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Unformatted text preview: Chapter 6 Chapter
Process Cost Accounting Additional Procedures: Accounting Additional for Joint Products and By-Products for Learning Objectives Learning
LO1 Compute unit costs when materials Compute are not added uniformly throughout the process. the LO2 Account for units lost in the production Account process. process. LO3 Account for units gained in the Account production process. production Learning Objectives Learning
LO4 Assign costs to inventories, using the Assign first-in, first-out method. first-in, LO5 Identify the methods used to Identify apportion joint costs to joint products and to account for by-products. account Equivalent Production and Equivalent Units Equivalent When industries apply materials into When production in different quantities and at varying points in the production cycle, equivalent units must be computed for each element of production cost. element The valuation of the ending work in process The requires the allocation of cost for each element. element. Equivalent Production and Equivalent Units - Materials Added at Beginning Added The only difference between equivalent unit The calculations for the material components and the labor and overhead components would concern the ending work in process inventory. the Example: Ending inventory of 400 units that were Example: ¾ complete. complete. Materials – 400 equivalent units (received all materials Materials when started) when Labor and overhead – 300 equivalent units (400 x ¾ Labor completed as to processing costs) completed Equivalent Production and Equivalent Units - Materials Added at Beginning (cont.) Added Once the equivalent production figures are Once calculated, the unit cost for the period can be calculated. calculated. Add the cost of each element in beginning WIP Add to the cost of production for that element incurred in the current month. in Total cost is then divided by the appropriate Total equivalent production figure. equivalent Cost is then applied to inventory to arrive at cost Cost of goods finished and the cost of the ending WIP. of Equivalent Production and Equivalent Units - Materials Added at Close of Processing Added Only units finished will have materials cost Only applied. applied. Units in process at the end of the Units accounting period will have no equivalent production for the period. production Equivalent units for labor and factory Equivalent overhead would be computed as the previous example. previous Equivalent Production and Equivalent Units - Materials Added at Different Stages Added The state of completion must be carefully The considered. considered. Finished units will include all materials Finished costs. costs. Units that were 50% completed will only Units have the percent of materials that are added in the first half of the cycle. added Equivalent Production and Equivalent Units - Materials Added at Different Stages (cont.) Different Example: 40% at the beginning 25% at one-quarter completed 35% at the end 1000 units are one-half completed Equivalent production for materials 1000 units X (40% + 25%) = 650 units Units Lost in Production Units Due to the nature of the processing cycle, Due many industries will have units that are lost due to evaporation, shrinkage, spillage, or other factors. spillage, Normal Losses Normal Are treated as products costs and are spread Are over the units finished and still in process. over On the cost of production summary, the lost units On are ignored in the calculation of equivalent production and in the determination of inventory costs. costs. If lost at the end of the production cycle, the cost If of lost units may be absorbed by the completed units only. units Normal Losses (cont.) Normal The lost units are included in the number of The units used to determine equivalent production. units Unit cost is applied to units finished, units in Unit process, and units that were lost. process, Cost of lost units is added to the cost of goods Cost completed, and the total is transferred to the next department or to Finished Goods. next Abnormal Losses Abnormal These are losses that are not inherent in the These manufacturing process and are not expected. manufacturing The lost units are included in the calculation of The equivalent production and unit costs. equivalent Abnormal losses are not included in the cost of Abnormal transferred or finished goods and are charged to a separate expense account. to Units Gained in Production Units In some processes, the addition of materials in In a subsequent department increases the number of units being processed. number Has the opposite effect of lost units and Has requires an adjustment to the unit cost for the previous department’s transferred-in units. previous The cost from the department is now spread The over more units. over Equivalent Production - First-In, First-Out (FIFO) Method First-Out This method assumes that the costs of This the current period are first applied to complete the beginning units in process, then to start and finish a number of units, and finally to start other units that are still in process. in Features of FIFO Features No need to break down the beginning WIP into its cost No elements. elements. If there is no beginning inventory, total equivalent If production figures will differ from those for the average method because the output required to complete the beginning inventory must be calculated. beginning When there is no beginning inventory, both methods When yield the same results. yield If units are lost, a decision must be made as to whether If the units lost came from the beginning inventory or from the units started during the process. from Comparison of Methods Comparison First-In, First-Out Cost is determined by Cost dividing the current period’s cost of each element by the unit output for the period. for Total costs to charge to Total the beginning WIP is the balance from the prior month plus the costs incurred to complete these units in the current period. units Average Cost Cost is determined by Cost dividing the merged costs of the current period and those carried over as WIP by the unit output. by Comparison of Methods – Computations Computations
Beginning Work in Process 3,000 units ⅔ complete. Beginning 5,000 units started and completed. Ending Work in Process 4,000 units ½ complete. Average Costing
Units in Beginning Work in Process Units Started and Completed Units Completed & Transferred Out (3,000 + 5,000) Ending Work in Process (4,000 x ½) Equivalent Units in Production 3,000 5,000 5,000 8,000 FIFO Costing
Work Done to Complete Beginning Work in Process (3,000 x 1/3) Units Started and Completed 1,000 5,000 2,000 2,000 10,000 Work Done this Period on Ending Work in Process (4,000 x ½) Equivalent Units in Production 2,000 8,000 Joint Products Joint The manufacturing process originates The with one or more raw materials started in process and two or more primary products are derived. products Common Bases for Allocation of Joint Costs of
1. Relative sales value 2. Physical unit of measure 3. Chemical, engineering, or other types Chemical, of analyses of The method most commonly used in The the relative sales value method. the Joint Costs and Joint Products Products
Product A Joint Processing Product B Split-off Point By-Products By-Products These are secondary products with These relatively little value that are derived from the manufacturing process. the The most common practice is to make no The allocation of the processing costs up to the split-off point. the By-Products (cont.) By-Products Entry to record the By-Products (Inventory) XX Entry estimated sales value of Work in Process XX the by-product the If the sales value is When the by-products When uncertain or insignificant, are sold, the difference the cost of the main between the actual sales products will not be price and the estimated reduced, and the only sales value is credited or entry will be made at the debited to Gain or Loss time of sale. on Sales of By-Products. on ...
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