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PROCESS COSTING (Hilton, Ronald W. Managerial Accounting)...........1


After studying this chapter, you will be able to:........................................1
1. COMPARISON OF JOB-ORDER COSTING AND PROCESS
COSTING .................................................................................................1
2. EQUIVALENT UNITS: A KEY CONCEPT.......................................3
3. PRODUCTION REPORTS ..................................................................3
3.1. Illustration of Process Costing ......................................................3
Basic Data for Illustration ....................................................................3
3.2. Weighted-Average Method of Process Costing ............................4
Chapter summary.......................................................................................7
Key terms...................................................................................................7
Appendix to Chapter 4 ( )............................................8
Process Costing in Sequential Production Departments ...............................8

PROCESS
COSTING (Hilton, Ronald W.
Managerial Accounting)
After studying this chapter, you will be able to:
1 List and explain the similarities and important differences between joborder and process costing.
2 Prepare journal entries to record the flow of costs in a process-costing
system with sequential production departments.
3 Prepare a table of equivalent units under weighted-average process
costing.
4 Compute the cost per equivalent unit under the weighted-average method
of process costing.
5 Analyze the total production costs for a department under the weightedaverage method of process costing.
6 Prepare a departmental production report under weighted-average process
costing.
7 Describe how an operation costing system accumulates and assigns the
costs of direct-material and conversion activity in a batch manufacturing
process.
8 After completing the appendix, prepare process-costing calculations for a
sequential manufacturing process.
account.

1. COMPARISON OF JOB-ORDER COSTING AND PROCESS


COSTING
Both product-costing systems have similar objectives: to accumulate total
product costs and to assign those costs to each unit manufactured. A
company that uses a job-costing system produces goods by order or in
distinct batches, and the products tend to differ significantly from each
other. With a process-costing system, a company works in a repetitive
production environment, manufacturing a large number of like units in a
continuous flow. Industries that use process costing include those involved
with paper, petroleum, lumber, and chemicals. Costs in a job-order system
are accumulated by job; in a process-costing system, the costs are
accumulated by department or process. The flow of costs through general
ledger accounts is similar in both systems: through Work in Process, to
Finished Goods, to Cost of Goods Sold. In a sequential production
operation, each department establishes its own Work-in-Process account.
Flow of Costs Exhibit 4-1 displays the flow of costs in two process-costing
situations: one with a single production department and one with two
production departments used in sequence. The same accounts are used in
this process-costing illustration as were used in job-order costing. As the
illustration shows, direct-material, direct-labor, and manufacturingoverhead costs are added to a Work- in-Process Inventory account. As
goods are finished, costs are transferred to Finished- Goods Inventory.
During the period when goods are sold, the product costs are transferred to
Cost of Goods Sold. In the two-department case, when goods are finished in
the first production department, costs accumulated in the Work-in-Process
Inventory account for production department A are transferred to the Workin-Process Inventory account for production department B.

Exhibit 4-1. Flow of Costs in Process Costing Systems

The journal entries for the case of two sequential production departments, as
illustrated in Exhibit 4-1, are as follows. (The numbers used in the journal
entries are assumed for the purpose of showing the form of the entries.)
1.As direct material and direct labor are used in production department A,
these costs are added to the Work-in-Process Inventory account for
department A. Overhead is applied using a predetermined overhead rate.
The predetermined overhead rate is computed in the same way in job-order
and process costing.
Work-in-Process Inventory: Production 100,000
Department A

Raw-Material Inventory
50,000
Wages Payable
20,000
Manufacturing Overhead
30,000
2.When production department A completes its work on some units of
product, these units are transferred to production department B. The costs
assigned to these goods are transferred from the Work-in-Process Inventory
account for department A to the Work-in-Process Inventory account for
department B. In department B, the costs assigned to these partially
completed products are called transferred-in costs.
Work-in-Process Inventory: Production 80,000
Department B
Work-in-Process
Inventory:
80,000
Production Department A
3. Direct material and direct labor are used in production department B,
and manufacturing overhead is applied using a predetermined overhead
rate.
Work-in-Process Inventory: Production 75,000
Department B
Raw-Material Inventory
40,000
Wages Payable
15,000
Manufacturing Overhead
20,000
4. Goods are completed in production department B and transferred to the
finished- goods warehouse.
Finished-Goods inventory
130,000
Work-in-Process
Inventory:
130,000
Production Department B
5. Goods are sold.
Cost of Goods Sold
125,000
Finished-Goods Inventory
125,000
Suppose there are 1,000 physical units in process at the end of an
accounting period. Each of the physical units is 75 percent complete with
respect to conversion (direct labor and manufacturing overhead). How much
conversion activity has been applied to these partially completed units?
Conversion activity occurs uniformly throughout the production process.
Therefore, the amount of conversion activity required to do 75 percent of
the con- version on 1,000 units is equivalent to the amount of conversion
activity required to do all of the conversion on 750 units. This number is
computed as follows:

(1,000 partially completed physical units in


process) X (75% complete with respect to
conversion) = 750
2. EQUIVALENT UNITS: A KEY CONCEPT
The term equivalent units is used in process costing to refer to the amount
of manufacturing activity that has been applied to a batch of physical units.
The I000 physical units in process represent 750 equivalent units of
conversion activity.
The term equivalent units is also used to measure the amount of direct
materials represented by the partially completed goods. Since direct
materials are incorporated at the beginning of the production process, the
1,000 physical units represent 1,000 equivalent units of direct material
(1,000 physical units X 100% complete with respect to direct materials).
The most important feature of process costing is that the costs of direct
material and conversion are assigned to equivalent units rather than to
physical units. For simplicity, suppose that the only production activity of
the current accounting period was to start work on the 1,000 physical units
and complete 75 percent of the required conversion activity. Assume that
the costs incurred were $1,500 for conversion (direct labor and
manufacturing overhead) and $5,000 for direct material. These costs would
then be assigned as follows:

($1,500 conversion cost)/ (750 equivalent units of


conversion) = $2.00 per equivalent unit for
conversion
($5,000 direct-material cost)/ (1,000 equivalent
units of direct material) = $5.00 per equivalent unit
for direct material
This is a highly simplified example because there is no work-in-process
inventory at the beginning of the accounting period and no goods were
completed during the period. Nevertheless, it illustrates the important
concept that under process costing, costs are assigned to equivalent units
rather than physical units.

3. PRODUCTION REPORTS
Departmental production reports are completed to derive the preceding
information (equivalent units, unit costs, as well as the cost of completed
production , and the cost of the ending work-in-process inventory).
Production reports may be compiled by using either the weighted-average
method or the FIFO method. The text focuses on the weighted-average
method because of its popularity in practice. Production reports have
several sections, which are completed as follows:
(1) Analyze the physical flow of actual units.
(2) Calculate the equivalent units for the various direct materials and
conversion.
(3) Calculate the cost per equivalent unit.
(4) Analyze the total costs to determine the cost of completed production
and the cost of ending work-in-process inventory. Step 4 is
accomplished by simply multiplying equivalent units (step 2) by the
equivalent-unit costs (step 3).

3.1. Illustration of Process Costing


Basic Data for Illustration
The Wisconsin Division of MVP Sports Equipment Company manufactures
baseball gloves in its Milwaukee plant. Two production departments are
used in sequence: the Cutting Department and the Stitching Department. In
the Cutting Department, direct material consisting of imitation leather is
placed into production at the beginning of the process. Direct-labor and
manufacturing overhead costs are incurred uniformly throughout the
process. The material is rolled to make it softer and then cut into the pieces
needed to produce baseball gloves. The predetermined overhead rate used in
the Cutting Department is 125 percent of direct-labor cost.
Exhibit 4-4 presents a summary of the activity and costs in the Cutting
Department during March. The direct-material and conversion costs listed
in Exhibit 4-4 for the March I work in process consist of costs that were
incurred during February. These costs were assigned to the units remaining
in process at the end of February.
Based on the data in Exhibit 4-4, the Cutting Department's Work-in-Process
Inventory account has the following balance on March 1:
Work-in-Process inventory: Cutting Department
March 1 balance
57,200

The following journal entry is made during March to add the costs of direct
material, direct labor, and manufacturing overhead to Work-in-Process
Inventory.
Work-in-Process inventory: Cutting 283,500
Department
Raw-Material Inventory
90,000
Wages Payable
86,000
Manufacturing Overhead
107,500
Exhibit 4-4 . Basic Data for Illustration - Cutting Department
Work in process, March 1-20,000 units:
Direct material: 100% complete, cost of
$ 50,000*
Conversion: 10% complete, cost of
7,200*
Balance in work in process, March 1
57,200*
Units started during March
30,000 units
.Units completed during March and transferred out of 40,000 units
the Cuffing Department
Work in process, March 31
10,000 units
Direct material: 100% complete
Conversion: 50% complete
Costs incurred during March:
Direct material
$ 90,000
Conversion costs:
Direct labor
$ 86,000
Applied manufacturing overhead
107,500+
Total conversion costs
$193,500
*These costs were incurred during the prior month, February.
+ (Predetermined overhead rate ) x (Direct labor cost) = 125% * $86,000 =
$107,500

3.2. Weighted-Average Method of Process Costing


We now present the four steps used to prepare a departmental production
report using weighted-average process costing.
Step 1: Analysis of Physical Flow of Units. The first step is to prepare a
table summarizing the physical flow of production units during March. The
table is shown in Exhibit 4-5 and reflects the following inventory formula.

(Physical units in beginning work in process) +


(Physical units started) - (Physical units completed

and transferred out) = (Physical units in ending


work in process)
Step 2: Calculation of Equivalent Units. The second step in the processcosting procedure is to calculate the equivalent units of direct material and
conversion activity. A table of equivalent units, displayed in Exhibit 4-6, is
based on the table of physical flows prepared in step I (Exhibit 4-5). The
40,000 physical units that were completed and transferred out of the Cutting
Department were 100 percent complete. Thus, they represent 40,000
equivalent units for both direct material and conversion. The 10,000 units in
the ending work-in- process inventory are complete with respect to direct
material, and they represent 10,000 equivalent units of direct material.
However, they are only 50 percent complete with respect to conversion.
Therefore, the ending work-in-process inventory represents 5,000
equivalent units of conversion activity (10,000 physical units X 50%
complete).
As Exhibit 4-6 indicates, the total number of equivalent units is calculated:

(Equivalent units of activity in units completed and


transferred out) + (Equivalent units of activity in
ending work in process) = (Total equivalent units
of activity)
Note that the total equivalent units of activity, for both direct material and
conversion, exceeds the activity accomplished in the current period alone.
Since only 30,000 physical product units were started during March and
direct material is added at the beginning of the process, only 30,000
equivalent units of direct material were actually placed into production
during March.
Exhibit 4-5. Step 1: Analysis of Physical Flow of Units - Cutting
Department
Physical Units
Work in process (WIP), March 1
20,000
Units started during March
30,000
Total units to account for
50,000
Units completed and transferred out during March
Work in process,(WIP) March 31

40,000
10,000

Total units accounted for

50,000

Exhibit 4-6. Step 2: Calculation of Equivalent Units - Cutting


Department (Weighted-Average Method)
Physic %of
Equivalent Units
al
Comple
Units
tion
with
Respect
to
Convers
ion
Direct
Conver
Material sion
Work in process, March 1
20,000 10%
Units started during March 30,000
Total units to account for
50,000
Units
completed
and
transferred out during
March
Work in process, March 31
Total units accounted for
Total equivalent units

40,000

100%

40,000

40,000

10,000
50,000

50%

10,000

5,000

50,000

45,000

However, the total number of equivalent units of direct material used for
weighted-average process costing is 50,000 (see Exhibit 4-6). The other
20,000 equivalent units of direct material were actually entered into
production during the preceding month. This is the key feature of the
weighted- average method. The number of equivalent units of activity is
calculated without making a distinction as to whether the activity occurred
in the current accounting period or the preceding period.
Step 3: Computation of Unit Costs. The third step in the process-costing
procedure, calculating the cost per equivalent unit for both direct material
and conversion activity, is presented in Exhibit 4-7. The cost per equivalent
unit for direct material is computed by dividing the total direct-material
cost, including the cost of the beginning work in process and the cost
incurred during March, by the total equivalent units (from step 2, Exhibit 46). An analogous procedure is used for conversion costs.

Step 4: Analysis of Total Costs. Now we can complete the process-costing


procedure by determining the total cost to be transferred out of the Cutting
Department's Work-in-Process Inventory account and into the Stitching
Department's Work-in-Process Inventory account. Exhibit 4-8 provides the
required calculations. For convenience, the computations in step 3 are
repeated in Exhibit 4-8. At the bottom of Exhibit 4-8, a check is made to be
sure that the total costs of $340,700 have been fully accounted for in the
cost of goods completed and transferred out and the balance remaining in
work-in-process inventory.
The calculations in Exhibit 4-8 are used as the basis for the following
journal entry to transfer the cost of goods completed and transferred out to
the Stitching Department.
Work-in-Process
Inventory:
Stitching 290,400
Department
Work-in-Process Inventory: Cutting
290,400
Department
On March 31, the Cutting Department's Work-in-Process Inventory account
appears as follows. The March 31 balance in the account agrees with that
calculated in Exhibit 4-8
Work-in-Process inventory: Cutting Department
March 1 balance
57,200
March cost of direct 283,500
290,400 Cost
of
goods
material, direct labor, and
completed
and
applied
manufacturing
transferred out of
overhead
Cutting Department
March 31 balance
50,300
Exhibit 4-7. Step 3: Computation of Unit Costs. - Cutting Department
(Weighted-Average Method)
Direct
Conversion Total
Material
WIP, March 1 (from Exhibit 4- $ 50,000 $ 7,200
$ 57,200
4)
Costs incurred during March 90,000
193,500
283,500
(from Exhibit 4-4)
Total costs to account for
$140,000 $200,700
$340,700
Equivalent units (from step 2, 50,000
45,000
Exhibit 4-6)
Costs per equivalent unit
$ 2.80
$ 4.46
$ 7.26

$140,000
/50,000

$200,700 /
45,000

$2.80
$4.46

Exhibit 4-8. Step 4:Analysis of Total Cost Cutting Department


(Weighted-Average Method)
Cost of goods completed and transferred out of the Cutting Department
during March:
(Number of units ) x ( Total cost per equivalent unit) = 40,000 x $7.26 =
$290,400
Cost remaining in March 31 work-in-process inventory in the Cutting
Department:
Direct material:
(Number of equivalent units of direct material)*(Cost per equivalent unit of
direct material) = 10,000 x $2.80 = $ 28,000
Conversion:
(Number of equivalent units of conversion) * (Cost per equivalent unit of
conversion) = 5,000 * $4.46 = 22,300
Total cost of March 31 work in process = $ 50,300
Check:
Cost of goods completed and transferred out
$ 290,400
Cost of March 31 work-in-process inventory
50,300
Total costs accounted for
$ 340,700
Departmental Production Report We have now completed all four steps
necessary to prepare a production report for the Cutting Department. The
report, which is displayed in Exhibit 4-9, simply combines the tables
presented in Exhibits 4-6 and 4-8. The report provides a convenient
summary of all of the process-costing calculations made under the
weighted-average method.
Why is this process-costing method called the weighted-average method?
Because the cost per equivalent unit for March, for both direct material and
conversion activity, is computed as a weighted average of the costs incurred
during two different accounting periods, February and March. To
demonstrate this fact, we will focus on direct material. Since direct material
is placed into production at the beginning of the process, the 20,000
physical units in the March I work in process already have their direct
material. The direct-material cost per equivalent unit in the March I work in
process is $2.50 ($50,000 - 20,000, from Exhibit 4-4). This cost was
actually incurred in February.

In March, 30,000 physical units were entered into work in process and
received their direct material. The direct-material cost incurred in March
was $90,000. Thus, the direct-material cost per equivalent unit experienced
in March was $3.00 ($90,000 + 30,000).
Under the weighted-average method of process costing, the cost per
equivalent unit for direct material was calculated in Exhibit 4-7 to be $2.80.
This $2.80 unit-cost figure is a weighted average, as the following
calculation shows.
Exhibit 4-9. Production Report Production Report
Physical %
of Equivalent Units
Units
Completion
with Respect
to Conversion
Direct
Convers
Material ion
WIP, March 1
20,000
10%
Units started during 30,000
March
Total units to account 50,000
for
Units completed and
transferred out during
March
WIP, March 31
Total units accounted
for
Total equivalent units

40,000

100%

40,000

40,000

10,000
50,000

50%

10,000

5,000

WIP, March 1 (from Exhibit 44)


Costs incurred during March
(from Exhibit 4-4)
Total costs to account for
Equivalent units (from step 2,
Exhibit 4-6)
Costs per equivalent unit

50,000
Conversion

45,000
Total

$ 7,200

$ 57,200

90,000

193,500

283,500

$140,000
50,000

$200,700
45,000

$340,700

$ 2.80
$140,000 /
50,000

$ 4.46
$200,700
45,000

Direct
Material
$ 50,000

$ 7.26
$2.80 +
$4.46

Cost of goods completed and transferred out of the Cutting Department


during March:
(Number of units ) x ( Total cost per equivalent unit) = 40,000 x $7.26 =
$290,400
Cost remaining in March 31 work-in-process inventory in the Cutting
Department:
Direct material:
(Number of equivalent units of direct material)*(Cost per equivalent unit of
direct material) = 10,000 x $2.80 = $ 28,000
Conversion:
(Number of equivalent units of conversion) * (Cost per equivalent unit of
conversion) = 5,000 * $4.46 = 22,300
Total cost of March 31 work in process = $ 50,300
Check:
Cost of goods completed and transferred out
$ 290,400
Cost of March 31 work-in-process inventory
50,300
Total costs accounted for
$ 340,700

$2.50 * (20,000 / 20,000 + 30,000) + $3.00 *(30,000 /


(20,000 + 30,000) = $2.80
$2.50 - Direct-material cost per equivalent unit in February
(20,000 / 20,000 + 30,000) - Proportion of total equivalent units
of direct material in the beginning work-in-process inventory

$3.00 - Direct-material cost per equivalent unit in March


30,000 / (20,000 + 30,000) - Proportion of total equivalent units
of direct material added during March

$2.80 - Weighted-average cost per equivalent unit of direct material


The point of this demonstration is that under weighted-average process
costing, unit- cost figures are weighted averages of costs incurred over two
or more accounting periods.
Chapter summary
Process costing is used in production processes where relatively large
numbers of nearly identical products are manufactured. The purpose of a
process-costing system is the same as that of a job-order costing system-to
accumulate costs and assign these costs to units of product. Product costs

are needed for planning, cost control, decision making, and reporting to
various outside organizations. The flow of costs in process-costing systems
and job-order costing systems is the same. Costs of direct material, direct
labor, and manufacturing overhead are added to a Work-in-Process
Inventory account. Direct labor and manufacturing overhead are often
combined into a single cost category termed conversion costs. When
products are completed, the costs assigned to them are transferred either to
Finished-Goods Inventory or to the next production department's Work-inProcess Inventory account. In sequential production processes, the cost of
the goods transferred from one production department to another is called
transferred-in cost. There are some important differences between job-order
and process-costing systems. Chief among these is that job-order costing
systems accumulate production costs by job or batch, whereas processcosting systems accumulate costs by department. Another important
difference is the focus on equivalent units in process costing. An equivalent
unit is a measure of the amount of productive input that has been applied to
a fully or partially completed unit of product. In process costing, production
costs per equivalent unit are calculated for direct-material and conversion
costs. The key document in a process-costing system is the departmental
production report, rather than the job-cost sheet used in job-order costing.
There are four steps in preparing a departmental production report: (1)
analyze the physical flow of units, (2) calculate the equivalent units, (3)
compute the cost per equivalent unit, and (4) analyze the total costs of the
department.
In the weighted-average method of process costing, the cost per equivalent
unit, for each cost category, is a weighted average of (1) the costs assigned
to the beginning work-in-process inventory and (2) the costs incurred during
the current period.
Job-order and process costing represent the polar extremes of productcosting systems. Operation costing is a hybrid of these two methods. It is
designed for production processes in which the direct material differs
significantly among product lines but the conversion activities are
essentially the same. Direct-material costs are accumulated by batches of
products using job-order costing methods. Conversion costs are
accumulated by production departments and are assigned to product units
by process-costing methods.
Key terms
batch manufacturing - High-volume production of several product lines
that differ in some important ways but are nearly identical in others.

departmental production report - The key document in a process-costing


system. This report summarizes the physical flow of units, equivalent units
of production, cost per equivalent unit, and analysis of total departmental
costs.
equivalent unit - A measure of the amount of production effort applied to a
physical unit of production. For example, a physical unit that is 50 percent
completed represents one-half of an equivalent unit.
hybrid product-costing system - A system that incorporates features from
two or more alternative product-costing systems, such as job-order and
process costing.
operation costing - A hybrid of job-order and process costing. Direct
material is accumulated by batch of products using job-order costing
methods. Conversion costs are accumulated by department and assigned to
product units by process-costing methods.
process-costing system - A product-costing system in which production
costs are averaged over a large number of product units. Used by firms that
produce large numbers of nearly identical products.
repetitive production - A production environment in which large numbers
of identical or very similar products are manufactured in a continuous flow.
transferred-in costs - Costs assigned to partially completed products that
are transferred into one production department from a prior department.
weighted-average method - A method of process costing in which the cost
assigned to beginning work-in-process inventory is added to the currentperiod production costs. The cost per equivalent unit calculated under this
process-costing method is a weighted average of the costs in the beginning
work in process and the costs of the current period.
batch -
batch manufacturing - ,


departmental production report -

equivalent units - , (..)
hybrid product-costing system -
,
operation costing -

process-costing systems - ,

repetitive production environment -



transferred-in costs - ,

,
(, )
unit -
weighted-average method - -
( )

Appendix
to
Chapter
)

Process Costing in Sequential Production


Departments
In manufacturing operations with sequential production departments, the
costs assigned to the units transferred out of one department remain
assigned to those units as they enter the next department. In our illustration,
the partially completed baseball gloves transferred out of the Cutting
Department go next to the Stitching Department. There the cut-out pieces
are stitched together. Since the cost of the thread used in the stitching is
very small, it is treated as an indirect-material cost and included in
manufacturing overhead, At the end of the process in the Stitching
Department, rawhide lacing is woven through the fingers and along some
edges of each baseball glove. The rawhide lacing is treated as a direct
material.
The cost of goods completed and transferred out of the Cutting Department
is transferred as shown below.
Work-in-Process inventory: Cutting Department
Direct material
Cost of goods
completed and
transferred out
Conversion:
Direct labor
Manufacturing overhead
Work-in-Process inventory: Stitching Department

Transferred- in costs
Direct material
Conversion:
Direct labor
Manufacturing overhead
As the T-accounts show, the Cutting Department has two cost elements:
direct-material and conversion costs. However, the Stitching Department
has three cost elements: direct-material, conversion, and transferred-in
costs. Transferred-in costs are the costs assigned to the units transferred
from the Cutting Department to the Stitching Department. Transferred-in
costs are conceptually similar to direct-material costs. The only difference is
that direct-material costs relate to raw materials, whereas transferred-in
costs relate to partially completed products.
Exhibit 4-12 presents the basic data for our illustration of process costing in
the Stitching Department. The March I work-in-process inventory in the
department consists of 10,000 units that received some work in the Stitching
Department during February but were not completed. The $61,000 of
transferred-in costs in the March I work-in-process inventory are costs that
were transferred into the Stitching Department's Work-in-Process Inventory
account during February. Note that any partially completed baseball glove
in the Stitching Department must have received all of its transferred-in
input, or it would not have been transferred from the Cutting Department.
The March I work-in-process inventory has not yet received any direct
material in the Stitching Department, because the direct material (rawhide
lacing) is not added until the end of the process.
As Exhibit 4-12 shows, 40,000 units were transferred into the Stitching
Department during March. This agrees with Exhibit 4-4, which shows that
40,000 units were completed and transferred out of the Cutting Department
during March. The Stitching Department completed 30,000 units during
March and transferred them to finished-goods inventory. This left 20,000
units in the Stitching Department's March 31 work-in-process inventory.
Exhibit 4-12 shows that the costs incurred in the Stitching Department
during March were $7,500 for direct material, $115,000 for direct labor, and
$115,000 for applied manufacturing overhead. The predetermined overhead
rate in the Stitching Department is 100 percent of direct-labor cost. Note
that the predetermined overhead rates are different in the two production
departments.
The March transferred-in cost in the Stitching Department is the cost of
goods completed and transferred out of the Cutting Department. The
amount shown in Exhibit 4-12, $290,400, comes from Exhibit 4-8.

Exhibit 4-12. Basic Data for illustration - Stitching Department


WIP, March 1-10,000 units:
Transferred-in: 100% complete, cost of
$ 61,000*
Direct material: none
-0Conversion: 20% complete, cost of
7,600*
Balance in WIP, March 1
$ 68,600*
Units transferred in from Cutting Department during
March
Units completed during March and transferred out to
finished-goods inventory

40,000 units
30,000 units

WIP, March 31
20,000 units
Transferred in: 100% complete
Direct material: none
Conversion: 90% complete
Costs incurred during March:
Transferred in from Cutting Department (assumes $290,400
that weighted-average method was used for
Cutting Department)
Direct material
$ 7,500
Conversion costs:
Direct labor
$115,000
Applied manufacturing overhead
115,000+
Total conversion costs
$230,000
*These costs were incurred during the prior month, February,
+(Predetermined overhead rate) * (Direct-labor cost) = 1000% x
$115,000 = $115,000
Exhibit 4-13 presents a completed production report for the Stitching
Department using weighted- average process costing. Steps I through 4 are
identified in the exhibit. The process-costing procedures used for the
Stitching Department are identical to those used for the Cutting Department,
except for one important difference. While there were only two cost
elements (direct material and conversion) in the Cutting Department, there
are three cost elements in the Stitching Department. In each of the four steps
in Exhibit 4-13, transferred-in costs are listed along with direct material and
conversion as a separate cost element.
The analysis of the physical flow of units (step I in Exhibit 4-13) is like the
analysis for the Cutting Department. Now focus on step 2. In calculating
equivalent units, we add a "transferred-in" column. Both the 30,000 units

10

completed and transferred out of the Stitching Department and the March
31 work- in-process inventory are 100 percent complete as to transferred-in
activity. Thus, the number of equivalent units is the same as the number of
physical units. The calculation yields 50,000 total equivalent units of
transferred-in activity for March. The equivalent units of direct material and
conversion are determined as described earlier for the Cutting Department.
Costs per equivalent unit are computed in step 3. Since we are using the
weighted-average method, the transferred-in costs in the March 1 work-inprocess inventory are added to the March transferred-in costs before
dividing by the equivalent units. Direct material and conversion costs are
handled like those for the Cutting Department.
The analysis of total costs is done in step 4. The 30,000 units completed and
transferred out of the Stitching Department are assigned a total weightedaverage cost per unit of $12.228. This unit cost includes the transferred-in
cost per equivalent unit of $7.028 calculated in step 3. The cost remaining
in the work-in-process inventory on March 31 consists of two cost
elements: transferred-in costs (20,000 equivalent units X $7.028 per
equivalent unit) and conversion costs (18,000 equivalent units X $4.95 per
equivalent unit). The March 31 work-in-process inventory has not yet
received any direct material in the Stitching Department.
The following journal entry is made to transfer the cost of the units
completed to the Finished- Goods Inventory account.
Finished-Goods Inventory
366,840
Work-in-Process Inventory:
366,840
Stitching Department
To transfer the cost of goods
completed, as computed under the
weighted-average method
Exhibit 4-13. Production Report-Stitching Department (weightedaverage method)
Step 1
Step 2
Physic %
of Equivalent Units
al
Comple
Units
tion
with
Respect Transf Direct
Conversio
to Con
erred
Material n
version
in
WIP, March 1
10,000 20%

Units started
during March
Total units to
account for

40,000

Units
completed and
transferred out
during March
WIP, March 31
Total
units
accounted for
Total
equivalent
units
Step 3

30,000

50,000

20,000
50,000

WIP,
March1
(from
Exhibit412)
Costs
incurred
during
March
(from Exhibit 412)
Total costs to
account for
Equivalent units
Costs
per
equivalent unit

90%

30,000

30,000

30,000

20,000

-0-

18,000

50,000

30,000

48,000

Transferred
in
$ 61,000

Direct
Material
-0-

Convers
ion
$ 7,600

Total

290,400*

$7,500

230,000

527,900

$351,400

$7,500

$596,500

50,000
$7.028

30,000
$ 0.25

$237,60
0
48,000
$ 4.95

$351,400 /
50,000

$7,500
30,000

$237,60
0
/
48,000

$7.028 + $
0.25 + $
4.95

Step4
Cost of goods completed and transferred out of the
Stitching Department during March: (Number of units )
x ( Total cost per equivalent unit) =30,000 x $12.228
Cost remaining in March 31 work-in-process inventory
in the Stitching Department: Transferred-in costs:
(Number of equivalent units of transferred-in costs) *

$ 68,600

$12.228

$366,840
$140,560

11

(Cost per equivalent unit of transferred-in cost) =


20,000 * $12,228
Direct material: none
Conversion: (Number of equivalent units of 89,100
conversion) * (Cost per equivalent unit of conversion)
= 18,000*$4,95
Total
$229,660
Check:
Cost of goods completed and transferred out
$ 366,840
Cost of March 31 work-in-process inventory
229,660
Total costs accounted for
$ 596,500
*Cost of goods completed and transferred out of Gutting Department during
March, under the weighted-average method (calculated in Exhibit 4-8).

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