ACC 3200. Process Costing. Learning Objectives. Describe the key features of a process costing system. Reconcile the number of physical units using the weighted average method Calculate equivalent units using the weighted average method.
The foundation of a process costing system is the production report. In the report we provide information about:
The number of units produced.
The manufacturing costs transferred into Work in Process Inventory.
The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory.
The number of units remaining in process at the end of the period.
The cost of units remaining in process at the end of the period.
Section 1 of Example Production Report
(Unit = 1 Barrel of Wine)
The report tells managers about the total number of units worked on and where they are in the process.
Equivalent units are used to convert partially complete units into the equivalent number of full units.
1Step 2: Translate Physical Units into Equivalent Units
We need to calculate equivalent units because a process usually has some partially completed unitsin its beginning and ending inventory.
Direct materials are added at the beginning of the process. So, once a unit is started, it will have 100% of the required direct materials.
Conversion costs are incurred uniformly in the process.
The 1,600 units that were transferred to bottling during the period are100% complete for material and conversion.
The 400 units in ending inventory are 60% complete as to conversion costs.
We have not discussed process costing when the FIFO method is applied. This material in covered in the Supplement to this chapter. The only difference between the two methods is how we treat beginning inventory.
We have not considered how to account for subsequent departments in process costing. We did not look at extending our example to cover the Bottling Department.
Beginning Units in Process
Units Started and Completed
Ending Units in Process
FIFO assumes that the units in beginning inventory were completed first. So, not all units that were completed during the current period were started in the current period.
Beginning inventory is 100% complete as to materials and 70% complete as to conversion.
400 units × 60% = 240
Complete as to materials
200 units × 30% = 60