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Write a paper reflecting this week learning activities. In your reflection paper, compare and contrast job costing and process costing and how they impact a business environment performance and bottomline.

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Chapter 6
Process Costing
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage.
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Learning Objectives
1. Describe the basic characteristics and cost flows associated with process
manufacturing
2. Define equivalent units and explain their role in process costing. Explain the
differences between the weighted average method and the FIFO method of
accounting for process costs
3. Prepare a departmental production report using the weighted average
method
4. Explain how nonuniform inputs and multiple processing departments affect
process costing
5. (Appendix 6A) Prepare a departmental production report using the FIFO
method
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Characteristics of Process Manufacturing
• Each product within a product line passing through the processes would
receive similar ‘‘doses’’ of materials, labor, and overhead costs
• Process costing works well whenever relatively homogeneous products
pass through a series of processes and receive similar amounts of
manufacturing costs
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Types of Processes (1 of 2)
• Sequential processing requires that units pass through one process before
they can be worked on in the next process in the sequence
• Parallel processing is another processing pattern that requires two or more
sequential processes to produce a finished good
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Types of Processes (2 of 2)
• Partially completed units (e.g., two subcomponents) can be worked on
simultaneously in different processes and then brought together in a final
process for completion
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Here’s How It’s Used: IN YOUR LIFE (1 of 8)
Example of Sequential and Parallel Process
The local chapter of Beta Alpha Psi has decided to have a bake sale to raise
money for a homeless shelter. John Henderson, a member of the honor
organization, agrees to bake two dozen cupcakes (for the first time in his life!).
Because this is his first time, he searches the Internet for information about
making cupcakes. He finds a good recipe on foodnetwork.com and realizes
that there are three sequential processes to follow. First, there is a mixing
process to create the batter.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Here’s How It’s Used: IN YOUR LIFE (2 of 8)
In this process, butter, sugar, eggs, flour, baking soda, baking powder, and
vanilla extract are all blended (in the proper proportions) in a food processor.
Next, while pulsing, milk is added down the funnel of the processor to create a
smooth dropping consistency.
The second process is baking. For this process, two 12-bin muffin tins are lined
with muffin papers. The oven is preheated to 400 degrees. Next, the batter
from mixing is poured into the two muffin tins and baked for 15 to 20 minutes.
The final step in this process is cooling.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Here’s How It’s Used: IN YOUR LIFE (3 of 8)
First, John removes the muffin tins from the oven and allows them to cool on
the rack for a few minutes. Then he removes the cupcakes from the tins and
allows them to cool in their papers. The cupcakes are then ready for the final
process: icing and boxing.
In this final process, icing is spread over each cupcake and four iced cupcakes
are placed in a small white box with a lid. The cupcakes will be sold for $2.50
per box at the bake sale. However, while the cupcakes are baking, John
discovers that he forgot to buy icing.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Here’s How It’s Used: IN YOUR LIFE (4 of 8)
He is relieved to find out that he can actually make the icing (using information
from the same website that provided the cupcake recipe). It requires a fourth
process that is independent of or parallel to baking. Thus, while the cupcakes
are baking, John makes a white icing by whipping egg whites and
confectioner’s sugar and adding some lemon juice to create the right
consistency. The icing becomes a material added at the beginning of the
boxing process.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Here’s How It’s Used: IN YOUR LIFE (5 of 8)
Equivalent Units of Homework
On Monday morning, Kelly Jackson received a homework assignment due on
Friday. It consisted of completing 12 exercises in her calculus class, three
exercises for each of four sections in the current chapter. Before working the
exercises, she must first read and study the section material and then test her
understanding by working the section’s review exercises. She believes that the
study time, the time for review exercises, and the time to work the assigned
exercises are all about the same.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Here’s How It’s Used: IN YOUR LIFE (6 of 8)
Thus, once a section is read and studied, one-third of the labor input to
produce a finished exercise is done. When the review exercise is complete,
two-thirds of the labor input needed to produce a finished exercise is complete.
By Tuesday night, Kelly had read and studied the first two sections, worked the
review exercises for those sections, and completed all the assigned exercises
for section 1. By Wednesday night, she had read all four sections, worked all
review exercises, and completed the assigned exercises for the first two
sections.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Here’s How It’s Used: IN YOUR LIFE (7 of 8)
Kelly wants to know her homework output for both Tuesday and Wednesday.
She is convinced that it is more than simply the homework exercises actually
completed. For Tuesday, her output (measured by equivalent units of assigned
exercise) would be three completed exercises plus two [ 32 ï‚´ 3] equivalent
exercises, for a total of five equivalent exercises. For Wednesday night, her
homework output measure in equivalent units would be six completed units
plus four equivalent exercises [ 32 ï‚´ 6], yielding a total of ten equivalent exercises.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Here’s How It’s Used: IN YOUR LIFE (8 of 8)
Unfortunately for Kelly if she did no further work, the professor would only give
her credit for the six fully completed exercises and not the 10 equivalent
exercises! However, using equivalent units does help her measure and
understand her degree of progress—and she only has two equivalent units of
output to complete as of Wednesday night (that sounds a lot better than six
more exercises). Moreover, a partially completed unit in the business world
can’t be sold until it’s finished (just as homework can’t be graded until it’s
finished!).
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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What’s In Common?
• Regardless of which processing pattern exists within a firm, all units
produced share a common property
o
Units are homogeneous and subjected to the same operations for a given
process and each unit produced in a period should receive the same unit cost
• Understanding how unit costs are computed requires an understanding of
the manufacturing cost flows that take place in a process-costing firm
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How Costs Flow through the Accounts in Process
Costing (1 of 4)
• The manufacturing cost flows for a process-costing system are the same as
those for a job-order system
• As raw materials are purchased, the cost of these materials flows into a raw
materials inventory account
• Similarly, raw materials, direct labor, and applied overhead costs flow into a
work-in-process (WIP) account
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How Costs Flow through the Accounts in Process
Costing (2 of 4)
• When goods are completed, the cost of the completed goods is transferred
from WIP to the finished goods account
• As goods are sold, the cost of the finished goods is transferred to the cost of
goods sold account
• The journal entries generally parallel those described in a job-order costing
system
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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How Costs Flow through the Accounts in Process
Costing (3 of 4)
• Although job-order and process cost flows are generally similar, some
differences exist
• In process costing, each producing department has its own WIP account
• As goods are completed in one department, they are transferred to the next
department
• The costs attached to the goods transferred out are also transferred to the
next department
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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How Costs Flow through the Accounts in Process
Costing (4 of 4)
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Example 6.1: How to Account for Cost Flows
Without Work-in-Process Inventories (1 of 3)
Suppose that Healthblend decides to produce 2,000 bottles of multivitamins
with the following costs. (there is no beginning or ending work in process for
each department):
Mixing
Department
Encapsulating
Department
Bottling
Department
$1,700
$1,000
$800
Direct labor
50
60
300
Applied overhead
450
500
600
Direct materials
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Example 6.1: How to Account for Cost Flows
Without Work-in-Process Inventories (2 of 3)
Required:
1. Calculate the costs transferred out of each department.
2. Prepare journal entries that reflect these cost transfers.
Solution:
1.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Example 6.1: How to Account for Cost Flows
Without Work-in-Process Inventories (3 of 3)
2.
Mixing
Department
Work in Process
(Encapsulating)
Encapsulating
Department
2,200
Work in Process (Mixing)
Work in Process (Bottling)
2,200
3,760
Work in Process
(Encapsulating)
Finished Goods
Work in Process (Bottling)
Bottling
Department
3,760
5,460
5,460
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Accumulating Costs in the Production Report (1 of 2)
• In process costing, costs are accumulated by department for a period of time
• The production report is the document that summarizes the manufacturing
activity that takes place in a process department for a given period of time
• A production report contains information on costs transferred in from prior
departments as well as costs added in the department such as direct
materials, direct labor, and overhead
• Similar to the job-order cost sheet, it is a subsidiary to the WIP account
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Accumulating Costs in the Production Report (2 of 2)
• A production report traces the flow of units through a department, identifies
the costs charged to the department, shows the computation of unit costs,
and reveals the disposition of the department’s costs for the reporting period
• Unit information section: The unit information section has two major
subdivisions:
o units to account for
o units accounted for
• Cost information section: The cost information section has two major
subdivisions:
o costs to account for
o costs accounted for
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Service and Manufacturing Firms
• Any product or service that is basically homogeneous and repetitively
produced can take advantage of a process-costing approach
• Let’s look at three possibilities: services, manufacturing firms with a just-intime (JIT) orientation, and traditional manufacturing firms
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Service Firms and Process Costing
• It is possible for firms engaged in service production to have WIP inventories
o
For example, an accounting firm can have a batch of tax returns that are partially
completed
• Process costing for services is relatively simple
• The total costs for the period are divided by the number of services provided
to compute unit cost:
Unit Costs =
Total Costs for the Period
Number of Services Provided
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Manufacturing Firms Using JIT (1 of 2)
• Manufacturing firms may also operate without significant WIP inventories
• Firms that have adopted a JIT approach try to reduce WIP inventories to very
low levels
• JIT firms usually structure their manufacturing so that process costing can be
used to determine product costs
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Manufacturing Firms Using JIT (2 of 2)
• In many JIT firms, work cells are created that produce a product or
subassembly from start to finish
• Costs are collected by cell for a period of time, and output for the cell is
measured for the same period
• Unit costs are computed by dividing the costs of the period by output of the
period:
Unit Costs =
Total Costs for the Period
Total Output of the Period
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Traditional Manufacturing Firms
• Traditional manufacturing firms may have significant beginning and ending WIP
inventories
• This causes complications in process costing due to several factors such as the
presence of beginning and ending WIP inventories
• Also, different approaches to the treatment of beginning inventory cost
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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The Impact of Work-In-Process Inventories on
Process Costing (1 of 3)
• The computation of unit cost for the work performed during a period is a key
part of the production report
• This unit cost is needed both to compute the cost of goods transferred out of
a department and to value ending work-in-process (EWIP) inventory
• Calculating the unit cost is easy—just divide total cost by the number of units
produced
• However, the presence of WIP inventories causes two problems:
o
Defining the units produced can be difficult, given that some units produced
during a period are complete, while those in ending inventory are not. This is
handled through the concept of equivalent units of production
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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The Impact of Work-In-Process Inventories on
Process Costing (2 of 3)
• The computation of unit cost for the work performed during a period is a key
part of the production report
• This unit cost is needed both to compute the cost of goods transferred out of
a department and to value ending work-in-process (EWIP) inventory
• Calculating the unit cost is easy—just divide total cost by the number of units
produced
• However, the presence of WIP inventories causes two problems:
o
Defining the units produced can be difficult, given that some units produced
during a period are complete, while those in ending inventory are not. This is
handled through the concept of equivalent units of production
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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The Impact of Work-In-Process Inventories on
Process Costing (3 of 3)
• How should the costs and work of beginning work-in-process (BWIP)
inventory be treated? Should they be counted with the current period work
and costs or treated separately? Two methods have been developed to solve
this problem: the weighted average method and the FIFO method
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Equivalent Units of Production (1 of 3)
• By definition, EWIP is not complete
• A unit completed and transferred out during the period is not identical (or
equivalent) to one in EWIP inventory, and the cost attached to the two units
should not be the same
• In computing the unit cost, the output of the period must be defined, a
significant issue for process costing
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Equivalent Units of Production (2 of 3)
• A measure that satisfies this objective is called equivalent units of output
• Equivalent units of output are the complete units that could have been
produced given the total amount of manufacturing effort expended for the
period under consideration
• Determining equivalent units of output for transferred-out units is easy; a unit
would not be transferred out unless it was complete
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Equivalent Units of Production (3 of 3)
• Every transferred-out unit is an equivalent unit
• Units remaining in EWIP inventory, however, are not complete
• Someone in production must “eyeball” EWIP to estimate its degree of
completion
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Example 6.2: How to Calculate Equivalent Units of
Production with No Beginning Work in Process (1 of 2)
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Example 6.2: How to Calculate Equivalent Units of
Production with No Beginning Work in Process (2 of 2)
Assume that a department has the following data for October: 1,000 units
completed; 600 units, 25% complete
Required:
Calculate the equivalent units for October.
Solution:
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Ethical Decisions and Estimating Completeness
• Estimating the degree of completion is an act that requires judgment and
ethical behavior
• Overestimating the degree of completion will increase the equivalent units of
output and decrease per-unit costs
• This outcome would cause an increase in both income (cost of goods sold
will be less) and in assets (WIP cost will increase)
• Deliberately overestimating the degree of completion would clearly be in
violation of ethical professional practice
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Example 6.3: How to Measure Output and Assign
Costs: No Beginning Work in Process (1 of 2)
For the month of October, Department A incurred manufacturing costs of
$11,500; units transferred out, 1,000; units in EWIP, 600 (25% complete).
Required:
1. Calculate the unit cost.
2. Calculate the cost of goods transferred out and the cost of EWIP.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Example 6.3: How to Measure Output and Assign
Costs: No Beginning Work in Process (2 of 2)
Solution:
1.
Units completed
Units in EWIP × 25% (600 × 0.25)
Equivalent units
1,.000
150
1,150
Total Cost
Equivalent Units
$11,500
Cost per Equivalent Unit =
= $10
1,150 units
Cost per Equivalent Unit =
2. Cost of Goods Transferred Out = $10 per unit × 1,000 equivalent units =
$10,000 Cost of EWIP = $10 per unit × 150 equivalent units = S1,500
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Two Methods of Treating Beginning Work-in-Process
Inventory
• In computing a current-period unit cost for a department, two approaches
have evolved for dealing with the prior-period output and prior-period costs
found in BWIP:
The weighted average costing method
o The FIFO costing method
o
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The Weighted Average Costing Method
• The weighted average costing method combines beginning inventory
costs and work done with current-period costs and work to calculate this
period’s unit cost
• The costs and work carried over from the prior period are counted as if they
belong to the current period
• Beginning inventory work and costs are pooled with current work and costs,
and an average unit cost is computed and applied to both units transferred
out and units remaining in ending inventory
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The FIFO Costing Method (1 of 2)
• The FIFO costing method separates work and costs of the equivalent units
in beginning inventory from work and costs of the equivalent units produced
during the current period
• Only current work and costs are used to calculate this period’s unit cost
• It is assumed that units from beginning inventory are completed first and
transferred out
• The costs of these units include the costs of the work done in the prior period
as well as the current period costs necessary to complete the units
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The FIFO Costing Method (2 of 2)
• Units started in the current period are divided into two categories:
units started and completed and
o units started but not finished (EWIP)
o
• Units in both of these categories are valued using the current period’s cost
per equivalent unit
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An Important Point
• If product costs do not change from period to period, or if there is no BWIP
inventory, the FIFO and weighted average methods yield the same results
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Weighted Average Costing (1 of 2)
• The weighted average costing method treats beginning inventory costs and
the accompanying equivalent output as if they belong to the current period
• This is done for costs by adding the manufacturing costs in BWIP to the
manufacturing costs incurred during the current period
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Weighted Average Costing (2 of 2)
• The total cost is treated as if it were the current period’s total manufacturing
cost
• Similarly, beginning inventory output and current period output are merged in
the calculation of equivalent units
• Under the weighted average method, equivalent units of output are
computed by adding units completed to equivalent units in EWIP
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Example 6.4: How to Measure Output and Assign
Costs: Weighted Average Method (1 of 4)
Heathblend’s mixing department had the following data for the month of July:
Production:
Units in process, July 1, 75% complete 20,000 gallons
Units completed and transferred out 50,000 gallons
Units in process, July 31, 25% complete 10,000 gallons
Costs:
Work in process, July 1 $ 3,525
Costs added during July $10,125
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Example 6.4: How to Measure Output and Assign
Costs: Weighted Average Method (2 of 4)
Required:
1. Calculate an output measure for July.
2. Assign costs to units transferred out and EWIP using the weighted average
method.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
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Example 6.4: How to Measure Output and Assign
Costs: Weighted Average Method (3 of 4)
Solution:
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Example 6.4: How to Measure Output and Assign
Costs: Weighted Average Method (4 of 4)
2.
Cost
$ 13,650
=
units = $0.26 cost per equivalent unit
Equivalent Units
52,500
Transferred out ($0.26 × 50,000)
$13,000
EWIP ($0.26 × 2,500)
650
Total cost assigned
$13,650
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Five Steps in Preparing a Production Report
• The production report is subsidiary to the WIP account for a department
• The following five steps describe the general pattern of a process-costing
production report:
1. Physical flow analysis
2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation of inventories (goods transferred out and EWIP)
5. Cost reconciliation
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Step 1: Physical Flow Analysis (1 of 2)
• The Physical flow schedule provides an analysis of the physical flow of units
• The purpose of the schedule is to trace the physical units of production
• Physical units are not equivalent units
o
They are units that may be in any stage of completion
o
The physical flow schedule traces the units in process regardless of their stage of
completion
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Step 1: Physical Flow Analysis (2 of 2)
• It has two parts:
units to account for and
o units accounted for
o
• Two calculations are often very helpful to construct a physical flow
schedule:
Units Started and Completed = Total Units Completed – Units in BWIP
Units Started = Units Started and Completed + Units in EWIP
• “Total units to account for” must equal the “Total units accounted for”
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Example 6.5: How to Prepare a Physical Flow
Schedule (1 of 3)
Heathblend’s mixing department had the following data for the month of July:
Production:
Units in process, July 1, 75% complete 20,000 gallons
Units completed and transferred out 50,000 gallons
Units in process, July 31, 25% complete 10,000 gallons
Required:
Prepare a physical flow schedule.
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Example 6.5: How to Prepare a Physical Flow
Schedule (2 of 3)
Solution:
Units Started and Completed = Units Completed – Units in BWIP = 50,000 –
20,000 = 30,000
Units Started = Units Started and Completed + Units in EWIP = 30,000 + 10,000
= 40,000
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Example 6.5: How to Prepare a Physical Flow
Schedule (3 of 3)
Physical flow schedule:
Units to account for:
Units in BWTP (75% complete)
20,000
Units started during the period
40,000
Total units to account for
60,000
Units accounted for:
Units completed and transferred out:
Started and completed
30,000
From beginning work in process
20,000 50,000
Units in EWIP (25%complctc)
10,000
Total units accounted for
60.000
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Step 2: Calculation of Equivalent Units (1 of 3)
• The weighted average method treats beginning inventory units as if they
were started and completed during the current period
• Because of this, the equivalent unit schedule shown in Step 2 shows only
the total units completed
• There is no need to show whether the units completed are from the month in
question (July) or from BWIP as was done by Example 6-4
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Step 3: Computation of Unit Cost (1 of 2)
• The weighted average method rolls back and includes the manufacturing
costs associated with the units in BWIP and counts these costs as if they
belong to month in question (July)
Total Manufacturing Costs for July = BWIP, July + Costs Added in July
Unit Cost =
Total Costs
Equivalent Units for July
• Manufacturing costs are carried over from the prior period and treated as if
they were current period costs
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Step 4: Valuation of Inventories
• Example 6.4 also showed how to value goods transferred out and EWIP
• Units completed (from Step 1), equivalent units in EWIP (from Step 2), and
the unit cost (from Step 3) are all needed to value both goods transferred out
and EWIP
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Step 5: Cost Reconciliation (1 of 2)
• Finally, the cost reconciliation checks to see if the costs to account for are
exactly assigned to inventories
• Remember, the total costs assigned to goods transferred out and to EWIP
must agree with the total costs in BWIP and the manufacturing costs incurred
during the current period
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Example 6.6: How to Prepare a Production Report:
Weighted Average Method (1 of 2)
Refer to Steps 1 to 5 of the Healthblend Company example.
Required:
Prepare a production report.
Solution:
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Example 6.6: How to Prepare a Production Report:
Weighted Average Method (2 of 2)
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Here’s How It’s Used: MANUFACTURING FIRM (1 of 5)
Estimating the Degree of Completion
You are the cost accounting manager for a plant that produces riding lawn
mowers. The plant manager receives a bonus at the end of each quarter if the
plant’s income meets or exceeds the quarter’s budgeted income. The plant had
no work in process at the beginning of the quarter; however, it had 2,500
partially completed units at the end of the quarter. During the quarter, 4,000
units were completed and sold. Manufacturing costs for the quarter totaled
$2,750,000. The production line supervisors estimated that the units in process
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Here’s How It’s Used: MANUFACTURING FIRM (2 of 5)
at the end of the quarter were 40% finished. Using this initial estimate, the
income for the quarter was $190,000 less than the quarter’s budgeted profit.
After seeing this tentative result, the plant manager approaches you and
argues that the degree of the completion is underestimated and that it should
be 60% and not 40%. He explains that he personally examined the partially
completed work and that 60% is his best guess. He would prefer that this new
estimate be used.
What effect does the estimated degree of completion have on the
quarter’s income? Should you use the new estimate?
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Here’s How It’s Used: MANUFACTURING FIRM (3 of 5)
Measure
Equation
40% Degree of
Completion
60% Degree of
Completion
Total equivalent
Equivalent Units = Units
Completed +
4,000 + (0.40 × 2,500) =
4,000 + (0.60 × 2,500) =
units
Units in EWIP × Fraction
Complete)
5,000 equivalent units
5,500 equivalent units
Unit cost
Unit Cost = Total
Cost
/
Total
Cost
Unit
Cost
=
Equivalent Units
Equivalent Units
2750000
/ 5000 = 550 dollars
$2,750,000
= $550
5,000
2750000
/ 5500 = 500
$2,750,000
Cost of Goods Sold = Units
Sold × Unit Cost
4,000 × $550 = $2,200,000
4,000 × $500 = $2,000,000
Cost of goods sold
5,500
= $500
Compared to the 40% estimate, the 60% estimate increases income by
$200,000.
Whether or not, as the cost accounting manager, you would feel comfortable
using the new estimate depends on several factors. First, is the 60% estimate
better than the 40% estimate?
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Here’s How It’s Used: MANUFACTURING FIRM (4 of 5)
(Suppose the line supervisors insist that their estimate is correct.) Second,
does the plant manager regularly participate in estimating degree of
completion? If not, what are the motives for doing so this time? Answers to
these questions are important. The estimate by the plant manager allows
income to increase by a sufficient amount to qualify him for a bonus. If
evidence favors the 40% estimate and the plant manager’s motive is the
bonus, then an ethical dilemma exists. In this case, you would need to follow
the organization’s established policies on the resolution of such conflicts.
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Here’s How It’s Used: MANUFACTURING FIRM (5 of 5)
Estimating the degree of completion is a vital and important part of
process costing and needs to be done with care and honesty.
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Evaluation of the Weighted Average Method (1 of 2)
Advantages
• Unit cost computations are simplified
• Units in BWIP are treated as those of the current period and all equivalent
units belong to the same category to calculate unit costs
Disadvantages
• Inaccuracies in computing unit costs for current-period output and for units in
BWIP
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Evaluation of the Weighted Average Method (2 of 2)
• If the unit cost in a process is stable from one period to the next, the
weighted average method is accurate
• If the price of manufacturing inputs increases from one period to the next, the
unit cost of current output is understated, and the unit cost of BWIP units is
overstated
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Multiple Inputs and Multiple Departments
• Accounting for production under process costing gets complicated because
of
nonuniform application of manufacturing inputs and
o presence of multiple processing departments
o
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Nonuniform Application of Manufacturing Inputs (1 of 3)
• Assuming uniform application of conversion costs (direct labor and
overhead) is not unreasonable
• Direct labor input is usually needed throughout the process, and overhead is
normally assigned on the basis of direct labor hours
• Direct materials are not as likely to be applied uniformly
• In many instances, materials are added either at the beginning or the end of
the process
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Nonuniform Application of Manufacturing Inputs (2 of 3)
• Different percentage completion figures for manufacturing inputs pose a
problem for the calculation of equivalent units, unit cost, and valuation of EWIP
(steps 2-4)
• If materials are added at the beginning or end of a process, then there will be
different completion percentages for materials and conversion costs.
• Conversion costs are added uniformly and materials are added at discrete
points in the production process
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Nonuniform Application of Manufacturing Inputs (3 of 3)
• Assuming conversion is less than 100% at a given point in time, then materials
added at the beginning are 100% complete, and materials added at the end are
0% complete
• Equivalent units are calculated for each type of input, and a unit cost is then
calculated for each input
• Calculating the unit cost for each category also requires that costs be accounted
for by input category
• The unit cost is the sum of the input category unit costs
• Valuation of goods transferred out uses the unit cost, whereas valuation of EWIP
uses input category unit costs
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Example 6.7: How to Calculate Equivalent Units, Unit Costs,
and Valuing Inventories with Nonuniform Inputs (1 of 5)
The mixing department of Healthblend has the following data for September:
Production:
Units in process, September 1.50% complete*
Units completed and transferred out
Units in process, September 30.40% complete*
Costs:
WIP, September 1:
Materials
Conversion costs
Total
Current costs:
Materials
Conversion costs
Total
10,000
60,000
20,000
$ 1,600
200
$ 1,800
$12,000
3,200
$15,200
*With respect to conversion costs, all materials are added at the beginning of the process.
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Example 6.7: How to Calculate Equivalent Units, Unit Costs,
and Valuing Inventories with Nonuniform Inputs (2 of 5)
Required:
Calculate Steps 2 through 4 using the weighted average method.
Solution:
1. Step 2: Calculation of equivalent units, nonuniform application:
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Example 6.7: How to Calculate Equivalent Units, Unit Costs,
and Valuing Inventories with Nonuniform Inputs (3 of 5)
Materials
Units completed
Conversion
60,000
60,000
20,000 × 100%
20,000
—
20,000 × 40%
—
8,000
80,000
68,000
Add: Units In Ending work in Process × Fraction Complete:
Equivalent units of output
2. Step 3: Calculation of unit costs:
Unit Materials Cost =
( $1,600 + $12,00 ) = $0.17
80,000
$200 + $3,200 )
(
Unit Conversion Cost =
= $0.05
68,000
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Example 6.7: How to Calculate Equivalent Units, Unit Costs,
and Valuing Inventories with Nonuniform Inputs (4 of 5)
Total Unit Cost = Unit Materials Cost + Unit Conversion Cost
= $0.17 + $0.05
= $0.22 per completed unit
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Example 6.7: How to Calculate Equivalent Units, Unit Costs,
and Valuing Inventories with Nonuniform Inputs (5 of 5)
3. Step 4: Valuation of EWIP and goods transferred out: The cost of EWIP is
as follows:
Materials: $0.17 × 20,000
$3,400
Conversion: $0.05 × 8,000
400
Total cost
$3,800
Valuation of Goods Transferred Out:
Cost of Goods Transferred Out = $0.22 × 60,000 = $13,200
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Production Report: Weighted Average Method (1 of 2)
Applying manufacturing inputs at different stages of a process poses no
serious problems, though it requires more effort
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Production Report: Weighted Average Method (2 of 2)
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Transferred-In Goods (1 of 3)
• In process manufacturing, some departments receive partially completed
goods from prior departments
• In dealing with transferred-in goods, three important points should be
remembered
o
The cost of this material is the cost of the goods transferred out as computed in
the prior department
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Transferred-In Goods (2 of 3)
• The units started in the subsequent department correspond to the units
transferred out from the prior department (assuming that there is a one-toone relationship between the output measures of both departments)
• Goods transferred in from a prior department represent a material added at
the beginning of the process for the department receiving the goods
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Transferred-In Goods (3 of 3)
• Transferred-in material is treated as a separate material category for
calculating equivalent units
• Thus, the department receiving transferred-in goods would have three input
categories:
one for the transferred-in materials
o one for materials added
o one for conversion costs
o
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Example 6.8: How to Calculate the Physical Flow
Schedule, Equivalent Units, and Unit Costs with
Transferred-In Goods (1 of 5)
For September, Healthblend’s encapsulating department had 15,000 units in
beginning inventory (with transferred-in costs of $3,000) and completed 70,000
units during the month. Further, the mixing department completed and
transferred out 60,000 units at a cost of $13,200 in September.
Required:
1. Prepare a physical flow schedule with transferred-in goods.
2. Calculate equivalent units for the transferred-in category.
3. Calculate unit cost for the transferred-in category.
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Example 6.8: How to Calculate the Physical Flow
Schedule, Equivalent Units, and Unit Costs with
Transferred-In Goods (2 of 5)
Solution:
1. In constructing a physical flow schedule for the encapsulating department,
its dependence on the mixing department must be considered:
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Example 6.8: How to Calculate the Physical Flow
Schedule, Equivalent Units, and Unit Costs with
Transferred-In Goods (3 of 5)
Units to account for:
Units in BWIP
15,000
Units transferred in during September
60,000
Total units to account tor
75,000
Units accounted for:
Units completed and transferred out:
Started and completed
55,000
From BWIP
15,000
Units in EWIP
Total units accounted for
5,000
75,000
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Example 6.8: How to Calculate the Physical Flow
Schedule, Equivalent Units, and Unit Costs with
Transferred-In Goods (4 of 5)
2. Equivalent units for the transferred-in category only:
Transferred in:
Units completed
70,000
Add: Units in EWIP× Fraction Complete (5,000×100%)*
5,000
Equivalent units of output
75,000
*Remember that the EWIP is 100% complete with respect to transferred-in
costs, not to all costs of the encapsulating department.
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Example 6.8: How to Calculate the Physical Flow
Schedule, Equivalent Units, and Unit Costs with
Transferred-In Goods (5 of 5)
3. To find the unit cost for the transferred-in category, we add the cost of the
units transferred in from mixing in September to the transferred-in costs in B
WIP and divide by transferred-in equivalent units:
$13,200 + $3,000 )
(
Unit Cost ( Transferred − In Category ) =
units
75,000
$16,200
=
units = $0.216
75,000
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Appendix 6A: Production Report- First-In, First-Out
Costing
• Under the FIFO costing method, the equivalent units and manufacturing
costs in BWIP are excluded from the current period unit cost calculation
• This method recognizes that the work and costs carried over from the prior
period legitimately belong to that period
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Evaluation of the Weighted Average Method
FIFO
• More Accurate: If changes occur in the prices of the manufacturing inputs
from one period to the next
• Better cost control
• Better pricing decisions
Weighted Average
• Most firms use this method due to simplicity
• FIFO has little advantage over weighted average, if unit costs are calculated
for short periods
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First-In, First-Out Method (1 of 2)
• Since FIFO excludes prior-period work and costs, it is necessary to create
two categories of completed units:
o BWIP units (FIFO assumes that units in BWIP are completed first, before any
new units are started)
o Units started and completed during the current period
• These two categories of completed units are needed in the FIFO method so
that each category can be costed correctly
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First-In, First-Out Method (2 of 2)
• For the units started and completed, the unit cost is obtained by dividing total
current manufacturing costs by the current period equivalent output
• For the BWIP units, the total associated manufacturing costs are the sum of
the prior period costs plus the costs incurred in the current period to finish
the units
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Example 6.9: How to Calculate Output and Cost
Assignments: First-In, First-Out Method (1 of 5)
In July, Healthblend had the following results:
Production:
Units in process, July 1, 75% complete 20,000 gallons
Units completed and transferred out 50,000 gallons
Units in process, July 31, 25% complete 10,000 gallons
Costs:
Work in process, July 1 $ 3,525
Costs added during July $ 10,125
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Example 6.9: How to Calculate Output and Cost
Assignments: First-In, First-Out Method (2 of 5)
Required:
1. Calculate the output measure for July.
2. Assign costs to units transferred out and EWIP using the FIFO method.
Solution:
1.
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Example 6.9: How to Calculate Output and Cost
Assignments: First-In, First-Out Method (3 of 5)
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Example 6.9: How to Calculate Output and Cost
Assignments: First-In, First-Out Method (4 of 5)
2. Costs for July:
Cost per unit =
$10,125
units = $ 0.27
37,500
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Example 6.9: How to Calculate Output and Cost
Assignments: First-In, First-Out Method (5 of 5)
Transferred out:
Cost from BWIP (prior period carryover)
$3.525
To complete BWIP ($0.27 × 5.000)
1350
Started and completed ($0.27 × 30.000)
8.100
Total
EWIP ($0.27 × 2.500)
Total cost assigned
$12,975
6-5
$13,650
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Step 1: Physical Flow Schedule
The purpose of Step 1 is to trace the physical units of production. As with the
weighted average method, in the FIFO method, a physical flow schedule is
prepared. This schedule is identical for both methods
Units to account for:
Units in beginning work in process (75% complete)
20,000
Units started during the period
40,000
Total units to account for
60,000
Units accounted for:
Units completed:
Started and completed
30,000
From beginning work in process
20,000 50,000
Units in ending work in process (25% complete)
Total units accounted for
10,000
60,000
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Step 2: Calculation of Equivalent Units (2 of 3)
• From the equivalent unit computation, one difference between weighted
average and FIFO becomes immediately apparent
• Under FIFO, the equivalent units in BWIP (work done in the prior period) are
not counted as part of the total equivalent work
• Only the equivalent work to be completed this period is counted
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Step 2: Calculation of Equivalent Units (3 of 3)
• In this example the percentage of work done in the prior period is 75%, the
percentage left to be completed this period is 25%, or an equivalent of 5,000
additional units of work
• The effect of excluding prior period effort is to produce the current period
equivalent output
• Under FIFO, equivalent units are 37,500 units – all current period output
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Step 3: Computation of Unit Cost (2 of 2)
• The additional manufacturing costs incurred in the current period are $10,125
• Thus, the current period unit manufacturing cost is $10,125 , or $0.27
37,500
• Notice that the costs of beginning inventory are excluded from this
calculation
• Only current period manufacturing costs are used
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Step 4: Valuation of Inventories (1 of 2)
• Example 6.9 shows FIFO values for EWIP and goods transferred out
• Since all equivalent units in ending work in process are current period units,
the cost of EWIP is simply $0.27 × 2,500, or $675, the same value that the
weighted average method would produce
• When it comes to valuing goods transferred out, a significant difference
emerges between the weighted average method and FIFO
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Step 4: Valuation of Inventories (2 of 2)
• Under weighted average, the cost of goods transferred out is simply the unit
cost times the units completed
• Under FIFO there are two categories of completed units:
Units started and completed
o Units from beginning inventory
o
• The cost of each category must be calculated separately and then summed
to obtain the total cost of goods transferred out
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Step 5: Cost Reconciliation (2 of 2)
• In Step 5, the costs assigned to production are reconciled to the total
manufacturing costs to account for
• With the completion of Step 5, the production report can be prepared
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
The Production Report
• A production report has two sections:
a unit information section
o a cost information section
o
• The unit information section presents the physical flow schedule and the
equivalent units schedule.
• The cost information section has two major subdivisions:
costs to account for
o costs accounted for
o
• The first cost subdivision includes the calculation of the unit cost, and the second
subdivision includes the valuation of goods transferred out and EWIP
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Example 6.10: How to Prepare a Production
Report: First-In, First-Out Method (1 of 2)
Refer to the five steps for the Healthblend Company.
Required:
Prepare a production report for July 2017 (FIFO method).
Solution:
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Example 6.10: How to Prepare a Production
Report: First-In, First-Out Method (2 of 2)
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part

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