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Process Costing

Process Costing. Product Costing when Units of Output are Similar. Process Costing. The Total Manufacturing Cost must be divided between: Ending WIP Inventory The Cost of Goods Transferred To FGI. Allocation of Production Costs. Beginning WIP Inventory $10,000

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Process Costing

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  1. Process Costing Product Costing when Units of Output are Similar

  2. Process Costing • The Total Manufacturing Cost must be divided between: • Ending WIP Inventory • The Cost of Goods Transferred To FGI

  3. Allocation of Production Costs • Beginning WIP Inventory $10,000 • Current Years Costs 25,000 • Total Manufacturing Cost 35,000 • Cost of Goods Trans. Out ? • Ending WIP Inventory ? • To make this allocation, we must know the cost per unit of our output.

  4. Process Costing • Converting the Cost of Inputs into the Cost of Outputs. • Difficulty results from partially completed units in beginning and ending WIP Inventory. • Solution is the concept of “Equivalent Units”

  5. Equivalent Units • The number of complete units that would represent the same cost as the partially complete physical units. • EU = Physical Units * Percentage Complete • Suppose we have 50 units that are 20% complete • EU = 50 * .20 = 10

  6. Cost Per Unit of Output • Dollars of Production Cost divided by Equivalent Units. • Dollars should correspond to the Equivalent Units. • Beginning Dollars  Beginning Equivalent Units • Current Dollars  Current Equivalent Units • Total Dollars  Total Equivalent Units

  7. Beginning Inventory • The numerator of the calculation is the dollars in beginning WIP inventory • The denominator of the calculation is the equivalent units in beginning inventory • Beginning Cost per Unit = Beg WIP/ Beg Equivalent Units

  8. Current Year Cost per Unit • The numerator of the calculation is the dollars spent during the current year. • The denominator of the calculation is the equivalent units of work done during the current year. • Current Cost per Unit = Current Cost / Current Equivalent Units

  9. Weighted Average Cost per Unit • The numerator is the sum of the beginning WIP inventory and the dollars spent during the current year. • The denominator is the sum of the beginning equivalent units and the equivalent units for the current year. • WA Cost per Unit = Total Cost / Total Equivalent Units

  10. Use of Cost per Unit Measures • For Weighted Average, use the average cost per unit for all calculations. • For FIFO, use the Beginning Cost per unit for the first units transferred out and the current cost for all other calculations.

  11. Steps to Solve Process Costing Problems • Organize information on Dollars • Organize information of Physical Units • Calculate Equivalent Units • Calculate Cost per Unit Measures • Allocate Total Production Cost between the Cost of Goods Transferred Out and Ending WIP Inventory

  12. Organize Information about Dollars • Beginning WIP Dollars • Current Expenditures • Total • Costs may need to be broken into components of Raw Materials and Conversion costs.

  13. Organize Information of Physical Units • Units in Beginning WIP Inventory • Units Started & Completed • Units Completed • Units in Ending WIP Inventory • Percentage of Completion is also necessary for beginning and ending WIP inventory.

  14. Calculate Equivalent Units • Beginning (Beginning Physical Units * Percentage Complete) • Current (Work Completed in the current year) • Total (Beginning & Current) • Beginning and Total are easy, current is more complex

  15. Current Equivalent Units • 1. Complete Units in Beginning Inventory • Physical units in beginning WIP * percentage remaining • 2. Units Started and Completed this Year • Total units transferred out - physical units in beginning WIP • 3. Begin Work on Units in Ending Inventory • Physical units in ending WIP * percentage complete • Current Equivalent Units is the sum of these three pieces

  16. Calculate Cost per Unit • BCU = Beg WIP/ Beg EU • CCU = Current Cost / Current EU • WACU = Total Cost / Total EU

  17. Allocate Production Costs • Weighted Average • FIFO

  18. Weighted Average • Cost of Goods Transferred Out • # of Units transferred out * WACU • Cost of Ending WIP Inventory • EU in ending WIP * WACU

  19. FIFO • Cost of Goods Transferred Out (2 parts) • 1) EU in Beg WIP * BCU (same as Beg WIP) • 2) (Units Transferred out - EU in Beg WIP) CCU • Ending WIP Inventory • EU in End WIP * CCU

  20. Example • Beginning WIP had 20 units that are 75% complete at a cost of $750. Ending WIP had 40 units that are 75% complete. During the year, 80 units were completed and transferred out. Current production costs were $5,700.

  21. Organize Information about Dollars • Beginning WIP Dollars 750 • Current Expenditures 5,700 • Total 6,450

  22. Organize Information about Dollars • Beginning WIP Dollars 750 • Current Expenditures 5,700 • Total 6,450

  23. Organize Information of Physical Units • Units in Beginning WIP 20 75% complete • Units Started & Comp 60 (80 - 20) • Units Completed 80 • Units in Ending WIP 40 75% complete • Total Units Started 100

  24. Current Equivalent Units • 1. Complete Units in Beginning Inventory • Physical units in beginning WIP * percentage remaining • 20 * .25 = 5 • 2. Units Started and Completed this Year • Total units transferred out - physical units in beginning WIP • 60 • 3. Begin Work on Units in Ending Inventory • Physical units in ending WIP * percentage complete • 40 * .75 = 30 • CEU = 5 + 60 + 30 = 95

  25. Beginning and Total Equivalent Units • Beginning (Beginning Physical Units * Percentage Complete) • 20 * .75 =15 • Total (Beginning + Current) • 15 + 95 = 110

  26. Calculate Cost per Unit • BCU = Beg WIP/ Beg EU • = 750 / 15 = 50 • CCU = Current Cost / Current EU • = 5,700 / 95 = 60 • WACU = Total Cost / Total EU • = 6,450 / 110 = 58.636

  27. Weighted Average • Cost of Goods Transferred Out • # of Units transferred out * WACU • 80 * 58.636 = 4,691 • Cost of Ending WIP Inventory • EU in ending WIP * WACU • 30 * 58.636 = 1,759

  28. FIFO • Cost of Goods Transferred Out (2 parts) • 1) EU in Beg WIP * BCU (same as Beg WIP) • 15 * 50 = 750 • 2) (Units Transferred out - EU in Beg WIP) * CCU • 65 * 60 = 3,900 • 4,650 = 750 + 3,900 • Ending WIP Inventory • EU in End WIP * CCU • 30 * 60 = 1,800

  29. Example 2 • Beginning WIP had 8 units that are 40% complete at a cost of $910,400. Ending WIP had 12 units that are 30% complete. During the year, 46 units were completed and transferred out. Current production costs were $13,920,000.

  30. Steps to Solve Process Costing Problems • Organize information on Dollars • Organize information of Physical Units • Calculate Equivalent Units • Calculate Cost per Unit Measures • Allocate Total Production Cost between the Cost of Goods Transferred Out and Ending WIP Inventory

  31. Organize Information about Dollars • Beginning WIP Dollars 910,400 • Current Expenditures 13,920,000 • Total 14,830,400

  32. Organize Information of Physical Units • Units in Beginning WIP 8 40% complete • Units Started & Comp 38 (46 - 8) • Units Completed 46 • Units in Ending WIP 12 30% complete • Total Units Started 50

  33. Current Equivalent Units • 1. Complete Units in Beginning Inventory • Physical units in beginning WIP * percentage remaining • 8 * .60 = 4.8 • 2. Units Started and Completed this Year • Total units transferred out - physical units in beginning WIP • 38 • 3. Begin Work on Units in Ending Inventory • Physical units in ending WIP * percentage complete • 12 * .30 = 3.6 • CEU = 4.8 + 38 + 3.6 = 46.4

  34. Beginning and Total Equivalent Units • Beginning (Beginning Physical Units * Percentage Complete) • 8 * .40 =3.2 • Total (Beginning + Current) • 3.2 + 46.4 = 49.6

  35. Calculate Cost per Unit • BCU = Beg WIP/ Beg EU • = 910,400 / 3.2 = 284,500 • CCU = Current Cost / Current EU • = 13,920,000 / 46.4 = 300,000 • WACU = Total Cost / Total EU • = 14,830,400 / 49.6 = 299,000

  36. Weighted Average • Cost of Goods Transferred Out • # of Units transferred out * WACU • 46 * 299,000 = 13,754,000 • Cost of Ending WIP Inventory • EU in ending WIP * WACU • 3.6* 299,000 = 1,076,400

  37. FIFO • Cost of Goods Transferred Out (2 parts) • 1) EU in Beg WIP * BCU (same as Beg WIP) • 3.2 * 284,500 = 910,400 • 2) (Units Transferred out - EU in Beg WIP) * CCU • 42.8 * 300,000 = 12,840,000 • 13,750,400 = 910,400 + 12,840,000 • Ending WIP Inventory • EU in End WIP * CCU • 3.6 *300,000 = 1,080,000

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