Process Costing Explained

3 Process Costing
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Learning Objectives
After studying Chapter 3, you will be able to:
• Differentiate among job and process cost systems.
• Understand the basic characteristics of modified and hybrid
cost systems.
• Recognize the fundamental aspects of a job cost system.
• Describe the cost elements and cost flows in a process cost
system.
• Compute the equivalent units of production and unit costs
using FIFO.
• Prepare and use cost of production reports.
• Explain the impact that JIT inventory systems have on process
cost accounting.
• Compute the equivalent units of production and unit costs
using the weighted average method.
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Chapter Outline
3.1 Overview of Job and Process Costing
Environment
Materials, Labor, and Overhead Costs
Focal Point for Cost Accumulation
3.2 Modified and Hybrid Systems
3.3 The Job Cost System
3.4 The Cost Elements in a Process Cost System
Materials
Conversion Costs
Cost Flows
3.5 The Equivalent Unit Concept
Unit Costs
Flow of Physical Units
Stage of Completion
Timing of Inputs
Computational Steps
3.6 Cost of Production Report
Management’s Use of Cost of Production Reports
Ethical Considerations
3.7 Simplifications of JIT and Automation

3.8 Weighted Average Cost Method
Weighted Average Computational Steps
Cost of Production Report
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Section 3.1 Overview of Job and Process Costing
Where There’s a Will, There’s a Way of Costing
When Stan Stein, an attorney, founded U Will It, he envisioned
an enterprise involving the
mass production of routine wills with standard wording and
little variation. Because he kept
his fees low and had clever advertising, his first two years were
very successful. Stein was
preparing wills for clients throughout Ohio.
Periodically, Stein was approached by clients who wished to
have more specialized and
complex wills prepared. Stein was reluctant to accept these jobs
because his practice was
near full capacity. Moreover, because these specialized wills
required considerable research,
client conferences, and other demands made by the clients,
Stein did not feel his current
practice was amenable to the preparation of specialized wills.
Therefore, he would routinely
turn down these requests.

One day, Stein decided to invest his growing profits into a new
venture that would be
oriented to preparing specialized wills. One of Stein’s many
concerns was how he would
determine the costs of these customized jobs. He knew that the
process costing system used
for his current firm would not be suitable for his new venture.
This chapter discusses how to determine the costs of products
produced in a process cost
environment as well as products produced in a job cost
environment. Although we focus on
manufactured products, the concepts presented are applicable in
service organizations, as
was just indicated in the above vignette.
3.1 Overview of Job and Process Costing
A job cost system identifies costs with individual jobs or
products. A separate tracking of
costs is associated with each job or product. The costs
accumulated for a job in process can be
determined at any point in time by referring to the job order
cost sheet.
A process cost system identifies costs with individual
departments for an interval of time,
such as one month. Costs are not charged to specific units or
orders as work is performed,
but unit costs are based on costs incurred during a time period
and on the volume of output
during the same period. The unit cost of a final product will be
the sum of all costs allocated
to the product by each department that worked on it.
Several other characteristics distinguish job costing from

process costing, as discussed below.
Figure 3.1 at the end of this section summarizes these
differences.
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Section 3.1 Overview of Job and Process Costing
Environment
Job costing is most appropriate in environments where jobs or
products are different from
one another. These jobs use different types or amounts of
materials, labor, and overhead.
Examples include building construction, defense contracting,
consulting engagements, and
printing shops.
Process costing is most appropriate in an environment where
products are mass produced
or result from continuous processing. Each unit going through
the same process is identical
to other units. Examples include candy, soft drinks, clothing,
chemicals, and most processed
foods. In addition, individual operations can be suitable for
process costing if every prod-
uct passing through the operation has the same work performed
on it. For instance, various
models of televisions and DVD players on an assembly line may
have the same operations

performed during the assembly process.
In a job cost environment, sales orders usually precede
production. Production is for a spe-
cific order. In a process cost environment, however, production
usually precedes sales. Goods
are produced for anticipated sales.
Materials, Labor, and Overhead Costs
A process cost environment will generally use materials that are
standard. In a job cost set-
ting, materials requirements are often unique to each job, and
sometimes even the types of
materials needed are unknown. Hence, process cost companies
usually have larger invento-
ries of materials.
Tasks in a process cost environment are generally routine. Less-
skilled labor is usually needed
than in a job cost environment, where workers need to perform a
greater variety of tasks
because of the different types of jobs. Automation is found
more often in process cost settings.
Therefore, the proportion of overhead cost in the total product
cost will generally be higher
than for job cost settings.
Focal Point for Cost Accumulation
In process cost systems, we identify materials, labor, and
overhead costs with specific depart-
ments or operating centers. This differs from job cost systems,
which identify costs with spe-
cific batches or customer orders. In this chapter, the term
department will be used as a generic
term and will cover the traditional concepts of department,
operating or work center, opera-

tion, task, activity center, and responsibility center. As a result
of charging costs to depart-
ments, few detailed records are needed with process costing.
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Section 3.2 Modified and Hybrid Systems
3.2 Modified and Hybrid Systems
Classifying an accounting system as a job cost or process cost
system is often not easy. This is
especially true when companies have a wide variety of products
and processes. Modifications
and adaptations are made to the accounting system to meet the
needs of specific situations.
These result in systems we categorize as modified cost systems
and hybrid cost systems.
A modified cost system has one or more elements of cost using
job costing, while the other
cost elements use process costing. For example, a manufacturer
of shoes will make different
sizes and styles and use different grades of leather. However,
the operations of cutting and
sewing the leather and attaching the heels and soles are
essentially the same for each shoe.
Consequently, the manufacturer can group the shoes by sizes,
styles, and grades of leather,
and treat the costing of materials using job costing. Then, the

labor and factory overhead
costs for the operations can use a process cost system.
Figure 3.1: Comparison of job costing and process costing
PRODUCT SIMILARITY
Job costing Process costing
TIMING
MATERIALS
LABOR
OVERHEAD
COST IDENTIFICATION
Products/jobs differ from one
another
Products are all alike
Salesorders precede
production
Production precedes sales; goods
produced for anticipated sales
Unique materials for each
product/job
Standard materials for all products
Variety of tasks are preformed due

to different types of products/jobs
Production tasks are routine due
to similarity of products
Relatively low degree of automation,
so overhead costs are generally not
a high portion of total cost
Often highly automated production,
so overhead costs are generally a
high portion of total cost
Costs indentified with specific
batches or customer orders
Costs identified with departments
or operating centers
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Section 3.4 The Cost Elements in a Process Cost System
A hybrid cost system exists where one type of cost system (job
costing or process costing)
is used for one phase of the production process, and another
system is used for a subsequent
phase. For example, in manufacturing cars, the various parts,
subassemblies, engines, trans-

missions, and so forth may be produced where a job cost system
is used. In assembly, every
car, regardless of model, has the same assembly operations
performed. Therefore, the labor
and factory overhead costs of the assembly operations may be
accounted for using a process
cost system. Hybrid cost systems can involve various sequences
of job and process costing,
depending on the particular production process.
Operation costing is a term often used to refer to modified or
hybrid cost systems. Except in
the simplest of cases, pure job costing or process costing does
not exist. There is usually some
modification. Managers need to understand their own
organization’s cost system in order to
evaluate the cost information generated by that system. The
remainder of this chapter pro-
vides detailed discussions of job cost and process cost systems.
3.3 The Job Cost System
The job cost system accumulates separately the costs of
materials, labor, and overhead for
each job, whether a job of one unit or a job of many units.
Every job is assigned a number,
which is used for accumulating the costs of that job. Daily,
weekly, or monthly cost summaries
for each job are generated. These summaries are referred to as
job, work, or production
orders. The file of production orders in process constitutes a
subsidiary ledger in support of
the work in process account in the general ledger.
Whereas a job cost system accumulates costs by jobs, a process
cost system accumulates costs
by departments. This, and other differences, changes the

approach to determining unit costs
in a process cost environment. However, as outlined in the
remaining sections of this chapter,
many of the product cost concepts of Chapter 2 apply as well to
process costing.
3.4 The Cost Elements in a Process Cost System
The cost elements in a process cost system depend on whether
the organization is a manufac-
turing or service organization. A manufacturer typically has
more detailed costs; therefore,
we focus on manufacturing firms in the following sections. We
will discuss the two major ele-
ments of manufacturing costs in a process cost system:
materials and conversion costs.
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Materials
Materials are requisitioned for use in a specific department, and
the materials costs are accu-
mulated by the department for a specific time period. Although
materials can be added in any
department, they are often issued from the storeroom to the first
operating department in the
process. The concept of accounting for materials costs does not
depend on whether materi-

als are added in the first department or in subsequent
departments. Distinguishing between
direct materials and indirect materials is not considered critical
to obtain accurate unit costs.
Two major differences in accumulating materials costs between
the job cost system and the
process cost system should be noted. Materials costs are
identified first with departments
and then assigned to individual units in a process cost system.
Materials costs bypass depart-
ments and are charged directly to specific jobs in a job cost
system. In process costing, materi-
als costs are accumulated for a period of time and averaged over
all units receiving materials
during the period. This averaging of costs is broader in a
process cost system than in a job cost
system, where costs would be averaged only over the batch of
units comprising a particular
job.
Conversion Costs
Labor and overhead costs are incurred to convert materials into
a finished product; hence,
labor and overhead costs are called conversion costs. Because
labor and overhead often enter
the process at the same time, we combine them for illustrations
throughout the chapter. This
assumes that overhead is applied to production using direct
labor hours or dollars. Where
another cost driver is used, we separate the two cost elements.
Labor cost is measured monthly, by department, and without
identifying specific orders.
Labor time tickets may be used for payroll accounting, but are
not needed to measure the

time to complete a single order because each unit of product in
a process cost setting is pre-
sumed to take the same amount of time. Like materials, little
emphasis is placed on distin-
guishing precisely between direct labor and indirect labor.
Overhead costs are accumulated by department. Typically, we
record them in a departmen-
tal overhead control ledger by type of cost (e.g., depreciation,
utilities). Overhead costs are
charged to production through predetermined overhead rates for
each department. In most
of our illustrations, overhead appears to be actual overhead.
However, the costs represent
charges based on predetermined overhead rates under a normal
cost system. Since normal
costing was discussed in Chapter 2, we will not repeat the
coverage here. We assume that
overhead is accumulated and applied using departmental rates.
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Cost Flows
In a process system, a product may flow through several
operations before completion. For
example, production of cellular phones may start in a
fabricating operation, as shown in Fig-

ure 3.2.
Both the physical units and costs will be identified for the
fabricating operation over a period
of time, such as a month. When the inner components of the
phones are completed in the fab-
ricating operation, the units with their costs are transferred by
automated guided vehicles to
the next operation—in this case, the molding operation where
the casings are formed. Addi-
tional costs will be incurred and accounted for in the molding
operation. At the completion
of the molding operation, the units and accumulated costs of
preceding operations will be
transferred to the last operation in this example, the finishing
operation.
Figure 3.2: Flow of units and costs in a process manufacturing
system
Department B,
Molding
Operation
Department C,
Finishing
Operation
Finished Goods
Inventory
Cost of
Goods Sold
Department A,

Fabricating
Operation
Start units.
Add costs.
Transfer units and
costs to Dept. B.
Add Dept. B
costs.
Transfer units and
costs to Dept. C.
Add Dept. C
costs.
Transfer units and
costs to Finished
Goods Inventory.
Record the cost
of goods sold.
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103

Figure 3.3: Flow of units and costs for subassembly components
Department B,
Molding
Operation
Department C,
Finishing
Operation
Finished Goods
Inventory
Cost of
Goods Sold
Department A,
Fabricating
Operation
Department X,
Soldering
Operation
Transfer units and
costs to Dept. C.
Department W,
Forming
Operation
Start units.
Add costs.

Transfer units and
costs to Dept. B.
Add Dept. B
costs.
Start subassembly
units and costs.
Transfer units and
costs to Dept. X.
Add Dept. X
costs.
Transfer units and
costs to Dept. C.
Add Dept. C
costs.
Transfer units and
costs to Finished
Goods Inventory.
Record the cost
of goods sold.
Main Production Line Subassembly Production Line
Because costs need to be identified with departments, a process
cost system normally involves
accounting transfers between departmental work in process
inventory accounts. Each depart-
ment has its own work in process account; when goods are
completed in one department,

their costs are transferred to the work in process account of the
next department.
In some types of operations, a subassembly may be produced on
a separate production line
for addition to the product at a later stage. For example, assume
that the main production
line for computer keyboards extends from Department A
(Fabricating) to Department C (Fin-
ishing). A subassembly line, consisting of Departments W
(Forming) and X (Soldering), uses
numerically controlled machines to produce a component that
converts physical measures
like velocity and pressure into digital form. These components
are brought into the main line
in Department C. A diagram showing the flow of units and costs
for this example appears in
Figure 3.3.
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Section 3.5 The Equivalent Unit Concept
3.5 The Equivalent Unit Concept
A primary goal of any cost accounting system is to identify
product costs for determining end-
ing inventories of work in process and finished goods and for
establishing the cost of goods
sold amount. Costs are attached to units in inventories whether

the units are wholly or par-
tially completed. The mechanism for tracing costs to units is a
unit cost.
Unit Costs
When calculating unit costs, we typically think of a formula
similar to the following:
Unit cost =
Total costs
Units produced or work done
Applying this formula to the typical process cost situation is
complicated by two major fac-
tors: (1) the stage of completion of units in work in process
inventories, and (2) the different
points in time that materials and conversion costs enter a
departmental process. We will dis-
cuss point (2) in more detail later in the chapter.
The number of units completed is not a good measure for
determining an appropriate unit
cost when there are partially completed units in beginning or
ending inventories. Conse-
quently, an equivalent unit must be identified. Equivalent units
represent the theoretical
number of units that could have been produced had the
resources been applied to units that
were started and completed during the period. We can also think
of equivalent units as rep-
resenting the actual work done on the physical units. For
instance, two physical units 50%
complete represent the equivalent of one unit 100% complete.
Flow of Physical Units

For each department, the flow of physical units can be viewed
as follows:
Units in beginning work in process inventory + Units of product
started during the period
= Units completed and transferred out + Units in ending work in
process inventory
This relationship among physical units is also shown in Figure
3.4. As diagrammed, the num-
ber of units started and completed during the period can be
computed two ways:
Units completed and transferred out – Units in beginning work
in process inventory
= Units started and completed
or
Units of product started during the period – Units in ending
work in process inventory
= Units started and completed
Knowing where all units are in a production process is an
important starting point for cal-
culating unit costs. Figure 3.4 represents the location and flow
of physical units through a
production process for a given time period.
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105
Stage of Completion
In a process cost system, the units in the beginning and ending
inventories are usually at
different stages of completion. The stage of completion is the
average percentage of work
completed on a unit of product at any point in time. For a
department, it is useful to identify
three distinct groupings of products when computing equivalent
units:
1. Partially completed units in the beginning inventory that are
completed during the
current period. The work to complete these units is represented
by 100% less the
stage of completion when the period started. We generally
assume a first-in, first-out
flow, which will be explained in more detail later in this
chapter.
2. Units started and completed during the period. The work
completed is represented
by 100%.
3. Partially completed units at the end of the period. The work
completed is represented
by the percentage of completion at the end of the period.
When all three of these groups are summed, the result is
equivalent units of output for this
time period—the work done by the workers in this department.
This is the number of units
that could have been produced if all production were started and

completed during the
period, assuming no beginning or ending work in process
inventories.
For example, the Norwich Post Office has a sorting department.
On March 1, 15,000 units
were in process and were 60% completed. During March, the
department started work on
200,000 units. On March 31, 20,000 units were in process and
were 30% completed. From
our flow of physical units formula, we calculate the number of
units completed as follows:
Figure 3.4: Relationship among physical units within a
department
Units Completed and Transferred Out
Units in beginning
work in process
inventory
Units started and completed
during the period
Units in ending
work in process
inventory
Units Started During the Period

Units in beginning inventory 15,000
+ Units started during period 200,000
− Units in ending inventory (20,000)
Units completed and transferred 195,000
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106
Next, we compute the units started and completed using both
methods described previously:
Current period work to complete beginning inventory [15,000 ×
(100% − 60%)] 6,000
+ Units started and completed (180,000 units × 100%)
180,000
+ Current period work in ending inventory (20,000 units ×
30%) 6,000
Equivalent units of output (work done during the period)
192,000
or

− Units in beginning inventory (15,000)
Units started and completed 180,000
Units started during period 200,000
– Units in ending inventory (20,000)
We now have the three groups of units and their stages of
completion, which are necessary to
find the number of equivalent units. The calculation for the
equivalent units of output for the
period is as follows:
Timing of Inputs
Materials, labor, and overhead are the inputs to the production
process. These inputs may
enter at different points during the process. The most common
situation is for materials to
enter at the beginning of a departmental process and for labor
and overhead to be added
continuously throughout the process. Consequently, it is
possible for some units in process to
have all of their materials added but only part of the labor and
overhead. In other processes,
the materials may be added continuously or at the end of the
process. For our purposes,
unless otherwise stated, presume that materials are added at the
beginning of the process,
and labor and overhead enter the process together and are added
continuously or evenly
throughout the process.

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107
To calculate unit costs when inputs have different timing for
entering a process, we need to
calculate the equivalent units for each cost input. Therefore, one
equivalent unit computa-
tion is for materials; another computation is for conversion
costs. The computational steps
developed in the next section will show how separate equivalent
units quantities are used to
establish unit costs.
Computational Steps
Tracing physical units to a department and accounting for those
units are generally cleri-
cal functions. Likewise, the identification of the costs charged
to a department is a relatively
simple function. However, distributing the costs to work
completed and ending inventories
requires an understanding of several steps. These steps are:
1. Determine flow of physical units.
2. Calculate equivalent units.
3. Compute unit costs.
4. Distribute total costs to units.
5. Reconcile the costs.

The last step checks whether the four previous steps were
completed accurately. This step veri-
fies that the total costs distributed to the units equal the total
costs charged to the department.
Each of these steps will be presented in detail as part of
developing a cost of production report.
We assume a first-in, first-out (FIFO) cost method in
progressing through the five compu-
tational steps. The beginning inventory is completed before new
units are completed. Costs
incurred flow in the same manner. Most companies using
process costing use the FIFO cost
method. Another frequently used method, the weighted average
cost method, is discussed
later in this chapter.
Under FIFO, the older units and costs are transferred out first,
and the more current units
and costs are transferred out next. Only the most recent costs
are held as ending inventory.
With the FIFO cost method, the equivalent units of output are
literally the units that could
have been completed if all efforts during the period were
devoted to starting and completing
units, allowing no partially completed units. Usually, however,
some units will be in a stage
of partial completion at both the beginning and at the end of the
month. The beginning work
in process units are completed during the month, and a start has
been made on the units in
ending work in process.
To illustrate the computational steps, consider the current plant
of Shirts Unlimited. Sweat-

shirts are produced in three departments: Cutting, Sewing, and
Finishing. Our illustration will
focus on the Cutting Department. All cloth material enters
production at the beginning of the
Cutting Department operations. The cloth is cut there. Both
materials and conversion costs
are incurred in the Cutting Department. Its activity for May is
summarized as follows:
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108
Step 1: Determine Flow of Physical Units. Determining the flow
of physical units for a
department involves identifying the units in the beginning
inventory, the units started and
completed during the period, and the units in the ending
inventory. These are whole units;
stage of completion is not an issue here. For the Cutting
Department of Shirts Unlimited, we
have:
Units in beginning work in process 4,000
Units started and completed: (12,000 – 2,000 or 14,000 – 4,000)
10,000
Units in ending work in process 2,000

Total units 16,000
Work in process, May 1:
Units 4,000
Stage of completion:
Materials 100%
Conversion costs 40%
Costs:
Materials $400,000
Conversion costs 80,000
Beginning inventory total cost $480,000
Units started 12,000
Current period costs:
Materials $1,200,000
Conversion costs 650,000
Total costs added $1,850,000
Units 2,000

Materials 100%
Conversion costs 30%
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109
Step 2: Calculate Equivalent Units. Equivalent units are
computed by multiplying physical
units by the percentage of work completed on them. For our
example, using the units started
and completed method, we have the following calculations:
Materials Conversion
Current period work to complete beginning inventory:
4,000 × (100% − 100%) 0
4,000 × (100% − 40%) 2,400
Units started and completed in May:
10,000 × 100% 10,000 10,000

May’s work in ending inventory:
2,000 × 100% 2,000
2,000 × 30% 600
Equivalent units (work done during May) 12,000 13,000
Materials Conversion Total
Beginning inventory $400,000 $80,000 $480,000
May’s costs 1,200,000 650,000 1,850,000
Total costs $1,600,000 $730,000 $2,330,000
Note that in deriving the 2,400 equivalent units to complete the
beginning inventory for con-
version costs, we multiply the 4,000 physical units by 60%
(100% – 40%) because the units
were already 40% complete and another 60% of work is needed
in the current period to
complete those units.
Step 3: Compute Unit Costs. We begin this step by itemizing
the costs for which the Cutting
Department will be held accountable.
The unit costs for materials and conversion costs are calculated
from the current month’s
costs and equivalent units. Last month’s costs and equivalent
units of work are included in
the beginning inventory amount and will be treated separately.
Using May’s costs and the
equivalent units from above, the costs for May are divided by
the equivalent units for May to

obtain unit costs:
Unit Costs for May:
Unit cost for materials = $1,200,000 / 12,000 = $100
Unit cost for conversion = $650,000 / 13,000 = $50
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110
The beginning work in process cost provides useful information
for managers. These dollars
represent costs from the prior period—in this case, the previous
month. Thus, unit cost infor-
mation about the beginning inventory is obtained by dividing
the beginning inventory costs
by the prior period work (i.e., equivalent units) in the beginning
inventory:
April’s Unit Costs in May’s Beginning Inventory:
Unit cost for materials = $400,000 / 4,000 = $100
These unit costs are identical to those for the current period,
although such a case will not

occur very often.
Step 4: Distribute Total Costs to Units. We next show the
distribution of costs to units using
the unit costs and equivalent units derived earlier.
Costs Accounted for: Materials Conversion Total
Completed and transferred to Sewing:
Work in Process, May 1:
Prior period costs $400,000 $80,000 $480,000
May:
Equivalent units 0 2,400
Times costs per unit $100 $50
Costs $0 $120,000 $120,000
Completed cost of beginning inventory $400,000 $200,000
$600,000
Started and Completed:
Units 10,000 10,000
Times cost per unit $100 $50
Costs $1,000,000 $500,000 $1,500,000
Total cost of completed and transferred units $1,400,000
$700,000 $2,100,000

Work in Process, May 31:
Equivalent units 2,000 600
Times cost per unit $100 $50
Costs $200,000 $30,000 $230,000
Total costs accounted for $1,600,000 $730,000 $2,330,000
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111
Section 3.6 Cost of Production Report
Note the sequence of computations. First, the old costs in the
beginning work in process are
listed. Then, we compute the cost to complete the beginning
work in process in the current
period. Next, we calculate the costs associated with units started
and completed. The sum of
all of these costs is the cost of goods completed and transferred
out. This is also called the cost
of goods manufactured. Finally, we determine the costs of the
work done on the units still in
process on May 31.
Often the unit cost calculations result in the need to round to
some decimal place. The more
decimal places used, the less the rounding error in total dollars

assigned to units completed
and units in ending inventory. If rounding errors occur, it is
customary to adjust the costs
assigned to units completed to compensate for the rounding
error.
Step 5: Reconcile the Costs. This final step in the computational
process is really a check to
ensure that all department costs are charged to units completed
and units in the ending inven-
tory. As shown in Step 3, the total costs charged to the Cutting
Department are $2,330,000.
After distributing the costs to the units completed and units in
the ending inventory, the sum
should also equal $2,330,000. This is confirmed by the total
costs accounted for in Step 4.
This check shows that materials and conversion costs charged to
the department have indeed
been distributed to all units.
3.6 Cost of Production Report
The five computational steps provide all of the calculations
needed to prepare a cost of pro-
duction report for May. This report, which presents information
about units, costs charged
to the department, and how the costs are accounted for, is
shown in Figure 3.5.
In T-account form, the transactions reflected in the cost of
production report would be sum-
marized as shown in Figure 3.6.
We use the same procedures to determine costs for subsequent
departments in the process-
ing operation. In departments after the first, however, unit costs
must be combined with the

accumulated costs of work done in earlier departments. For
example, if operations cover 10
departments, Department 10 would obtain a unit cost for the
total work done in all preceding
nine departments and calculate a unit cost for its own work.
Management’s Use of Cost of Production Reports
Internal accounting reports often serve only to attach dollars to
the events about which man-
agers already know. For example, managers know about
volumes, inefficiencies, and scrap,
but they do not know the costs related to them. However, the
information provided by a cost
of production report can be used by managers in several
different ways.
When unit costs for materials and conversion costs change from
one period to the next, a
manager should ask why. Why is a materials price higher or
lower? What causes conversion
costs to change? The manager has to find the answers to ensure
that the numbers reported
represent reality and are accurate. Sometimes managers
intuitively know the numbers are
either correct or incorrect because of their experiences.
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112

Physical
Units
4,000
Shirts Unlimited
Cutting Department
Cost of Production Report for the Month of May
Materials Equivalent
Units
Conversion Equivalent
UnitsUnits:
Beginning work in process:
Prior Month
4,000 × 100%
4,000 × 40%
May’s work:
4,000 × (100% – 100%)
4,000 × (100% – 40%)
Units started and completed:

10,000 × 100%
Ending work in process
2,000 × 100%
2,000 × 30%
Total units
Equivalent units of output
10,000
2,000
16,000
$ 400,000
4,000
$ 100
$1,200,000
12,000
$ 100
$1,600,000
4,000
10,000

2,000
12,000
$ 80,000
1,600
$ 50
$650,000
13,000
$ 50
$730,000
1,600
10,000
600
13,000
$ 480,000
$1,850,000
$2,330,000
Materials Conversion Total Costs Charged to Department:

Beginning work in process:
Costs
Divided by equivalent units
Cost per unit
May’s production:
Costs
Cost per unit
Total costs charged
0 2,400
Costs Accounted for:
Prior period costs
May: Equivalent units
Times cost per unit
Costs
Completed cost of beginning
inventory

Started and completed:
Units
Times cost per unit
Costs
Total cost of completed and transferred units
Equivalent units
Times cost per unit
Costs
Total costs accounted for
$ 400,000
0
$ 100
$ 0
$ 400,000
10,000
$ 100
$1,000,000

$1,400,000
2,000
$ 100
$ 200,000
$1,600,000
$ 80,000
2,400
$ 50
$120,000
$200,000
10,000
$ 50
$500,000
$700,000
600
$ 50
$ 30,000
$730,000

$ 480,000
$ 120,000
$ 600,000
$1,500,000
$2,100,000
$ 230,000
$2,330,000
Shirts Unlimited
Cutting Department
Figure 3.5: Cost of production report for Cutting Department
(FIFO method)
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113
Cost of production reports for several periods in succession can

show trends. Here certain
questions arise. Are inventories bouncing around, or are they
stable? Why? Why are unit
costs steadily moving up, or why are they erratic? Are we
changing the mix of workers as
reflected in labor cost changes? These and many other questions
help managers understand
their working environment and the company’s focus much
better.
Ethical Considerations
As with all financial reports, production reports can easily be
manipulated. Estimating the
stage of completion of the work in process is an area
particularly susceptible to manipulation
by production managers. These estimates are very subjective.
Two reasons explain why man-
agers might be motivated to overestimate the stage of
completion. First is pressure to meet
production quotas of units or equivalent units produced. A
second reason relates to minimiz-
ing unit costs. A higher estimate for the degree of completion of
the work in process inventory
results in a greater number of equivalent units of output for the
period. This, in turn, gener-
ates a lower cost per equivalent unit. Notice, however, that any
overestimate in one period
results in an opposite impact in the following period.
Management accountants, nevertheless,
need to be aware that temptations to overestimate the stage of
completion may exist.
Beg. Inventory
Materials

Conversion
End. Inventory
480,000
1,200,000
650,000
230,000
Completed 2,100,000 Transferred in 2,100,000
Work in Process — Cutting Work in Process — Sewing
Figure 3.6: Flow of cost from Cutting Department to Sewing
Department
Contemporary Practice 3.1: Process Costing
at a Consumer Packaged Goods Company
A journal article describes process costing at a consumer
packaged goods company as
follows: “Production volume that’s in process at the end of the
reporting period is estimated
based on the standard cost per unit multiplied by a percentage-
complete standard. A study
is conducted periodically that analyzes the level of work-in-
process over time. Results
indicate that work-in-process tends to be, on average, 75%
complete. The company uses this
percentage (75%) of the inputs placed into production for the
period as the volume standard
to apply to work-in-process inventory for reporting purposes.”
(Dosch & Wilson, 2010, p. 43)

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114
Section 3.8 Weighted Average Cost Method
3.7 Simplifications of JIT and Automation
For companies adopting a just-in-time (JIT) philosophy, the
expectation is to reduce
or eliminate inventories. If a company implements JIT
throughout its operations, the final
departments in the process finish the products just in time to be
shipped; parts, components,
and subassemblies are manufactured just in time to meet the
final department’s needs; and
so on, back through the process. Even in the beginning,
materials are received just in time to
enter the appropriate department.
JIT can significantly simplify accounting for a process cost
system. Partially completed units
within each department will be kept as low as possible. Thus,
little difference exists between
units completed and work done during the period. Consequently,
the costs incurred during
the period are largely tied to goods completed. As a result, unit
costs are more accurate in
a JIT environment because they are less influenced by stage of
completion estimates. This
is true of automated factories as a whole, since they tend to

have fairly uniform amounts of
beginning and ending work in process inventories. Thus, work
done during the period will be
approximately equal to the number of units completed during
the period.
In addition, little need exists to transfer costs from one
department to the next. The costs of
the period can be recorded directly to the cost of goods sold
account. Process costs per unit
can still be computed, but on a daily or weekly basis. The unit
costs will be calculated using
units produced, rather than equivalent units. Further aspects of
JIT product costing are dis-
cussed in Chapter 4.
In JIT factories, certain departments remain idle until their
outputs are needed by the next
department. This may cause a particular department to appear
inefficient in one period and
very efficient in another. Therefore, evaluations of managers
and costs in JIT plants need to
consider the flow of production and who controls decisions of
what and when to produce.
Many managers believe that a system truly operating under JIT
will have no inventories and,
therefore, no need for a process cost system. Because the
process flow time is not zero, some
items are always in production in a partially completed stage.
Process costing becomes greatly
simplified in such a setting, but it is not eliminated.
3.8 Weighted Average Cost Method
An alternative to the first-in, first-out cost method for
calculating equivalent units is the

weighted average cost method. This method averages the
beginning work in process inven-
tory (last period’s costs) and the current production (this
period’s costs). The method assumes
that the started and completed units for the period are the units
completed and transferred
out (regardless of when the units were started). In computing
unit costs, equivalent units
are calculated as the sum of (1) the units completed during the
period, and (2) the ending
work in process inventory multiplied by its stage of completion.
Whereas the equivalent units
for the FIFO unit cost represent only work done during the
current period, equivalent units
for the weighted average method represent all units completed
during this period (including
work already done in the beginning work in process) plus any
work done on ending work in
process units.
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115
The weighted average cost method is easier and simpler than
FIFO because it does not require
tracking the costs in the beginning inventory separately from
those costs added during the
current period. It is justified on the basis of convenience and

simplicity. One can argue that a
process which produces identical or similar units should
generate the same unit costs from
one month to the next. In addition, if beginning and ending
inventories do not differ signifi-
cantly from period to period, the costs per unit are relatively
stable. However, the weighted
average method commingles costs and production efforts of two
time periods. The resulting
product costs do not match production management’s measures
of inputs and outputs. Thus,
many managers view the extra effort for FIFO as worthwhile.
Weighted Average Computational Steps
We apply the same computational steps to the weighted average
cost method that we used
for the FIFO cost method. A slight difference occurs in the
“Costs Accounted for” section of the
cost of production report. In this section, costs are distributed to
units completed and units in
the ending inventory. The weighted average cost method will
usually have different unit costs
from FIFO.
We continue the example of Shirts Unlimited that we explored
earlier in the chapter. For the
Cutting Department, we prepared the cost of production report
using the FIFO cost method.
Now, we apply the weighted average cost method to the data.
Step 1: Determine Flow of Physical Units. Determining the flow
of physical units for a
department is the same as for the FIFO method:
Units in beginning work in process 4,000

Units started and completed: (12,000 – 2,000 or 14,000 – 4,000)
10,000
Units in ending work in process 2,000
Total units 16,000
Step 2: Calculate Equivalent Units. The weighted average
method computes unit costs by
aggregating costs to date (for the completed units and ending
work in process) and dividing
these by work done to date. Thus, to obtain the equivalent units
of work done to date on the
completed units and ending work in process, we need only
consider the 14,000 units com-
pleted (4,000 + 10,000) and the 2,000 units in ending work in
process. For our example, we
would have the following calculation:
Units completed: 14,000 × 100% 14,000 14,000
Ending inventory:
2,000 × 100% 2,000
2,000 × 30% 600
Equivalent units of work done to date 16,000 14,600
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116
Step 3: Compute Unit Costs. The unit costs for materials and
conversion costs are calculated
from the total costs and the equivalent units. The costs for
which the Cutting Department will
be held accountable are:
Costs Charged to Dept. Materials Conversion Total
Beginning inventory $400,000 $80,000 $480,000
Current month 1,200,000 650,000 1,850,000
Total costs $1,600,000 $730,000 $2,330,000
We calculate unit costs by using the equivalent units from
above and dividing them into the
total costs:
Unit Costs for May:
Unit cost for materials = $1,600,000 / 16,000 = $100
These unit costs are identical to those calculated using the FIFO
cost method because April’s
unit costs were the same as those for May. Usually, some
difference will occur in the numbers,
but generally not a significant one.

Step 4: Distribute Total Costs to Units. The distribution of costs
using the unit costs from
Step 3 is as follows:
Costs Charged to Dept. Materials Conversion Total
Units 14,000 14,000
Multiplied by cost per unit $100 $50
Costs $1,400,000 $700,000 $2,100,000
Equivalent units 2,000 600
Multiplied by cost per unit $100 $50
Costs $200,000 $30,000 $230,000
Total costs accounted for $1,600,000 $730,000 $2,330,000
Step 5: Reconcile the Costs. As shown in Step 3, the total costs
charged to the Cutting Depart-
ment are $2,330,000. After distributing the costs to the units
completed and units in the end-
ing inventory, the sum of that distribution should equal
$2,330,000. This is confirmed by the
total costs accounted for in Step 4.
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117
Cost of Production Report
The five computational steps provide all of the calculations
needed to prepare a cost of pro-
duction report for May. The report prepared under the weighted
average cost method appears
in Figure 3.7.
Figure 3.7: Cost of production report for Cutting Department
(weighted
average method)
Physical
Units
Shirts Unlimited
Cutting Department
Material Equivalent
Units
Conversion Equivalent
UnitsUnits:
Units completed:

14,000 × 100%
Ending work in process:
2,000 × 100%
2,000 × 30%
Total units
Equivalent units of work to date
14,000
2,000
16,000
14,000
2,000
16,000
14,000
600
14,600
Prior period cost

Current month costs
Total per unit
Cost per unit
$ 400,000
1,200,000
$1,600,000
16,000
$ 100
$ 80,000
650,000
$730,000
14,600
$ 50
$ 480,000
1,850,000
$2,330,000
Costs Charged to Department:

Units
Times cost per unit
Costs
Equivalent units
Times cost per unit
Costs
Total costs accounted for
14,000
$ 100
$1,400,000
2,000
$ 100
$ 200,000
$1,600,000
$2,100,000

$ 230,000
14,000
$ 50
$700,000
600
$ 50
$ 30,000
$730,000 $2,330,000
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118
Summary & Resources
Summary & Resources
Chapter Summary
In a job cost environment, costs are identified with specific
batches or customer orders. In
a process cost environment, products are continuously
manufactured through a series of

departments. Physical units and costs are identified with the
departments. Unit costs are
used in tracing the costs through the various departments and to
the finished goods inven-
tory account.
Because manufacturing situations will vary from one company
to another, modifications and
adaptations to the cost accounting system must be made.
Modified and hybrid cost systems
are common. A modified cost system will have some elements
of cost using job costs and
other elements of cost using process costs. A hybrid cost system
will have one department on
a job cost basis and another department on a process cost basis.
Unit costs in a process cost system are computed by dividing
the appropriate current costs
by the related equivalent units. The inventory costing method
used is the first-in, first-out
method. This assumes the beginning inventory is completed
before new units are completed.
Costs incurred are assumed to flow in the same manner. The
cost of production report sum-
marizes the costs charged to departments and how the costs are
distributed between com-
pleted units and ending work in process.
Changes taking place in the manufacturing environment have an
impact on a process cost
system. Some changes, such as JIT, can simplify the calculation
of unit costs.
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119
Summary & Resources
cost of production report A report that
presents information about units, costs
charged to the department, and how the
costs are accounted for.
equivalent units The theoretical number of
units that could have been produced had the
resources been applied to units that were
started and completed during the period.
first-in, first-out (FIFO) cost method A
process costing method that presumes the
beginning inventory is completed before
new units are completed.
hybrid cost system One type of cost system
is used for one phase of the production
process, and another system is used for a
subsequent phase.
job cost system A cost system that sepa-
rately tracks costs associated with each job
or product.
job order A cost summary for each job.
just-in-time (JIT) philosophy An inven-
tory management approach that seeks to

minimize or eliminate inventories.
modified cost system A cost system that
has one or more elements of cost using job
costing, while the other cost elements use
process costing.
operation costing Usage of a modified or
hybrid cost system.
process cost system Identification of costs
with individual departments for an interval
of time; unit costs of a final product are the
sum of all costs assigned to the product by
each department that worked on it.
production order A cost summary for each
job.
stage of completion Average percentage of
work completed on a unit of product at any
point in time.
weighted average cost method A process
costing method that averages the costs of
the beginning work in process inventory and
the current production.
work order A cost summary for each job.
Key Terms
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120
Summary & Resources
Problem for Review
Irene Carol Fisheries raises cutthroat trout for local restaurants
and uses a FIFO process cost
system. The fish represent materials. The process involves three
ponds: raising, growing, and
fattening. Fingerlings are grown after hatching in the raising
pond. At a specified point, the
fingerlings are moved to the growing pond, where they mature.
After maturing, the fish are
transferred to the fattening pond. The growing pond had 5,000
fingerlings on April 1 that
were 10% complete for the growing pond. During the month, an
additional 30,000 fingerlings
were put into the pond. By the end of April, 28,000 fish had
been moved to the fattening pond.
The fingerlings remaining in the growing pond were 30%
complete.
Questions:
1. Determine the equivalent units for fingerlings.
2. Determine the equivalent units for conversion costs.
Solution

:
1. Equivalent units for fingerlings:
Physical flow:
Beginning inventory 5,000
Add units started during month 30,000
Available 35,000
Minus units completed (28,000)
Ending inventory 7,000
Started and completed:
Units completed 28,000
Minus beginning inventory (5,000)
or

Units started 30,000
Minus ending inventory (7,000)
Equivalent units for fingerlings:
To complete beginning inventory: 5,000 × (100% − 100%) 0
Units started and completed: 23,000 × 100% 23,000
Ending inventory: 7,000 × 100% 7,000
Equivalent units 30,000
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121

Summary & Resources
2. Equivalent units for conversion costs:
To complete beginning inventory: 5,000 × (100% − 10%) 4,500
Units started and complete: 23,000 × 100% 23,000
Ending inventory: 7,000 × 30% 2,100
Equivalent units 29,600
Questions for Review and Discussion
1. Distinguish between a job cost system and a process cost
system as to the timing of
sales versus production.
2. What is the focal point for cost accumulation in a process
cost system?
3. Distinguish between a modified cost system and a hybrid cost
system.
4. What is the purpose of a job, work, or production order?
5. List the five computational steps necessary to account for

costs in a process cost
system.
6. Explain how equivalent units are computed under the FIFO
method of process
costing.
7. How are the unit costs computed under the FIFO method of
process costing?
8. Why are equivalent units for materials usually different from
equivalent units for
conversion costs?
9. What accounting report is the major document for a process
cost system?
10. How can one check to ensure that cost distribution to
completed units and ending
inventory has been done properly?
11. How can management use a cost of production report?
12. Which aspect of determining unit costs in a process cost
system is particularly sus-
ceptible to manipulation by production managers?

13. Explain how a just-in-time environment can simplify a
process cost system.
14. What is the distinction between equivalent units under the
FIFO method and equiva-
lent units under the weighted average method?
15. Under what circumstances will both FIFO and weighted
average yield the same
equivalent units?
16. On a cost of production report, the costs of units completed
and transferred out are
treated one way under the FIFO method and a different way
under the weighted
average method. Explain this difference.
Exercises
3-1. Physical Flow. Rolnick’s Protective Coating Service
specializes in providing
protective coating for eyeglasses. The company’s work in
process inventory in
Operation 1 on July 1 was 2,500 units. During July, 72,000
units were completed

in Operation 1 and transferred to Operation 2. The ending work
in process
inventory in Operation 1 was 3,500 units.
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122
Summary & Resources
Questions:
1. Compute the number of units started during July.
2. Compute the number of units started and completed.
3. Why is the stage of completion for the work in process
inventories irrelevant for
these computations?
3-2. Costs of Finished Units and Work in Process. Henry’s Dry

Cleaners uses a FIFO
process cost system. Its work in process on December 1
consisted of 8,000 gar-
ments, which were 20% complete; $12,800 in processing costs
were incurred last
month for these garments.
During December, 82,000 garments were started and 78,000
were completed. Pro-
cessing costs during December amounted to $245,225. The
ending work in process
was 80% complete.
Question:
Determine the cost of the finished garments and the cost of the
ending work in process.
3-3. Cost of Completed Units. Blair Products of Wellington,
New Zealand, produces a
kiwi fruit drink and uses a FIFO process cost system. The units
and equivalent units
(in liters), as well as unit costs, for the Initial Mix Department
are as follows:

Equivalent units in beginning work in process 6,000 1,200
Units started and completed 40,000 40,000
Equivalent units in ending work in process 3,000 1,800
Unit costs NZ$0.10 NZ$0.20
Questions:
1. Compute the current period costs for:
a. Materials.
b. Conversion costs.
2. If the beginning work in process inventory was valued at
NZ$12,600, what would be
the cost of units completed?
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123
Summary & Resources
3-4. Conversion Costs. The Fabrication Department is the first
stage of Hiller Company’s
production process. Conversion costs in beginning work in
process for this depart-
ment were 70% complete, and in the ending work in process
they were 40% com-
plete. Hiller Company uses a FIFO process cost system.
Conversion costs data in the
Fabrication Department for January are as follows:
Units
Conversion
Costs
Work in process at January 1 28,000 $ 51,000
Units started and costs incurred during January 153,000
$293,000

Units completed and transferred to next department during
January 131,000
Questions:
1. What was the conversion cost of work in process in the
Fabrication Department at
January 31?
2. What were the conversion costs per equivalent unit last
month and this month,
respectively?
3-5. Distribution of Total Cost and Ethics. There were 5,000
units in process in the
Cutting Department of Grossman & Marcus, Inc., at the
beginning of February. These
units had materials and conversion costs of $48,000 and were
60% complete for
conversion costs. Materials are added at the beginning of the
process. During Febru-
ary, 60,000 units were started. The ending inventory for the
month totaled 8,000
units, 25% complete for conversion costs. The unit cost

calculation shows $4 for
materials and $8 for conversion costs. A FIFO process cost
system is used.
Questions:
1. Compute the cost of units completed and transferred to the
next department.
2. Compute the cost of units in the ending inventory for the
month.
3. Why might the production manager wish to inflate the
estimate of the degree of
completion of the ending inventory from 25% to 50%? Support
your answer with
computations.
3-6. Unit Costs in a Bank. Chittenden Bank of Columbus, Ohio,
processes checks in its
Check Clearing Department. No materials costs are incurred in
this department. On
June 1, 4,000 checks in process were 25% complete with an
associated processing
cost of $200. During June, 100,000 checks were started in
process. By the end of June,

70,000 checks had been started and completed. The direct
processing costs in June
amounted to $18,000. On June 30, the checks in process were
one-third complete.
Question:
Assuming a FIFO process cost system, calculate equivalent
units and the unit cost of work
done during June.
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124
Summary & Resources
3-7. Cost Distribution. Koniver Products manufactures a
vitamin product and uses a
FIFO process cost system. On July 1, it had 8,000 units in

process that were 25%
complete for conversion costs. Materials (a coating) are added
at the end of the
process. The cost of the beginning work in process was $1,800.
July conversion costs
were $36,000, and the materials costs were $17,000. Koniver
Products started and
completed 60,000 units in July. The work in process inventory
on July 31 of 10,000
units was 60% complete.
Questions:
1. What was the total cost of work transferred to the finished
goods inventory in July?
2. Determine the cost of work in process inventory on July 31.
3-8. Equivalent Units—FIFO and Weighted Average.
Schroeder’s Photo Lab began the
month with 6,000 items in inventory, which averaged 50%
complete for materials
and 40% complete for conversion costs. At the end of the
month, there were 7,000
items in inventory, which averaged 60% complete for materials
and 30% complete

for conversion costs. During the month, 65,000 items were
completed.
Questions:
1. Using the FIFO method, determine the appropriate numbers
of equivalent units
needed to compute unit costs for materials and for conversion
costs.
2. Using the weighted average method, determine the
appropriate numbers of equiva-
lent units needed to compute unit costs for materials and for
conversion costs.
3-9. Conversion Costs—Weighted Average Cost Method. Abe’s
Vineyards grows
grapes; after sorting and crating them, it sells the crates of
grapes to Madelyn’s Win-
ery. On December 1, Abe’s Vineyards had 10,000 pounds of
grapes that were 40%
complete for conversion costs. The conversion costs in the
beginning work in pro-
cess inventory were $20,000. In December, 150,000 pounds of
grapes were started

in process. Conversion costs in December amounted to
$790,000. On December 31,
20,000 pounds of grapes were 40% complete for conversion
costs. A weighted aver-
age process cost system is used.
Questions:
1. Compute the equivalent units (pounds).
2. Determine the conversion costs per pound.
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Summary & Resources
3-10. Cost Distribution—Weighted Average Cost Method. Amy
Dee’s Beef Processing
Company (“Let us meat your needs”) had work in process at the

beginning and end
of the year as follows:
Percentage of Completion
Direct Materials Processing Costs
January 1 – 3,000 pounds 40% 10%
December 31 – 2,000 pounds 80% 40%
The company completed 41,000 pounds of finished products
during the year.
Costs incurred during the year were: direct materials, $242,600;
processing costs,
$456,200. Work in process at January 1 was carried at a cost of
$16,600 (direct
materials, $13,000; processing costs, $8,900).
Questions:
1. Compute the cost of ending work in process using the
weighted average method.
2. Compute the cost of finished products using the weighted
average method.

3-11. Total Costs—FIFO and Weighted Average. Lefkove, Inc.
manufactures staplers.
Materials are added at the beginning of the process; conversion
costs are incurred
uniformly. Beginning work in process consisted of 6,000
staplers. These units were
65% complete. During the period, the company began working
on an additional
87,000 staplers, and finished the period with 9,000 staplers that
were 30% com-
plete in ending work in process.
Costs attached to beginning inventory were $7,500 for
materials and $9,500 for
conversion costs. Costs added during the period were $74,000
for materials and
$22,000 for conversion.
Questions:
1. Compute the cost of finished products and the cost of ending
work in process using
the FIFO method.

2. Compute the cost of finished products and the cost of ending
work in process using
the weighted-average method.
sch84920_03_c03_095-134.indd 125 7/31/17 1:37 PM
126
Summary & Resources
3-12. Unit Costs—FIFO and Weighted Average. Craig’s Diaper
Service, located in a
medium-sized city in California, is the lone remaining company
that cleans cloth dia-
pers in that city. The company currently uses a FIFO method of
process costing and
has arrived at a unit cost of $0.65. Harold Solomon, the owner,
wonders what the
unit cost would be with the weighted average method. He has
obtained the following

information from his accountant:
Equivalent units for the weighted average method 4,780
Equivalent units for FIFO method 5,000
Costs in beginning work in process $800
Question:
Compute the unit cost for the weighted average method.
Problems
3-13. Cost of Production Report. McKemie Robotics, a
subsidiary of U.S.-based Kutner
Robotics located in Dublin, Ireland, manufactures a small robot
that looks like a
leprechaun and can be moved by remote control. It can be used
as a novelty to serve
food and drinks to guests; and, with a special attachment, it can
vacuum the carpet.
The materials are all added at the beginning of the Assembly
Operation (the first

operation). Labor and overhead are added during the month.
Data for the month of
July in the Assembly Operation are as follows:
Units
Work in process, July 1 35,000
Units started in process 250,000
Costs
(in U.S. Dollars)
Work in process, July 1:
Materials $240,000
Labor and overhead 80,000
July costs:
Materials $3,500,000
Labor and overhead 1,457,280

sch84920_03_c03_095-134.indd 126 7/31/17 1:37 PM
127
Summary & Resources
The inventory of work in process on July 1 was complete as to
materials but only
25% complete as to labor and overhead. On July 31, the
inventory consisted of
20,000 units that were 40% complete with respect to labor and
overhead.
Question:
Using FIFO, prepare a cost of production report for the
Assembly Operation for the month of
July.
3-14. Cost of Production Report and Ethics. The Lipseyville

Municipality uses a FIFO
process cost system to compute water purification costs. All
materials (chemicals)
are added at the beginning of the purification process. Data for
the month of May are
given as follows (units are kiloliters of water):
Units
Work in process, May 1 5,000
Units started in process 120,000
Costs
Materials $15,000
May’s costs:
Materials $360,000

The beginning work in process was 20% complete for labor and
overhead. During the month,
115,000 units were completed, and 10,000 units that were 20%
complete as to labor and
overhead were in process at May 31.
Questions:
1. Prepare a cost of production report for the month of May.
2. Explain how management might use this cost of production
report.
3. What might motivate the production manager to inflate the
estimate of the degree of
completion of the ending work in process from 20% to 40%?
Support your answer
with computations.
sch84920_03_c03_095-134.indd 127 7/31/17 1:37 PM

128
Summary & Resources
3-15. Explanations About a Cost of Production Report. Daniel
S. Tryker’s Painting Ser-
vice receives a continuous flow of clear light bulbs from
various manufacturers who
want their bulbs painted—typically yellow or black. A partial
production report,
using FIFO, for the month of May is as follows for Department
1 (units are packages
of eight bulbs):
Physical Units:
Work in process, May 1 (40% complete) 500
Started and completed 1,700
Work in process, May 31 (50% complete) 300
Total units 2,500

Costs Charged to Department:
Work in process, May 1 $ 800.00
Production costs, May 9,020.00
Total costs charged $9,820.00
Transferred to Department 2:
Work in process, May 1 $ 800.00
Cost to complete work in process, May 1 1,258.60
Started and completed 7,132.09
$9,190.69
Work in process, May 31 629.30
Total costs accounted for $9,819.99*

*Difference caused by rounding.
Questions:
1. Explain what the above partial cost of production report
shows about the quantity
flow and the cost flow.
2. Explain why equivalent units are preferred to total units
produced in determining
costs of units completed and units in ending inventory.
3. What additional information can this report give a manager?
4. Calculate how many units were completed during the month
of May.
sch84920_03_c03_095-134.indd 128 7/31/17 1:37 PM
129

Summary & Resources
3-16. Cost of Production Report—Several Months. David Jared
Industries is a bottling
company that purchases orange juice from growers in Florida
and bottles the juice
in one-gallon plastic containers for sale to grocery stores. Only
in its second year
of operations, the company’s accounting system is evolving and
has not been fully
formalized. A chief accountant, Alan Neal, has been hired to
bring order to the paper
shuffling. In the process, Neal has gathered data to prepare
FIFO cost of produc-
tion reports for Activity Center A for the first three months of
the current fiscal year
(April, May, and June). This information is as follows:
April May June
Gallons:
Beginning inventory 10,000 ? ?
Started in production 80,000 65,000 70,000

Completed 70,000 60,000 ?
Ending inventory ? ? 20,000
Beginning inventory 60% 30% 70%
Ending inventory 30% 70% 40%
Cost data:
Beginning inventory:
Materials $ 10,000 ? ?
Conversion costs 20,000 ? ?
Current period:
Materials $ 80,000 $ 66,000 $ 70,000
Conversion costs 170,000 142,000 156,000

Materials (orange juice) are added at the beginning of Activity
Center A. Conversion
costs flow uniformly throughout the process.
Questions:
1. Compute the physical flows of units (gallons) for each of the
three months.
2. Prepare a cost of production report for each of the three
months. Round unit costs to
four decimal places and total dollars to the nearest dollar.
3. Analyze the cost of production reports for each month, and
comment on production
stability and unit costs for materials and conversion costs.
sch84920_03_c03_095-134.indd 129 7/31/17 1:37 PM
130

Summary & Resources
3-17. Analysis of a Work in Process Account. Garber
Pharmaceutical Company manu-
factures a tablet for allergy sufferers and uses a FIFO process
cost system. All
ingredients are added at the beginning of the Blending
Operation. Conversion costs
flow uniformly throughout the process. Tableting and Coating
are operations down-
stream from Blending. Information on the Blending Operation
for October is as
follows:
Work in Process – Blending Operation
October 1, balance (100,000 units,
40% complete for conversion costs)
$ 151,760 Completed and transferred to
Tableting:
Direct materials added (1,000,000 units) $1,310,000 Units – ?

Direct labor costs ? Costs – ?
Factory overhead (applied at 180%
of direct labor cost)
$396,000
October 31, balance (200,000 units,
70% complete for conversion costs)
?
The October 1 balance consists of the following cost elements:
Direct materials $128,000
Direct labor 8,800
Factory overhead 14,960
Total costs $151,760
Questions:
1. Compute the amount of direct labor cost for the period.

2. Calculate the unit costs for direct materials, direct labor, and
factory overhead for the
current month (October). Direct labor and factory overhead
should be separate; do
not combine them into one figure.
3. Calculate the unit costs for direct materials, direct labor, and
factory overhead in the
inventory at the beginning of October.
4. Compare the unit costs computed in Parts (2) and (3). Explain
what information this
comparison gives to a manager.
3-18. Work in Process Costs—FIFO and Weighted Average. The
following data pertain
to the Claims Processing Department of Smilgoff Insurance
Company, which does
not incur any direct materials costs:
sch84920_03_c03_095-134.indd 130 7/31/17 1:37 PM

131
Summary & Resources
Units (claims) 3,200
Conversion costs (10% complete) $6,900
Units (claims) started in May 13,500
May’s conversion costs $285,000
Units (claims) 1,900
Stage of completion for conversion costs 60%
Questions:

1. Using the FIFO method, compute the cost of the May 31 work
in process.
2. Using the weighted average method, compute the cost of the
May 31 work in process.
3-19. Finished Goods and Work in Process Costs—Weighted
Average. The following
information is available for the Assembly Department of
Lerman Enterprises for
August:
Units Costs
Work in process, August 1 (70% complete) 5,000
Direct materials $ 6,000
Direct labor 3,000
Manufacturing overhead 4,000
Total work in process, August 1 $13,000
Started in production during August 20,000

Costs added:
Direct labor 8,000
Manufacturing overhead 10,000
Total costs added during August $47,000
Work in process, August 31 (80% complete) 3,000
Materials are added at the beginning of the process.
Questions:
1. Compute the total cost of goods transferred out using the
2. Compute the total cost of ending work in process using the
sch84920_03_c03_095-134.indd 131 7/31/17 1:37 PM

132
Summary & Resources
3-20. Work in Process—FIFO and Weighted Average. The
Division of Corporate Taxa-
tion processes corporate tax returns for a state located in the
northeastern United
States. Processing costs for this agency were 70% complete as
to the beginning work
in process and 60% complete as to the ending work in process.
Information on pro-
cessing costs for the month of August is as follows:
Number of
Returns
Processing
Costs
Work in process at August 1 8,000 $ 95,000

Returns started and costs incurred during August 45,000
$666,000
Returns completed during August 49,000
Questions:
1. Using the FIFO method, what amount of processing cost was
in work in process at
August 31?
2. Using the weighted average method, what amount of
processing cost was in work in
process at August 31?
3-21. Cost of Finished Units—FIFO and Weighted Average. The
Department of Motor
Vehicles processes auto tag applications. All materials costs
(i.e., tags) are completed
when processing begins. The following information was
obtained by the controller,
Arthur Kurtz, for October:
The October 1 work in process had 5,000 applications (40%
completed) and the fol-

lowing costs:
Direct labor 16,880
Overhead 31,400
During October, 11,000 applications were completed, and the
following costs were incurred:
Direct labor 95,775
Overhead 159,925
On October 31, there were 2,400 partially processed
applications on hand (80% completed).
Questions:
1. Using the FIFO method, determine the cost of completed
applications.
2. Using the weighted average method, determine the cost of

completed applications.
sch84920_03_c03_095-134.indd 132 7/31/17 1:37 PM
133
Summary & Resources
Case: Wyncote Pipelines
Wyncote Pipelines, Inc., is a liquid petroleum pipeline
transportation company. The line
running from Corpus Christi to Kansas City is a 30-inch, high-
pressure line that moves
product at an average of 8 miles per hour. A filled line contains
28 million barrels of product,
which travel an average of 192 miles per day. The line speed
can be increased safely to
about 280 miles per day or slowed to almost a stop. The line can
be filled to capacity or be

partially empty. Over certain segments, the line moves faster
than elsewhere as more product
is placed in and taken out. The line carries various products,
including crude oil of varying
weights, home heating oil, and numerous other petroleum
products.
As a transportation company, Wyncote Pipelines does not own
the products transported.
Instead, it is paid a fee for its services based on moving 10,000
barrels (420,000 gallons) of
product one mile. The variable cost of running the line is for the
30 pumping stations along
the line: the higher the traffic, the higher the fuel cost for
pumping. The other cost of running
the line is overhead cost, which relates to line maintenance. One
unit is considered to be
moving 10,000 barrels of product one mile.
On April 1, the Corpus Christi to Kansas City line had 1.44
million units in process (18 million
barrels that were to be transported an average of 800 miles),
which were 60% complete.
During the month, the line completed 12 million units of
delivered product and had ending

units in process of two million units (20 million barrels to be
transported 1,000 miles) that
were 40% complete. The beginning units in transit had
accumulated costs of $8,800,000,
of which $2,400,000 were variable costs. During the month, the
Corpus Christi to Kansas
City line had $33,420,800 in variable costs and $81,168,800 in
fixed costs. The completed
deliveries were billed at $134,400,000 for services.
Questions:
1. What is the nature of the costs incurred as to direct materials,
direct labor, and
variable or fixed overhead?
2. Why should this application be considered for a modified
process cost system?
3. Compute the equivalent units of production for the Corpus
Christi to Kansas City
line. (Round to four places, if needed.)
4. Compute a cost per unit of output for variable and fixed
costs.
5. What were the profits before administrative expenses and
taxes during April?

6. What were the costs of the units in transit on April 30?
sch84920_03_c03_095-134.indd 133 7/31/17 1:37 PM
sch84920_03_c03_095-134.indd 134 7/31/17 1:37 PM
2/14/2018 First Solar Preview: Manufacturing Costs, Project
Order Book In The Spotlight
https://www.forbes.com/sites/greatspeculations/2014/02/24/first
-solar-preview-manufacturing-costs-project-order-book-in-the-
spotlight/#635b41381f20 1/2

/
First Solar Preview: Manufacturing Costs,
Project Order Book In The Spotlight
Great Speculations
Opinions expressed by Forbes Contributors are their own.
Trefis Team , Contributor
First Solar, one of the world’s largest solar panel manufacturers
and project
developers, is expected to release its fourth quarter 2013 results
on February 25.
During Q3 2013, the company’s revenues stood at around $1.26
billion, up by
around 50% year-over-year, while operating income nearly
doubled to around $207
million. For the fourth quarter, we expect the company’s
earnings to be influenced
by revenue recognition on its Desert Sunlight project as well its

improving
manufacturing efficiencies. Here is an overview of what to
expect and some of the
factors we will be tracking when the company reports.
See Our Complete Analysis For Solar Stocks First Solar |
SunPower |
Yingli |Trina Solar
Desert Sunlight Project Will Power Results, Watching For New
Project
Orders
First Solar's project business now accounts for over 80% of the
company’s revenues.
For this quarter, we expect the 550 megawatt Desert Sunlight
project, which the
company is building in California, to contribute significantly to
revenues and
margins. While the company has been executing its existing
project orders relatively
smoothly, we will be watching its progress in improving its new
order book. At the
end of the third quarter, the company’s total outstanding
bookings stood at around

2.7 gigawatts, while bookings in terms of expected revenues
were about $7.8 billion
(including contracted module sales), which is slightly below the
December 2012
value. However, the company has indicated that it has potential
project
opportunities to the tune of 7.7 GW, of which around 1.4 GW of
the opportunities
https://www.forbes.com/investing
https://www.forbes.com/
http://www.forbes.com/sites/greatspeculations/
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lance.jsp?tkr=fslr&tab=searchtabquotesdark
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http://files.shareholder.com/downloads/FSLR/2952337849x0x70
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1cffc05c3abb/Q313_Earnings_Call_Presentation_FINAL.pdf
http://www.forbes.com/sites/greatspeculations/

2/14/2018 First Solar Preview: Manufacturing Costs, Project
Order Book In The Spotlight
https://www.forbes.com/sites/greatspeculations/2014/02/24/first
-solar-preview-manufacturing-costs-project-order-book-in-the-
spotlight/#635b41381f20 2/2
are in the mid to late stages. We will be watching the
company’s progress in
converting these leads into project orders.
Panels Manufacturing Costs And Efficiencies
Although First Solar’s standalone panel sales remain small
when compared to its
systems sales , the company’s panel technology is an important
factor in driving its
competitiveness in the solar power systems business. Over the
third quarter, the
company took some significant strides in reducing its core panel
manufacturing
costs (excluding freight, recycling and warranty charges) by
around 12% sequentially

to $0.49 per watt, which is the lowest in the solar industry. The
company also
increased the conversion efficiency of its panels by around 30
basis points to about
13.3%, while the efficiency for its lead production line touched
13.9%. For this
quarter, we will be watching the company’s progress in bringing
down its
manufacturing costs further and also its progress in replicating
its lead line
conversion efficiency gains across its other production lines.
Trefis will be updating its model and price estimate for First
Solar following the
earnings release.
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