weighted-average method was used for Cutting Department)

$290,400

Direct material

$ 7,500

Conversion costs:

Direct labor

$115,000

Applied manufacturing overhead

115,000+

Total conversion costs

$230,000

*These costs were incurred during the prior month, February,

+(Predetermined overhead rate) * (Direct-labor cost) = 1000% x $115,000 = $115,000

 

Exhibit 4-13 presents a completed production report for the Stitching Department using weighted- average process costing. Steps I through 4 are identified in the exhibit. The process-costing procedures used for the Stitching Department are identical to those used for the Cutting Department, except for one important difference. While there were only two cost elements (direct material and conversion) in the Cutting Department, there are three cost elements in the Stitching Department. In each of the four steps in Exhibit 4-13, transferred-in costs are listed along with direct material and conversion as a separate cost element.

The analysis of the physical flow of units (step I in Exhibit 4-13) is like the analysis for the Cutting Department. Now focus on step 2. In calculating equivalent units, we add a "transferred-in" column. Both the 30,000 units completed and transferred out of the Stitching Department and the March 31 work- in-process inventory are 100 percent complete as to transferred-in activity. Thus, the number of equivalent units is the same as the number of physical units. The calculation yields 50,000 total equivalent units of transferred-in activity for March. The equivalent units of direct material and conversion are determined as described earlier for the Cutting Department.

Costs per equivalent unit are computed in step 3. Since we are using the weighted-average method, the transferred-in costs in the March 1 work-in-process inventory are added to the March transferred-in costs before dividing by the equivalent units. Direct material and conversion costs are handled like those for the Cutting Department.

The analysis of total costs is done in step 4. The 30,000 units completed and transferred out of the Stitching Department are assigned a total weighted-average cost per unit of $12.228. This unit cost includes the transferred-in cost per equivalent unit of $7.028 calculated in step 3. The cost remaining in the work-in-process inventory on March 31 consists of two cost elements: transferred-in costs (20,000 equivalent units X $7.028 per equivalent unit) and conversion costs (18,000 equivalent units X $4.95 per equivalent unit). The March 31 work-in-process inventory has not yet received any direct material in the Stitching Department.

The following journal entry is made to transfer the cost of the units completed to the Finished- Goods Inventory account.

Finished-Goods Inventory

366,840

Work-in-Process Inventory: Stitching Department

366,840

To transfer the cost of goods completed, as computed under the weighted-average method

 

 

 

Exhibit 4-13. Production Report-Stitching Department (weighted-average method)

Step 1

Step 2

Physical Units

% of Completion with Respect

Equivalent Units

to Con

version

Transferred in

Direct Material

Conversion

Work in process, March 1

10,000

20%

Units started during March

40,000

Total units to account for

50,000

Units completed and transferred out during March

30,000

30,000

30,000

30,000

Work in process, March 31

20,000

90%

20,000

-0-

18,000

Total units accounted for

50,000

Total equivalent units

50,000

30,000

48,000

Step 3

Transferred in

Direct Material

Conversion

Total

Work in process, March 1 (from Exhibit 4-12)

$ 61,000

-0-

$ 7,600

$ 68,600

Costs incurred during March (from Exhibit 4-12)

290,400*

$7,500

230,000

527,900

Total costs to account for

$351,400

$7,500

$237,600

$596,500

Equivalent units

50,000

30,000

48,000

Costs per equivalent unit

$7.028

$ 0.25

$ 4.95

$12.228

$351,400 /50,000

$7,500 /30,000

$237,600 /48,000

$7.028 + $ 0.25 + $ 4.95

Step4

Cost of goods completed and transferred out of the Stitching Department during March: (Number of units ) x ( Total cost per equivalent unit) =30,000 x $12.228

$366,840

Cost remaining in March 31 work-in-process inventory in the Stitching Department: Transferred-in costs:

(Number of equivalent units of transferred-in costs) * (Cost per equivalent unit of transferred-in cost) = 20,000 * $12,228

$140,560

Direct material: none

Conversion: (Number of equivalent units of conversion) * (Cost per equivalent unit of conversion) = 18,000*$4,95

89,100

Total

$229,660

 

Check:

Cost of goods completed and transferred out

$ 366,840

Cost of March 31 work-in-process inventory

229,660

Total costs accounted for

$ 596,500

 

*Cost of goods completed and transferred out of Gutting Department during March, under the weighted-average method (calculated in Exhibit 4-8).