MANAGEMENT ACCOUNTING (2)

Chapter (17) Process Costing

Lectures (10 and 11)
 Job Order Costing Vs. Process Costing

• The main difference between process costing and job costing is the
extent of averaging used to compute unit costs of products or services.
• In a job-costing system, individual jobs use different quantities of
production resources, so it would be incorrect to cost each job at the
same average production cost.
• In contrast, when identical or similar units of products or services are
mass-produced, not processed as individual jobs, process costing is
used to calculate an average production cost for all units produced.
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 Process Costing
• Process costing is a system where the unit cost of a
product or service is obtained by assigning total costs
to many identical or similar units.
• Examples:
• Each unit receives the same or similar amounts of
direct materials costs, direct labor costs, and
manufacturing overhead.
• Unit costs are computed by dividing total costs
incurred by the number of units of output from the
production process.
 Process-Costing Assumptions
• Direct materials are added at the beginning of
the production process, or at the start of work
in a subsequent department down the
assembly line.
• Conversion costs are added equally along the
production process.
Flow of Process Costing

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Question (1):What is an equivalent unit?
Nihon, Inc., is a manufacturer of digital cameras. It has two departments: assembly and testing. In January
2012, the company incurred $750,000 on direct materials and $798,000 on conversion costs, for a total
manufacturing cost of $1,548,000
Required:
Assume there was no beginning inventory of any kind on January 1, 2012. During January, 10,000 cameras were placed
into production and all 10,000 were fully completed at the end of the month.

•What is a conversion cost?

Conversion costs = …………………….

Direct +………………………..
MOH
labor

•The direct materials were consumed by how many units? 10,000 units
•The conversion costs were consumed by how many units? 10,000 units

What is the unit direct material cost of an assembled camera in January?

Cost/unit of DM = 750,000 / 10,000 = $75/unit

•What is the unit conversion cost of an assembled camera in January?

Cost/unit of CC =
798,000 / 10,000 = $79.8/unit

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2. Assume that during February 10,000 cameras are placed into production. Further assume the same total
assembly costs for January are also incurred in February, but only 9,000 cameras are fully completed at the
end of the month. All direct materials have been added to the remaining 1,000 cameras. However, on average,
these remaining 1,000 cameras are only 50% complete as to conversion costs.

•The direct materials were consumed by how many in February?

10,000 units

•The conversion costs were consumed by how many in February?

9,000 1,000 units each

1,000 I have to convert the
complete received half its share
incomplete
incomplete units to
units from the Conversion
units complete units
costs = 500 units
received full share of
9,000 + 500 = 9,500 equivalent units conversion costs
What is the unit direct material cost of an assembled camera in January?

Cost/unit of DM =
750,000/10,000 = $75/ unit

What is the unit conversion cost of an assembled camera in January?

Cost/unit of CC = 798,000/9,500 = $84/ unit

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•What is total cost for the finished assembled cameras in February 2012?

Total cost = DM + CC
= 9,000 x 75 + 9,000 x 84 = $1,431,000

•What is total cost for the WIP assembled cameras in February 2012?

Total cost = DM + CC

= 1000 x 75 + 500 x 84 = $117,000

What if You have Beginning and

Ending WIP ??????
Use the Weighted Average Method Use the FIFO
(No distinction between the beginning (Beginning units are completed
units and the newly produced) first)

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Question (2): Beginning and Ending , Weighted Average and FIFO

THE ASSEMBLY DIVISION USES THE WEIGHTED-AVERAGE METHOD OF PROCESS COSTING

PHYSICAL DIRECT CONVERSION

UNITS MATERIAL COSTS
BEG. WIP (MAY 1ST) 80 $493,360 $91,040
STARTED IN MAY 2012 500
COMPLETED DURING MAY 460
2012 (I.E FINISHED GOODS)
ENDING WIP (MAY 31ST) 120
TOTAL COSTS ADDED $3,220,000 $1,392,000
DURING MAY
THE BEGINNING WIP UNITS WERE ALREADY 90% COMPLETED FOR DIRECT
MATERIALS AND 40% FOR CONVERSION COSTS
WHILE THE ENDING UNITS WIP UNITS ARE NOW 60% COMPLETED FOR
DIRECT MATERIALS AND 30% COMPLETED FOR CONVERSIONS COSTS
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Question (2): Beginning and Ending , Weighted Average and FIFO

Required:
•Using the Weighted Average Method
•Compute the number of equivalent units utilized the Direct Materials and the Conversion Costs

Physical Units Equivalent Units

DM CC
WIP beginning 80
Started in the current period 500
Total
580
Completed and transferred out 460 460 460
WIP ending 120 120 x 60% 120 x 30%
72 36
Total 532 496

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 DM CC Total
Cost of WIP Beg 493,360 91,040 $584,400***
Costs added during the current period 3,220,000 1,392,000
Total costs to account for $3,713,360 $1,483,040 $5,196,400
÷
Equivalent units
532 units 496 units
Cost / equivalent unit
$6,980 $2,990

Assignment of costs to:

Completed (finished units) $6,980 x 460 $2,990 x 460 $4,586,200
WIP ending $6,980 x 72 $2,990 x 36 $610,200
Total costs $5,196,400

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Question (2): Beginning and Ending , Weighted Average and FIFO

THE ASSEMBLY DIVISION USES THE WEIGHTED-AVERAGE METHOD OF PROCESS COSTING

PHYSICAL DIRECT CONVERSION

UNITS MATERIAL COSTS
BEG. WIP (MAY 1ST) 80 $493,360 $91,040
STARTED IN MAY 2012 500
COMPLETED DURING MAY 460
2012 (I.E FINISHED GOODS)
ENDING WIP (MAY 31ST) 120
TOTAL COSTS ADDED $3,220,000 $1,392,000
DURING MAY
THE BEGINNING WIP UNITS WERE ALREADY 90% COMPLETED FOR DIRECT
MATERIALS AND 40% FOR CONVERSION COSTS
WHILE THE ENDING UNITS WIP UNITS ARE NOW 60% COMPLETED FOR
DIRECT MATERIALS AND 30% COMPLETED FOR CONVERSIONS COSTS
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Question (2): Beginning and Ending , Weighted Average and FIFO

Required:
•Using the FIFO Method
•Compute the number of equivalent units utilized the Direct Materials and the Conversion Costs

Physical Units Equivalent Units

DM CC
WIP beginning 80
Started in the current period 500
Total
580
Completed and transferred out 80 80 x 10% = 8 80 x 60% = 48
From Beg.
From newly started 380 380 380
WIP ending 120 x 60% 120 x 30%
120
72 36
Total 460 464

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 DM CC Total
Cost of WIP Beg 0 0
Costs added during the current period 3,220,000 1,392,000
Total costs to account for $3,220,000 $1,392,000 $4,612,000
÷
Equivalent units
460 units 464 units
Cost / equivalent unit
$7000 $3,000

Assignment of costs to:

Completed a) from Beg $7,000 x 8 $3,000 x 48 $200,000
b) From newly started $7,000 x 380 $3,000 x 380 $3,800,000
WIP ending $7000 x 72 $3,000 x 36 $612,000
Total costs $4,612,000

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 End of Lecture (10 and 11)
Covered today
• Definition and Examples of Process Costing
• Meaning of Equivalent units
• Calculating the cost/equivalent unit under the
following cases:
– No beginning no ending inventory
– Ending inventory only
– Beginning and ending inventory using
• Weighted Average (WA)
• FIFO

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