Handout 7 - Process Costing

ACCT 102 Managerial Accounting
September 2011
1 Cheng Nam Sang
Objectives
To understand what is process costing To understand what is process costing
To understand the physical flow and basic To understand the physical flow and basic
entries in a process costing system entries in a process costing system
To be To be able to calculate able to calculate the production cost the production cost
1
in a process costing system by using in a process costing system by using
the Weighted Average method the Weighted Average method
Oil Refinery: A Typical Example
for the use of Process Costing
2
The oil refining process starts with a fractional distillation column.
J ob J ob- -order costing order costing Process costing Process costing
Comparison of J ob-Order Costing
and Process Costing
gg
Costs accumulated by Costs accumulated by
the the job job..
Work in process has a Work in process has a
job job--cost sheet for each cost sheet for each
job job..
M i M i hi h t hi h t
gg
Costs accumulated by Costs accumulated by
department or department or process process..
Work in process has a Work in process has a
production report for production report for
each batch of each batch of products products. .
A f id ti l A f id ti l l t l t
3
Many unique, Many unique, high cost high cost
jobs. jobs.
J obs built to J obs built to customer customer
order. order.
A few identical, A few identical, low cost low cost
products. products.
Units Units continuously continuously
produced for inventory produced for inventory
in automated process. in automated process.
Process
Costing
J ob-order
Costing
J ob-Order
Costing
Process
Costing
Typical Application of Process Costing
Typical process cost applications:
Chocolate Making (e.g. Hersheys)
http://www.hersheys.com/discover/tour_video.asp
http://www.youtube.com/watch?v=rdTpA0luD2U
Oil Refinery
4
Oil Refinery
http://www.youtube.com/watch?v=jvYgXJgoLJ0&feature=related
Paint manufacturer
http://painting.about.com/od/artsupplies/youtube/paint_factory.htm
Paper mill
http://www.youtube.com/watch?v=7SdJtYkAzTw
September 2011
2 Cheng Nam Sang
Types of Processes
Process 1 Process 3 Finished
Goods
Process 2
Sequential:
Process 1
Process 4 Finished
Product X
Process 2
Process 5 Finished
Product Y
Process 3
Parallel:
5
Process 3 Process 1
Process 4 Process 2
Process 5 Finished
Goods
J ob-order and Process Costing
Applications:
1. 1. Evian ( Evian (www.evian.com www.evian.com))
2. 2. Paramount Pictures ( Paramount Pictures (www.paramount.com www.paramount.com)) a a ou c u es ( a a ou c u es ( pa a ou co pa a ou co ))
3. 3. Nestle S.A. ( Nestle S.A. (www.nestle.com www.nestle.com))
4. 4. SAP ( SAP (www.sap.com www.sap.com))
5. 5. Toyota Motor ( Toyota Motor (www.toyota.com www.toyota.com))
6. 6. Zurich Financial Services Group ( Zurich Financial Services Group (www.zurich.com www.zurich.com))
Qn: Find out the brief background of these companies Qn: Find out the brief background of these companies
6
Qn: Find out the brief background of these companies Qn: Find out the brief background of these companies
and justify the reason for the most likely choice and justify the reason for the most likely choice
between job between job--order and process costing systems order and process costing systems
used by them. used by them.
Process Costing:
Note for Calculation
Direct
Direct-labor costs
Material
Direct labor costs
are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
a
r

A
m
o
u
n
t
Direct
b
Manufacturing
Overhead
7
automation)
Type of Product Cost
D
o
l
l
Labor
Process Costing:
Note for Calculation
Direct
Material
Direct-labor costs
are usually small
Conversion
are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)
o
l
l
a
r

A
m
o
u
n
t
8
So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.
Type of Product Cost
D
September 2011
3 Cheng Nam Sang
The work-in-process
account consists of
Differences Between J ob-Order
and Process Costing
Direct Material
Finished
Goods
Direct Labor
Jobs
account consists of
individual jobs in a
job-order cost system.
9
Cost of
Goods
Sold
ManufacturingO
verhead
The work-in-process
account consists of
Differences Between J ob-Order
and Process Costing
Direct Material
Finished
Goods
Products
account consists of
individual products in a
process cost system.
Direct Labor
& Overhead
(C i )
10
Cost of
Goods
Sold
(Conversion)
When direct labor is a relatively small amount
compared to material and overhead, it is often
combined with overhead.
Process Costing
Accumulate the total costs for a period Accumulate the total costs for a period
Measure the output of the process Measure the output of the process
Calculate the average unit cost of the output Calculate the average unit cost of the output
Can be used in non Can be used in non--manufacturing manufacturing
organizations organizations
eg postal service sorting
11
e.g. postal service sorting
Example of the transaction flow: see Exhibit Example of the transaction flow: see Exhibit
14 14--1 in the next slide 1 in the next slide
12
September 2011
4 Cheng Nam Sang
Process Cost Flows
without WIP
Mi xi ng /
Brewi ng
department
Bottl i ng
department
Packagi ng
department
$'000 $'000 $'000
Di M i l 5 300 3 000 2 500
http://www.youtube.com/watch?v=ztNW2rzP6HM
13
Di rect Materi al s 5,300 3,000 2,500
Di rect Labour 2,700 950 1,050
Appl i ed overhead 1,500 2,500 2,200
9,500 6,450 5,750
Cost transferred i n 0 9,500 15,950
Cost transferred out 9,500 15,950 21,700
Equivalent Units:
A Key Concept in WIP
Costs are accumulatedfor a Costs are accumulatedfor a periodof time periodof time Costs are accumulated for a Costs are accumulated for a period of time period of time
for products in work for products in work--in in--process inventory. process inventory.
Products in work Products in work- -in in--process inventory at process inventory at
the beginning and end of the period are the beginning and end of the period are
only only partially complete partially complete. .
Eq i alent nits Eq i alent nits is a concept e pressing is a concept e pressing
14
Equivalent units Equivalent units is a concept expressing is a concept expressing
these partially completed products as a these partially completed products as a
smaller number of fully completed smaller number of fully completed
products. products.
Equivalent Units Example
Two one-half completed products are
i l t t l t d d t
+
=
equivalent to one completed product.
15
Equivalent Units Example
Two one-half completed products are
i l t t l t d d t equivalent to one completed product.
+
=
16
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
September 2011
5 Cheng Nam Sang
For the current period, Jones started 15,000
units and completed 10 000 units leaving
Equivalent Units Question 1
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production
did Jones have for the period?
a. 10,000
17
b. 11,500
c. 13,500
d. 15,000
18
Calculating and Using Equivalent
Units of Production
To calculate the cost per To calculate the cost per To calculate the cost per To calculate the cost per
equivalent unit for the period: equivalent unit for the period:
Cost per
equivalent
=
Costs for the period
E i l i f h i d
19
equivalent
unit
=
Equivalent units for the period
If Jones incurred $27,600 in
production costs for the 11,500
p ,
equivalent units. What was Joness cost
per equivalent unit for the period?
a. $1.84
b $2 40
20
b. $2.40
c. $2.76
d. $2.90
September 2011
6 Cheng Nam Sang
21
Overall Concept of the Production Cost
1. Analysis of
h i l fl
2. Calculation
f i l t
Production
Report
physical flow
of units.
of equivalent
units.
22
3. Computation
of total cost and
unit costs.
4. Stock valuation
and
5. Cost reconciliation.
Production Cost: Process Costing
The The weighted weighted--average average method . . . method . . .
Makes no distinction between work done in the Makes no distinction between work done in the
prior periodand work done in the current period prior periodand work done in the current period prior period and work done in the current period. prior period and work done in the current period.
Blends together units and costs from the prior Blends together units and costs from the prior
period and the current period. period and the current period.
FIFO FIFO method method (NOT EXAMINABLE) (NOT EXAMINABLE)
Equivalent units are based on the work done in Equivalent units are based on the work done in
th t i d l th t i d l
23
the current period only. the current period only.
See Attachment See Attachment - - Process costing example with rearrangement.pdf Process costing example with rearrangement.pdf
The FIFO method is a more
complex method.
Calculation in
Process Costing
can be very
complicated and
confusing.
Please try
Textbook
Exercise:
9-8
24
September 2011
7 Cheng Nam Sang
Process Costing: Key Steps
Key steps to help resolve some of the Key steps to help resolve some of the
issues issues issues issues
1. 1. Summarize the physical flow of units Summarize the physical flow of units
2. 2. Compute equivalent units of productions Compute equivalent units of productions
3. 3. Summarize the total cost incurred for the Summarize the total cost incurred for the
period period
3.1Compute the cost per equivalent unit 3.1Compute the cost per equivalent unit
25
3 Co pute t e cost pe equ ae t u t 3 Co pute t e cost pe equ ae t u t
4. 4. Calculate the cost of completed units and Calculate the cost of completed units and
the value of closing WIP the value of closing WIP
5. 5. Cost reconciliation Cost reconciliation a control process a control process
Check your understanding
Can a firm adopt a costing system that Can a firm adopt a costing system that
employing both job and processing employing both job and processing
costing? Why? costing? Why?
What is a Hybridcostingsystem? What is a Hybridcostingsystem?
26
What is a Hybrid costing system? What is a Hybrid costing system?
Operation Costing
Operation costing employs some aspects
of both job-order and process costing. of both job order and process costing.
Job-order Operation Costing Process
Costing (Products produced in batches) Costing
27
Conversion costs
assigned to batches
as in process costing.
Material Costs Charged
to batches as in
job-order costing.
Conclusions
J ob J ob--costing costing J ob J ob--costing costing
A simple costing method to specific jobs and A simple costing method to specific jobs and
products products
Process costing Process costing
28
A more complicated system to value cost of A more complicated system to value cost of
mass produced items mass produced items
Other related issues include material losses, Other related issues include material losses,
joint products and by joint products and by--products products
September 2011
8 Cheng Nam Sang
Challenging Questions
Attachments: Attachments: Attachments: Attachments:
Process Costing MCQ File 1 +File 2 Process Costing MCQ File 1 +File 2
Process Costing Process Costing- - challenging questions challenging questions
29
Managerial Accounting

Cheng Nam Sang
1
1 PROCESS COSTING - STOCK AND WORK IN PROGRESS VALUATIONS
1.1 Introduction
In many processes production is continuous, so that at any time there will be partly processed
materials within the process. Thus part of the costs incurred in the period will relate to completed
production, and part to the uncompleted work-in-progress.
1.2 Equivalent units of production
Consider the following situation:
Total costs incurred in the period $18,000
Finished units completed - 6,000
Work-in-progress at the end of the period - 3,000 units.

A naive approach to obtain the cost per unit is to simply divide $18,000 by 9,000 units (ie, the total
number of completed and uncompleted units) to give a unit cost of $2.

This makes the assumption that all units, regardless of whether they are finished or are in work-in-
progress at the period end, should be valued at the same cost per actual unit.

Surely this would be very misleading if the work-in-progress had only just been started at the period
end, and so accounted for very little of the total costs incurred.

What we require, then, is a method of identifying how much of the resources used in the period are
to be apportioned to finished goods and to work-in-progress respectively.

We will use the technique of equivalent units of production, which simply says that 2 units 50%
complete are equivalent to 1 unit 100% complete in terms of resources used.

(Note that equivalent units may also be called effective units, or effective finished units.)

Let us now assume that, in our example, the work in progress is 50% complete.

$
Total Costs 18,000
Equivalent units of production:
Finished units 6,000
WIP (3,000 x 50%) 1,500
7,500
Therefore cost per equivalent unit =
$18,000
$2.40
7,500
=

Finally, to apportion our total costs for the period:

Finished production 6,000 x $2.40 = 14,400
Work-in-progress 1,500 x $2.40 = 3,600
18,000

You will see that this gives a different valuation (and obviously a more sensible one!) than our naive
treatment of valuing all units at $2 each.


Cheng Nam Sang
2
1.3 Several cost items

Now consider a more practical development of the above example, in which different types of cost
are incurred at different times during the process.
Total costs incurred in the period: $
Materials input 16,200
Conversion 1,800
18,000

Finished units produced 6,000
Work-in-progress (100% material, 50% conversion) 3,000

In relation to the work-in-progress, the whole amount of material necessary for their completion has
been input ('100% complete' with respect to materials), but only half the necessary work has been
done ('50% complete' with respect to Conversion), ie the material is all added at the beginning but
only half the 'stirring' has been performed.

Because the number of equivalent units will be different for each of the two types of cost, the
calculation is more complex:

Physical
Units
%
done
Material Conversion Total
Work in progress:
Closing units 3,000
A 100% 3,000
B 50% 1,500

Completed Units 6,000
C 100% 6,000 6,000
Equivalent unit D 9,000 7,500

Costs E $16,200 $1,800 $18,000
Cost per Equivalent
Unit
E
F=
D
$1.80 $0.24

The total cost will thus be divided as follows:
Work in progress
AxF $5,400
BxF $360
$5,400 $360 $5,760
Completed
CxF $10,800 $1,440 $12,240
$18,000

Note carefully the following:

(1) The number of equivalent units for each individual cost is the product of units that will
eventually be produced, and % completion to date.

(2) There is no limit to the number of different cost items in such a problem. For example,
overheads may be segregated from conversion cost, and may have a different percentage of
completion.

(3) Obviously, a clear and logical presentation of cost per unit calculations is needed -
tabulation is to be preferred.


Cheng Nam Sang
3
(4) Where we are dealing with successive processes, a process will take in completed output
from the previous process in the production cycle.

This injection can be called transferred-in cost and will be treated just like any other
material costs but should be kept separate from direct materials added in the current process.

1.4 Opening and closing work-in-progress - Example

Since we are usually dealing with continuous processes, then it is likely that there will be opening
work-in-progress, as well as closing work-in-progress.

There are two accepted ways of dealing with Beginning Work-In-Progress, depending upon the
assumptions which can be made concerning the work being done in the period. The two methods
are Weighted Average and FIFO. The following worked example will be used to illustrate their
differences.

Work-in-progress on 1 March: 2,000 units (i.e. Beginning WIP)
50% complete with respect to materials, value $1,375 [d]
25% complete with respect to Conversion, value $89 [d]

Cost incurred during March: Materials $10,500
Conversion $1,680
6,000 units were completed during March.
Work-in-progress on 31 March: 1,000 units (i.e. Ending WIP)
25% complete with respect to materials
10% complete with respect to Conversion

1.5 Solution - Weighted Average flow of costs

Under this method, our assumptions are that:

(a) All units are equally likely to be completed in the period; and

(b) Because of this, it is possible that some of the opening work-in-progress is carried forward as
closing work-in-progress.

In this type of process the opening work-in-progress becomes mixed with the work done in the
period.

This means that it is not possible to identify, strictly, the work done in the period. We therefore
compute a weighted average cost per unit, by aggregating costs bought forward and costs incurred in
the period, and spreading the resulting total cost over the corresponding production. This production
can now be identified as:

(a) completed units (whenever started); and

(b) closing work-in-progress (whenever started).

Finally note that, in order to use the weighted average method, it is necessary to know the break-
down of the opening work-in-progress into the different categories of costs.

Cheng Nam Sang
4
The steps in the solution are:

(a) Physical flow of units

This should be the first step in the solution whether the FIFO or the weighted average
method is used. It is simply an equation to identify the items to be worked on, as shown
below.
Beginning WIP 2,000
Units started 5,000 (balancing figure)
7,000

Units completed 6,000
Ending WIP 1,000
7,000

(b) Compute equivalent units of production in the current period.

Note that we do not need to know how many of the completed units were in the Beginning
WIP, and how many were started in the period. The crucial point is that it doesn't matter!
(The major different from the FIFO method below)

(c) Compute the Weighted Average Cost per equivalent unit.

Material Conversion Total
Costs b/f (BWIP) d $1,375 $89 $1,464
Costs in the period $10,500 $1,680 $12,180
b $11,875 $1,769 $13,644

Cost per Equivalent Unit
b
c=
a

$1.90 $0.29 $2.19

(d) We can now calculate the cost of completed units and the value of closing work-in-progress.

Valuation of Inventories Material Conversion Total
Completed units f x c $13,140

WIP e x c 475 29 $ 504

Total Ending Inventory $13,644

(e) Cost reconciliation:
Costs brought forward +incurred in the period =completed units +Ending WIP
$1,464 + $12,180 = $13,140 + $504
Material Conversion
Work in progress:
Completed Units f 6000 6,000 6,000
Ending Equiv. units e 1000 25%
10%
250
100
Equiv. Unit of Production a 6,250 6,100
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Cheng Nam Sang
5

SUMMARY OF THE CALCULATION IN THE TABULATED FORMAT

WEIGHTED AVERAGE
BWIP 2,000
STARTED 5,000 Bal
Fig

7,000
EQUIVALENT UNIT
MATERIAL CONVERSION TOTAL
COMPLETED 6,000 6,000 6,000
EWIP 1,000 25%
10%
250
100

7,000 6,250 6,100
COSTS
BWIP $1,375 $89 $1,464
INCURRED DURING THE
PERIOD
$10,500 $1,680 $12,180
$11,875 $1,769 $13,644
EQUIVALENT COST PER
UNIT

$1.90 $0.29 $2.19
COST OF GOODS TFR
OUT (i.e. completed)
6,000*$1.9 6,000*0.29 6,000*$2.19 =
$13,140
Value of EWIP 250*$1.9 =$475 100*$0.29 =$29 $504
TOTAL INVENTORY $13,644

Cheng Nam Sang
6
Summary of Weighted Average Process Costing

Weighted Average
1 Physical flow calculation Calculate physical flow (in units):
BWIP + Units started = Units completed + EWIP
2 Equivalent Unit calculation Calaculate the equivalent units based on
completed units
and
EWIP
3 Brought Forward Costs Add to the current period to calculate the average cost
per equivalent unit
4 Cost incurred in the period Differentiate Material and Conversion costs
5 Cost per Equiv. Unit
(CEU)
Cost b/f + Cost in the period
Equivalent unit produced
6 Cost of completed Units Completed units
x
CEU
7 Final Checking Cost reconciliation:
Costs brought forward + incurred in the period
=
completed units + Ending WIP

Note:
For calculations involving multiple materials (e.g Material 1, . and Material N) and multiple
conversion processes (e.g. Conversion 1 and Conversion N), the tabel format for calculation in the
earlier example helps even more. Simply, include additional columns for individual material and
process. If some materials are partially or fully completed in the previous process, then it can also
have another column(s) for Transfer In Material(s) (TIM 1 TIM N) e.g. see MCQ Exercises File 2
Q12-Q14.

Physical
Units
%
done
TIM
1

TIM
N
Mat
1

Mat
N
Con
1

Con
N
Total
Work in progress:
Closing units

Completed Units


Cheng Nam Sang
7
Example: Budo Pte Ltd

The following information is available for Budo Pte Ltd for the month of December:
Physical Units Cost
Work in process, 1 December (75% completed) 4,000
Direct Material (100% at the beginning) $8,000
Conversion $17,000
Total work in process, 1 December $25,000

Started during December 17,000

Cost added:
Direct Material $35,000
Conversion $60,000
Total cost added in December $95,000

Work in progress, 31 December (40% completed) 5,000

Materials are added at the beginning of the process.

1. Budo Pte Ltds conversion cost per equivalent unit of production using the weighted average method would
be:
(A) $3.50
(B) $3.67
(C) $4.28
(D) $4.81
(E) None of the above

2. Budo Pte Ltds cost of goods transferred out using the weighted average method would be:
(ROUND UP YOUR ANSWER TO THE NEAREST THOUSAND)
(A) $ 68,000
(B) $101,000
(C) $108,000
(D) $133,000

Working:
WEIGHTED AVERAGE
BWIP
STARTED

EQUIVALENT UNIT
MATERIAL CONVERSION TOTAL
COMPLETED
EWIP

COSTS
BWIP
INCURRED DURING
THE PERIOD

EQUIVALENT COST
PER UNIT

COST OF GOODS TFR
OUT (i.e. completed)

Value of EWIP

ACCT 102 Management Accounting

Cheng Nam Sang 1
Exercise 9-8
Weighted-Average Method

1. Materials Labor Overhead
Units transferred to the next department ...... 42,000 42,000 42,000
Work in process, ending:
Materials:
8,000 units 75% complete ................. 6,000
Labor and overhead:
8,000 units 50% complete ................. 4,000 4,000
Equivalent units of production ...................... 48,000 46,000 46,000

2. Materials Labor Overhead
Cost of beginning work in process ............ $ 4,320 $ 1,040 $ 1,790
Cost added during the period ................... 52,800 21,500 32,250
Total cost (a) .......................................... $57,120 $22,540 $34,040

Equivalent units of production (b) ............. 48,000 46,000 46,000
Cost per equivalent unit (a) (b) ............. $1.19 $0.49 $0.74


Cheng Nam Sang 1
Process Costing MCQ File 1

E1. Which of the following best describes sequential processing?
a. Several sequences of production are applied to a product in the department.
b. Units must pass through one process before they can be worked on in later processes,
c. Only one process can be applied to a product in each department.
d. sub components can be worked on simultaneously in different processes and then brought
together in a final process for completion.

E2. Which of the following best describes parallel processing?
a. A large number of similar products pass through an identical set of processes.
b. Units typically pass through a series of manufacturing or producing departments.
c. Partially completed units can be worked on simultaneously in different processes and then
brought together in a final process for completion.
d. Units must pass through one process before they can be worked on in later processes.

E3. Which statement best describes the concept of equivalent units of production?
a. Equivalent units are the measure of a period's output
b. Equivalent units are the units completed in a department.
c. Equivalent units are the total of the units produced by all departments
d. Equivalent units are the number of units completed at the end of the last process.

E4. The Fox Company uses the weighted average method. The beginning work in process consists of
20,000 units (100% completed as to materials and 50% complete as to conversion costs). The
number of units completed was 80,000. The ending work in process consists of 10,000 units
(100% complete as to materials and 20% complete as to conversion costs). The equivalent units
of production for conversion costs was:
a. 80,000
b. 90,000
c. 110,000
d. 92,000
e. 82,000

E5. Garcia Company uses the weighted average method in its costing system. For the month of May
in the Assembly Department, the equivalent units for conversion costs amounted to 35,000. There
were 5,000 units in beginning work-in-process that were 50% complete. During the month,
33,000 units were started and 31,400 were completed and transferred. The ending work in process
consists of:
a. 5,000 units
b. 7,000 units
c. 6,600 units
d. 3,600 units


Cheng Nam Sang 2
Figure 1 (for E6 & E7)

The following information is available for Department X for August:

Work in process, August 1:
Materials $8,000
Conversion costs $15,000

Costs added during August:
Materials $28,000

Equivalent units of production (weighted average):
Materials 4,000
Conversion 5,000

E6. Refer to Figure 1. Department X's cost per equivalent unit for materials using the weighted
average method would be
a. $2.00
b. $7.00
c. $8.00
d. $9.00

E7. Refer to Figure 1. Department X's cost per equivalent unit for conversion using the weighted
average method would be
a. $8.00
b. $5.00
c. $3.00
d. $9.00

E8. Burgundy Manufacturing uses a process cost system and computes cost using the weighted
average method. During the current period, the beginning work-in-process inventory cost was
$13,525. Manufacturing cost added was $57,000. If Burgundy's ending work-in-process
inventory was valued at $15,100, then cost of goods transferred must have been
a. $70,525
b. $55,425
c. $84,625
d. $58,575

E9. The following information is provided:
Units
Work in process, J une 1 (20% complete) 4,000
Started in J une 32,000
Work in process, J une 30 (30% complete) 12,000


Equivalent units of production for conversion costs using the weighted average method would be
a. 35,600
b. 34,800
c. 36,000
d. 27,600


Cheng Nam Sang 3
Suggested Answers:

E1. B

E2. C

E3. A

E4. E

Units completed 80,000
Ending work in process (10,000 x 20%) 2,000
82,000

E5. C

Ending inventory =(5,000 +33,000) - 31,400 =6,600 units

E6. D

Beginning work in process, materials $ 8,000
Material costs incurred during period 28,000
Total costs to account for $36,000

Cost per equivalent unit for materials
($36,000/4,000) $9.00

E7. A

Beginning work in process, conversion $15,000
Conversion costs incurred during period 25,000
Total costs to account for $40,000

Cost per equivalent unit for conversion
($40,000/5,000) $8.00

E8. B

Cost to be accounted for =$13,525 +$57,000 =$70,525

Cost to be accounted for - Ending inventory =Cost transferred
$70,525 - $15,100 =$55,425

E9. D

Units completed (4,000 +32,000 - 12,000) 24,000
Units in ending work in process (12,000 x 30%) 3,600
Total equivalent units--conversion 27,600

ACCT 102 Management Accounting - Process Costing File 2

ChengNamSang Page1

1. The weighted average method in process-costing system typically measures
overall production costs for the period and then averages the costs based on total
units produced during the period. The resulting average cost per unit is then used
to determine the __________ cost and the __________.

A. equivalent unit; equivalent units
B. inventory, cost of goods sold.
C. product, product price.
D. overhead, finished goods cost.
E. total, variance from budget.
F. none of the above.

2. Deleted

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 3 5
The following information is available for Gandalf Pte Ltd for the month of
December:
Physical Units Cost
Work in process, 1 December (75% completed) 4,000
Conversion $17,000
Total work in process, 1 December $25,000

Started during December 17,000

Cost added:
Conversion $60,000
Total cost added in December $95,000

Work in progress, 31 December (40% completed) 5,000



ChengNamSang Page2

FOR QUESTIONS 3 AND 4, ROUND UP YOUR ANSWER TO 2 DECIMAL
PLACES

3. Gandalf Pte Ltds conversion cost per equivalent unit of production using the
weighted average method would be:

(A) $3.50
(B) $3.67
(C) $4.28
(D) $4.81

4. Deleted

5. Gandalf Pte Ltds cost of goods transferred out using the weighted average
method would be: (ROUND UP YOUR ANSWER TO THE NEAREST
THOUSAND)

(A) $ 68,000
(B) $101,000
(C) $108,000
(D) $133,000

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 6 11

ABC Company is a manufacturing organization. 70% of direct materials are added
at the beginning of the process and the remaining 30% of the direct materials are
added when the units are 75% converted. All conversion costs are added
uniformly in the production process. Information for September are as follows:

Work-in-Process, September 1:
8000 units (80 % converted)
Direct materials (DM) $48,000
Conversion costs (CC) $73,600

During September, 60,000 units were completed and transferred to the Finished
Goods Department. The following costs were incurred by the Manufacturing
Department during September:

DM $333,000
CC $673,200

Also, 5,000 units that were 50 % converted remained in the Manufacturing
Department at the end of the day on September 30.

Work to two (2) significant decimal place


ChengNamSang Page3

6. The prime cost incurred by the Manufacturing Department for the month of
September (only) is:

A. $ 333,000
B. $ 481,000
C. $1,006,200
D. $1,154,200
E. $1,230,800
F. none of the above

7. The total equivalent unit (EU) of production for direct materials using the
Weighted Average (WA) method for the month of September is:
A. 55,500 EU
B. 58,500 EU
C. 63,500 EU
D. 65,000 EU
E. 68,000 EU

8. Deleted

9. Deleted

10. Deleted

11. The cost of the ending inventory (WIP) as at 30
th
September using the WA
method is:

A. $48,390
B. $48,555
C. $50,875
D. $51,000
E. $52,375

Answer Question 12 17 using the following information

The J ohnson Chemical Company produces a special kind of body oil that is widely used by
professional sportsmen. The oil is produced in three processes: Blending, Mixing and
Packaging. Raw oil materials are introduced at the beginning of the blending process.

In the mixing process, coloring material is totally added to the transferred-in inventory at the
start of the process. Half-way through the process, a Secret ingredient is totally added to give
the oil a sporty fragrance. Conversion costs incur uniformly in Mixing Department. The
output from the Mixing process is then sent for packaging.

The following information is available for the Mixing Dept for J anuary 2006.


ChengNamSang Page4

Litres Costs

Beginning Work-in-process (WIP) 10,000
Transferred in Costs (TIC) from Blending Dept $ 8,400
Coloring Material $ 13,000
Conversion costs (40% complete) $ 16,000
Total WIP J an 1
st
2006 $ 37,400

TIC during J anuary 2006 150,000 $150,000

Cost incurred in Mixing Dept during J anuary 2006
Coloring Material $ 75,000
Secret Ingredient $ 80,000
Total Current Costs $463,000

During J anuary 120,000 litres of body oil was sent for packaging. At the end of January, the
closing WIP was 60% complete with respect to conversion.

12. Using the weighted average approach, what is the cost per equivalent unit for
conversion cost?

A $2.00
B $2.25
C $3.01
D $4.00
E $2.01
F none of the above

13. Using the weighted average approach, the equivalent units (EU) of production for the
special ingredient would be:

A 160,000
B 145,000
C 150,000
D 135,000
E 140,000
F none of the above

14. Using the weighted average approach, what is the cost of the closing WIP?

A $136,000
B $129,850
C $137,450
D $135,600
E $140,000
F none of the above

15. Deleted

16. Deleted


ChengNamSang Page5

17. Deleted

18. Which one of the following methods of allocating joint costs uses a measure such as
pounds or units to allocate joint costs to joint products?
A) net realizable value method.
B) physical measure method.
C) product measure method.
D) cost measure method.
E) sales value at split-off method.

19. Which one of the following methods of allocating joint costs allocates joint costs to
joint products on the basis of estimated sales values at the split-off point?
A) net realizable value method.
B) physical measure method.
C) average cost method.
D) net sales value method.
E) sales value at split-off method.

20. Which of the following statements best describes a by-product?
A) A product that is produced from material that would otherwise be scrap.
B) A product that has a similar unit selling price than the main product.
C) A product created along with the main product whose sales value does not cover
its cost of production.
D) A product that usually produces a small amount of revenue when compared to the
main product's revenue.
E) A product that has a lower unit selling price that the main unit.


ChengNamSang Page6

Suggested Answers:

1. B 2. 3. C 4. 5. B
6. F 7. C 8. 9. 10.
11. C 12. B 13. A 14. D 15.
16. 17. 18. B 19. A 20. D

Working Q3

DM CC
BWIP 4,000 4,000
Started & Completed 12,000 12,000
EWIP 5,000 2,000
21,000 18,000

Cost to account for: $43,000 $77,000
Cost per EU: $2.05 $4.28

Working Q4 (Deleted)

Working Q5

Cost per unit transferred out = $2.05 +$4.28 (see answer for Q.4)
= $6.33
Cost transferred out = $6.33 x 16,000 = $101,280


ChengNamSang Page7

Workings Q6 Q9

WEIGHTED
AVERAGE

BWIP 8000
STARTED Bal
57000

65000
EQUIVALENT UNIT
MATERIAL CONVERSION
COMPLETED 60000 60000 60000
EWIP 5000 5000*70%=3500 5000*50%=2500
65000 63500 62500
COSTS
BWIP 48000 73600
INCURRED
DURING THE
PERIOD
333000 673200
381000 746800
EQUIVALENT
COST PER
UNIT
381000/63500=6 746800/62500=11.95
EWIP 3500*6+2500*11.95=50875

Working for Q 12 Q14

WA
1. PU
BWIP 40% 10,000
Started 150,000
Units to A/C 160,000
2. EU
TIC CM SI CC
Completed 120,000 120,000 120,000 120,000 120,000
EWIP 60% ??? 40,000 40,000 40,000 40,000 24,000
Units to A/C 160,000 160,000 160,000 160,000 144,000
3. COSTS
BWIP 8,400 13,000 0 16,000
INCURRED DURING
THE PERIOD
150,000 75,000 80,000 308,000
Total costs 158,400 88,000 80,000 324,000
Costs per EU 0.99 0.55 0.5 2.25

Cost of EWIP EU*Cost per EU =(40,000*(0.99+0.55+0.5))+(24000*2.25)=135,600

ACCT 102 Management Accounting Process Costing Challenging Questions

Cheng Nam Sang 1
Use the following information to answer questions 1-3 regarding information for the current
period:

Yummy Pizza Corporation produces frozen pizzas for selling to supermarkets all over Singapore.
The pizzas pass through three departments: (1) Assembly, (2) Freezing, and (3) Packaging. In the
Assembly Department, 70% of direct materials are added at the beginning of the process and the
other 30% are added at the end of the process. Conversion costs are added evenly throughout the
assembly process. Data for the current period for the Assembly Department are as follows:

Beginning work in process inventory (30% completed) 6,000 units
Units started in current period 30,000 units
Ending work in process inventory (80% completed) 4,000 units

Costs in beginning work in process inventory
Direct Materials $3,978
Conversion Costs $1,800
Total $5,778

Costs added during the current period:
Direct Materials ?
Conversion Costs ?
Total $47,170

Cost per equivalent unit from weighted average method:
Direct Materials $0.51
Conversion Costs $1.00

1. Using the weighted average method, compute the physical units (PU) completed.

2. Using the weighted average method (WA), compute the equivalent units (EU) for conversion
costs.

3. Using the weighted average method (WA), compute the total value of ending WIP inventory.


Cheng Nam Sang 2
Suggested Answers:
Q1.
6,000 +30,000 4,000 =32,000 units

Q2.

Physical
Units DM CC
BWIP 6,000 70% 30%
Started 30,000
Completed 32,000
EWIP 4,000 70% 80%

EU (CC) =32,000 +4000*0.8 =35,200 units

Q3.
2,800*0.51 +3,200*1.00 =$4,628


Cheng Nam Sang 3
Example: Sure Marks Up (SMU)

Sensing strong potential demand from stressed out students coping with examinations and project work, a
group of enterprising SMU students bunch together to concoct a tonic soup that would regenerate brain cells,
improve attention span, and enable students to understand concepts and not just memorise textbooks blindly.

Given the huge untapped customer group ranging from primary school students to university undergraduates,
these entrepreneurs eschewed traditional methods in favor of the latest advanced techniques to make a good
bowl of potent soup. With a grant from the government, they set up the Tonic Soup factory, an advanced,
computerized-integrated manufacturing (CIM) production facility located on J urong Island to produce their
unique, patented Sure Marks Up (SMU) tonic soup.

The manufacturing process of The Tonic Soup factory is premised on the need to churn out as much soup as
possible within the shortest period of time in order to meet the insatiable demands of its customers. As such,
the Tonic Soup factory would manufacture this product continuously, 24 hours a day, 7 days a week.

The operation process of churning out the tasty SMU tonic soup is as follows. The factory basically consists
of a gigantic manufacturing silo, a huge, cylindrical steel container that is capable of making up to 50,000 pre-
packaged bowls of hot, tasty SMU tonic soup. To brew this delicious soup, the raw materials, consisting of
ginseng, lingzhi, ginko nuts and a variety of Chinese herbs including bulbus lilli (Bai He), euryale ferox (Qian
Shi), polyconattum(Yu Zhu) and semin nelumbinis (Lian Zi) are first poured inside the silo. Thereafter, 100%
pure, clean and totally distilled Newater is added in. Once all the ingredients are in, the processing process
will commence. In converting it into the final product, the solution is double-boiled over a slow fire and a
giant stirrer within the silo will stir and mix the soup to ensure that all the ingredients are evenly mixed and
well-blended. The process would take 5 days, after which the soup is cooked to perfection.

The SMU tonic soup is a huge commercial success, as mothers stocked up the product in the dozens, since its
pre-packaged bowl ensures the freshness of the soup for up to two months. In accounting for the production
cost of the tonic soup, the group of entrepreneurs used process costing, which they remembered from their
Management Accounting lessons. In the month of October, the accountant was hospitalized as a result of an
overdose of the SMU soup (despite health warning precautions), and the Chief Financial Officer (CFO)
requested your help in doing the accounting.

He provided you with the following data and stated that the company is using a weighted average method.

Table 1 - Operational Data for the Month of October

Units Costs
Beginning WIP, 1 October 2002 30,000 bowls
Direct Materials (herbs): 50,000 kg $270,000
Conversion (stirred and boiled for 3 days): $352,000
Total WIP costs $622,000

Costs incurred in the month of October 2002
Direct Materials added: 300,000 kg $1,755,000
Conversion costs $2,321,000

Closing WIP, 31 October 2002 50,000 bowls
(stirred and boiled for 2 days)

200,000 completed bowls of soup were sent from the factory to the warehouse in October 2002.

(a) Prepare a cost of production report for the month of October based on the weighted average method.
Your answers should state clearly the cost of goods manufactured, the value of the ending WIP and
the unit cost per bowl of soup.

Cheng Nam Sang 4

In reviewing the manufacturing process and your report, the Chief Executive Officer (CEO) commented that
the conversion process of stirring and boiling should not be assumed to be uniform. He has learned that while
the soup is boiled continuously for five days, most of the stirring is done in the initial days, and very little
stirring is done at the later stage. Hence, the CEO felt that the accounting system should distinguish separately
the boiling and stirring processes so as to be more accurate.

Hurriedly, the CFO instructed the operational manager to split the conversion process into two distinct
processes, boiling and stirring. The revised operational data for the month of October is then handed to you.

Table 2 Revised Operational Data for the Month of October

Units Costs
Beginning WIP, 1 October 2002 30,000 bowls
Direct Materials (herbs): 50,000 kg $270,000
Conversion:
Boiling process (60% completed) $ 36,000
Stirring process (90% completed) $ 316,000
Total WIP costs $ 622,000

Costs incurred in the month of October 2002:
Direct Materials added: 300,000 kg $1,755,000
Conversion:
Boiling $ 404,000
Stirring $1,917,000

Closing WIP, 31 October 2002 50,000 bowls
Conversion:
Boiling process (40% completed)
Stirring process (80% completed)

Note: 200,000 completed bowls of soup were sent from the factory to the warehouse in October 2002.

(b) Prepare a revised cost of production report for the month of October based on the weighted average
method. Your answers should state clearly the cost of goods manufactured, the value of the ending
WIP and the unit cost per bowl of soup.

The CEO was bemused to see different sets of unit cost of the SMU tonic soup even through the total cost
figures are intact. He asked you to prepare a short explanation to reconcile and justify the reasons why the cost
figures keep changing.

(c) Prepare a short note to the CEO explaining the reasons why the cost of goods manufactured and the
unit cost of one bowl of SMU tonic soup differ based on your two production cost reports.
Substantiate your reasons with computations if necessary.


Cheng Nam Sang 5

Suggested Answers to SMU

Req (a)
Units/Bowls to be accounted for:
BWIP 30,000
Added ??? 220,000
250,000
Materials Conversions
Completed 200,000 200,000 200,000
EWIP 50,000 50,000 20,000
Equivalent Units 250,000 250,000 220,000

Costs (Weighted Average) Total
BWIP $270,000 $352,000 $622,000
Incurred during the period $1,755,000 $2,321,000 $4,076,000
Total Costs $2,025,000 $2,673,000 $4,698,000

Cost per Equiv. Unit $8.10 $12.15 $20.25
Cost of goods manufactured (i.e. completed) $1,620,000 $2,430,000 $4,050,000
Value of EWIP $405,000 $243,000 $648,000

Req (b)
Weighted Average
Materials Boiling Stirring
Completed 200,000 200,000 200,000 200,000
EWIP 50,000 50,000 20,000 40,000
Equivalent Units 250,000 250,000 220,000 240,000

Costs Total
BWIP $270,000 $36,000 $316,000 $622,000
Incurred during the period $1,755,000 $404,000 $1,917,000 $4,076,000
Total Costs $2,025,000 $440,000 $2,233,000 $4,698,000

Cost per Equivalent Unit $8.10 $2.00 $9.30 $19.40
Cost of goods manufactured (i.e. completed) $1,620,000 $400,000 $1,860,833 $3,880,833
Value of EWIP $405,000 $40,000 $372,167 $817,167

As can be seen from the above table, the main difference is the split between the value of EWIP and
Cost of goods manufactured for the two methods.

Req (c)
1. For the two calculations the total of goods manufactured and EWIP are the same.
2. The change from a to b is the conversion element is split into stirring and boiling. For EWIP,
instead of 40% (2 out of 5 days) completed for conversion under a, we have 40% complete
for boiling and 80% complete for stirring.
3. It should be noted that stirring is more expensive than boiling. Since we have a higher % of
stirring under WIP for method b, we should expect the EWIP for method b to be higher.

Cheng Nam Sang 6

Overall, the differences are caused by not having the processes defined correctly and accurately,
assuming method b is the correct method, then method b will give us the correct figure. However,
one must weight the costs and benefits of these detailed analyses. If the differences are not big we
may not want to alter our calculation.

Handout 7 - Process Costing

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ACCT 102 Managerial Accounting

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