ACC203e

Managerial Accounting
Seminar 4

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Mangerial Accounting

STUDY UNIT 4
Process Costing
Chapter 2
❑ Four Steps for Process
Costing

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 Learning outcomes

By the end of this seminar, you should be able to

1. Calculate unit product cost by applying the four steps
of process costing.
2. Describe how production-related costs are tracked
through a process costing accounting system by
posting journal entries.
3. Calculate unit product cost using process costing in a
sequential production environment.
4. Describe how spoilage costs are tracked through a
process costing accounting system by posting journal
entries.
5. .
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 The Four-step Process
1. Analyze the physical units (i.e., how many
units have been completed and how many
remain in process?)
2. Compute the equivalent units produced.
(covered during last seminar)
3. Calculate unit cost.
4. Assign costs to products

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 Assigning Costs to Products –
Some Units Not Fully Completed

BeTech incurred the following manufacturing costs

in Feb:
Direct materials $40,000
Conversion costs 20,000
Total costs to be assigned $60,000

BeTech started 80,000 toys and completed 40,000

toys in Feb. BeTech had no beginning work in
process inventory. All direct materials had been
added to each toy still in process, but only 25
percent of conversion costs had been incurred for
the 40,000 toys still in process.

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 Assigning Costs to Products –
Some Units Not Fully Completed

Step 1 Step 2
Physical Equivalent Units
Flow of Units in Feb Units Material Conversion
Units to account for
Beginning work in process inventory 0
Units started this period 80,000
Total units to account for 80,000
Units accounted for
Completed and transferred out 40,000 40,000 40,000
Ending work in process inventory 40,000 40,000 10,000
Total units accounted for 80,000 80,000 50,000

25% x 40,000

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 Assigning Costs to Products –
Some Units Not Fully Completed

$40,000/80,000 $20,000/50,000
Flow of Costs in Feb Material Conversion Total
Costs to account for
Costs in beginning work in process inventory $ 0 $ 0 $ 0
Current period costs 40,000 20,000 60,000
Total costs to account for $ 40,000 $ 20,000 $ 60,000

Costs per equivalent unit (Step 3) $ 0.50 $ 0.40 $ 0.90

Costs accounted for (Step 4)

Costs assigned to units transferred $ 20,000 $ 16,000 $ 36,000
Cost of ending work in process inventory 20,000 4,000 24,000
Total costs accounted for $ 40,000 $ 20,000 $ 60,000

40,000*$0.50 40,000*$0.40 10,000*$0.40

40,000*$0.50

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 Process Costing with Beginning and Ending WIP Inventory

More challenging :
Beginning WIP Inventory consists of goods
started last period but not
completed by the end of last period.

Ending Work in Process Inventory consists

of units started during this period, but
incomplete at the end of this period.

We must now deal with inventory flow assumptions.

Weighted-average method & FIFO method

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 Assigning Costs Using Weighted-Average
Costing
❑ The weighted average method . . .
➢ Makes no distinction between work done in the
prior period and work done in the current
period.
➢ Blends together units and costs in beginning
inventory with units and costs in the current
period.

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Assigning Costs Using Weighted-Average
Costing

BeTech had the following cost and

unit data for March:
Percentage Complete Total Costs
Units Materials ConversionMaterials Conversion
Costs incurred in March $ 51,000 $ 62,600
Beginning WIP inventory 40,000 100% 25% 20,000 4,000
Units Started in March 120,000
Units completed 130,000 100% 100% ? ?
Ending WIP inventory 30,000 40% 60% ? ?

Total cost = $137,600

Note : March beginning inventory is Feb ending inventory.

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 Flow of units
Units accounted for

Beginning
Inventory 130,000 units
40,000 units completed
(40% completed) 160,000 units
(units to account
for) Ending Inventory
120,000 units 30,000 units
started (30% completed)

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Assigning Costs Using Weighted-Average
Costing

Step 1 Step 2
Physical Equivalent Units
Flow of Units in March Units Material Conversion
Units to account for
Beginning work in process inventory 40,000
Units started this period 120,000
Total units to account for 160,000
Units accounted for
Completed and transferred out 130,000 130,000 130,000
Ending work in process inventory 30,000 12,000 18,000
Total units accounted for 160,000 142,000 148,000

30,000*40% 30,000*60%

Complete step 2

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Assigning Costs Using Weighted-Average
Costing

$71,000/142,000 $66,600/148,000
Flow of Costs in March Material Conversion Total
Costs to account for
Costs in beginning work in process inventory $ 20,000 $ 4,000 $ 24,000
Current period costs 51,000 62,600 113,600
Total costs to account for $ 71,000 $ 66,600 $ 137,600

Costs per equivalent unit (Step 3) $ 0.50 $ 0.45 $ 0.95

Costs accounted for (Step 4)

Costs assigned to units transferred $ 65,000 $ 58,500 $ 123,500
Cost of ending work in process inventory 6,000 8,100 $ 14,100
Total costs accounted for $ 71,000 $ 66,600 $ 137,600

12,000 equivalent units @ $0.50 18,000 equivalent units @ $0.45

Complete step 3 & step 4

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Assigning Costs Using (FIFO) Costing

FIFO costing

Assumes units in
Distinguishes between
beginning work in
work done in the prior
process inventory are
period and work done in
completed and
the current period.
transferred first.

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 Assigning Costs Using (FIFO) Costing

Advantages of
FIFO costing

Inventory costs are

Managers can better more current as current
identify and manage period costs are assigned
current period costs. to units in process
and units completed.

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Using the four-step process in FIFO method

Step 1 Step 2
Physical Equivalent Units
Flow of Units in Mar Units Material Conversion
Units to account for
Beginning work in process inventory 40,000
Units started this period 120,000
Total units to account for 160,000
Units accounted for
Units completed and transferred out 130,000

Ending work in process inventory 30,000

Total units accounted for 160,000

Need to separate units completed and transferred out

into units started last month and completed this month
and units started this month and completed this month

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Using the four-step process in FIFO method

Step 1 Step 2
Physical Equivalent Units
Flow of Units in Mar Units Material Conversion
Units to account for
Beginning work in process inventory 40,000
Units started this period 120,000
Total units to account for 160,000
Units accounted for
Started last period & completed 40,000 - 30,000
Started this period & completed 90,000 90,000 90,000
Ending work in process inventory 30,000 12,000 18,000
Total units accounted for 160,000 102,000 138,000
40,000x0% (all completed last month) 40,000x75% (25% done last month)

30,000x40% 30,000x60%

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 Assigning Costs Using FIFO Costing
Use current costs only to compute cost/EU

$51,000/102,000 $62,600/138,000
Flow of Costs in March Material Conversion Total
Costs to account for
Prior period costs $ 20,000 $ 4,000 $ 24,000
Current period costs 51,000 62,600 113,600
Total costs to account for $ 71,000 $ 66,600 $ 137,600

Costs per equivalent unit (Step 3) $ 0.50 $ 0.454 $ 0.954

Must be equal
Costs accounted for (Step 4)
Prior period costs $ 20,000 $ 4,000 $ 24,000
Costs assigned to units transferred $ 45,000 $ 54,450 $ 99,450
Cost of ending work in process inventory 6,000 8,150 $ 14,150
Total costs accounted for $ 71,000 $ 66,600 $ 137,600

90,000 equivalent units @ $0.50 120,000 equivalent units @ $0.454

12,000 equivalent units @ $0.50

18,000 equivalent units @ $0.454

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 Cost of goods manufactured for the
month
Weighted average method
Cost of goods manufactured
= Costs assigned to units completed & transferred out
= $123,500 (slide 13)
FIFO
Cost of goods manufactured
= Cost of opening WIP + Current period’s costs
assigned to units completed & transferred out
= $24,000 + $45,000 + $54,450
= $123,450 (slide 18)

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 Flow of Manufacturing Costs

Picking Encapsulating Bottling

Department Department Department

Direct Materials $1,700 $1,000 $800

Direct Labour 50 60 300
Applied overhead 450 500 600

Required:
1.Calculate the costs transferred out of each department.
2.Prepare journal entries that reflect these costs transfers.

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 Journal entries & Costs transferred out

Picking Encapsulating Bottling

Department Department Department

Direct Materials 1 $1,700 $1,000 $800

Direct Labour 50 60 300
Applied overhead 450 500 600
Costs added $2,200 $1,560 $1,700
Costs transferred in 0 $2,200 $3,760
Costs transferred out $2,200 $3,760 $5,460

1 Dr Work in process (Picking) 2,200

Cr Raw Material inventories 1,700
Cr Wages payable 50
Cr Overhead control 450
Cost incurred for Picking Department

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 Journal entries & Costs transferred out

Picking Encapsulating Bottling

Department Department Department

Direct Materials $1,700 $1,000 $800

Direct Labour 50 60 300
Applied overhead 450 500 600
Costs added $2,200 $1,560 $1,700
Costs transferred in 0 $2,200 $3,760
Costs transferred out $2,200 $3,760 $5,460
2
2 Dr Work in process (Encapsulating) 2,200
Cr Work in process (Picking) 2,200
Transfer of costs from Picking to Encapsulating
Department

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 Journal entries & Costs transferred out

Picking Encapsulating Bottling

Department Department Department

Direct Materials $1,700 3 $1,000 $800

Direct Labour 50 60 300
Applied overhead 450 500 600
Costs added $2,200 $1,560 $1,700
Costs transferred in 0 $2,200 $3,760
Costs transferred out $2,200 $3,760 $5,460

3 Dr Work in process (Encapsulating) 1,560

Cr Raw Material inventories 1,000
Cr Wages payable 60
Cr Manufacturing overhead control 500
Cost incurred for Encapsulating Department

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 Journal entries & Costs transferred out

Picking Encapsulating Bottling

Department Department Department

Direct Materials $1,700 $1,000 $800

Direct Labour 50 60 300
Applied overhead 450 500 600
Costs added $2,200 $1,560 $1,700
Costs transferred in 0 $2,200 $3,760
Costs transferred out $2,200 $3,760 $5,460
4
Dr Work in process (Bottling) 3,760
4 Cr Work in process (Encapsulating) 3,760
Transfer of costs from Encapsulating to Bottling
Department

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 Journal entries & Costs transferred out

Picking Encapsulating Bottling

Department Department Department

Direct Materials $1,700 $1,000 5 $800

Direct Labour 50 60 300
Applied overhead 450 500 600
Costs added $2,200 $1,560 $1,700
Costs transferred in 0 $2,200 $3,760
Costs transferred out $2,200 $3,760 $5,460

5 Dr Work in process (Bottling) 1,700

Cr Raw Material inventories 800
Cr Wages payable 300
Cr Manufacturing overhead control 600
Cost incurred for Bottling Department

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 Journal entries & Costs transferred out

Picking Encapsulating Bottling

Department Department Department

Direct Materials $1,700 $1,000 $800

Direct Labour 50 60 300
Applied overhead 450 500 600
Costs added $2,200 $1,560 $1,700 Finished
Costs transferred in 0 $2,200 $3,760
goods
Costs transferred out $2,200 $3,760 $5,460
6
Dr Finished goods 5,460
6 Cr Work in process (Bottling) 5,460
Transfer of costs from Bottling Department to Finished
goods

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 Journal entries for Be Tech

❑ Please write the journal entries for March.

❑ Weighted average method
➢ Cost incurred for the month (slide 10)
Dr WIP $113,600
Cr Direct materials $51,000
Cr Wages payable/overhead control $62,600
➢ Cost transferred out (slide 19)
Dr Finished goods $123,500
Cr WIP $123,500

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 Journal entries for Be Tech

❑ Please write the journal entries for March.

❑ FIFO
➢ Cost incurred for the month (slide 10)
Dr WIP $113,600
Cr Direct materials $51,000
Cr Wages payable/overhead control $62,600
➢ Cost transferred out (slide 19)
Dr Finished goods $123,450
Cr WIP $123,450

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 Spoilage & Process Costing
❑ Normal spoilage
➢ treated as part of cost of goods manufactured and transferred
out with the good units produced
➢ considered a product cost
❑ Abnormal spoilage
➢ Treated as a “loss” on the income statement and must be
expensed in the period it is incurred.
➢ considered a period cost.

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 Spoilage illustration (Jul 2020 Q2
adapted
❑ P Ltd manufactures small plastic pails with metal handles. P Ltd uses
process costing and weighted average costing. The production process
takes place in two sequential departments. Pails completed in Moulding
Department during a certain calendar month are transferred to Assembly
Department to be attached with the metal handles and packaging, in the
following month.
Moulding Department Assembly Department
(April X0) (May X0)
Direct material incurred $134,000 $156,000

Conversion costs incurred $228,000 $306,000

Beginning WIP $0 DM $2,000

CC $1,000
TIC $2,000
Ending WIP $0 $?

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 Spoilage illustration (Jul 2020 Q2
adapted
❑ There was no beginning and ending WIP in April 20X0 for the Moulding
Department. All material and conversion costs are added evenly throughout the
Moulding process. In Assembly Department, handles (DM) are added at the
beginning of the production process. Pails are inspected at 90% point in Assembly
Department. If a pail does not pass the inspection, no packaging cost is added to
the product cost, and the defective pails are discarded. At the end of the
production process in Assembly Department, ‘good’ pails are transferred to the
warehouse for storage.
❑ There were 4,000 units of pails in WIP at the beginning of May 20X0 in Assembly
Department. These pails were 50% complete with respect to conversion costs.
Conversion costs are incurred evenly throughout the production process. At the
end of May 20X0, there were 1,000 pails in WIP and these pails were 80%
complete with respect to conversion costs. During May 20X0, 180,000 pails were
started. At the end of May 20X0, 177,000 finished pails were transferred to the
warehouse. Normal spoilage is set at 3% of inspected pails.
(a) Compute the normal and abnormal spoilage in units (b) the cost incurred for spoilage,
WIP and the cost per pail manufactured and (c) journal entries to close the spoilage costs
(normal and abnormal) at the end of May 2020 from Assembly Department.

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 Spoilage illustration
a) Compute the normal and abnormal spoilage in units

No. inspected = BWIP + started - EWIP

= 183,000 units
Normal spoilage = 183,000 x 0.03
= 5,490 units
Total spoilage = (4,000 + 180,000 - 177,000 - 1,000)
= 6,000 units
Abnormal spoilage = 6,000 - 5,490 units
= 510 units

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 Spoilage illustration
b) Calculate the cost incurred for spoilage, WIP and the cost per
pail manufactured
Calculate the EU
equivalent units Physical units TIC DM CC
Beg WIP 4,000 100% 100% 50%
Started 180,000
Total 184,000
Completed 177,000 177,000 177,000 177,000
Spoiled (90% complete) 6,000 6,000 6,000 5,400
End WIP (80% complete) 1,000 1,000 1,000 800
Total 184,000 184,000 184,000 183,200

Cost $ Total TIC DM CC

Beg WIP $5,000 $2,000 $2,000 $1,000
Incurred in May $824,000 $362,000 $156,000 $306,000
Total $829,000 $364,000 $158,000 $307,000
Cost per EU (2dec) $4.52 $1.98 $0.86 $1.68 33 33
 Spoilage illustration
b) Calculate the cost incurred for spoilage, WIP and the cost per
pail manufactured

Cost assignment Total TIC DM CC

(Cost per EU x EU)
Costs of good units $798,751 $350,152 $151,989 $296,610
transferred out
Normal spoilage $23,855 $10,861 $4,714 $8,280
Abnormal spoilage $2,216 $1,009 $438 $769
Ending WIP $4,178 $1,978 $859 $1,341
$1.98 x 177,000

$1.98 x 5,490
(See slide 32) $0.86 x 510
(See slide 32) $1.68 x 800

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 Spoilage illustration
❑ Normal loss is treated as part of cost of goods
manufactured and transferred out with the good units
produced.
➢ The costs of completed units from assembly process
for the period = $798,751 + $23,855
➢ = $822,606
➢ Cost per unit (litre) = $822,606 ÷ 177,000
➢ = $4.65

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 Spoilage illustration
c) Post the relevant journal entries journal entries to close the
spoilage costs (normal and abnormal)

Dr Cr
Finished Goods Inventory $822,606
WIP Assembly Dept (completed) $798,751
WIP Assembly Dept (normal spoilage) $23,855

Loss from Abnormal Spoilage $2,216

WIP Assembly Dept (abnormal spoilage) $2,216

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 Class Participation Feedback

❑ Provide feedback on class participation

❑ Give pointers on improvements
❑ Answer any queries raised and show how class
participation can be improved.

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 Activity

❑ Do individually or in group & submit

➢ Activity 4 Question 1
➢ Activity 4 Question 2
➢ Activity 4 Question 3
❑ Go through answers in class
❑ Do Activity 4 MCQs and submit by next day,
11.59pm

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