University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

107

Pages:

27
Author:

Jovanny Schaefer

Chapter 6: Process Costing 4 Multiple Inputs and Multiple Departments ►Accounting for production under process costing gets complicated because of ►Nonuniform application of manufacturing inputs and ►Presence of multiple processing departments. 4 Nonuniform Application of Manufacturing Inputs ►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, on the other hand, are not as likely to be applied uniformly. ►In many instances, materials are added either at the beginning or the end of the process. 4 Nonuniform Application of Manufacturing Inputs (continued) ► 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). ► In such cases, equivalent unit calculations are done for each category of manufacturing input. ► Thus, equivalent units are calculated for each category of materials and for conversion cost. ► Next, a unit cost for each category is computed. The individual category costs are then used in Step 4 to cost out EWIP. ► The total unit cost is used to calculate the cost of goods transferred out in the same way as when there was only one input category. Cornerstone 6-7 4 Calculating Equivalent Units, Unit Costs, and Valuing Inventories with Nonuniform Inputs 4 Cornerstone 6-7 Calculating Equivalent Units, Unit Costs, and Valuing Inventories with Nonuniform Inputs (continued) 4 Production Report: Weighted Average Method Applying manufacturing inputs at different stages of a process poses no serious problems, though it requires more effort. 4 Multiple Departments ►In process manufacturing, some departments receive partially completed goods from prior departments. ►The usual approach is to treat transferred-in goods as a separate material category when calculating equivalent units. ►Thus, the department receiving transferred-in goods would have three input categories: 1. one for the transferred-in materials 2. one for materials added 3. one for conversion costs 4 Transferred-In Goods ►In dealing with transferred-in goods, two important points should be remembered. 1. The cost of this material is the cost of the goods transferred out as computed in the prior department. 2. 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). 4 Cornerstone 6-8 Calculating the Physical Flow Schedule, Equivalent Units, and Unit Costs with Transferred-In Goods 4 Cornerstone 6-8 Calculating the Physical Flow Schedule, Equivalent Units, and Unit Costs with Transferred-In Goods (continued) 4 Cornerstone 6-8 Calculating the Physical Flow Schedule, Equivalent Units, and Unit Costs with Transferred-In Goods 5 Appendix 6A: Production ReportFirst-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. 5 Differences between the First-In, First-Out and Weighted Average Methods FIFO Weighted Average ► More Accurate: If changes occur in the prices of the manufacturing inputs from one period to the next. ► Better cost control ► Better pricing decisions ►Most firms use this method due to simplicity. ►FIFO has little advantage over weighted average, if unit costs are calculated for short periods. 5 First-In, First-Out Method ► Since FIFO excludes prior-period work and costs, it is necessary to create two categories of completed units: 1. BWIP units (FIFO assumes that units in BWIP are completed first, before any new units are started) 2. 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. ► For the units started and completed, the unit cost is obtained by dividing total current manufacturing costs by the current period equivalent output. ► However, 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. 5 Cornerstone 6-9 Calculating Output and Cost Assignments: First-In, First Out Method 5 Cornerstone 6-9 Calculating Output and Cost Assignments: First-In, First Out Method (continued) 5 Cornerstone 6-9 Calculating Output and Cost Assignments: First-In, First Out Method 5 Cornerstone 6-9 Calculating Output and Cost Assignments: First-In, First Out Method (continued) 5 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. 5 Step 2: Calculation of Equivalent Units ► 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. ►In this example the percentage of work done in the prior period is 75 percent, the percentage left to be completed this period is 25 percent, 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. 5 Step 3: Computation of Unit Cost ►The additional manufacturing costs incurred in the current period are $10,125. ►Thus, the current period unit manufacturing cost is $10,125/37,500, or $0.27. ►Notice that the costs of beginning inventory are excluded from this calculation. ►Only current period manufacturing costs are used. 5 Step 4: Valuation of Inventories ► Cornerstone 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 X 2,500, or $675, the same value that the weighted average method would produce. ► However, when it comes to valuing goods transferred out, a significant difference emerges between the weighted average method and FIFO. ► Under weighted average, the cost of goods transferred out is simply the unit cost times the units completed. Under FIFO, however, there are two categories of completed units: units started and completed and Units from beginning inventory. The cost of each category must be calculated separately and then summed to obtain the total cost of goods transferred out. 5 Cornerstone 6-10 Preparing a Production Report: First-In, First Out Method 5 Cornerstone 6-10 Preparing a Production Report: First-In, First Out Method (continued) 5 Cornerstone 6-10 Preparing a Production Report: First-In, First Out Method (continued) 5 Step 5: Cost Reconciliation ►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.