Process Costing

Chapter 9
Part 2

© 2021 McGraw-Hill Education

 Learning Objective 5

Compute the equivalent

units of production using
the FIFO method.

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 1

 FIFO vs. Weighted-Average Method

The FIFO method (generally considered more

accurate than the weighted-average method)
differs from the weighted-average method in
two ways:

1. The computation of equivalent units.

2. The way in which the costs of beginning
inventory are treated.

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 2

 Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Here is
information concerning the Assembly Department
for the month of June.
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 3

 Equivalent Units – FIFO Method
Step 1: Determine equivalent units needed to complete
beginning Work in Process Inventory.

Materials Conversion
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 4

 Equivalent Units – FIFO Method
Step 2: Determine units started and completed during
the period.

Materials Conversion
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 5

 Equivalent Units – FIFO Method
Step 3: Add the equivalent units in ending Work in
Process Inventory.

Materials Conversion
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
Ending Work in Process
Materials: 900 units × 60% complete 540
Conversion: 900 units × 30% complete 270
Equivalent units of production 5,820 5,610

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 6

 FIFO Example
Materials 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

300 × 60%
180 Equivalent Units
5,100 Units Completed 900 × 60%
540 Equivalent Units
5,820 Equivalent units
of production

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 7

 FIFO Example
Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

300 × 80%
240 Equivalent Units
5,100 Units Completed 900 × 30%
270 Equivalent Units
5,610 Equivalent units
of production

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 8

 Learning Objective 6

Compute the cost per

equivalent unit using the
FIFO method.

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 9

 Cost per Equivalent Unit - FIFO
Let’s revisit the Smith Company Assembly Department
for the month of June to prepare our production report.
Beginning work in process: 400 units
Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920

Production started during June 6,000 units

Production completed during June 5,400 units

Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130

Ending work in process 900 units

Materials: 60% complete
Conversion: 30% complete

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 10

 Cost per Equivalent Unit - FIFO
The formula for computing the cost per
equivalent unit under FIFO method is:

Cost per Cost added during the period

equivalent =
unit Equivalent units of production

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 11

 Cost per Equivalent Unit - FIFO

Total
Cost Materials Conversion

Cost added in June $ 199,751 $ 118,621 $ 81,130

Equivalent units 5,820 5,610
Cost per equivalent unit $ 20.3816 $ 14.4617

$118,621 ÷ 5,820 $81,130 ÷ 5,610

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 12

 Learning Objective 7

Assign costs to units using

the FIFO method.

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 13

 Applying Costs - FIFO
Step 1: Record the equivalent units of production in ending Work
in Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270

900 units × 60% 900 units × 30%

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 14

 Applying Costs - FIFO
Step 2: Record the cost per equivalent unit.

Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 20.3816 $ 14.4617

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 15

 Applying Costs - FIFO
Step 3: Compute the cost of ending Work in Process Inventory.

Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of Ending WIP inventory $ 11,006 $ 3,905 $ 14,911

540 × $20.3816 270 × 14.4617

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 16

 Cost of Units Transferred Out
Step 1: Record the cost in beginning Work in Process Inventory.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 17

 Cost of Units Transferred Out
Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,668 $ 3,471 7,139

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 18

 Cost of Units Transferred Out
Step 3: Compute the cost of units started and completed this
period.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,668 $ 3,471 7,139
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of units started and completed $ 103,946 $ 73,755 177,701

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 19

 Cost of Units Transferred Out
Step 4: Compute the total cost of units transferred out.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,668 $ 3,471 7,139
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of units started and completed $ 103,946 $ 73,755 177,701
Cost of Units Transferred Out $ 194,879

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 20

 Learning Objective 8

Understand the
treatment of losses in
process costing
weighted average

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 21

 Accounting for Normal Losses and Scrap
Value
 Normal Losses
 It is part of the production outputs
 It is treated as part of the normal production cost for the finished
items (i.e. is absorbed into all products and is included in
inventory valuation)

 Normal Losses with scrap value

 Scrap value is part of the expected income to offset the expense
therefore is net-off from the expenses.

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 22

 Accounting for Abnormal Losses and Scrap
Value
 Abnormal Losses
 They are a part of the production outputs
 They are not part of the normal production cost, and therefore
are expensed off separately from the production costs (i.e.
cannot be used for inventory valuation)

 Abnormal Losses with scrap value

 Scrap value receivable is also not part of the normal production
income, and therefore is treated as other income.

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 23

 An Example: Losses with Scrap Value
Let’s revisit the Smith Company Assembly Department for the month of June
with the additional losses information.
Beginning Work in Process Inventory: 400 units
Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units

Expected losses of 2% completed units cannot pass quality check. These rejected
items can normal be sold for $5 each as scrap.

In addition to the normal losses of 2%, 200 of the latest produced items were found
out of shape during the problem of the finishing touch from the machine.

Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130

Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 24

 Physical Flow of Units (the Weighted
Average Method)
• Normal and Abnormal Losses are parts of the outputs
• Completed quantity is most effectively calculated as a balancing figure
Physical
Weighted-Average method Units %
Beginning work in process (BWIP) 300
Started 6,000
Total available or Inputs 6,300

Completed (i.e. transferred out) 5,092 100%

Normal loss 2% of 5400 units 108 100%
Abnormal loss 200 units 200 100%
Ending work in process (EWIP) 900 60%
30%
Total produced or Ouputs 6,300

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 25

 Compute the Equivalent Units of Production

Physical
Weighted-Average method Units %
Beginning work in process (BWIP) 300
Started 6,000
Total available or Inputs 6,300
Materials Conversion
Equivalent Unit
Completed (i.e. transferred out) 5,092 100% 5,092 5,092
Normal loss 2% of 5400 units 108 100% 108 108
Abnormal loss 200 units 200 100% 200 200
Ending work in process (EWIP) 900 60% 540
30% - 270
Total produced or Ouputs 6,300 5,940 5,670

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 26

 Summarize the Total Cost Incurred and
Compute the Cost Per Equivalent Unit
Physical
Weighted-Average method Units %
Scrap
Beginningvalue
work in receivable
process (BWIP)from Normal Losses
normally is netting-off the cost as the
300
loss
Startedand the income are part of the expected 6,000 process. In most cases, scrap value
is off-setting the Totalmaterial
available orcost
Inputsbecause
6,300scrap is normal valuing the material
Materials Conversion
Equivalent Unit
Completed (i.e. transferred out) 5,092 100% 5,092 5,092
Normal loss 2% of 5400 units 108 100% 108 108
Abnormal loss 200 units 200 100% 200 200
Ending work in process (EWIP) 900 60% 540
30% - 270
Total produced or Ouputs 6,300 5,940 5,670
Costs
BWIP $ 6,119 $ 3,920
Incurred during the period $ 118,621 $ 81,130
Less: Scrap value of the normal loss $ (540) $ -
Total costs added $ 124,200 $ 85,050
Cost per equivalent unit $ 20.91 $ 15.00
$124 ,200 $85,050
 $20.91  $15.00
© 2021 McGraw-Hill Education 5,940 Noreen, Brewer, Cheng & Yuen
Garrison, 5,670 27
 Calculate the Values of Completed and
Ending WIP Inventories
Physical
Weighted-Average method Units % Abnormal loss is not
ginning work in process (BWIP) 300
a part of the
arted 6,000
inventory valuation
Total available or Inputs 6,300
Materials Conversion
Equivalent Unit
mpleted (i.e. transferred out) 5,092 100% 5,092 5,092
ormal loss 2% of 5400 units 108 100% 108 108
bnormal loss 200 units 200 100% 200 200
ding work in process (EWIP) 900 60% 540 -
30% - 270
Total produced or Ouputs 6,300 5,940 5,670
Costs Total
WIP $ 6,119 $ 3,920 $ 10,039
curred during the period $ 118,621 $ 81,130 $ 199,751
ss: Scrap value of the normal loss $ (540) $ - $ (540)
Total costs added $ 124,200 $ 85,050 $ 209,250
ost per equivalent unit $ 20.91 $ 15.00 $ 35.91
Valuation Total
lue of goods transferred out (before normal loss value) $ 106,469 $ 76,380 $ 182,849
ormal loss $ 2,258 $ 1,620 $ 3,878
lue of goods transferred out (normal loss value included) $ 108,727 $ 78,000 $ 186,727
lue of EWIP $ 11,291 $ 4,050 $ 15,341
© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen
Total value of inventory $ 202,068 28
Cost Reconciliation Abnormal loss is not
Weighted-Average method
Physical a part of the
Units %
Beginning work in process (BWIP) 300
inventory valuation.
Started 6,000 It is treated as a part
Total available or Inputs 6,300 of the expense in
Materials Conversion
COGS.
Equivalent Unit
Completed (i.e. transferred out) 5,092 100% 5,092 5,092
Normal loss 2% of 5400 units 108 100% 108 108
Abnormal loss 200 units 200 100% 200 200
Ending work in process (EWIP) 900 60% 540 -
30% - 270
Total produced or Ouputs 6,300 5,940 5,670
Costs Total
BWIP $ 6,119 $ 3,920 $ 10,039
Incurred during the period $ 118,621 $ 81,130 $ 199,751
Less: Scrap value of the normal loss $ (540) $ - $ (540)
Total costs added $ 124,200 $ 85,050 $ 209,250
Cost per equivalent unit $ 20.91 $ 15.00 $ 35.91
Valuation Total
Value of goods transferred out (before normal loss value) $ 106,469 $ 76,380 $ 182,849
Normal loss $ 2,258 $ 1,620 $ 3,878
Value of goods transferred out (normal loss value included) $ 108,727 $ 78,000 $ 186,727
Value of EWIP $ 11,291 $ 4,050 $ 15,341
Total value of inventory $ 202,068
Value of abnormal loss to be written off as incurred $ 4,182 $ 3,000 $ 7,182
© 2021 McGraw-Hill Education Garrison, Noreen,
Total inventory and abnomal loss Brewer, Cheng & Yuen $ 209,250 29
 Learning Objective 9

Understand the
treatment of losses in
process costing
FIFO

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 30

 Process Costing with Losses
Physical Flow of Units (the FIFO Method)

Physical % completed in
FIFO method Units this period

BWIP (Portion to be completed) 300 60% = (1 - 40%)

80% = (1 - 20%)
Started and completed (S&C) 4,792 100%
5,400 ( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)
units Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP) 108 100%
Abnormal loss 200 units 200 100%
Ending work in process (EWIP) 900 60%
30%
Total produced or Outputs 6,300

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 31

 Compute the Equivalent Units of Production

Physical % completed in
FIFO method Units this period
Materials Conversion
Equivalent Unit
BWIP (Portion to be completed) 300 60% = (1 - 40%) 180 -
80% = (1 - 20%) - 240
Started and completed (S&C) 4,792 100% 4,792 4,792
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)

Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP) 108 100% 108 108
Abnormal loss 200 units 200 100% 200 200
Ending work in process (EWIP) 900 60% 540 -
30% - 270
Total produced or Outputs 6,300 5,820 5,610

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 32

 Summarize the Total Cost Incurred and
Compute the Cost Per Equivalent Unit
Physical % completed in
FIFO method Units this period
Materials Conversion
Equivalent Unit
BWIP (Portion to be completed) 300 60% = (1 - 40%) 180 -
80% = (1 - 20%) - 240
Started and completed (S&C) 4,792 100% 4,792 4,792
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)

Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP) 108 100% 108 108
Abnormal loss 200 units 200 100% 200 200
Ending work in process (EWIP) 900 60% 540 -
30% - 270
Total produced or Outputs 6,300 5,820 5,610
Costs
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations)
Incurred during the period $ 118,621 $ 81,130
Less Scrap value of the normal loss $ (540) $ -
Total costs added $ 118,081 $ 81,130
Cost per equivalent unit $ 20.29 $ 14.46

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 33

 Calculate the Values of Completed and
Ending WIP Inventories
Physical % completed in
FIFO method Units this period
Materials Conversion
Equivalent Unit
BWIP (Portion to be completed) 300 60% = (1 - 40%) 180 -
80% = (1 - 20%) - 240
Started and completed (S&C) 4,792 100% 4,792 4,792
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)

Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP) 108 100% 108 108
Abnormal loss 200 units 200 100% 200 200
Ending work in process (EWIP) 900 60% 540 -
30% - 270
Total produced or Outputs 6,300 5,820 5,610
Costs Total
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations) $ 10,039
Incurred during the period $ 118,621 $ 81,130 $ 199,751
Less Scrap value of the normal loss $ (540) $ - $ (540)
Total costs added $ 118,081 $ 81,130 $ 209,250
Cost per equivalent unit $ 20.29 $ 14.46 $ 34.75
Valuation Total
Value of goods transferred out (i.e. completed)
1. Total cost associated with BWIP
a) Cost brought forward from the previous period by BWIP $ 6,119 $ 3,920 $ 10,039
b) Cost incrred in the period to complete BWIP $ 3,652 $ 3,471 $ 7,123
2. Cost associated with units Started and Completed in the period $ 97,224 $ 69,300 $ 166,524
3. Cost associated with normal loss in the period $ 2,191 $ 1,562 $ 3,753
Total value of completed goods $ 109,186 $ 78,253 $ 187,439
Value of EWIP $ 10,956 $ 3,905 $ 14,861
Total value of inventory $ 202,300

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 34

 Cost Reconciliation
Physical % completed in
FIFO method Units this period
Materials Conversion
Equivalent Unit
BWIP (Portion to be completed) 300 60% = (1 - 40%) 180 -
80% = (1 - 20%) - 240
Started and completed (S&C) 4,792 100% 4,792 4,792
( i.e. Completed - BWIP - Normal Loss - Abnormal Loss)

Normal loss: (2% on 5,100 S&C + 2% on 300 BWIP) 108 100% 108 108
Abnormal loss 200 units 200 100% 200 200
Ending work in process (EWIP) 900 60% 540 -
30% - 270
Total produced or Outputs 6,300 5,820 5,610
Costs Total
BWIP (Irrelevant for the cost per equivalent unit calculation but important for cost reconciliations) $ 10,039
Incurred during the period $ 118,621 $ 81,130 $ 199,751
Less Scrap value of the normal loss $ (540) $ - $ (540)
Total costs added $ 118,081 $ 81,130 $ 209,250
Cost per equivalent unit $ 20.29 $ 14.46 $ 34.75
Valuation Total
Value of goods transferred out (i.e. completed)
1. Total cost associated with BWIP
a) Cost brought forward from the previous period by BWIP $ 6,119 $ 3,920 $ 10,039
b) Cost incrred in the period to complete BWIP $ 3,652 $ 3,471 $ 7,123
2. Cost associated with units Started and Completed in the period $ 97,224 $ 69,300 $ 166,524
3. Cost associated with normal losses in the period $ 2,191 $ 1,562 $ 3,753
Total value of completed goods $ 109,186 $ 78,253 $ 187,439
Value of EWIP $ 10,956 $ 3,905 $ 14,861
Total value of inventory $ 202,300
Value of abnormal loss to be written off as incurred $ 4,058 $ 2,892 $ 6,950
$ 209,250

© 2021 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 35