A Simple Example of process costing: (No Beg. WIP and one production dept.

) ACME Industries machines engine castings for an engine manufacturer. Thus only inputs direct labor and manufacturing overhead into production. (There is no direct material.) There is only one production department the machining work center. It began business on 1/1/90 and uses actual absorption costing. The following information is available for January 1990. Units in beginning W-I-P Inv. 0 Units started into production 230 Units completed 180 Units in ending W-I-P Inv = (0 + 230 180) = 50 Manufacturing costs for January: Direct labor Manufacturing overhead $10,000 $20,000

The 50 incomplete units were on average 40% complete as regards all conversion costs ( Direct Labor + Manufacturing Overhead) Note: In general the degree of completion can be different for each cost component. Required: Compute the following for January using actual absorption costing. a. Cost-of-Goods-Manufactured b. Ending balance of W-I-P inventory

Solution: Consider the W-I-P Inventory account Work-In-Process Inventory Beg.Bal 0 units $0 Started 230 units Manf. costs for Jan. DL $10,000 MOH $20,000 End.Bal 50 units $? 180 units completed $ ? (COGM)

What is the accounting task at hand here? To allocate the dollars in the Beg. Bal. ($0 here) and the periods manf. costs ($30,000 here) between two groups of units the 180 (complete units) finished in the period and the 50 incomplete units (only 40% finished) left on the factory floor at the end of the period. What seems a reasonable way to do this? If a completed unit is charged $Y, then a 40% complete unit should be charged $0.4 Y. 180 Y + 50 0.4 Y = 30,000 (180 + 50 0.4) Y = 30,000 Y = 30,000 / (180 + 50 0.4) Y = $150

Completing the allocation task: the COGM for January the Ending W-I-P Inv. = 180 $150 = 50 0.4 $150 $ 30,000 Accountants refer to the denominator in the last expression for Y above, namely the sum (180 + 50 0.4) = 200, as the equivalent units of production for the period. Makes sense, working on 180 units (100%) and 50 units (40%) is akin to working on 200 units (100%). Accordingly, the resulting value for Y, $150, is referred to as the cost per equivalent unit. Similarly, while there are 50 physical units (40% complete on average) in ending W-I-P, one would say there are 20 equivalent units therein. The dollar amount of ending W-I-P can thus be computed as either 50 0.4 $150 = $3,000 or 20 $150 =$3,000. = $27,000 = $ 3,000

Process Costing Example 2: (different degrees of completion for cost components) Midwest Refining reprocesses used motor oil. The following data are is for January 1999. January 1999 Units Materials Conversion Work in process, beginning: 0 Units started into production 200,000 Manf. Costs added $78,400 $148,000 Units completed 180,000 Work in process, ending: Units in process ? Percentage completion 80% 25% Required: Compute COGM and End WIP Inv. for January 1999.

SOLUTION W-I-P Beg. Inv Jan 99 0 Units (180,000 units completed) Cost of Beg. Inv. $0 (200,000 Units started in Jan) cost/eq.unit # eq.units Material added:$78,400 Materials content $0.40 180,000 = $72,000 Conversion: $148,000 Conversion content $0.80 180,000 = $144,000 Costs added in Jan. $226,400 COGM in Jan. $216,000 Total costs to be accounted for $226,400 End. Inv Jan99 (0 + 200,000 180,000 =20,000 Units) cost/eq.unit # eq.units Matl. (80% complete): 0.40 16,000 = $6,400 Conv. (25% complete): 0.80 5,000 = $4,000 Cost of End. Jan. Inv. $10,400 Cost/eq. unit for materials: = Total material content of production Eq. units of production (material) = $78,400 = 180,000 + 20,000 0.80 $78,400 196,000 = $0.40

Cost/eq. unit for conversion: = Total conversion content of production = $148,000 = Eq. units of production (conversion) 180,000 + 20,000 0.25 $148,000 185,000 = $0.80

Process Costing Example 3: (with beginning WIP Inventory) Continuing with Example 2 into February 1999 (whence the ending WIP calculated earlier becomes the beginning WIP), and given the following information: February 1999 Units started into production Costs added Units completed Work in process, ending: Units in process Percentage completion Units 220,000 $96,200 210,000 ? 60% 15% $171,890 Materials Conversion

Required: Compute COGM and End WIP Inv. for February 1999. (Since now there is beginning WIP, we need to make a cost flow assumption. Use the weighted average method.)

SOLUTION

W-I-P End. Inv Jan99 (20,000 Units) (210,000 units completed) cost/eq.unit # eq.units Matl. (80% complete): 0.40 16,000 = $6,400 Conv. (25% complete): 0.80 5,000 = $4,000 Cost of End. Jan. Inv. $10,400 (220,000 Units started in Feb) cost/eq.unit # eq.units Material added:$96,200 Materials content $0.45 210,000 = $94,500 Conversion: $171,890 Conversion content $0.82 210,000 = $172,200 Costs added in Feb. $268,090 COGM in Feb. $266,700 Total costs to be accounted for $278,490 End. Inv Feb99 (20,000 + 220,000 210,000 = 30,000 Units) cost/eq.unit # eq.units Matl. (60% complete): 0.45 18,000 = $8,100 Conv. (15% complete): 0.82 4,500 = $3,690 Cost of End. Feb. Inv. $11,790 Cost/eq. unit for materials: = Total material content of production Eq. units of production (material) = $(6,400 + 96,200) = 210,000 + 30,000 0.60 $(4,000 + 171,890) = 210,000 + 30,000 0.15 $102,600 228,000 $175,890 214,500 = $0.45

Cost/eq. unit for conversion: = Total conversion content of production = Eq. units of production (conversion) = $0.82