ch18b - PENDIX Average Cost Method A cost flow assumption...

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Unformatted text preview: PENDIX Average Cost Method A cost flow assumption must be used as product costs flow through manufacturing processes. In this chapter, the first-in, first-out cost flow method was used for the Mixing Department of Frozen Delight. In this appendix, the average cost flow method is illustrated for S&W Ice Cream Company (S&W). Determining Costs Using the Average Cost Method S&W’s operations are similar to those of Frozen Delight. Like Frozen Delight, S&W mixes direct materials (milk, cream, sugar) in refrigerated vessels and has two manu- facturing departments, Mixing and Packaging. Chapter 18 Process Cost Systems 833 The manufacturing data for the Mixing Department for July 2010 are as follows: Work in process inventory, July 1, 5,000 gallons (70% completed) . . $ 6,200 Direct materials cost incurred in July, 60,000 gallons . . . . . . . . . . . . 66,000 Direct labor cost incurred in July . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500 Factory overhead applied in July . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,405 Total production costs to account for . . . . . . . . . . . . . . . . . . . . . . . $89,105 Cost of goods transferred to Packaging in July (includes units in process on July 1), 62,000 gallons . . . . . . . . . . . . . . . . . . . . . .. .7 Cost of work in process inventory, July 31, 3,000 gallons, 25% completed as to conversion costs . . . . . . . . . . . . . . . . . . . . . . .7 Using the average cost method, the objective is to allocate the total costs of produc— tion of $89,105 to the following: 1. The 62,000 gallons completed and transferred to the Packaging Department 2. The 3,000 gallons in the July 31 (ending) work in process inventory The preceding costs show two question marks. These amounts are determined by preparing a cost of production report using the following four steps: Step 1. Determine the units to be assigned costs. Step 2. Compute equivalent units of production. Step 3. Determine the cost per equivalent unit. Step 4. Allocate costs to transferred out and partially completed units. Under the average cost method, all production costs (materials and conversion costs) are combined together for determining equivalent units and cost per equivalent unit. To simplify, this approach is used in this appendix. Step 1: Determine the Units to Be Assigned Costs The first step is to deter- mine the units to be assigned costs. A unit can be any measure of completed production, such as tons, gallons, pounds, barrels, or cases. For S&W, a unit is a gallon of ice cream. S&W's Mixing Department had 65,000 gallons of direct materials to account for during July, as shown here. Total gallons to account for: Work in process, July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 gallons Received from materials storeroom . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Total units to account for by the Packaging Department . . . . . . 6_5,000 gallons There are two groups of units to be assigned costs for the period. Group 1 Units completed and transferred out Group 2 Units in the July 31 (ending) work in process inventory During July, the Mixing Department completed and transferred 62,000 gallons to the Packaging Department. Of the 60,000 gallons started in July, 57,000 (60,000 3,000) gallons were completed and transferred to the Packaging Department. Thus, the end— ing work in process inventory consists of 3,000 gallons. The total units (gallons) to be assigned costs for S&W can be summarized as follows: Group 1 Units transferred out to the Packaging Department in July 62,000 gallons Group 2 Work in process inventory, July 31 . . . . . . . . . . . . . . . . . . . . 3,000 Total gallons to be assigned costs . . . . . . . . . . . . . . . . . . . 6=5,000 gallons The total units (gallons) to be assigned costs (65,000 gallons) equal the total units to account for (65,000 gallons). 834 Chapter 18 Process Cost Systems Step 2: Compute Equivalent Units of Production S&W has 3,000 gallons of whole units in the work in process inventory for the Mixing Department on July 31. Since these units are 25% complete, the number of equivalent units in process in the Mixing Department on July 31 is 750 gallons (3,000 gallons X 25%). Since the units trans— ferred to the Packaging Department have been completed, the whole units (62,000 gal- lons) transferred are the same as the equivalent units transferred. The total equivalent units of production for the Mixing Department are determined by adding the equivalent units in the ending work in process inventory to the units transferred and completed during the period as shown below. Equivalent units completed and transferred to the Packaging Department during July . . . . . . . . . . . . . . 62,000 gallons Equivalent units in ending work in process, July 31 .. 7 750 Total equivalent units . . . . . . . . . . . . . . . . . . . . . .. gJSO gallons Step 3: Determine the Cost per Equivalent Unit Since materials and conver- sion costs are combined under the average cost method, the cost per equivalent unit is determined by dividing the total production costs by the total equivalent units of pro- duction as follows: Total Production Costs Cost er E uivalent Unit : p q Total Equivalent Units _ . 7 Total Production Costs 7 $89,105 7 COSt per Equwalem umt _ Total Equivalent Units _ 62,750 gallons _ $142 The cost per equivalent unit shown above is used in Step 4 to allocate the produc- tion costs to the completed and partially completed units. Step 4: Allocate Costs to Transferred Out and Partially Completed Units The cost of transferred and partially completed units is determined by multiplying the cost per equivalent unit times the equivalent units of production. For the Mixing Department, these costs are determined as follows: Group 1 Transferred out to the Packaging Department (62,000 gallons - $1.42) $88,040 Group 2 Work in process inventory, July 31 (3,000 gallons 2-: 25% 2-2 $1.42) . . 1,065 Total production costs assigned . . . . . . . . . . . . . . . . . . . . . . . . . . . $89,105 The Cost of Production Report The July cost of production report for S&W’s Mixing Department is shown in Exhibit 11. This cost of production report summarizes the following: 1. The units for which the department is accountable and the disposition of those units 2. The production costs incurred by the department and the allocation of those costs between completed and partially completed units Cost of Production Report for S&W’s Mixing Department— Average Cost sq: 5:124 Chapter 18 Process Cost Systems 835 I“ 1 5mm 2 “ammo—mam 3 FailelihllErlHJuysl,“ —5H31 4 nuts fig—sup: 5 ' Whole Units 'Equivalent Units 6 of Production 7 Units to account for during production: 8 Work in process inventory, July1 5,000 9 Received from materials storeroom 60,000 10 Total units accounted for by the Mixing Department 65 000 11 12 Units to be assigned costs: 13 Transferred to Packaging Department in July 62,000 62,000 14 Inventory in process, July 31 (25% completed) 3,000 750 15 Total units to be assigned costs 65 000 62 750 16 17 (1315 18 19 Cost per equivalent unit: 20 Total production costs for July In Mixing Department $39,105 21 Total equivalent units (from Step 2 above) -:-62,750 22 Cost per equivalent unit $ 1.42 23 24 Costs assigned to production: 25 Inventory in process, July1 $ 6,200 26 Direct materials, direct labor, and factory overhead incurred in July 82,905 27 Total costs accounted for by the Mixing Department $89 105 28 29 30 Costs allocated to completed and partially completed units: 31 Transferred to Packaging Department In July (62,000 gallons 2-: $1.42) $88,040 32 Inventory in process, July 31 (3,000 gallons -' 25% -' $1.42) 1,065 33 Total costs assigned by the Mixing Department $89,105 34 ...
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This note was uploaded on 07/17/2011 for the course ACCT 102 taught by Professor Martinez during the Summer '11 term at Rio Hondo College.

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ch18b - PENDIX Average Cost Method A cost flow assumption...

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