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Question 1
Janine Grimm has decided to set up a business with her cousin to use old barrels from a
local winery. They plan to cut up the barrels to produce wood, which is sold to barbecue-pit
enthusiasts to impart what Janine calls Ã¢â‚¬Å“a unique flavour to your barbecuing.Ã¢â‚¬Â Janine will
pay the winery \$20 for each barrel and pay her cousin Clementine \$5 to disassemble each
barrel.
The barrels render three products:
Ã¢â‚¬Â¢ staves that can be cut and packaged into bundles and sold to barbecue enthusiasts
Ã¢â‚¬Â¢ solid white oak barrel tops and bottoms that are sanded and sold to craft enthusiasts
Ã¢â‚¬Â¢ steel barrel hoops that are sold to the local scrap yard without further processing
It costs \$3 per barrel to sand and package the top/bottom, and \$2 to cut and package the
staves. The following table summarizes the yield from each wine barrel:
Product
Top/Bottom
Number of each, per barrel
2
Sales value at split-off, per barrel
\$15
Sales value after sanding or cutting
\$19
Hoops
4
\$0.10
\$0.10
Staves
18
\$20
\$24
Required:
a) Assuming that the tops / bottoms and the staves are treated as joint products and
the hoops are treated as byproducts, use each of the following methods to allocate
the joint cost of each barrel. Assume that the byproducts are recognized at the time
production is completed.
a. Physical output method
b. Sales value at split-off
c. Net realizable value
d. Constant gross margin percentage
b) Janine discovers that the batch of staves from each barrel could be rendered into
charcoal for an extra \$6, packaged for an additional \$1, and sold for \$30. If this
option is chosen, the \$2 currently spent on cutting and packaging could be saved.
Should Janine get into the charcoal business? If so, recalculate the joint cost
allocations, assuming the following allocation method:
a. Net realizable value
Question 2
Power Potables brews a special low-calorie craft beer that requires processing in six
different departments. The first two departments are malting and mashing. In the
malting department, the barley grain is prepared for brewing by going through a soaking
and drying process. The malt from the malting department is then transferred to the
mashing department, where the starch from the malt is converted into sugars that can
be fermented in a later process. Conversion costs are assumed to be added
continuously throughout all departments.
Summary data for malting department (October 2020)
Direct materials, added at the beginning of the process
160,000 kg
Direct materials cost
\$ 185,000
Conversion costs incurred during October
\$ 80,000
Work-in-process, Oct. 1: 2,000 kg, 90% complete:
Direct materials cost
\$ 1,400
Conversion cost
\$ 600
Work-in-process, Oct. 31: 3,000 kg, 50% complete.
Required:
Calculate the cost of goods transferred out of the malting department to the mashing
department during October and the cost of the malting department work-in-process
inventory at Oct. 31,
(a) assume that Power uses the weighted average approach
(b) assume that Power uses the first in, first out (FIFO) approach.
(Round all unit costs to four decimals.)
Question 3
For the month of November, CatherineÃ¢â‚¬â„¢s Charming Cookie Company (CCCC) started
150,000 of their special 8-inch cookies into production in the mixing department. The
cookies are mixed and shaped in this department before being transferred to the baking
department.
The mixing departmentÃ¢â‚¬â„¢s WIP on November 1 consisted of 15,000 cookies that were
50% complete for conversion costs and 90% complete for ingredients. The cost of
opening WIP was \$8,250, consisting of \$3,750 in conversion costs plus \$4,500 in
ingredients.
CCCCÃ¢â‚¬â„¢s quality team inspects the cookies before they are transferred to baking.
Cookies that do not pass inspection are considered wasted and the cost of normal
spoilage is added to good cookies transferred to the baking department. Normal
spoilage is 1.5% of good cookies produced.
In November, a total of 152,000 cookies were transferred to baking. Total costs added
during the month were \$139,000; \$85,000 of this was conversion costs, and the rest
was ingredients. Ending WIP at November 30 is 10,000 cookies, which are 50%
complete for ingredients and 10% complete for conversion costs.
Required:
1) Using either the weighted average or the FIFO method:
a) Prepare a production report for the mixing department of CCCC.
b) Prepare the journal entries to record:
i) the cost of direct materials added to the process during the month
ii) the cost of conversion costs added to the process during the month
iii) the transfer of cookies to the baking department
iv) the cost of abnormal spoilage
Be sure to clearly indicate which method you chose to use.
Example Problems
Life Cycle Pricing Ã¢â‚¬â€œ CPA PREP question
Ã¢Å¾Â¢Target pricing Ã¢â‚¬â€œ 12-15
Ã¢Å¾Â¢Time & materials pricing Ã¢â‚¬â€œ 12-27
Ã¢Å¾Â¢Market-based pricing Ã¢â‚¬â€œ 12-31
Ã¢Å¾Â¢Special order pricing Ã¢â‚¬â€œ 12-33
1
Example Problems from Text
Ã¢â‚¬Â¢ Solutions for those on the previous slide and several
other sample problems from the text have been
posted to Brightspace
Ã¢â‚¬Â¢ Note that a few review problems from Chapter 11
have been included as well as the expected several
from Chapter 12
Chapter 14 Ã¢â‚¬â€œ Cost Allocation
Support and production departments
Service / Support departments provide support to themselves, other service departments
and production departments.(e.g. Maintenance, IT services, Personnel, Accounting,
Cafeteria)
Production departments primarily act to produce a product for the organizationÃ¢â‚¬â„¢s
customers. (e.g. Cutting Assembly, Packaging) Costs include both the direct costs of the
department itself as well as the allocated costs from the service / support departments.
Costs are traced to each department to determine departmental costs.
Support departments allocate costs to production departments (and can allocate costs
among themselves first).
The overall cost transferred to finished goods and ultimately the external customer
includes costs for both support and production.
Support Department Cost Allocation
Methods of allocating support department costs
Ã¢â‚¬Â¢ Services are allocated using a rate based on the cost driver related to the
use of the services (square metres, number of employees, machine
hours, and so on).
Ã¢â‚¬Â¢ Costs can be allocated using either:
o a single rate (combine variable and fixed costs into a budgeted rate,
and multiply by the actual use of the cost driver)
or
o a dual rate (variable costs and fixed costs each have a budgeted rate.
Variable costs are applied based on actual use but fixed costs are
applied based on budgeted use)
Example 1 Ã¢â‚¬â€ cost allocation
Patricia Corporation is developing a new research lab that requires fixed
costs of \$100,000 per year and variable costs of \$10 per machine hour for
the lab equipment. This is based on a budget of 1,000 hours for the year.
Patricia has two departments that will be using the lab: Department A and
Department B. It is expected that Department A will use 750 hours and
Department B will use 250 hours.
At year end, it was determined that Department A actually used 625 hours
and Department B used 375 hours.
Calculate the allocation of the labÃ¢â‚¬â„¢s costs based on a single rate system of
allocation and then based on a dual rate system.
Solution to Example 1 Ã¢â‚¬â€ cost allocation
Single rate system:
Rate = \$100,000 + (\$10 Ãƒâ€” 1,000)
= \$110,000 for 1,000 hours = \$110 per hour
Allocation to A and B based on usage:
A: 625 hours Ãƒâ€” \$110 = \$68,750
B: 375 hours Ãƒâ€” \$110 = \$41,250
Solution to Example 1 Ã¢â‚¬â€ cost allocation
Single rate system:
Allocation to A and B based on usage:
A: 625 hours Ãƒâ€” \$110 = \$68,750
B: 375 hours Ãƒâ€” \$110 = \$41,250
Dual rate system:
Fixed rate = \$100,000 ÃƒÂ· 1,000 hours = \$100 per hour allocated,
based on budgeted usage
Variable rate = \$10 per hour allocated, based on actual usage
Allocation to A and B based on usage:
A: (\$100 Ãƒâ€” 750 hours) + (\$10 Ãƒâ€” 625 hours) = \$81,250
B: (\$100 Ãƒâ€” 250 hours) + (\$10 Ãƒâ€” 375 hours) = \$28,750
Methods of allocating support department costs
There are three methods to allocate costs (all arbitrary):
Ã¢â‚¬Â¢ direct method
Ã¢â‚¬Â¢ step method
Ã¢â‚¬Â¢ reciprocal method
Example 2 Ã¢â‚¬â€ service department cost allocation
Irmgard Garment Manufacturing makes womenÃ¢â‚¬â„¢s clothing. The
company has two service departments (administration and
design) and two production departments (cutting and sewing).
Administration costs are allocated based on labour hours, and
design is based on machine hours.
Design
Cutting
\$320,000
\$200,000
\$345,000
\$731,000
Labour hours
24,000
20,000
60,000
100,000
Machine hours
10,000
10,000
40,000
60,000
Costs
Sewing
Example 2Ã¢â‚¬â€ three methods continued
Required:
Calculate the total overhead costs for each of cutting and
sewing using each of the following methods:
Ã¢â‚¬Â¢ direct method
Ã¢â‚¬Â¢ step method Ã¢â‚¬â€ administration first
Ã¢â‚¬Â¢ step method Ã¢â‚¬â€ design first
Ã¢â‚¬Â¢ reciprocal method
Direct Method
Design
\$ 320,000
(60/160; 100/160) (320,000)
Costs
Cutting
Sewing
\$ 200,000
\$ 345,000
\$ 731,000
0
120,000
200,000
80,000
120,000
(40/100; 60/100)
0
(200,000)
Total
0
0
\$ 545,000 \$1,051,000
14
Design
\$ 320,000
(320,000)
Costs
(20/180; 60/180;
100/180)
Cutting
Sewing
\$ 200,000
\$ 345,000
\$ 731,000
35,556
106,667
177,777
94,222
141,334
235,556
(40/100; 60/100)
0
(235,556)
Total
0
0
\$ 545,889 \$1,050,111
15
Step Method Ã¢â‚¬â€œ Design first
Design
Costs
(10/110; 40/110;
60/110)
Cutting
Sewing
\$ 200,000
\$ 320,000
\$ 345,000
\$ 731,000
(200,000)
18,182
72,727
109,091
126,818
211,364
338,182
(60/160; 100/160)
0
(338,182)
Total
0
0
\$ 544,545 \$1,051,455
16
Reciprocal Method
A = 320,000 + 10/110D = 320,000 + 0.09091D
D = 200,000 + 20/180A = 200,000 + 0.11111A
Substitute:
A = 320,000 + 0.09091 (200,000 + 0.11111A)
A = 320,000 + 18,182 + 0.0101A
0.9899A = 338,182
A = \$341,632
Therefore, D = 200,000 + (.11111Ãƒâ€” 341,632) = \$237,959
17
Reciprocal Method
Design
\$ 320,000
(20/180; 60/180;
100/180)
(10/110; 40/110;
60/110)
Costs
Total
Cutting
Sewing
\$ 200,000
\$ 345,000
\$ 731,000
(341,632)
37,959
113,877
189,796
21,632
(237,959)
86,531
129,796
0
0
\$ 545,408 \$1,050,592
Summary of Different Methods
Direct
Cutting
Sewing
Total
18
545,000
1,051,000
1,596,000
Step1
545,889
1,050,111
1,596,000
Step2
544,545
1,051,455
1,596,000
Reciprocal
545,408
1,050,592
1,596,000
Chapter 15: Joint and byproduct costing
Ã¢â‚¬Â¢ Joint costs are costs of processing one input into multiple products.
Ã¢â‚¬Â¢ Costs are pooled until the split-off point.
Ã¢â‚¬Â¢ The split-off point is the point in the process where products become separately identifiable.
Ã¢â‚¬Â¢ After split-off, products can be either sold or developed further.
Ã¢â‚¬Â¢ Separable costs are costs incurred related to one or more specific products.
Why allocate joint costs?
Joint costs are allocated for:
Ã¢â‚¬Â¢ inventory and COGS calculations (for use in financial statements and for tax purposes)
Ã¢â‚¬Â¢ internal cost calculations
Ã¢â‚¬Â¢ reimbursement of costs
Ã¢â‚¬Â¢ Should not be used for economic decision-making purposes
Visualize the Problem
Joint cost allocation methods
Four main methods of allocation:
Ã¢â‚¬Â¢ physical output
Ã¢â‚¬Â¢ sales value at split-off
Ã¢â‚¬Â¢ net realizable value
Ã¢â‚¬Â¢ constant gross margin percentage
Selecting a method:
Ã¢â‚¬Â¢ If products can be sold at split-off point, use the sales value at splitÃ‹â€”off point.
Ã¢â‚¬Â¢ Otherwise, use estimated NRV or constant gross margin percentage.
Ã¢â‚¬Â¢ Physical output not usually recommended
Physical output method and sales value at splitoff method
Physical output method:
Ã¢â‚¬Â¢ Allocate costs based on amount of physical volume of each product at split-off point.
Ã¢â‚¬Â¢ Fairly simple and straight forward
Ã¢â‚¬Â¢ Allocates costs evenly among products
Sales value at split-off method:
Ã¢â‚¬Â¢ Allocate costs based on sales value of product at split-off point.
Ã¢â‚¬Â¢ This can only be used if all products can be sold at split-off. They may not be saleable finished
products at this stage in the process.
Ã¢â‚¬Â¢ Based on an Ã¢â‚¬Å“ability to payÃ¢â‚¬Â concept.
Net realizable value method and Constant gross
margin percentage method
Net realizable value method:
Ã¢â‚¬Â¢ Allocate costs based on final sales value of each product, less any separable costs after the
split-off point associated with that product.
Ã¢â‚¬Â¢ Essentially, what each product would theoretically be worth at the split-off point.
Constant gross margin percentage method:
Ã¢â‚¬Â¢ Calculate gross margin (sales Ã¢â‚¬â€œ COGS) for the entire process.
Ã¢â‚¬Â¢ Deduct the gross margin percentage from the sales value for each product, which provides
the total cost for each product.
Ã¢â‚¬Â¢ Deduct the separable costs from total costs to find allocation of joint costs.
Ã¢â‚¬Â¢ Allocate the joint costs to each product so that all products have the same gross profit margin.
Example
1.
2.
3.
4.
Using the estimated net realizable value method, allocate the joint costs to each
product.
Using the sales value at split-off method, allocate the joint costs to each product.
Using the constant gross margin method, allocate the joint costs to each product
Is the decision to process all three chemicals further the optimal decision? If the
optimal decision had been made, by how much would the income of Omega
Company have improved?
Solution Part 1
A (100,000 Ã¢â‚¬â€œ 28,000)
B (60,000 Ã¢â‚¬â€œ 10,000)
C (40,000 Ã¢â‚¬â€œ 12,000)
Total NRV
Allocations:
A \$60,000 x (72 / 150) =
B \$60,000 x (50 / 150) =
C \$60,000 x (28/150) =
Total allocation
8
Net Realizable Value
72,000
50,000
28,000
150,000
\$28,800
\$20,000
\$11,200
\$60,000
Solution – Part 2
Sales Value at Split-off
A
B
C
Total Value at Split-off
Allocations:
A \$60,000 x (50 / 120) =
B \$60,000 x (40 / 120) =
C \$60,000 x (30 / 120) =
Total allocation
9
50,000
40,000
30,000
120,000
\$25,000
\$20,000
\$15,000
\$60,000
Constant Gross margin method
GM = 200,000 – 50,000 Ã¢â‚¬â€œ 60,000 = 90,000
GM% = 90,000 / 200,000 = 45%
A
B
C
Revenue
100,000
60,000
40,000
10
Sep. Costs Joint Cost
28,000
27,000
10,000
23,000
12,000
10,000
GM @ 45%
45,000
27,000
18,000
Solution Ã¢â‚¬â€œ Part 4
Only C should not be processed further. When deciding to process further, the
incremental revenues are compared to the incremental costs of processing further. In this
case, the incremental revenues are \$40,000 Ã¢â‚¬â€œ \$30,000 = \$10,000, and the incremental
costs are \$12,000; thus, Omega is losing \$2,000.
Alternatively,
Value at Split-off
NRV
A
\$50,000
\$72,000
B
\$40,000
\$50,000
C
\$30,000
\$28,000
11
Joint and byproduct costing
Byproducts:
Ã¢â‚¬Â¢ Product with little or nominal sales value (in comparison to the other products).
Ã¢â‚¬Â¢
Sometimes a byproduct can become a main product Ã¢â‚¬â€œ e.g. chicken wings
Ã¢â‚¬Â¢ Two methods for handling:
o
Reduce joint costs by the NRV of the byproduct(s) and record the byproducts in inventory at
their NRV (IFRS requirement).
o
Recognize revenues when sold and do not record in inventory.
Spoilage, rework, and scrap
Scrap:
Ã¢â‚¬Â¢ generally, any proceeds received netted against product cost
Spoilage:
Ã¢â‚¬Â¢ normal versus abnormal
Ã¢â‚¬Â¢ normal Ã¢â‚¬â€ included in cost of product (expected cost)
Ã¢â‚¬Â¢ abnormal Ã¢â‚¬â€ loss in period
Rework:
Ã¢â‚¬Â¢ normal versus abnormal
Ã¢â‚¬Â¢ normal Ã¢â‚¬â€ added to cost of product
Ã¢â‚¬Â¢ abnormal Ã¢â‚¬â€ loss in period
Problem 15-34
Joint-cost allocation with a byproduct. The Seattle Recycling Company (SRC) purchases old
water and soda bottles and recycles them to produce plastic covers for outdoor furniture. The
company processes the bottles in a special piece of equipment that first melts, then reforms the
plastic into large sheets that are cut to size. The edges from the cut pieces are sold for use as
package filler. The filler is considered a byproduct.
SRC can produce 25 table covers, 75 chair covers, and 5 pounds of package filler from 100
pounds of bottles.
In June, SRC had no beginning inventory. It purchased and processed 120,000 pounds of
bottles at a cost of \$600,000. SRC sold 25,000 table covers for \$12 each, 80,000 chair covers
for \$8 each, and 5,000 pounds of package filler at \$1 per pound.
Required
Assume that SRC allocates the joint costs to table and chair covers using the sales value at
splitoff method and accounts for the byproduct using the production method. What is the
ending inyentory cost for each product and gross margin for SRC? 1
Problem 15-34
Joint-cost allocation with a byproduct. The Seattle Recycling Company (SRC) purchases old
water and soda bottles and recycles them to produce plastic covers for outdoor furniture. The
company processes the bottles in a special piece of equipment that first melts, then reforms the
plastic into large sheets that are cut to size. The edges from the cut pieces are sold for use as
package filler. The filler is considered a byproduct.
SRC can produce 25 table covers, 75 chair covers, and 5 pounds of package filler from 100
pounds of bottles.
In June, SRC had no beginning inventory. It purchased and processed 120,000 pounds of
bottles at a cost of \$600,000. SRC sold 25,000 table covers for \$12 each, 80,000 chair covers
for \$8 each, and 5,000 pounds of package filler at \$1 per pound.
Required
Assume that SRC allocates the joint costs to table and chair covers using the sales value at
splitoff method and accounts for the byproduct using the sales method. What is the
ending inventory cost forÃ‚Â· each product and gross margin for SRC?
Problem 15-34
Joint-cost allocation with a byproduct. The Seattle Recycling Company (SRC) purchases old
water and soda bottles and recycles them to produce plastic covers for outdoor furniture. The
company processes the bottles in a special piece of equipment that first melts, then reforms the
plastic into large sheets that are cut to size. The edges from the cut pieces are sold for use as
package filler. The filler is considered a byproduct.
SRC can produce 25 table covers, 75 chair covers, and 5 pounds of package filler from 100
pounds of bottles.
In June, SRC had no beginning inventory. It purchased and processed 120,000 pounds of
bottles at a cost of \$600,000. SRC sold 25,000 table covers for \$12 each, 80,000 chair covers
for \$8 each, and 5,000 pounds of package filler at \$1 per pound.
Required
Discuss the difference between the two methods of accounting tor byproducts, focusing on what
conditions are necessary to use each method.
Problem 15-35
Byproduct-costing journal entries (continuation of 15-34). The accountant for SRC needs
to record the information about the joint and byproducts in the general journal, but is not
sure what the entries should be. The company has hired you as a consultant to help its
accountant.
Required
1. Show journal entries at the time of production and at the time of sale assuming
SRC accounts for the byproduct using the production method.
Ã‚Â·.
2. Show journal entries at the time of production and at the time of sale assuming
SRC accounts for the byproduct using the sales method.
1
Chapter 17: Process costing
Ã¢â‚¬Â¢ Process costing is used for products that are:
o identical to each other (homogeneous)
o produced continuously through a standard set of processes
o E.g. Oil Refinery, Canned Vegetable Processor, Brewery
Ã¢â‚¬Â¢ Cost is accumulated by process (department) and is assigned to all units passing
through that process.
Ã¢â‚¬Â¢ The difficulty is in determining the equivalent number of units that have passed
through a process when the units are not yet complete.
2
Process versus job costing
Ã¢â‚¬Â¢ Similarities
Ã¢â‚¬Â¢ same objective: assign costs to products
Ã¢â‚¬Â¢ same basic costs and accounts: DM, DL and MOH
Ã¢â‚¬Â¢ DM, WIP and FG inventories
Ã¢â‚¬Â¢ same flow of costs through accounts
Ã¢â‚¬Â¢ Differences
Ã¢â‚¬Â¢ Focus on costs by department rather than by job
Ã¢â‚¬Â¢ All units are the same so costs are spread out equally to each unit
Ã¢â‚¬Â¢ To determine cost per unit we need to know the equivalent number of
full units in the partially complete WIP units
3
Process Costing vs. Job Costing
4
Process-costing steps in each department
Ã¢â‚¬Â¢ Determine physical flow of goods.
Ã¢â‚¬â€œ Goods in beginning work-in-process (WIP) plus all units started
must end up in one of three places:
o completed and transferred out
o ending WIP
o spoiled (normal and abnormal)
1. Calculate equivalent units of production for the period.
2. Calculate the cost per equivalent unit (EU) for each cost category.
3. Using the unit costs and equivalent units, assign costs to the three
places where the units end up (completed, ending WIP and
spoilage).
5
Equivalent units (EU)
Ã¢â‚¬Â¢
Ã¢â‚¬Â¢
Ã¢â‚¬Â¢
Ã¢â‚¬Â¢
Not all units will be completely through the process at the end of the period.
There will usually be some beginning and ending WIP.
Two units 50% complete are the equivalent of one fully completed unit.
Four units 25% complete are the equivalent of one fully completed unit.
Equivalent units = # of partially completed units Ãƒâ€” % of completion
Ã¢â‚¬Â¢ Need to calculate EU to get the cost/unit for the department.
Ã¢â‚¬Â¢ Need to calculate EU for each type of input cost separately. E.g. materials,
transferred in, conversion
6
Exercise 1 Ã¢â‚¬â€ equivalent units
Company A has two processing departments: cutting and finishing. Direct
materials are added at the beginning of the process, and conversion costs are
The cutting department had the following inventory and production for the latest
period:
WIP inventory Ã¢â‚¬â€ beginning
0
Units completed and transferred to finishing
50,000
WIP inventory Ã¢â‚¬â€ ending (35% complete)
5,000
Required:
Calculate the equivalent units of production for direct materials and conversion
costs for the most recent period.
7
Exercise 1 Ã¢â‚¬â€ solution
Equivalent units
Direct
materials
50,000
100% completed
WIP Ã¢â‚¬â€ end:
(5,000 Ãƒâ€” 100% | 5,000 Ãƒâ€” 35%) 5,000
Total equivalent units
55,000
Conversion
costs
50,000
1,750
51,750
8
Cost-flow assumptions Ã¢â‚¬â€ weighted average
Equivalent units and unit costs can be calculated using either weighted average or
FIFO.
Weighted-average cost-flow assumption:
Ã¢â‚¬â€œ mixes costs and units from prior and current periods
Cost / EU = (beg. WIP costs + costs added) ÃƒÂ· total EU for period
Ã¢â‚¬â€œ does not separately track work done last period versus current period.
Ã¢â‚¬â€œ Comingles the cost of beginning WIP with costs added during the period. Then
compares that to the equivalent units of Beginning WIP and units added during the
period.
EU for period = units completed and transferred out + EU of ending WIP
9
Cost-flow assumptions Ã¢â‚¬â€ FIFO
First-in first-out (FIFO) cost-flow assumption:
Ã¢â‚¬â€œ separates costs and units of each period
Ã¢â‚¬â€œ bases cost per EU only on work done in current period
Cost / EU = (costs added this period) ÃƒÂ· EU for period
EU for period = EU of work done to finish beg. WIP + units started and
completed + EU of ending WIP
Ã¢â‚¬â€œ considered more accurate
Ã¢â‚¬â€œ better for performance evaluation as costs of each period are kept separately
Only major difference is how beginning WIP influences the EU and cost
per unit calculations
10
Exercise 2 Ã¢â‚¬â€ equivalent units
Company A has two processing departments: cutting and finishing. The cutting
department had the following inventory and production for the latest period:
WIP inventory Ã¢â‚¬â€ beginning (70% complete)
6,000
Units started during the period
60,000
WIP inventory Ã¢â‚¬â€ ending (40% complete)
4,000
Required:
Determine the physical flow of the units, and calculate the equivalent units of
production for the cutting department for the most recent period assuming that
direct materials are added at the beginning of the process and conversion costs
are added uniformly throughout the process using the following:
a) weighted-average cost-flow assumption
b) FIFO cost-flow assumption
11
Exercise 2 Ã¢â‚¬â€ solution
a) Weighted-average cost-flow assumption:
Physical flow and EU:
Beginning WIP
Started into production
Units to account for
Completed and transferred out
(6,000 + 60,000 Ã¢â‚¬â€œ 4,000)
Ending WIP (4,000 Ãƒâ€” 40%)
Total
Units
6,000
60,000
66,000
62,000
4,000
66,000
Equivalent units
Materials
62,000
4,000
66,000
Conversion
62,000
1,600
63,600
12
Exercise 2 Ã¢â‚¬â€ solution (continued)
b) FIFO cost-flow assumption:
Physical flow and EU:
Beginning WIP
Started into production
Units to account for
Physical flow and EU:
Completed and transferred out:
Complete beg. WIP (6,000 Ãƒâ€” 30%)
Started and completed in period
(62,000 completed Ã¢â‚¬â€œ 6,000 from beg.WIP)
Ending WIP (4,000 Ãƒâ€” 40%)
Total
Units
6,000
60,000
66,000
Units
Equivalent units
Mater.
Conversion
6,000
0
1,800
56,000
4,000
66,000
56,000
4,000
60,000
56,000
1,600
59,400
13
Exercise 2A Ã¢â‚¬â€ equivalent units and costs
Company A from the previous example has provided the following additional information:
Ã¢â‚¬Â¢ Beginning WIP inventory was valued at \$24,300. (\$18,000 for materials and \$6,300 for
conversion)
Ã¢â‚¬Â¢ Materials added during the month cost \$186,000
Ã¢â‚¬Â¢ Conversion costs added during the month were \$83,160
Remember: The cutting department had the following inventory and production for the latest
period:
WIP inventory Ã¢â‚¬â€ beginning (70% complete)
6,000
Units started during the period
60,000
WIP inventory Ã¢â‚¬â€ ending (40% complete)
4,000
Required:
Calculate the cost of units transferred out and the cost of ending WIP inventory using both the
FIFO and weighted-average methods.
14
Slide Exercise 2A Ã¢â‚¬â€ solution
FIFO cost-flow assumption:
Physical flow and EU:
Beginning WIP
Started into production
Units to account for
Units
6,000
60,000
66,000
Physical flow and EU:
Units
Completed and transferred out:
Complete beg. WIP (6,000 Ãƒâ€” 30%)
6,000
Started and completed in period
(62,000 completed Ã¢â‚¬â€œ 6,000 from beg.WIP)
56,000
Ending WIP (4,000 Ãƒâ€” 40%)
4,000
Total
66,000
Unit cost (Materials) = \$186,000 ÃƒÂ· 60,000 = \$3.10
Unit cost (Conversion) = \$83,160 ÃƒÂ· 59,400 = \$1.40
Equivalent units
Material
Conversion
0
1,800
56,000
4,000
60,000
56,000
1,600
59,400
15
Slide Exercise 2A Ã¢â‚¬â€ solution (continued)
FIFO (continued):
Cost of goods transferred out:
Cost of opening WIP (6,000 units 70% done)
\$ 24,300
Cost to complete opening WIP (1,800 * \$1.40)
2,520
Cost of started and completed (56,000 * (\$3.10 + \$1.40))
252,000
Total
\$278,820
Cost of ending WIP = (4,000 * \$3.10 + 1,600 * \$1.40) = \$14,640
Check: \$278,820 + \$14,640 = \$24,300 + \$186,000 + \$83,160
16
Slide Exercise 2A Ã¢â‚¬â€ solution (continued)
Weighted average:
(6,000 + 60,000 Ã¢â‚¬â€œ 4,000)
Ending WIP (4,000 Ãƒâ€” 40%)
Total
Completed and
transferred out
62,000
4,000
66,000
Materials
62,000
4,000
66,000
Unit cost (Materials = (\$18,000 + \$186,000) ÃƒÂ· 66,000 = \$3.0909
Unit cost (Conversion) = (\$6,300 + \$83,160) ÃƒÂ· 63,600 = \$1.4067
Total cost per unit = \$3.0909 + \$1.4067 = \$4.4976
Cost of goods transferred out = (62,000 * \$4.4976) = \$278,851
Cost of ending WIP = (4,000 * \$3.0909 + 1,600 * \$1.4067) = \$14,614
Check: \$278,851 + \$14,614 = \$24,300 + \$186,000 + \$83,160 (rounded)
Conversion
62,000
1,600
63,600
17
Cost categories for process costing
Ã¢â‚¬Â¢ Direct materials
Ã¢â‚¬Â¢ Transferred-in costs:
Ã¢â‚¬â€œ Ã¢â‚¬ËœTransferred-in costsÃ¢â‚¬â„¢ is just a name given to the materials received
from a previous department in the production process. Direct
materials Ã¢â‚¬â€œ internal.
Ã¢â‚¬â€œ Normally assumed to be added at the beginning of the process for
the receiving department
Ã¢â‚¬â€œ An additional column is necessary to account for EU and costs.
Ã¢â‚¬Â¢ Conversion costs:
Ã¢â‚¬â€œ Because of automation, DL is becoming a less significant part of
manufacturing processes.
Ã¢â‚¬â€œ DL and MOH are often combined into conversion costs.
18
Example Problem
Candy making in the Processing Department starts with the mashed fruit from fruit mashing
department. Pectin is added when the candies are 15% of the way through the process.
Conversion costs are added throughout the candy-making process.
Beginning work-in-progress inventory consisted of 800 units which were 10% of the way
through the process. 12,500 units were started during the month.
Beginning inventory included conversion costs of \$6,450 and \$15,500 in mashed fruit
transferred in.
During July pectin costing \$26,500 was added to production along with \$31,450 in conversion
costs and \$27,900 in mashed fruit transferred in.
At the end of July, 11,500 completed units were transferred to the packaging department and
a remaining 1,800 units were 10% complete.
Required:
Calculate the cost of goods transferred out to the packaging department and ending WIP.
Assume weighted average approach.
19
Units
Transferred Out
11,500
End WIP (10% complete) 1,800
Accounted for
13,300
Cost per Equivalent Unit
TI (\$15,500 + \$27,900) / 13,300 =
DM (\$26,500) / 11,500 =
CC (\$6,450 + \$31,450) / 11,680 =
Total cost per unit =
TI
11,500
1,800
13,300
DM
11,500
0
11,500
\$3.2632
\$2.3043
\$3.2449
\$8.8124
Total costs transferred out:
Goods transferred out (11,500 x \$8.8124)
Ending WIP (TI = 1,800 * 3.2632)
(CC = 180 * 3.2449)
CC
11,500
180
11,680
\$101,342
5,874
584
6,458
\$107,800