Cost Systems

What type of industries are best suited for process cost systems? Discuss how the process cost system is tracked and recorded for one of the following types of business: (a) TV assembler, (b) building contractor, (c) automobile repair shop, (d) paper manufacturer, (e) custom jewelry manufacturer? In the business type you selected, what is the most important purpose of the cost of production report and how can it improve operations in that business type?

Directions:

• Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate.
• Support your submission with course material concepts, principles, and theories from the textbook and at least Three scholarly, peer-reviewed journal articles
• Your initial post should address all components of the question with a 500 word limit.

Chapter 3
Process Cost
Systems
Learning Objectives
(slide 1 of 2)
• Obj. 1: Describe process cost systems.
• Obj. 2: Prepare a cost of production report.
• Obj. 3: Journalize entries for transactions using a
process cost system.
• Obj. 4: Describe and illustrate the analysis of unit cost
changes between periods.
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Learning Objectives
(slide 2 of 2)
• Obj. 5: Describe and illustrate the use of a cost of
production report in evaluating a company’s
performance.
• Obj App: Describe and illustrate the weighted
average method of preparing a cost of production
report.
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Accounting for Process Manufacturers
(slide 1 of 2)
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Accounting for Process Manufacturers
(slide 2 of 2)
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Examples of Process Cost and Job Order
Companies
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Process Cost System and Job Order Cost
System – Similarities
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Process Cost and Job Order Cost Systems
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Comparing Job Order and
Process Cost Systems
• Process and job order cost systems are different in
several ways.
o A process cost system accumulates (records) product
costs in work in process accounts for each department.
In contrast, a job order cost system accumulates
(records) product costs by jobs, using job cost sheets.
o In a job order cost system, the work in process at the
end of the period is the sum of the job cost sheets for
partially completed jobs. In a process cost system, the
work in process at the end of the period is the sum of
the costs remaining in each department account at the
end of the period.
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Physical Flows for a Process Manufacturer
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Cost Flows for a Process Manufacturer—
Frozen Delight
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Cost of Production Report
(slide 1 of 4)
• In a process cost system, the cost of units transferred
out of each processing department must be
determined along with the cost of any partially
completed units remaining in the department. The
report that summarizes these costs is a cost of
production report.
o The cost of production report summarizes the
production and cost data for a department as follows:
▪ The units the department is accountable for and the
disposition of those units.
▪ The product costs incurred by the department and the
allocation of those costs between completed (transferred
out) and partially completed units.
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Preparing a Cost of Production Report
Determine
units to be
assigned costs
Compute
equivalent
units of
production
Determine cost
per equivalent
unit
Allocate costs
to units
transferred out
and to partially
completed
units
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Cost of Production Report
(slide 2 of 4)
• Preparing a cost of production report requires making
a cost flow assumption.
• Like merchandise inventory, costs can be assumed
to flow through the manufacturing process using the
first-in, first-out (F I F O), last-in, first-out (L I F O), or
average cost methods.
o Because the first-in, first-out (F I F O) method is often
the same as the physical flow of units, the FIFO
method is used in this chapter.
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Cost of Production Report
(slide 3 of 4)
• A cost of production report for the Mixing Department of
Frozen Delight for July is prepared.
Specifics
Amount ($)
Inventory in process, July 1, 5,000 gallons:
Direct materials cost, for 5,000 gallons
5,000
Conversion costs, for 5,000 gallons, 70% completed
1,225
Total inventory process, July 1
6,225
Direct materials cost for July, 60,000 gallons
66,000
Direct labor cost for July
10,000
Factory overhead applied for July
7,275
Total production cost to account for
90,000
Gallons transferred to Packaging in July (includes units in process on July 1),
62,000 gallons
?
Inventory in process, July 31, 3,000 gallons, 25% conversion costs
?
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Cost of Production Report
(slide 4 of 4)
• By preparing a cost of production report, the cost of
the gallons transferred to the Packaging Department
in July and the ending work in process inventory in
the Mixing Department are determined.
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Step 1: Determine the Units to Be Assigned
Costs (slide 1 of 4)
• The first step is to determine the units to be
assigned costs.
o A unit can be any measure of completed production,
such as tons, gallons, pounds, barrels, or cases.
▪ For Frozen Delight, a unit is a gallon of ice cream.
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Step 1: Determine the Units to Be Assigned
Costs (slide 2 of 4)
• The Mixing Department is accountable for
65,000 gallons of direct materials during July,
computed as follows:
Total Units (Gallons) Charged to
Production
Quantity in Gallons
In process, July 1
5,000
Received from materials storage
60,000
Total units accounted for
65,000
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Step 1: Determine the Units to Be Assigned
Costs (slide 3 of 4)
• For July, the following three groups of units (gallons)
are assigned costs:
o Group 1: Units (gallons) in beginning work in process
inventory on July 1.
o Group 2: Units (gallons) started and completed during
July.
o Group 3: Units (gallons) in ending work in process
inventory on July 31.
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July Units to Be Costed—Mixing Department
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Step 1: Determine the Units to Be Assigned
Costs (slide 4 of 4)
• The total units (gallons) to be assigned costs for
July are summarized as follows:
Group
Particulars
Quantity in
Gallons
Group 1 Inventory in process, July 1, completed in July
5,000
Group 2 Started and completed in July
57,000
Transferred out to the Packaging
Department in July
Group 3 Inventory in process, July 31
Total units (gallons) to be assigned costs
62,000
3,000
65,000
The total gallons to be assigned costs equal the total gallons accounted for
by the Mixing Department.
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Step 2: Compute Equivalent Units of
Production (slide 1 of 5)
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Step 2: Compute Equivalent Units of
Production (slide 2 of 5)
• Assume that a 1,000-gallon batch (vat) of ice cream
at Frozen Delight is only 40% complete in the mixing
process on May 31.
o Thus, the batch is only 40% complete as to
conversion costs such as power.
▪ In this case, the whole units and equivalent units of
production are as follows:
Type of Cost
Whole Units in
Gallons
Material Costs
1,000
Conversion Costs
1,000
Equivalent Units in
Gallons
1,000
400 gallons (1000 × 40%)
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Step 2: Compute Equivalent Units of
Production (slide 3 of 5)
• Equivalent units for materials and conversion
costs are usually determined separately.
o This is because materials and conversion costs
normally enter production at different times and rates.
▪ In contrast, direct labor and factory overhead normally enter
production at the same time and rate.
▪ For this reason, direct labor and factory overhead are
combined as conversion costs in computing equivalent units.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Step 2: Compute Equivalent Units of
Production (slide 4 of 5)
• To compute equivalent units for materials, it is
necessary to know how materials are added during
the manufacturing process.
o In the case of Frozen Delight, all the materials are
added at the beginning of the mixing process.
Group
Specifics
Whole Units
Group 1
Inventory in process, July 1
5,000
Group 2
Started and completed in July
(62,000 − 5,000)
57,000
Group 3
Transferred out to Packaging
Department in July
62,000
Inventory in process, July 31
3,000
Total gallons to be assigned costs
65,000
Percent Materials
Added in July
Units for Direct
Materials
0%
0
100%
57,000
57,000
100%
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3,000
60,000
Direct Materials Equivalent Units
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Step 2: Compute Equivalent Units of
Production (slide 5 of 5)
• To compute equivalent units for conversion costs, it is
necessary to know how direct labor and factory overhead
enter the manufacturing process.
o
Direct labor, utilities, and equipment depreciation are often incurred
uniformly during processing. Hence, it is assumed that Frozen Delight
incurs conversion costs evenly throughout its manufacturing process.
Group
Specifics
Whole
Units
Percent Conversion
Completed in July
Equivalent Units
for Conversion
Group 1
Inventory in process, July 1 (70%
completed)
5,000
30%
1,500
Group 2
Started and completed in July (62,000
− 5,000)
57,000
100%
57,000
Transferred out to Packaging
Department in July
62,000
Inventory in process, July 31 (25%
completed)
3,000
Total gallons to be assigned costs
65,000
Group 3
58,500
25%
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750
59,250
Conversion Equivalent Units
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Check Up Corner 17-1
•
Equivalent Exits
The Bottling Department of Rocky Springs Beverage Company had 2,000
liters in the beginning work in process (30% complete). During the month,
28,500 liters were started and 29,000 liters were completed. The ending
work in process inventory was 1,500 liters (60% complete). Materials are
added at the beginning of the process, while conversion costs are added
evenly throughout the process.
a. How many units were started and completed during the month?
b. What are the total equivalent units for:
1.
2.
Direct materials
Conversion costs
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Check Up Corner 17-1
Equivalent Exits
Solution (slide 1 of 3)
a. The units started and completed can be computed as follows:
Alternative One
Units
Alternative Two
Units
Completed (transferred out)
29,000
Started (during month)
28,500
Inventory in process
(beginning)
(2,000)
Inventory in process
(beginning)
(1,500)
Started and completed
27,000
Started and completed
27,000
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Check Up Corner 17-1
Equivalent Exits
Solution (slide 2 of 3)
b.
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Check Up Corner 17-1
Equivalent Exits
Solution (slide 3 of 3)
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Step 3: Determine the Cost per Equivalent Unit
(slide 1 of 4)
• The cost per equivalent unit for direct materials
and conversion costs is computed as follows:
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Step 3: Determine the Cost per Equivalent Unit
(slide 2 of 4)
• The July direct materials and conversion cost
equivalent units for Frozen Delight’s Mixing
Department from Step 2 are as follows:
Equivalent Units
Direct
Materials
Group
Specifics
Group 1
Inventory in process, July 1
0
1,500
Group 2
Started and completed in July
(62,000 − 5,000)
57,000
57,000
Transferred out to Packaging
Department in July
57,000
58,500
Inventory in process, July 31
3000
750
Total gallons to be assigned costs
60,000
59,250
Group 3
Conversion
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Step 3: Determine the Cost per Equivalent Unit
(slide 3 of 4)
• The direct materials and conversion costs
incurred by Frozen Delight in July are as follows:
Direct Materials
$66,000
Conversion costs
Direct labor
$10,500
Factory overhead
$7,275
Total product costs incurred in July
$17,775
$83,775
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Step 3: Determine the Cost per Equivalent Unit
(slide 4 of 4)
• The direct materials and conversion costs per
equivalent unit are computed as follows:
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Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units (slide 1 of 8)
• Product costs must be allocated to the units
transferred out and the partially completed units on
hand at the end of the period.
o The product costs are allocated using the costs per
equivalent unit for materials and conversion costs that
were computed in Step 3.
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Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units (slide 2 of 8)
• The total production costs to be assigned for
Frozen Delight in July are $90,000, computed as
follows:
Specifics
Cost ($)
Inventory in process, July 1, 5,000 gallons:
Direct materials cost, for 5,000 gallons
5,000
Conversion costs, for 5,000 gallons, 70% completed
1,225
Total inventory in process, July 1
6,225
Direct materials cost for July, 60,000 gallons
66,000
Direct labor cost for July
10,500
Factory overhead applied for July
7,275
Costs incurred in July
83,775
Total production costs to account for
90,000
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Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units (slide 3 of 8)
• The units to be assigned these costs follow. The
costs to be assigned these units are indicated by
question marks.
Group
Specifics
Whole
Units
(Gallons)
Total Cost ($)
Group 1
Inventory in process, July 1,
completed in July
5,000
?
Group 2
Started and completed in July
57,000
?
Transferred out to the
Packaging Department in July
62,000
?
Inventory in process, July 31
3,000
?
65,000
90,000
Group 3
Total
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Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units (slide 4 of 8)
• The 5,000 gallons of inventory in process on July
1 (Group 1) were completed and transferred out
to the Packaging Department in July. The cost of
these units is determined as follows:
Specifics
Direct Materials
Costs ($)
Conversion
Costs ($)
Inventory in process, July 1 balance
0
0
Equivalent units for completing the July 1
in-process inventory
0
1,500
Cost per equivalent unit
× 1.10
Cost of July 1 in-process inventory
0
Cost of July 1 in-process inventory
transferred to the Packaging
Department
Total
Costs ($)
6,225
× 0.30
450
450
6,675
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Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units (slide 5 of 8)
• The 57,000 units started and completed in July
(Group 2) incurred all (100%) of their direct
materials and conversion costs in July.
o Thus, the cost of the 57,000 gallons started and
completed is computed by multiplying 57,000 gallons
by the costs per equivalent unit for materials and
conversion costs as follows:
Specifics
Units started and
completed in July
Cost per equivalent unit
Cost of the units started
and completed in July
Direct
Materials Cost
Conversion
Costs
57,000 gallons
57,000 gallons
× $1.10
× $0.30
$62,700
$17,100
Total
Costs
$79,800
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Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units (slide 6 of 8)
• The total cost transferred to the Packaging
Department in July is the sum of the beginning
inventory cost and the costs of the units started
and completed in July, computed as follows:
Group
Specifics
Amount ($)
Group 1
Cost of July 1 in-process inventory
6,675
Group 2
Cost of the units started and
completed in July
79,800
Total costs transferred to the
packaging department in July
86,475
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Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units (slide 7 of 8)
• The 3,000 gallons in process on July 31 (Group
3) incurred all their direct materials costs and
25% of their conversion costs in July. The cost of
these partially completed units is computed as
follows:
Specifics
Direct Materials
Costs
Conversion
Costs
Equivalent units in ending
inventory
3,000 gallons
750 gallons
Cost per equivalent unit
× $1.10
× $0.30
Cost of 31 July in-process
inventory
$3,300
$225
Total Costs
$3,525
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Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units (slide 8 of 8)
• To summarize, the total manufacturing costs for
Frozen Delight in July were assigned as follows:
Whole Units
(Gallons)
Group
Specifics
Group 1
Inventory in process, July 1,
completed in July
5,000
6,675
Group 2
Started and completed in July
57,000
79,800
Transferred out to the
Packaging Department in
July
62,000
86,475
Inventory in process, July 31
3,000
3,525
Total
65,000
90,000
Group 3
Total Cost ($)
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Preparing the Cost of Production Report
• A cost of production report is prepared for each
processing department at periodic intervals.
• The report summarizes the following production
quantity and cost data:
o The units for which the department is accountable
and the disposition of those units.
o The production costs incurred by the department and
the allocation of those costs between completed
(transferred out) and partially completed units.
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Cost of Production Report for Frozen
Delight’s Mixing Department—F I F O
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Check Up Corner
Cost per Equivalent Unit
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Check Up Corner
Cost per Equivalent Unit
Solution (slide 1 of 2)
a. 1.
2.
Costs per equivalent unit are used to allocate the direct
materials and conversion costs to the completed and
partially completed units in part b.
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Check Up Corner
Cost per Equivalent Unit
Solution (slide 2 of 2)
b.
Direct
Materials
Costs ($)
Specifics
Conversion
Costs($)
Inventory in process, beginning of period
1,860
To complete inventory in process, beginning
of period
Started and completed during the period
0
$420a
420
21,600b
8,100c
29,700
Transferred out of Bottling (completed)
Inventory in process, end of period
Total
Costs($)
31,980
1,200d
270e
1,470
Total costs assigned by the Bottling
Department
33,450
Completed and transferred out of production
31,980
Inventory in process, ending
1,470
a1,400 units × $0.30 = $420
b27,000 units × $0.80 = $21,600
d1,500 units × $0.80 = $1,200
c27,000 units × $0.30 = $8,100
e900 units × $0.30 = $270
No materials cost is added
during the current period for
beginning inventory.
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Journal Entries for a Process Cost System
(slide 1 of 6)
• The journal entries for Frozen Delight’s July
transactions are shown on the next four slides.
o To simplify, the entries are shown in summary form,
even though many of the transactions would be
recorded daily.
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Journal Entries for a Process Cost System
(slide 2 of 6)
a. Purchased materials, including milk, cream, sugar, packaging, and
indirect materials on account, $88,000.
Materials
$88,000
Accounts Payable
$88,000
a. The Mixing Department requisitioned milk, cream, and sugar,
$66,000. This is the total amount from the original July data.
Packaging materials of $8,000 were requisitioned by the Packaging
Department. Indirect materials for the Mixing and Packaging
departments were $4,125 and $3,000, respectively.
Work in Process—Mixing
$66,000
Work in Process—Packaging
$8,000
Factory Overhead—Mixing
$4,125
Factory Overhead—Packaging
$3,000
Materials
$81,125
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Journal Entries for a Process Cost System
(slide 3 of 6)
c. Incurred direct labor in the Mixing and Packaging
departments of $10,500 and $12,000, respectively.
Work in Process—Mixing
$10,500
Work in Process—Packaging
$12,000
Wages Payable
$22,500
c. Recognized equipment depreciation for the Mixing and
Packaging departments of $3,350 and $1,000,
respectively.
Factory Overhead—Mixing
$3,350
Factory Overhead—Packaging
$1,000
Wages Payable
$4,350
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Journal Entries for a Process Cost System
(slide 4 of 6)
e. Applied factory overhead to Mixing and Packaging
departments of $7,275 and $3,500, respectively.
Work in Process—Mixing
$7,275
Work in Process—Packaging
$3,500
Factory Overhead—Mixing
$7,725
Factory Overhead—Packaging
$3,500
e. Transferred costs of $86,475 from the Mixing
Department to the Packaging Department per the cost
of production report.
Work in Process—Packaging
$86,475
Work in Process—Mixing
$86,475
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Journal Entries for a Process Cost System
(slide 5 of 6)
g. Transferred goods of $106,000 out of the Packaging
Department to Finished Goods according to the
Packaging Department cost of production report.
Finished Goods—Ice Cream
$106,000
Work in Process—Packaging
$106,000
g. Recorded the cost of goods sold out of the finished
goods inventory of $107,000.
Cost of Goods Sold
$107,000
Finished Goods—Ice Cream
$107,000
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Frozen Delight’s Cost Flows
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Journal Entries for a Process Cost System
(slide 6 of 6)
• The ending inventories for Frozen Delight are
reported on the July 31 balance sheet as
follows:
Specifics
Amount ($)
Materials
6,875
3,525
Work in process–Mixing Department
(Determined from the cost of
production report)
Work in process–Packaging Department
7,725
Finished Goods
4,000
Total inventories
22,125
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Check Up Corner
•
Process Costing Journal Entries
The cost of materials transferred into the Bottling Department of Rocky Springs
Beverage Company is $22,800, including $20,000 from the Blending Department
and $2,800 from the materials storeroom. The conversion costs for the period in
the Bottling Department are $8,790 ($3,790 factory overhead applied and $5,000
direct labor). The total cost transferred to Finished Goods during the period is
$31,980. The Bottling Department had a beginning work in process inventory of
$1,860.
a.
Journalize:
1.
2.
3.
b.
The cost of transferred-in materials
The conversion costs
The costs transferred out
Determine the balance of Work in Process—Bottling at the end of
the period.
• Note: The costs transferred out of the Bottling Department and the cost of the
Bottling Department’s ending inventory are computed in Check Up Corner 17-2.
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Check Up Corner
Process Costing Journal Entries
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Using the Cost of Production Report for
Decision Making—Frozen Delight (slide 1 of 3)
• Frozen Delight’s cost of production report for the
Mixing Department shows that beginning
inventory is $6,225 (see slide 40). The July 1
inventory in process of $6,225 consists of the
following costs:
Specifics
Amount ($)
Direct materials cost, 5,000
gallons
5,000
Conversion costs, 5,000
gallons, 70% completed
1,225
Total inventory in
process, July 1
6,225
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Cost of Production Report for
Decision Making—Frozen Delight (slide 2 of 3)
• Using the preceding data, the June costs per
equivalent unit of materials and conversion costs
can be determined as follows:
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Cost of Production Report for
Decision Making—Frozen Delight (slide 3 of 3)
• In July, the cost per equivalent unit of materials
increased by $0.10 per gallon, while the cost per
equivalent unit for conversion costs decreased
by $0.05 per gallon, computed as follows:
Specifics
July ($)*
June ($)
Increase
(Decrease) ($)
Cost per equivalent unit for direct
materials
1.10
1.00
0.10
Cost per equivalent unit for
conversion costs
0.30
0.35
(0.05)
*From Exhibit 8
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Cost of Production Report for
Decision Making—Holland Beverage Company
(slide 1 of 2)
• A cost of production report may be prepared showing more
cost categories beyond just direct materials and conversion
costs.
• To illustrate, the Blending Department of Holland Beverage
Company prepared cost of production reports for April and
May showing multiple cost categories, as follows:
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Cost of Production Report for
Decision Making—Holland Beverage Company
(slide 2 of 2)
• The May results indicate that total unit costs have
increased from $0.50 to $0.53, or 6% in May.
• To determine the possible causes for this increase, the
cost of production report is restated in per-unit terms by
dividing the costs by the number of units completed, as
follows:
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Yield
(slide 1 of 2)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Yield
(slide 2 of 2)
• Assume that 1,000 pounds of sugar enter the
Packaging Department, and 980 pounds of sugar
were packed.
o
The yield is computed as follows:
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Appendix: Determining Cost Using the Average
Cost Method (slide 1 of 2)
• Assume that S&W Ice Cream Company (S&W)
mixes direct materials (milk, cream, sugar) in
refrigerated vats and has two manufacturing
departments, Mixing and Packaging.
o The manufacturing data for the Mixing Department for
July are as follows:
Specifics
Amount ($)
Inventory in process, July 1, 5,000 gallons (70% completed)
6,200
Direct materials cost incurred in July, 60,000 gallons
66,000
Direct labor cost in July
10,500
Factory overhead applied in July
6,405
Total production costs to account for
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
89,105
Appendix: Determining Cost Using the Average
Cost Method (slide 2 of 2)
• Under the average cost method, all production
costs (materials and conversion costs) are
combined together for determining equivalent
units and cost per equivalent unit.
Amount
Specifics
(To be determined by
preparing a cost of
production report)
Cost of goods transferred to Packaging in July
(includes units in process on July 1), 62,000
gallons
?
Cost of work in process inventory, July 31,
3,000 gallons, 25% completed as to
conversion costs
?
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Appendix: Step 1:
Determine the Units to Be Assigned Costs (slide 1 of 3)
• The first step is to determine the units to be assigned
costs.
o
A unit can be any measure of completed production, such
as tons, gallons, pounds, barrels, or cases.
▪ For S&W, a unit is a gallon of ice cream.
• S&W’s Mixing Department had 65,000 gallons of direct
materials to account for during July, as shown here:
Specifics
Total Gallons to
Account for
Inventory in process, July 1
5,000 gallons
Received from materials storeroom
60,000 gallons
Total units to account for by the Packaging Department
65,000 gallons
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Appendix: Step 1:
Determine the Units to Be Assigned Costs (slide 2 of 3)
• There are two groups of units to be assigned
costs for the period.
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Appendix: Step 1:
Determine the Units to Be Assigned Costs (slide 3 of 3)
• The total units (gallons) to be assigned costs for
S&W can be summarized as follows:
Group
Specifics
Number of Gallons
Group 1
Units transferred out to the
Packaging Department in July
62,000
Group 2
Inventory in process, July 31
3,000
65,000
Total gallons to be assigned
costs
(Total gallons to be assigned
costs equal the total units to
account for)
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Appendix: Step 2:
Compute Equivalent Units of Production (slide 1 of 2)
• S&W has 3,000 gallons of whole units in the work in process
inventory for the Mixing Department on July 31. Because these
units are 25% complete, the number of equivalent units in
process in the Mixing Department on July 31 is 750 gallons
(3,000 gallons × 25%). Because the units transferred to the
Packaging Department have been completed, the whole units
(62,000 gallons) transferred are the same as the equivalent units
transferred.
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Appendix: Step 2:
Compute Equivalent Units of Production (slide 2 of 2)
• The total equivalent units of production for the Mixing
Department are determined by adding the equivalent units in
the ending work in process inventory to the units transferred
and completed during the period, computed as follows:
Specifics
Number of Gallons
Equivalent units completed and transferred to
the Packaging Department during July
62,000
Equivalent units in ending work in process,
July 31
750
Total equivalent units
62,750
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Appendix: Step 3:
Determine the Cost per Equivalent Unit
• Because materials and conversion costs are combined
under the average cost method, the cost per equivalent
unit is determined by dividing the total production costs
by the total equivalent units of production as follows:
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Appendix: Step 4: Allocate Costs to
Transferred Out and Partially Completed Units
• The cost of transferred and partially completed
units is determined by multiplying the cost per
equivalent unit times the equivalent units of
production. For S&W’s Mixing Department, these
costs are determined as follows:
Group
Specifics
Amount ($)
Group 1
Transferred out to the Packaging
Department (62,000 gallons × $1.42)
88,040
Group 2
Inventory in process, July 31 (3,000
gallons × 25% × $1.42)
1,065
Total production costs
89,105
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Cost of Production Report for S&W’s
Mixing Department—Weighted Average Method
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.