A Simple Example of process costing: (No Beg
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 $10,000
Manufacturing overhead $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 $0 180 units completed
Started 230 units $ ? (COGM)
Manf. costs for Jan.
DL $10,000
MOH $20,000
End.Bal 50 units $ ?
What is the accounting task at hand here?
To allocate the dollars in the Beg. Bal. ($0 here) and the period’s 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 = 180 ( $150 = $27,000
the Ending W-I-P Inv. = 50 ( 0.4 ( $150 = $ 3,000
$ 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.
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 Jan’99 (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 = $78,400 = $78,400 = $0.40
Eq. units of production (material) 180,000 + 20,000 ( 0.80 196,000
Cost/eq. unit for conversion:
= Total conversion content of production = $148,000 = $148,000 = $0.80
Eq. units of production (conversion) 180,000 + 20,000 ( 0.25 185,000
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 Materials Conversion
Units started into production 220,000
Costs added $96,200 $171,890
Units completed 210,000
Work in process, ending:
Units in process ?
Percentage completion 60% 15%
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 Jan’99 (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 Feb’99 (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 = $(6,400 + 96,200) = $102,600 = $0.45
Eq. units of production (material) 210,000 + 30,000 ( 0.60 228,000
Cost/eq. unit for conversion:
= Total conversion content of production = $(4,000 + 171,890) = $175,890 = $0.82
Eq. units of production (conversion) 210,000 + 30,000 ( 0.15 214,500
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