Session 08 - Session 8 Process Costing - continued Process...

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Session 8 Process Costing - continued
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Process Costing With Beginning Inventory The Flow of Inventory and Inventory Costs When there is beginning WIP, the costs of that inventory must be taken into account to determine the costs of both the units completed in the period and the units remaining in ending inventory. That is, in this cases, there are two different groups of costs to be allocated between the goods completed and the unfinished goods remaining at the end of the period (the outputs for the period): 1) The costs assigned to the beginning (unfinished) WIP (incurred in a prior period), and 2) The costs incurred in the current period To allocate those costs between the units completed during the period and the incomplete units remaining, we need to determine the physical flow of the goods within the production process (department) and match the “flow” of costs to that physical flow of goods.
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In the real world, the flow of costs which corresponds to the physical flow of goods can be approximated by one of two inventory costing methods (cost flows) – FIFO or (Weighted) Average Cost.
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1) First-in First-Out (FIFO) : – Under FIFO, goods move sequentially through a department each period: the beginning inventory is finished first ; then, other units are started and completed; and, finally, some units are started but only partially completed, remaining in the ending inventory. – So, the cost of the beginning inventory completed in the current period includes the costs incurred in the prior period (to partially process them) and the costs incurred in the current period to complete them. – Only current period costs are to be assigned to the units that were started and completed in the current period. – The units remaining on hand at the end of the period – ending WIP – were started and only partially completed in the current period – only current period costs are to be assigned to these units. e.g. Automobile manufacturing
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2) Weighted Average – To understand a weighted average process, think of a beverage bottling operation. – As the beverage is produced, it is stored in a holding tank. In the tank, the new beverage, just added, mixes with the older beverage that was already there. – Then, each bottle that’s filled, from the tank, will be filled with a mixture of the older and new beverage. (The first bottles are not filled with the older beverage and subsequent bottles are not filled with the newer beverage.) There’s no way to separate the older beverage from the new. – And, the beverage remaining in the tank, is also a mixture of old and new.
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– Given that physical flow of product, there is no way to match the costs incurred in the prior period (that are assigned to the beginning inventory) exclusively with the units completed or with the units remaining. – So, the (prior period) costs of the beginning inventory and the costs
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Session 08 - Session 8 Process Costing - continued Process...

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