䊏 Example 3 - Process costing with some beginning and some ending production inventories in process SG-40. Unit and assign total costs to units completed and units ending work in process for Pacific Electronics' assembly department for February 2012.
Assign Total Costs to Units Completed and to Units in Ending Work in Process
The equivalent units of work done on the 175 physical units started and completed are equal to 175 units times 100% for both direct materials and conversion costs because all work on these units is done in the current period. The equivalent units of work done on 100 units of ending work in process equals 100 physical units times 100% for direct materials (because all direct materials for these units are added in the current period) and 50% for conversion costs (because 50% of conversion costs work on these units is carried out in the current period).
Compute Cost per Equivalent Unit. Exhibit 17-7 shows the Step 4 computation of cost per equivalent unit for work done in the current period only for direct materials
The FIFO method assumes that the earliest equivalent units of work in progress are completed first.䊏 The first physical units completed and transferred during the period are 225 units from the beginning work in progress inventory. The FIFO method begins by allocating the cost of the starting work-in-process inventory of $26,100 to the first completed and transferred units.
Under FIFO, ending work-in-process inventory comes from units that have been started but not fully completed during the current period. Total cost of the 100 partially assembled physical units in ending work in process is as follows: Notice how under the FIFO method, the layers of beginning work in process and costs added in the current period are kept separate.
A reduction in current period cost per equivalent unit results in lower costs of completed and transferred units and higher ending work in progress under the weighted average method compared to FIFO.
Learning Objective 5
To examine the weighted-average process costing method with transferred costs, we use the five-step procedure described earlier (p. 610) to allocate costs from the testing department to units completed and transferred and to units to end. work in process. All units, whether completed and transferred during the period or in ending work in process, are always fully completed with respect to transferred costs. Beginning work in process and work done in the current period are combined for purposes of calculating costs per equivalent unit for transferred costs, direct materials costs, and conversion costs.
To examine the FIFO process costing method with transferred costs, we again use the five-step procedure. Cost per equivalent unit for the current period in Step 4 is calculated only based on costs transferred and work done in the current period. Again, except considering transferred costs, the calculations mirror those under the FIFO method for the assembly department shown in Exhibit 17-7.
How are the weighted average and FIFO process costing methods applied to transferred costs.
Learning Objective 6
Accordingly, when units are received in the second department, their measurements must be converted into liters. Product cost systems do not always fall neatly into the categories of job costs or process costs. Manufacturers of a relatively wide variety of closely related standardized products (e.g., televisions, dishwashers, and washing machines) tend to use hybrid cost systems.
An overhead costing system is a hybrid costing system applied to lots of similar, but not identical, products. An operating costing system uses work orders that specify the direct materials and step-by-step operations required. Our examples assume only two cost categories—direct materials and conversion costs—but operating costs can have more than two cost categories.
Managers find operation costing useful in cost management because operation costing focuses on control of physical processes, or operations, of a given production system.
Concepts in Action Hybrid Costing for Customized Shoes at Adidas
As with process costing, it is assumed that all product units in each work order consume identical amounts of conversion costs from a given operation. Baltimore's operating cost system uses a budgeted rate to calculate the conversion costs of each operation. The budgeted conversion costs of Operation 1 include labor, energy, repairs, supplies, depreciation, and other overhead costs of this operation.
If some units are not completed (that is, all units in Operation 1 have not received the same amounts of conversion costs), the conversion cost rate is calculated by dividing the budgeted conversion costs by the equivalent units of conversion costs, as in the determination of the cost of the process. As goods are produced, conversion costs are allocated to the job orders processed in Operation 1 by multiplying the conversion cost of $11.60 per unit by the number of units processed. Costs are added throughout the fiscal year to the conversion cost control account and the conversion cost allocation account.
Any over- or under-allocation of conversion costs is discarded in the same way as over- or under-allocation of manufacturing overhead in a labor cost system (see pp. 117-122).
Problem for Self-Study
Allied Chemicals operates a thermosetting process as the second of three processes at its plastics plant.
Solution
The FIFO method uses only equivalent units produced in the current period to calculate costs per unit. equivalent unit.
Decision Points
The weighted average method calculates unit costs by dividing total costs in the Work in Process account by total equivalent units completed to date and assigns this average cost to completed units and to units in ending work in process stock. The first-in, first-out (FIFO) method calculates unit costs based on costs incurred during the current period and equivalent units of work performed in the current period. Operating income may differ materially between the two methods when (1) direct material or conversion costs per equivalent unit vary significantly from period to period and (2) physical inventory levels of work in process are large relative to the total number of units transferred from the process.
The weighted-average method calculates transferred costs per unit by dividing total transferred costs to date by total equivalent transferred units completed to date, and assigns this average cost to units completed and to units in ending work-in-process stock. The FIFO method calculates transferred costs per unit based on costs transferred during the current period and equivalent units of transferred costs of work done in the current period. The FIFO method allocates transferred costs in beginning work in process to units completed and costs transferred during the current period first to complete beginning inventory, next to beginning and completing new units, and finally to units in ending work -in- process inventory.
Operation costing is a hybrid costing system that blends characteristics of both job costing and process costing systems.
Appendix
What is an activity costing system and when is a better approach to product costing. A better approach to product costing is when production systems have some characteristics of make-to-order production and other characteristics of mass-production production.
Standard-Costing Method of Process Costing
These steps are identical to those described for the FIFO method in Figure 17-6 because, like FIFO, the standard costing method also assumes that the earliest equivalent units at the start of work in progress are completed first. In step 3, the total costs to be taken into account (i.e. the total depreciation for Work in Process - Assembly) differ from the total depreciation for Work in Process - Assembly according to the actual cost-based weighted average. Equivalent units of work done in the current period 275 315. c Degree of completion in this department: direct materials, 100%; conversion costs, 50%. b400 physical units completed and transferred minus 225 physical units completed and transferred from the beginning work-in-process inventory. a Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
This is because, as with all standard costing systems, debits to the Work in Progress account are made at standard costs, rather than actual costs. In Figure 17.13, Step 5, total costs are allocated to units completed and transferred and to units in the closing work-in-process inventory, as in the FIFO method. These costs are allocated (1) first to complete the beginning work-in-process inventory, (2) then to start and complete new units, and (3) finally to start new units that are in the ending work-in-process inventory.
Exhibit 17-13 Steps 3, 4, and 5: Summarize total costs to budget, calculate costs per equivalent unit, and allocate total costs to units completed and to units in ending work in process using standard costing method of process costs for assembly Department of Pacific Electronics for March 2012.
Terms to Learn
Assignment Material
Sum total costs to calculate and assign total costs for units completed (and transferred in) and units in work in process. Assign total costs to units completed (and transferred) and to units in work in process. Assign total costs to units completed and transferred out and to units in work in process.
Required Summarize the assembly department's total costs for April 2012 and allocate the total costs to units completed (and transferred) and to units in ending work in progress. Summarize the total binding department costs for April 2012 and allocate these costs to units completed (and transferred) and to units for ending work in progress. Use the weighted average method to summarize the total costs of the drying and packaging department for week 37 and allocate the total costs to units completed (and transferred) and to units for ending work in progress.
Summarize the total costs of the Drying and Packing Department for week 37 and allocate the total costs to units completed and transferred out and units ending work in progress using the FIFO method.
