Job Order Costing and Process Costing

Job-Order Costing
Chapter 3
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
http://accounts.smccd.edu/whitten/lectures131/chap003.ppt 19/08/2019, 8<17 AM

Page 1 of 95
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Job-Order Costing: An Overview
Job-order costing systems are

used when:
1.Many different products are produced each
period.
2.Products are manufactured to order.
3.The unique nature of each order requires
tracing or allocating costs to each job, and
maintaining cost records for each job.

Page 2 of 95
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Job-Order Costing: An Overview
Examples of companies that

would use job-order costing include:
1.Boeing (aircraft manufacturing)
2.Bechtel International (large scale construction)
3.Walt Disney Studios (movie production)

Page 3 of 95
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Job-Order Costing – An Example
Direct Materials
Charge
Job No. 1 direct
material
Direct Labor
Job No. 2 and direct
labor costs
Job No. 3 to each job
as work is
performed.

Page 4 of 95
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Job-Order Costing – An Example

Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor
Job No. 2 indirect labor,
are allocated to
Manufacturing
all jobs rather
Job No. 3
Overhead than directly
traced to each
job.

Page 5 of 95
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The Job Cost Sheet

PearCo Job Cost
Sheet
Job Number A - Date Initiated 3-4-
143 11
Date
Department Completed
Units
B3
Item Wooden cargo Completed
crate
Direct Direct Manufacturing
Materials
Req. Amoun TicketLabor
Hour Amoun Overhead
Hour Rate Amoun
No. t s t s t
Cost Units
Direct Summary DateShipped
Numbe Balance
Materials
Direct r
Labor
Manufacturing
Overhead
Total Cost
Unit Product
Cost

Page 6 of 95
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Measuring Direct Materials Cost
Will E. Delite

Page 7 of 95
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Measuring Direct Materials Cost

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Measuring Direct Labor Costs

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Job-Order Cost Accounting

Page 10 of 95
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Learning Objective 1
Compute a
predetermined overhead
rate.

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Why Use an Allocation Base?

An allocation base, such as direct labor hours,
direct labor dollars, or machine hours, is used to
assign manufacturing overhead to individual jobs.
We use an allocation base because:
a. It is impossible or difficult to trace overhead costs to particular
jobs.
b. Manufacturing overhead consists of many different items
ranging from the grease used in machines to the production
manager’s salary.
c. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.

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Manufacturing Overhead Application

The predetermined overhead rate
(POHR) used to apply overhead to jobs
is determined before the period begins.

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The Need for a POHR

Using a predetermined rate makes it
possible to estimate total job costs sooner.
Actual overhead for the period is not

known until the end of the period.

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Computing Predetermined Overhead Rates

The predetermined overhead rate is computed before the period begins
using a four-step process.
1.Estimate the total amount of the allocation base (the denominator)
that will be required for next period’s estimated level of production.
2.Estimate the total fixed manufacturing overhead cost for the coming
period and the variable manufacturing overhead cost per unit of the
allocation base.
3.Use the following equation to estimate the total amount of
manufacturing overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.
4.Compute the predetermined overhead rate.

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Apply overhead cost to

jobs using a
predetermined overhead
rate.

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Overhead Application Rate

PearCo estimates that it will require 160,000 direct labor-hours to meet the
coming period’s estimated production level. In addition, the company
estimates total fixed manufacturing overhead at $200,000, and variable
manufacturing overhead costs of $2.75 per direct labor hour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-
hours)
Y = $200,000 + $440,000
Y = $640,000
$640,000 estimated total manufacturing
POHR = overhead
160,000 estimated direct labor hours
(DLH)
POHR = $4.00 per direct labor-

hour

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Page 18 of 95
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Compute the total cost

and average cost per unit
of a job.

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Page 20 of 95
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Page 21 of 95
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Learning Objectives 4 and 5

Learning Objective 4 is to
understand the flow of costs in
the job-order costing system and
prepare appropriate journal
entries to record costs.
Learning Objective 5 is to use

T-accounts to show the flow of
costs in a job-order costing
system.

Page 24 of 95
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Key Definitions
1. Raw materials include any materials that go
into the final product.
2. Work in process consists of units of
production that are only partially complete and
will require further work before they are ready
for sale to customers.
3. Finished goods consist of completed units of
product that have not been sold to customers.
4. Cost of goods manufactured include the
manufacturing costs associated with the goods
that were finished during the period,

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Flow of Costs: A Conceptual Overview

Balance Sheet Income
Costs Inventories Statement
Expenses
Material Raw Materials
Purchases
Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold
Selling and Period Costs Selling and

Administrative Administrative

Page 26 of 95
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Job-Order Costing: The Flow of Costs

The transactions (in
T-account and journal
entry form) that
capture the flow of
costs in a job-order
costing system are
illustrated on the
following slides.

Page 27 of 95
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The Purchase and Issue of Raw

Materials: T-Account Form
Raw Work in Process
● MaterialsDirect
Material ● (Job Cost Sheet)
Purchases Materials
Direct
●
Indirect
●
Materials
Materials
Mfg. Overhead
Actual Applied
Indirect
●
Materials

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Cost Flows – Material Purchases

On October 1, Smith Corporation had $5,000 in raw
materials on hand. During the month, the company
purchased $45,000 in raw materials.

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Issue of Direct and Indirect Materials

On October 3, Smith had $43,000 in raw materials
requisitioned from the storeroom for use in
production. These raw materials included $40,000
of direct and $3,000 of indirect materials.

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Labor Costs
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
●Direct Direct
●
Labor Materials
● Indirect Direct
●
Labor Labor
Mfg. Overhead
Actual Applied
Indirect
●
Materials
● Indirect
Labor

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Labor Costs
During the month the employee time tickets included
$35,000 of direct labor and $12,000 for indirect
labor.

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Recording Actual Manufacturing

Overhead
●Direct Direct
●
Labor Materials
● Indirect Direct
●
Labor Labor
Mfg. Overhead
Actual Applied
●Indirect
Materials
● Indirect
Labor
Other
●
Overhead

Page 33 of 95
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Recording Actual Manufacturing

Overhead
During the month the company incurred the
following actual overhead costs:
1. Utilities (heat, water, and power) $1,700
2. Depreciation of factory equipment $2,900
3. Property taxes payable on factory $1,000

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Applying Manufacturing Overhead

●Direct Direct
●
Labor Materials
● Indirect Direct
●
Labor Labor
Overhead
Mfg. Overhead
●
Applied
Actual Applied
●Indirect
Materials
Overhead
●
If actual and applied
● Indirect Applied to manufacturing
Labor Work in overhead
Process are not equal, a year-
Other
●
Overhead end adjustment is

required.

Page 35 of 95
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Applying Manufacturing Overhead

Smith uses a predetermined overhead rate of
$3.50 per machine-hour. During the month,
5,000 machine-hours were worked on jobs.

Page 36 of 95
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Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to
individual jobs, rather they are expensed in the
period incurred.
Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.

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Accounting for Nonmanufacturing Cost

During the month, Smith incurred but has not
paid sales salaries of $2,000, and advertising
expense of $750.

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Transferring Completed Units

Work in Process Finished Goods
(Job Cost Sheet
●)Direct Cost of
●
Materials ●Cost of Goods

Goods Mfd.
Direct
● Mfd.
Labor
● Overhead
Applied

Page 39 of 95
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Transferring Completed Units

During the period, Smith completed jobs with a total
cost of $27,000.

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Transferring Units Sold

Work in Process Finished Goods
(Job Cost Sheet)
Direct
●
Cost of
● Cost of
●
Materials ●Cost of Goods Goods

Goods Mfd. Sold
Direct
● Mfd.
Labor
● Overhead
Applied
Cost of Goods Sold
Cost of
●
Goods
Sold

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Transferring Units Sold

Smith sold the $27,000 in Finished Goods Inventory
to customers for $43,500 on account.

Page 42 of 95
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Prepare schedules of
cost of goods
manufactured and cost
of goods sold and an
income statement.

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Schedule of Cost of Goods

Manufactured: Key Concepts
This schedule contains three
types of costs, namely direct It calculates the
materials, direct labor, and manufacturing
manufacturing overhead. costs associated
with goods that
It calculates the cost of raw were finished
material and direct labor used in during the
production and the amount of period.
manufacturing overhead
applied to production.

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Product Cost Flows
As items are removed from raw materials

inventory and placed into the production
process, they are
called direct materials.

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Product Cost Flows
Conversion costs
are costs incurred
to convert the
direct material into
a finished product.

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Product Cost Flows
All manufacturing costs added to production

during the period are added to the beginning
balance of work in process.

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Product Cost Flows
Costs associated with the goods that are

completed during the period are transferred to
finished goods inventory.

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Product Cost Flows

Page 49 of 95
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Compute underapplied
or overapplied overhead
cost and prepare the
journal entry to close
the balance in
Manufacturing Overhead
to the appropriate
accounts.

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Underapplied and Overapplied

Overhead―A Closer Look
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.
Underapplied overhead exists when Overapplied overhead exists when
the amount of overhead applied to the amount of overhead applied to
jobs during the period using the jobs during the period using the
predetermined overhead rate is less predetermined overhead rate is
than the total amount of overhead greater than the total amount of
actually incurred during the period. overhead actually incurred during the
period.

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Overhead Application Example

PearCo’s actual overhead for the year was
$650,000 with a total of 170,000 direct labor hours
worked on jobs.
How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s
predetermined overhead rate of $4.00 per direct
labor hour.
Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH =
$680,000

Page 60 of 95
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Overhead Application Example

PearCo’s actual overhead for the year was $650,000
with a total of 170,000 direct labor hours worked
on jobs.
How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.
Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH =
$680,000

Page 61 of 95
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Disposition of Under- or Overapplied

Overhead PearCo’s Method
$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods
Cost of Cost of
Goods Sold Goods Sold

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Disposition of Under- or Overapplied

Overhead
PearCo’s Cost PearCo’s

of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$650,000 $680,000
$30,000
Adjusted $30,000 $30,000

Balance overapplied

Page 65 of 95
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Allocating Under- or Overapplied

Overhead Between Accounts
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:

Page 66 of 95
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We would complete the following allocation of
$30,000 overapplied overhead:
$68,000 ÷ 10% ×
$680,000 $30,000

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Page 68 of 95
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Overapplied and Underapplied

Manufacturing Overhead - Summary
PearCo’s Method
More accurate but more complex to compute.

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Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single

predetermined overhead rate called a plantwide
overhead rate.
Large companies often use May be more complex but . . .

multiple predetermined
overhead rates.
May be more accurate because it reflects

differences across departments.

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Job-Order Costing in Service Companies
Job-order costing is used in many different

types of service companies.

Page 73 of 95
The Predetermined Overhead
Rate and Capacity
Appendix 3A
PowerPoint Authors:

Page 74 of 95
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Understand the implications

of basing the predetermined
overhead rate on activity at
capacity rather than on
estimated activity for the
period.

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Predetermined Overhead Rate and

Capacity
Calculating predetermined overhead rates using an
estimated, or budgeted amount of the allocation base
has been criticized because:
1.Basing the predetermined overhead rate upon
budgeted activity results in product costs that fluctuate
depending upon the activity levels.
2.Calculating predetermined rates based upon
budgeted activity charges products for costs that they
do not use.

Page 76 of 95
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Capacity-Based Overhead Rates

Criticisms can be overcome by using
estimated total units in the allocation base
at capacity in the denominator of the
predetermined overhead rate calculation.
Let’s look at the difference!

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Capacity-Based Overhead Rates:

An Example
Equipment is leased for $100,000 per
year. Running at full capacity, 50,000
units may be produced. The company
estimates that 40,000 units will be
produced and sold next year. What is
the predetermined overhead rate?

Page 78 of 95
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An Example
Equipment is leased for $100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000
units will be produced and sold next year.
Traditiona $100,00
= = $2.50 per
l 0
unit
Method 40,000
Capacity $100,00
= = $2.00 per
Method 0
unit
50,000

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Income Statement Preparation – Capacity

Page 88 of 95
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Income Statement Preparation – Traditional

Page 89 of 95
Further Classification of Labor
Costs
Appendix 3B
PowerPoint Authors:

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Properly account for labor

costs associated with idle
time, overtime, and fringe
benefits.

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Idle Time
Machine Material
Breakdowns Shortages
Power
Failures
The labor costs incurred

during idle time are
ordinarily treated as
manufacturing overhead.

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Overtime
The overtime premiums for all factory
workers are usually considered to be
part of manufacturing overhead.

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Labor Fringe Benefits

Fringe benefits include employer paid
costs for insurance programs,
retirement plans, supplemental
unemployment programs, Social
Security, Medicare, workers’
compensation, and unemployment
taxes.
Some companies Other companies
include all of these treat fringe benefit
costs in expenses of direct
manufacturing laborers as
overhead. additional direct
labor costs.

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End of Chapter 3B

Page 95 of 95
Process Costing
Chapter 4
PowerPoint Authors:
http://accounts.smccd.edu/whitten/lectures131/chap004.ppt 19/08/2019, 8=20 AM

Page 1 of 83
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Similarities Between Job-Order and

Process Costing
• Both systems assign material, labor, and overhead
costs to products and they provide a mechanism
for computing unit product costs.
• Both systems use the same manufacturing
accounts, including Manufacturing Overhead, Raw
Materials, Work in Process, and Finished Goods.
• The flow of costs through the manufacturing
accounts is basically the same in both systems.

Page 2 of 83
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Differences Between Job-Order and

Process Costing
Process costing:
1. Is used when a single product is produced on a
continuing basis or for a long period of time. Job-order
costing is used when many different jobs having different
production requirements are worked on each period.
2. Systems accumulate costs by department. Job-order
costing systems accumulated costs by individual jobs.
3. Systems compute unit costs by department. Job-order
costing systems compute unit costs by job on the job cost
sheet.

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Processing Departments
Any unit in an organization where materials,
labor, or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one department
to another.

Page 6 of 83
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Record the flow of

materials, labor, and
overhead through a
process costing system.

Page 7 of 83
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Comparing Job-Order and Process

Costing
Direct
Materials
Work in Finished
Direct Labor
Process Goods
Manufacturi Cost of
ng Overhead Goods
Sold

Page 8 of 83
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Costing
Costs are traced and
applied to individual
Direct jobs in a job-order
Materials cost system.
Finished
Direct Labor Jobs Goods
Manufacturi Cost of
ng Overhead Goods
Sold

Page 9 of 83
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Costing
Costs are traced and
applied to
Direct departments in a
Materials process cost system.
Direct Labor Processing Finished

Department Goods
Manufacturi Cost of
ng Overhead Goods
Sold

Page 10 of 83
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T-Account and Journal Entry Views of

Process Cost Flows
For purposes of this example, assume
there are two processing departments –
Departments A and B.
We will use T-accounts and journal
entries.

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Process Cost Flows: The Flow of Raw

Materials (in T-account form)
Work in Process
Raw Materials Department A
•Direct •Direct
Material Materials
s
Work in Process
Department B
•Direct
Materials

Page 12 of 83
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Process Cost Flows: The Flow of Raw

Materials (in journal entry form)

Page 13 of 83
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Process Cost Flows: The Flow of Labor

Costs (in T-account form)
Wages Payable Department A
•Direct
•Direct Materials
Labor •Direct
Labor
Work in Process
Department B
•Direct
Materials
•Direct
Labor

Page 14 of 83
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Process Costing: The Flow of Labor

Costs (in journal entry form)

Page 15 of 83
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Process Cost Flows: The Flow of Manufacturing

Overhead Costs (in T-account form)
Work in Process
Department A
Manufacturing •Direct
Materials
Overhead •Direct
•Actual •Overhead Labor
Overhea Applied to •Applied
d Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead

Page 16 of 83
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Process Cost Flows: The Flow of Manufacturing

Overhead Costs (in journal entry form)

Page 17 of 83
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Process Cost Flows: Transfers from WIP-

Dept. A to WIP-Dept. B (in T-account form)
Work in Process Work in Process

Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labor Labor
•Applied •Applied
Overhead Overhead
•Transferre
d
from Dept.
A
Departmen Departmen
t t
A B

Page 18 of 83
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Process Cost Flows: Transfers from WIP-Dept. A

to WIP-Dept. B (in journal entry form)

Page 19 of 83
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Process Cost Flows: Transfers from WIP-Dept.

B to Finished Goods (in T-account form)
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufacture Manufactured
Labor d
•Applied
Overhead
•Transferre
d
from Dept.
A

Page 20 of 83
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Process Cost Flows: Transfers from WIP-Dept. B

to Finished Goods (in journal entry form)

Page 21 of 83
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Process Cost Flows: Transfers from Finished

Goods to COGS (in T-account form)
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufacture Manufactured Sold
Labor d
•Applied
Overhead
•Transferre
d Cost of Goods Sold
from Dept.
A •Cost of
Goods
Sold

Page 22 of 83
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Process Cost Flows: Transfers from Finished

Goods to COGS (in journal entry form)

Page 23 of 83
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Equivalent Units of Production

Equivalent units are the
product of the number
of partially completed
units and the
percentage completion
of those units.
These partially completed units complicate the

determination of a department’s output for a given
period and the unit cost that should be assigned to
that output.

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Equivalent Units – The Basic Idea

Two half completed products are
equivalent to one complete product.
+ = 1
So, 10,000 units 70% complete

are equivalent to 7,000 complete units.

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Calculating Equivalent Units

Equivalent units can be calculated
two ways:
The First-In, First-Out Method – FIFO is
covered in the appendix to this chapter.
The Weighted-Average Method – This method
will be covered in the main portion of the chapter.

Page 28 of 83
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Compute the equivalent

units of production using
the weighted-average
method.

Page 29 of 83
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Equivalent Units of Production

Weighted-Average Method
The weighted-average method . . .

1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.

Page 30 of 83
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Treatment of Direct Labor

Direct
Materia
ls Direct labor
D costs
Manufacturi may be small
o
ng
ll Overhead
in comparison
a Direc to
r t other product
A Labo costs in process
m r
cost systems.
o Type of Product
u Cost
n
t

Page 31 of 83
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Treatment of Direct Labor

Direct
Materia
ls Direct labor and
Conversio
D n
manufacturing
o Direc overhead may
t
ll Labo be combined
r
a Direc Manufacturin
into one
r t g classification of
Overhead
A Labo product cost
m r called
o Type of Product conversion
u Cost costs.
n
t

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Weighted-Average – An Example
Smith Company reported the following activity in
the Assembly Department for the month of June:

Page 33 of 83
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The first step in calculating the equivalent units is to
identify the units completed and transferred out of
Assembly Department in June (5,400 units)

Page 34 of 83
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The second step is to identify the equivalent units of production in
ending work in process with respect to materials for the month
(540 units) and adding this to the 5,400 units from step one.

Page 35 of 83
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The third step is to identify the equivalent units of production in
ending work in process with respect to conversion for the
month (270 units) and adding this to the 5,400 units from step
one.

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Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in
process

Page 37 of 83
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6,000 Units
Materials Started
Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete
5,400 Units
Completed
540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production

Page 38 of 83
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6,000 Units
Conversion Started
Beginning Ending
5,400 Units
900 × 30%
Completed
270 Equivalent Units
5,670 Equivalent units
of production

Page 39 of 83
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Compute the cost per

equivalent unit using the
weighted-average
method.

Page 40 of 83
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Compute and Apply Costs

Beginning Work in Process Inventory: 400 units
Materials: 40% complete $ 6,119

Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units
Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130
Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete

Page 41 of 83
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The formula for computing the cost per
equivalent unit is:
Cost of beginning
Cost per
Work in Process + Cost added
equivalen =
Inventory during the period
t
unit Equivalent units of
production

Page 42 of 83
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Here is a schedule with the cost and equivalent
unit information.

Page 43 of 83
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Here is a schedule with the cost and equivalent
unit information.
$124,740 ÷ 5,940 units = $85,050 ÷ 5,670 units =
$21.00 $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00

Page 44 of 83
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Assign costs to units

using the weighted-
average method.

Page 45 of 83
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Applying Costs

Page 46 of 83
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Applying Costs

Page 47 of 83
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Applying Costs

Page 48 of 83
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Computing the Cost of Units

Transferred Out

Page 49 of 83
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Transferred Out

Page 50 of 83
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Transferred Out

Page 51 of 83
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Prepare a cost
reconciliation report.

Page 52 of 83
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Reconciling Costs

Page 53 of 83
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Reconciling Costs

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Operation Costing
Operation cost is a hybrid of job-order and
process costing because it possesses
attributes of both approaches.
Operation costing is
commonly used when
batches of many
different products
pass through the same
processing
department.

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FIFO Method
Appendix 4A
PowerPoint Authors:

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FIFO vs. Weighted-Average Method

The FIFO method (generally considered more
accurate than the weighted-average method) differs
from the weighted-average method in two ways:
1. The computation of equivalent units.

2. The way in which the costs of beginning
inventory are treated.

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Compute the equivalent

units of production using
the FIFO method.

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Equivalent Units – FIFO Method

Let’s revisit the Smith Company example. Here is
information concerning the Assembly Department
for the month of June.

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Step 1: Determine equivalent units needed to complete
beginning Work in Process Inventory.

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Step 2: Determine units started and completed during
the period.

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Step 3: Add the equivalent units in ending Work in
Process Inventory.

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FIFO Example
Materials 6,000 Units
Started
Beginning Ending
300 ×
60% 180 Equivalent Units
5,100 Units 900 ×
Completed 60%
5,820 Equivalent
units
of production

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FIFO Example
Conversion 6,000 Units
Started
Beginning Ending
300 ×
80%
5,100 Units 900 ×
Completed 30%
5,610 Equivalent
units
of production

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Equivalent Units:
Weighted-Average vs. FIFO
As shown below, the equivalent units in beginning inventory
are subtracted from the equivalent units of production per the
weighted-average method to obtain the equivalent units of
production under the FIFO method.

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Compute the cost per

equivalent unit using the
FIFO method.

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Cost per Equivalent Unit - FIFO

Let’s revisit the Smith Company Assembly Department
for the month of June to prepare our production report.
Beginning work in process: 400 units
Materials: 40% complete $ 6,119

Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units
Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130
Ending work in process 900 units

Materials: 60% complete
Conversion: 30% complete

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The formula for computing the cost per
equivalent unit under FIFO method is:

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$118,621 ÷ 5,820 $81,130 ÷ 5,610
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

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Assign costs to units

using the FIFO method.

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Applying Costs - FIFO

Step 1: Record the equivalent units of production in ending Work
in Process Inventory.
900 units × 60% 900 units × 30%

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Step 2: Record the cost per equivalent unit.

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Step 3: Compute the cost of ending Work in Process Inventory.
540 × $20.3816 270 × 14.4617

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Cost of Units Transferred Out

Step 1: Record the cost in beginning Work in Process Inventory.

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Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.

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Step 3: Compute the cost of units started and completed this
period.

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Step 4: Compute the total cost of units transferred out.

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Prepare a cost
Prepare a cost
reconciliation report
reconciliation report

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Reconciling Costs

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Reconciling Costs
* $1 rounding error.

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A Comparison of Costing Methods

In a lean production environment, FIFO and
weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is
superior to weighted-average because it does
not mix costs of the current period with
costs of the prior period.

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Service Department Allocations
Appendix 4B
PowerPoint Authors:

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End of Chapter 4

Page 83 of 83

Job Order Costing and Process Costing

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