CHAPTER4PROCESSCOSTI NGSYSTEM

Companiesthatproducei denti
calorsimilaruni
tsofapr oductorservice(forexampl
e,anoil
-r
efi
ning
company)oftenuseprocesscost ing.Akeypar tofprocesscostingisv al
uingi
nvent
ory,
whichentail
s
deter
mininghow manyuni t
soft heproductt hefir
m hasonhandatt heendofanaccount ing
repor
ti
ngperiod,eval
uatingt heunits’st
agesofcompl etion,andassigningcoststotheunit
s.There
aredif
fer
entmethodsf ordoingthis,eachofwhi chcanresulti
ndi f
fer
entprofit
s.

Il
lust
rat
ingProcessCosti
ng
Beforeweexami neprocesscost inginmoredetai
l
,let’
sbrief
lycomparejobcosti
ngandpr
ocess
costi
ng.Job-
costi
ngandpr ocess-cost
ingsy
stemsarebestv
iewedasendsofacont i
nuum:
Jobcosti
ngsy stem Processcost
ingsy
stem

Dist
inct
,identi
fiableunitsof Massesofi dent
icalorsi mi
lar
a product or ser vice (for unit
s
example, custom-made ofapr oductorservice( f
or
machinesandhouses) exampl e,
foodorchemi cal
Inapr ocess-costingsystem,t heunitcostofapr oductorser vi
ceisobtainedbyassi gni
ngtot alcost
s
tomanyi denticalorsimil
aruni t
sofout put.I
not herwords, uni
tcostsar ecalculatedbydividingtotal
costsi ncurr
edbyt henumberofuni tsofout putfrom thepr oducti
onpr ocess.I namanuf acturi
ng
process-costingset t
ing,eachuni treceivesthesameorsi mi
laramount sofdi r
ectmat erialcosts,
dir
ectmanuf acturi
nglaborcost s,andindir
ectmanuf act
uringcosts( manufacturingov er
head).

Themai ndi ff
erencebet weenpr ocesscostingandj obcost i
ngistheext entofaver agingusedt o
comput eunitcost sofpr oduct sorser vi
ces.I
naj ob-costingsyst
em,i ndivi
dualjobsusedi ff
erent
quanti
ti
esofpr oductionr esources,soitwouldbei ncorrecttocosteachj obatt hesameav erage
producti
oncost .I ncont rast,wheni denti
calorsi mi l
aruni t
sofpr oductsorser vi
cesar emass-
produced,notpr ocessed as i ndivi
dualjobs,process cost i
ng is used to cal
culate an average
producti
oncostf orallunitspr oduced.Someprocessessuchascl othesmanuf acturi
nghav easpects
ofbothpr ocesscost i
ng( costperuni tofeachoperat i
on,suchascut ti
ngorsewi ng,isidenti
cal
)and
j
obcost ing(diff
erentmat eri
alsareusedi ndiff
erentbat chesofclothing,say,woolv ersuscott
on).
Thef i
nalsectionint hischapt erdescri
bes“hybri
d”cost ingsystemst hatcombineel ementsofbot h
j
obandpr ocesscosting.

Consi dert hefoll

owingill
ustr
ationofpr ocesscost i
ng:Supposet hatPacifi
cElectronicsmanuf actur
es
av arietyofcel lphonemodel s.Thesemodel sareassembl edi ntheassembl ydepar tment .Upon
compl et i
on,unitsaret r
ansferredt othet esti
ngdepartment.Wef ocusont heassembl ydepar t
ment
processf oronemodel ,SG-40.Al lunitsofSG- 40arei denti
calandmustmeetasetofdemandi ng
performancespeci fi
cati
ons.Thepr ocess-
cost i
ngsystem forSG-40int heassembl ydepar t
menthasa
si
ngl edi r
ect-costcategory–di rectmaterials–andasi ngleindir
ect-
costcategory–conv ersi
oncosts.
Conv ersion cost s are allmanuf actur
ing costs other t han direct mater
ialcost s,includi
ng
manuf acturi
ng labor,energy,pl antdepr eciat
ion,and so on.Di r
ectmat eri
als are added att he
beginni ngoft heassembl yprocess.Conv ersioncost
sar eaddedev enlyduri
ngassembl y
.

Thef
oll
owi
nggr
aphi
crepr
esent
sthesef
acts:
Conversi
oncosts
addedevenl
y
duri
ngprocess

Assembl
y Test
ing
Tr
ansf
er Depar
tme
Depar
tme
 Di
rectmater
ial
s
addedatendofprocess

Process-costingsy st
emssepar at
ecost sint
ocostcat egoriesaccor dingt owhencost sar eint
roduced
i
nt othepr ocess.Of t
en,asi nourPaci f
icElectr
onicsexampl e,onl ytwocostcl assi
fi
cations–di r
ect
mat eri
alsandconv er
sioncost s–ar enecessarytoassi gncost st opr oduct
s.Whyonl ytwo?Because
alldir
ectmat erial
sareaddedt otheprocessatonet imeandal lconv ersi
oncost sgenerallyar
eadded
tot hepr ocessev enlythrought i
me.I f,however,twodi fferentdi rectmat er
ialswer eaddedt othe
processatdi ff
erentt i
mes,twodi ffer
entdi r
ect–mat erialscat egorieswouldbeneededt oassign
thesecost stopr oducts.
Simi l
arl
y,ifmanuf acturi
nglaborcost swer eaddedt othepr ocessatadi ff
erentt i
mef rom whent he
otherconv ersi
oncost swer eadded, anadditi
onalcostcat egory–di rectmanuf acturi
nglaborcosts–
woul dbeneededt osepar at
elyassignthesecoststopr oduct s.

Wewi l
luset heproduct
ionoftheSG-40componentintheassemblydepart
mentt oill
ustr
ateprocess
costi
ngi nthreecases,star
ti
ngwiththesimplestcaseandi nt
roduci
ngaddi t
ionalcomplexi
tiesin
subsequentcases:
Case1–Pr ocesscostingwithzer
obeginni
ngandzer oendingwork-i
n-pr
ocessi nv
entoryofSG-40.
(Thatis,al
lunit
sar est
artedandful
lycomplet
edwi t
hintheaccounti
ngperi )Thi
od. scasepresents
t
hemostbasi
cconcept
sofpr
ocesscost
ingandi
l
lust
rat
est
hef
eat
ureofaver
agi
ngofcost
s.
Case2–Pr ocesscost
ingwithzerobeginni
ngwork-i
n-pr
ocessinv
entoryandsomeendi ngwork-
in-
pr
ocessinventoryofSG-40.(
Thatis,someunit
sofSG- 40star
tedduringtheaccount
ingperi
odar e
i
ncomplet
eatt heendoft heper
iod.)Thi
scaseint
roducesthefi
vestepsofprocesscost
ingandthe
conceptofequi
val
entuni
ts.
Case3–Pr ocesscost
ingwit
hbothsomebeginni
ngandsomeendingwork-
in-
processi
nvent
oryof
SG-40.Thi
scaseaddsmor ecomplexi
tyandi
l
lust
rat
estheef
fectofwei
ghted-
averageandfir
st-
in,
f
ir
st-
out(FIFO)costf
low assumpt
ionsoncostofuni
tscompl
etedandcostofwor
k-i
n-pr
ocess
i
nvent
ory.

Case1:Pr ocessCosti
ngwithNoBeginni
ngorEndingWor k-
in-
ProcessI
nventory
OnJanuar y1,2012,ther
ewasnobegi nni
nginventor
yofSG- 40unitsi
nt heassembl
ydepartment
.
Duringthemont hofJanuar
y,Pacif
icEl
ect
roni
csstart
ed,completel
yassembled,andt
ransf
err
edout
t
ot hetest
ingdepart
ment400units.

Dat
afort
heassembl
ydepart
mentforJanuary2012areasf
oll
ows:
Physi
calUni
tsforJanuary2012

Wor
kinpr
ocess,
begi
nni
ngi
nvent
ory(
Januar
y1) 0uni
ts

St
art
eddur
ingJanuar
y 400
uni
ts

Compl
etedandt
ransf
err
edoutdur
ingJanuar
y 400
uni
ts

Wor
kinpr
ocess,
endi
ngi
nvent
ory(
Januar
y31) 0uni
ts

Phy
sicaluni
tsr
efert
othenumberofout
putuni
ts,
whet
hercompl
eteori
ncompl
ete.I
nJanuar
y2012,
al
l400phy
sical
uni
tsst
art
edwerecomplet
ed.
Tot
alCost
sforJanuar
y2012

Di
rectmat
eri
alcost
saddeddur
ingJanuar
y $32,
000

Conv
ersi
oncost
saddeddur
ingJanuar
y 24,
000

Totalassembl
ydepar
tmentcost
saddeddur
ing $56,
000
January

Pacif
icElect
ronicsrecordsdir
ectmateri
alcost
sandconversioncostsintheassemblydepar
tmentas
thesecostsareincurred.Byaver
aging,
assemblycostofSG-40is$56,000/400units=$140perunit
,
i
temizedasf ol
lows:
Directmater
ial
costperunit(
$32,
000/400uni ts) $80

Conv
ersi
oncostperuni
t($24,
000/400uni
ts) 60

Assembl
ydepar
tmentcostperuni
t $140

Case1showst hatinapr ocess-

cost
ingsy stem,averageuni tcostsarecalculat
edbydi v i
dingt ot
al
costsi nagi venaccountingper i
odbyt otalunitsproducedi nthatperi
od.Becauseeachuni tis
i
dentical,
weassumeal l
unitsrecei
vethesameamountofdi rectmateri
alcostsandconv ersi
oncost s.
Case1appl ieswhenev eracompanypr oducesahomogeneouspr oductorser v
icebuthasno
i
ncompl eteunitswheneachaccount i
ngper i
odends,whi chi sacommonsi tuati
oninser vi
ce-sector
organizat
ions.Forexample,abankcanadoptt hi
sprocess-costi
ngapproacht ocomput etheuni tcost
ofprocessing100,000customerdeposits,eachsimil
artot heother,madeinamont h.

Case2:Pr ocessCostingwi thZeroBeginni

ngandSomeEndi ngWor k-
in-ProcessInventory
InFebruary2012,Pacifi
cEl ectr
onicspl
acesanother400uni t
sofSG- 40intopr oduct
ion.Becauseall
uni
tsplacedi nt
oproductioni nJanuarywerecompl et
elyassembled,thereisnobegi nninginv
entory
ofpart
iall
ycompl et
eduni tsintheassemblydepar t
mentonFebr uary1.Somecust omer sorderlat
e,
sonotal lunitsstar
tedi nFebr uaryarecompletedbyt heendoft hemont h.Only175uni t
sar e
completedandt r
ansferr
edt othetesti
ngdepar
tment .

Dat
afort
heassembl
ydepar
tmentf
orFebr
uar
y2012areasfol
lows:
Physi
ca Di r
ect Conv er
sio Total
lUni
ts n
Materi
al Costs
(
SG- s Costs
(
4)=(2)+(3)
40s)(1)
(2) (3)

Worki
npr
ocess,begi
nni
ngi
nvent
ory(
Febr
uar
y 0
1)

St
art
eddur
ingFebr
uar
y 400

Compl
etedandt
ransf
err
edoutdur
ingFebr
uar
y 175
 Worki
n pr
ocess,endi
ng i
nvent
ory(
Febr
uar
y 225
29)

Degr
ee of compl
eti
on of endi
ng wor
kin 100% 60%
pr
ocess

Tot
alcost
saddeddur
ingFebr
uar
y $32,
000 $18,
600 $50,
600

The225par ti
all
yassembl eduni t
sasofFebr uary29,2012,areful
lyprocessedwithrespecttodirect
material
s,becausealldi
rectmat eri
alsi
nt heassembl ydepar t
mentareaddedatt hebeginningoft he
assemblyprocess.Conversioncosts,howev er ,
areaddedev enl
yduri
ngassembl y
.Basedont hewor k
compl et
edrelat
ivet
ot hetotalworkrequir
edt ocompl etetheSG-40unitssti
lli
nprocessattheendof
February,anassembl ydepartmentsuper vi
sorest i
matest hattheparti
all
yassembleduni t
sar e,on
average,60%completewi t
hr especttoconver si
oncosts.

Theaccur acyoft hecompl et

ion esti
mat eofconv ersion cost sdependson t hecar e,skil
l,and
experienceoft heest i
matorandt henatur
eoft heconv ersionpr ocess.Est
imat ingthedegr eeof
compl eti
oni susuallyeasi
erfordirectmateri
alcost st hanf orconv ersi
oncosts,becauset hequant it
y
ofdi r
ectmat eri
alsneededf oracompl eteduni tandt hequant ityofdi r
ectmat erial
sinapar t
iall
y
compl eteduni tcanbemeasur edmor eaccur atel
y .I ncont rast,theconv er
sionsequenceusual l
y
consistsofanumberofoper at i
ons,eachf oraspeci fi
edper iodoft i
me,atv ariousstepsi nt he
productionpr ocess.Thedegreeofcompl eti
onf orconv ersi
oncost sdependsont hepr oporti
onoft he
totalconversioncost sneededtocompl eteoneuni t( orabat chofpr oducti
on)thathasal readybeen
i
ncur r
edont heuni tsstil
linprocess.Itisachal l
engef ormanagementaccount antstomaket his
estimateaccur atel
y.

Becauseoft heseuncer tai

nti
es,depart
mentsuper vi
sorsand li
nemanager s– i ndi
vi
dualsmost
famil
iarwiththeprocess–of t
enmakeconv er
sioncostesti
mates.Sti
ll
,insomei ndustr
ies,suchas
semiconductormanuf acturi
ng,noexactestimateispossibl
e;inothersetti
ngs,suchast hetextil
e
i
ndust r
y,vastquantit
iesi nprocessmaket het askofestimati
ont oocostly
.Int hesecases,i tis
necessarytoassumet hatallworkinprocessinadepar tmentiscompletetosomepr esetdegr ee
wit
hr espectt
oconv ersi
oncost s(f
orexample,one–thir
d,one–hal f
,ortwo–t hi
rdscompl ete)
.

Thepointt
ounder
standherei
sthatapar
ti
all
yassembl
eduni
tisnotthesameasaf ul
l
yassembled
uni
t.Facedwit
hsomef ul
l
yassembledunit
sandsomepar ti
all
yassembleduni
ts,werequi
rea
commonmet ri
ct hatwillenableust ocompar etheworkdonei neachcat egoryand,mor eimpor t
ant,
obtai
nat ot
almeasur eofwor kdone.Theconceptwewi lluseinthisregar
di sthatofequival
entunits.
Wewi ll
expl
ainthisnotioni ngreaterdetailnextaspartoft hesetoffi
v est
epsr equir
edtocal cul
ate(1)
thecostofful
lyassembl edunitsinFebruar y2012and( 2)t hecostofpart
iall
yassembl eduni t
ssti
lli
n
processattheendoft hatmont h,forPaci fi
cElectr
onics.Thef ivestepsofpr ocesscost i
ngar eas
fol
lows:
Step1:Summar izethef l
owofphy sical
uni tsofoutput
.
Step2:Comput eoutputi ntermsofequi v al
entunit
s.
Step3:Summar izetotalcostst oaccountf or.
Step4:Comput ecostperequi valentunit.
Step5:Assigntotalcostst ounitscompl etedandtounitsi nendingwor ki
npr ocess.

PhysicalUnit
sandEquiv
alentUnit
s(Steps1and2)
Step1t r
acksphysi
calunit
sofout put
.Recal
lthatphy
sicaluni
tsar
ethenumberofout
putuni
ts,
whethercompl et
eorincomplete.Wheredidphysi
calunit
scomef r
om?Wheredidtheygo?The
physi
cal
-uni
tscolumnofExhi bi
t4–1t rackswherethephysi
caluni
tscamefr
om (400uni
tsstarted)
andwheret heywent( 175unit
scompletedandt r
ansf
erredout
,and225unit
sinendinginventory)
.
Remember ,
whent hereisnoopeni
nginventor
y,uni
tsstar
tedmustequalt
hesum ofuni
tst
ransferred
outandendinginvent
ory.

Becausenotal l400phy sicalunit

saref ull
ycompl eted,outputi nSt ep2i scomput edi nequi valent
uni
ts,noti nphysicalunits.Toseewhatwemeanbyequi v
alentuni ts,let’
ssayt hatdur ingamont h,50
physi
caluni tswer estartedbutnotcompl etedbyt heendoft hemont h.These50uni tsinendi ng
i
nventoryar eestimat edt obe70%compl etewithr espectt oconv ersioncosts.Let ’sex aminet hose
uni
tsf rom t heper spectiveoft heconv ersi
oncost salr
eadyi ncur r
edt ogett heuni t
st obe70%
complete.Suppose we putal lthe conv er
sion cost sr epresented i nt he 70% i nto maki ng f ull
y
completeduni ts.How manyuni tscouldhav ebeen100% compl etebyt heendoft hemont h?The
answeri s35uni ts.Why ?Because70% ofconv ersioncost sincur redon50i ncompl eteuni t
scoul d
havebeeni ncurr
edt omake35( 0.70x50)compl eteuni t
sbyt heendoft hemont h.Thati s,i
fal lthe
conversion-costinputint he50uni tsi
ninventoryhadbeenusedt omakecompl etedout putuni ts,the
companywoul dhav eproduced35compl etedunits( al
socal edequi
l valentuni
ts)ofout put.

Exhi
bit4–1St eps1and2:Summar i
zeOut
putinPhy
sicalUnit
sandComput
eOut
puti
nEqui
val
ent
Unit
sforAssemblyDepar
tmentofPaci
fi
cEl
ect
roni
csforFebruary2012

(
Step1) (
Step2)

Equi
val
entUni
ts

Physi
ca Di
rect Conv
ersi
o
lUni
ts n
Fl
owofPr
oduct
ion Mat
eri
al
(SG- s Cost
s
40s)(
1)
(
2) (
3)

Wor
kinpr
ocess,
begi
nni
ng 0

St
art
eddur
ingcur
rentper
iod 400

Toaccountf
or 400

Complet
edandt
ransf
err
edoutdur
ingcur
rent 175 175 175
per
iod

Wor
kinpr
ocess, nga
endi 225

(
225×100%;
225×60%) _
__ 225 135

Account
edf
or 400 _
__ _
__

Equi
val
entuni
tsofwor
kdonei
ncur
rentper
iod 400 310
a
Degreeofcompl
eti
oni
nthi
sdepar
tment
;di
rectmat
eri
als,
100%;
conv
ersi
on
costs,60%.
Equivalentunitsisader i
vedamountofout putuni t
sthat( 1)takest hequantit
yofeachi nput(f
actor
ofproduct i
on)i nunitscompl etedandi ni
ncompl eteunitsofwor ki nprocessand( 2)convert
st he
quantit
yofi nputintotheamountofcompl etedoutputunitst hatcouldbepr oducedwiththatquantit
y
ofinput.Not ethatequi v
alentunitsarecal
culatedseparatelyforeachi nput(suchasdirectmateri
als
andconv er
sioncost s).Moreover,ever
ycompl etedunit
,bydef i
nit
ion,iscomposedofoneequi val
ent
uni
tofeachi nputr equir
edt omakei t
.Thischapt erfocusesonequi val
ent– unitcalcul
ati
onsi n
manuf acturi
ngset t
ings.

Equi
val
ent-
unitconcept
sar ealsofoundinnonmanufact
uri
ngset t
ings.Forexampl
e,uni
ver
sit
ies
conv
ertt
heirpar
t-
ti
mest udentenr
oll
ment
sint
o“ful
l
-ti
mestudentequi
v al
ent
s.”

Whencalcul
ati
ngequi
val
entunit
sinSt
ep2,focusonquanti
ties.Di
sregarddol
l
aramountsunt
ilaf
ter
equi
val
entunit
sarecomputed.Int
hePaci
fi
cEl ect
roni
csexample,all400physi
caluni
ts–the175
ful
lyassembledunitsandt he225par ti
all
yassembledunits–ar e100% completewithrespectt o
dir
ectmateri
alsbecausealldir
ectmateri
alsareaddedintheassemblydepartmentatt
hestar tofthe
process.Ther
efore,Exhibi
t4– 1showsout putas400equi val
entuni
tsf ordi
rectmaterials:175
equival
entuni
tsfort he175phy si
caluni
tsassembledandt r
ansferr
edout,and225equivalentunits
forthe225physi
cal uni
tsinendi
ngwor k-
in-
processi
nvent
ory.

The175f ull
yassembl eduni t
sarealsocompl etelyprocessedwi threspectt
oconv ersi
oncosts.The
part
ial
l
yassembl eduni t
si nendingwor ki npr ocessar e60% compl et
e(onav erage).Therefor
e,
conver
sioncostsi nthe225par ti
all
yassembl eduni tsareequivalenttoconversi
oncost sin135(60%
of225)full
yassembl edunits.Hence,Exhibi
t4–1showsout putas310equi valentuni t
swi t
hrespect
toconversi
oncost s:175equi val
entunitsfort he175phy si
caluni t
sassembl edandt ransf
err
edout
and135equi val
entunitsforthe225phy si
caluni tsinendingwor k-i
n-pr
ocessinventory.

CalculationofPr oductCost s(Steps3,4,and5)

Exhibit4–2showsSt eps3, 4,and5.Toget her,theyarecalledthepr oductioncostwor ksheet.
Step3summar izest otalcost stoaccountf or.Becauset hebegi nningbal anceofwor k–i nprocess
i
nv entoryiszeroonFebr uary1,t ot
alcoststoaccountf or(thatis,thet ot
alchar gesordebi tstothe
Wor kinPr ocess–Assembl yaccount)consi stonlyofcost saddeddur ingFebruar y:directmat er
ials
of$32, 000andconv ersioncost sof$18,600,forat ot
al of$50,600.
Step4i nExhibit4–2cal cul
atescostperequi valentunitsepar atelyfordirectmat erial
sandf or
conv ersi
oncostsbydi vidingdirectmateri
alcost sandconv ersioncost saddeddur i
ngFebr uarybythe
rel
atedquant it
yofequi valentunitsofworkdonei nFebruary(ascalcul at
edi nExhibit4–1) .

Toseet hei mpor t

anceofusi ngequi valentuni t
si nunit-costcalcul ations,compar econv ersioncost s
forJanuaryandFebr uary2012.Tot alconv ersi
oncost sof$18, 600f ort he400uni tswor kedondur ing
Februaryar elowerthant heconv ersioncost sof$24, 000f ort he400uni tswor kedoni nJanuar y
.
Howev er,inthisexample,theconv ersioncost stofullyassembl eauni tare$60i nbot hJanuar yand
February.Totalconver
sioncost sarel oweri nFebr uarybecausef ewerequi valentunit
sofconv er
sion-
costswor kwer ecompl etedinFebr uary( 310)t haninJanuar y(400) .Usingphy si
caluni t
si nsteadof
equival
entuni tsi nthe per -
unitcal culation would hav el ed t ot he erroneous conclusi on that
conversi
oncost sperunitdecli
nedf rom $60i nJanuar yt o$46. 50( $18,600÷400uni ts)inFebr uar y
.
Thisincorrectcosti
ngmi ghthavepr ompt edPaci f
icElectroni
cst opr esumet hatgreateref f
icienci
esi n
processinghadbeenachi evedandt olowert hepr i
ceofSG- 40,f orexampl e,wheni nf actcost shad
notdeclined.

St
ep5inExhi
bit4–2assi
gnsthesecost
stouni
tscompl
etedandtr
ansf
err
edoutandt
ounit
ssti
l
lin
pr
ocessatt
heendofFebr
uary2012.Theideai
stoatt
achdoll
aramountstot
heequi
val
entout
put
uni
tsf ordirectmater
ialsandconversi
oncostsof(a)uni
tscompletedand(b)endi
ngwor ki
nprocess,
ascal cul
atedinExhibit4–1, ep2.Equi
St val
entoutputuni
tsforeachinputar
emul t
ipl
i
edbycostper
equivalentunit,ascalcul
atedinSt ep4ofExhibit4–2.Forexampl e,costsassi
gnedtothe225
physicalunitsinendi
ngwor k-
in-
processi
nventor
yareasfoll
ows:

Di
rectmat
eri
alcost
sof225equi
val
entuni
ts(
Exhi
bit4–1,
St
ep2)x
$18,
00
$80costperequi
val
entuni
tofdi
rectmat
eri
alscal
cul
atedi
n 0
Step4

Conver
sioncost
sof135equi
val
entuni
ts(
Exhi
bit4–1,St
ep
2)x
8,
100
$60costperequi
val
entuni
tofconv
ersi
oncost
scal
cul
atedi
n
Step4

Tot
alcostofendi
ngwor
k–i
n–pr
ocessi
nvent
ory $26,
10
0

Not
ethatt
otal
cost
stoaccountf
ori
nSt
ep3(
$50,
600)equal
tot
alcost
saccount
edf
ori
nSt
ep5.

Exhi
bit4–2St eps3,4,and5:SummarizeTotalCost
stoAccountFor
,Comput
eCostperEquival
ent
Unit
,andAssi
gnTotalCoststoUni
tsCompletedandtoUni
tsinEndi
ngWorkinProcessf
orAssembly
Depart
mentofPacif
icEl
ectroni
csf
orFebruar
y2012

Tot
al Di
rect Conv
ersi
o
n
Pr
oduct
io Mat
eri
al
n s Cost
s

Cost
s

(St
ep Cost
saddeddur
ingFebr
uar
y $50,
600 $32,
000 $18,
600
3)

Tot
alcost
stoaccountf
or $50,
600 $32,
000 $18,
600

(St
ep Cost
saddedi
ncur
rentper
iod $50,
600 $32,
000
4)

Divi
debyequi
val
entuni
tsofwor
kdonei
ncur
rentper
iod ÷400 ÷310
(Exhi
bit4–1)
 Costperequi
val
entuni
t $80 $60

(St
ep Assi
gnmentofcost
s:
5)

Compl
etedandt
ransf
err
edout(
175uni
ts) $24,
500 (
175a× (175a×$60)
$80)

Wor
kinpr
ocess,
endi
ng(
225uni
ts)
: 26,
100 225b×
( 135b×
+(
$80) $60)

Tot
alcost
saccount
edf
or $50,
600 $32,
000 +$18,
600
a
Equi
val
entuni
tscomplet
edandt
ransf
erredoutfrom Exhi
bit4–1,st
ep2.
b
Equi
val
entuni
tsinendi
ngworki
nprocessfrom Exhi
bit4–1, st
ep2.

JournalEntri
es
Journalentri
esinprocess-costi
ngsy stemsar esimilartotheentr
iesmadei njob-costi
ngsystems
withrespecttodi
rectmat er
ial
sandconv er
sioncosts.Themai ndi
ff
erenceisthat,i
npr ocesscosti
ng,
thereisoneWor kinProcessaccountf oreachpr ocess.I
nourexampl e,t
hereareaccount sforWor k
i
nPr ocess–Assembl yandWor kinProcess–Test ing.Paci
ficEl
ectr
onicspurchasesdirectmateri
als
asneeded.Thesemat er
ialsaredeliv
ereddirectl
ytot heassemblydepartment.Usingamount sfrom
Exhibi
t4–2, summar yjournalent
riesforFebruar
yar easfoll
ows:

1.Wor kinPr ocess–Assembl y 32,000

Account sPay ableControl 32,
000
Torecor ddirectmat eri
alspurchasedandusedi nproductiondur
ingFebruary.
2.Wor kinPr ocess–Assembl y 18,600
Var i
ous account s such as Wages Pay able Controland Accumul ated Depr eciat
ion
18,
600
Tor ecordconv er
sioncostsf orFebruary
; examplesincl
udeenergy ,
manuf act
ur i
ngsuppl i
es,al
l
manuf acturi
ngl abor,andplantdepreciat
ion.
3.Wor kinPr ocess–Test i
ng 24,500
Wor kinPr ocess–Assembl y 24,
500
Torecor dcostofgoodscompl etedandt r
ansferredfrom assemblytot
estingdur i
ngFebr uar
y .

Exhibi
t4–3showsagener alframewor kforthefl
owofcost st hr
oughT- accounts.Noti
cehowent r
y
3for$24,500f ol
lowst hephysicaltr
ansferofgoodsfrom theassembl yt othetesti
ngdepartment .
TheT-accountWor kinProcess–Assembl yshowsFebruary2012’sendingbal anceof$26,100,
whi ch
i
st hebeginni
ngbalanceofWor ki nProcess–AssemblyinMar ch2012.Iti si
mpor t
anttoensurethat
al
lcostshav ebeenaccountedf orandthattheendi
nginventoryoft hecurrentmonthisthebeginning
i
nventoryofthefoll
owingmont h.

Case3:Pr
ocessCost
ingwi
thSomeBegi
nni
ngandSomeEndi
ngWor
k-i
n-Pr
ocessI
nvent
ory

Atthebegi
nni
ngofMar ch2012,Paci
fi
cElect
roni
cshad225par t
ial
l
yassembl
edSG-
40uni
tsi
nthe
assembl
ydepar
tment
.Itstar
tedpr
oducti
onofanother275uni
tsi
nMar ch.

Dat
afort
heassembl
ydepar
tmentf
orMar
char
easf
oll
ows:
 Physi
cal Di
rect Conv
ersi
on Tot
al
Unit
s
Mat
eri
als Cost
s Cost
s
(SG-
40s)(
1) (
2) (
3) (
4)=(
2)+(
3)

Wor
kinpr
ocess,
begi
nni
ngi
nvent
ory(
Mar
ch1) 225 $18,
000a 100a
$8, $26,
100

Degr
eeofcompl
eti
onofbegi
nni
ngwor
kin 100% 60%
pr
ocess

St
art
eddur
ingMar
ch 275

Compl
etedandt
ransf
err
edoutdur
ingMar
ch 400

Wor
kinpr
ocess,
endi
ngi
nvent
ory(
Mar
ch31) 100 100% 50%

Degree ofcompl
eti
on ofendi
ng wor
kin
pr
ocess

Tot
alcost
saddeddur
ingMar
ch $19,
800 $16,
380 $36,
180
a
Wor
kinpr
ocess,
begi
nni
ngi
nvent
ory(
equal
swor
kinpr
ocess,
endi
ngi
nvent
oryf
orFebr
uar
y)

Conv
ersi
oncost
s:225phy
sical
uni
ts×60%compl
eted×$60peruni
t=$8,
100

Di
rectmat
eri
als:
225phy
sical
uni
ts×100%compl
eted×$80peruni
t=$18,
000

Paci f
icElectroni
csnowhasi ncompl eteuni t
sinbot hbeginningwor k-i
n-processi nv
entoryandendi ng
wor k-i
n-processinventoryforMar ch2012.Wecanst i
l
luset hef i
vest epsdescr ibed earl
ierto
calculate(1)costofuni t
scompl etedandt r
ansferr
edoutand( 2)costofendi ngwor kinprocess.To
assigncost stoeachoft hesecat egor ies,however,wef ir
stneedt ochooseani nventory
-valuat
ion
met hod.Wenextdescr i
bet hef i
ve- stepappr oachf ortwoi mpor tantmet hods– t hewei ghted–
averagemet hodandt hef i
rst–i n,f i
rst–outmet hod.Thesedi ff
er entv al
uationmet hodspr oduce
dif
ferentamount sf
orcostofuni tscompl etedandf orendingwor kinpr ocesswhent heuni tcostof
i
nput schangesf rom oneperiodtot henext .

Wei
ght
ed-
Aver
ageMet
hod

Thewei ghted-averageprocess–cost i
ngmet hodcalculatescostperequivalentunitofallworkdone
todate(regardlessoftheaccount ingperi
odinwhi chitwasdone)andassi gnsthiscosttoequi val
ent
unitscompl et
edandt r
ansferredoutoftheprocessandt oequival
entunitsinendingwor k-in-
process
i
nventory.Thewei ghted–av eragecostisthetotalofal
lcost sent
eringtheWor kinPr ocessaccount
(whetherthecost sarefrom beginningworkinprocessorf rom workstar
teddur i
ngthecur rentperiod)
div
idedbyt otalequival
entunitsofwor kdonetodat e.Wenowdescr i
bethewei ghted-aver
agemet hod
usingthefive–st epprocedur es.

St
ep1:Summar
izet
heFl
owofPhy
sicalUni
tsofOut
put
.Thephy
sical
-uni
tscol
umnofExhi
bit4–4
showswher etheuni t
scamef rom –225unit
sf r
om begi nningi nvent
oryand275uni tsstart
eddur i
ng
thecurrentperi
od–andwher et heywent–400uni tscompl et
edandt ransferr
edoutand100uni t
sin
endinginventory.
Step2:Comput eOut putinTer msofEquivalentUni ts.Thewei ght
ed-averagecostofi nventor
yis
calcul
atedbymer gingt oget
hert hecost
sofbegi nningi nventoryandt hemanuf act
uri
ngcost sofa
periodanddi vi
dingbyt hetotalnumberofunit
si nbegi nninginventor
yanduni t
sproduceddur i
ngthe
accountingperiod.Weappl ythesameconcepther eexceptt hatcalculat
ingtheunits–i nthiscase
equival
entunits–i sdonedi ff
erentl
y.Weusetherelationshipshowni nthef ol
lowingequati
on:

Equi
val
entuni
tsi
nbeginni
ngworki
nprocess+Equi val
entuni
tsofworkdoneincur
rentper
iod
=
Equi
val
entuni
tscompl
etedandt
ransf
err
edoutincurrentperi
od+Equiv
alentuni
tsi
nendingworkin
process

Alt
houghwear einter
est
edincalculat
ingthelef
t-
handsi deoftheprecedi
ngequation,i
tiseasierto
cal
cul
atet hi
s sum using the equati
on’
sr i
ght-hand side:(1)equival
entunit
s compl et
ed and
tr
ansfer
redouti
nt hecur
rentper
iodplus(2)equiv
alentunitsi
nendi
ngwor kinprocess.Notethatthe
st
ageofcompl
eti
onoft
hecur
rent
-per
iodbegi
nni
ngwor
kinpr
ocessi
snotusedi
nthi
scomput
ati
on.

Theequi val
ent-
unit
scol umnsi nExhibit4– 4show equi v al
entunit
sofwor kdonet odate:500
equiv
alentunit
sofdi r
ectmat eri
alsand450equivalentuni
tsofconv er
sioncosts.Allcompletedand
tr
ansferr
ed-outunit
sar e100%compl eteastobothdirectmat er
ial
sandconv ersi
oncost s.Part
ial
ly
completedunitsinendingwor kinprocessare100%compl eteastodirectmateri
alsbecausedirect
materi
alsareintr
oducedatt hebeginningoftheprocess,and50%compl eteastoconv ersi
oncosts,
basedonest i
matesmadebyt heassembl ydepar
tmentmanager .

Step3:Summar i
zeTotalCoststoAccountFor.Exhibit4–5pr esentsStep3.Tot
alcoststoaccount
forinMarch2012aredescri
bedi
nt heexampledataonpage615: beginni
ngworkinprocess,$26,
100
(di
rectmater
ial
s,$18,
000,plusconversi
oncosts,$8,100),pl
uscost saddedduringMar ch,$36,
180
(di
rectmater
ial
s,$19,
800,pl
usconversi
oncosts,$16,380)
.Thetotalofthesecost
sis$62,280.

Step4:Comput eCostperEqui valentUnit.Exhibit4–5, Step4, showst hecomput ati

onofwei ght ed-
averagecostperequi val entunitf ordir
ectmat erialsandconv ersioncosts.Weighted-averagecostper
equivalentuni
ti sobt
ai nedbydi v i
dingthesum ofcost sforbegi nningwor kinprocesspl uscost sf or
workdonei nt hecurrentper iodbyt otalequivalentunitsofwor kdonet odat e.Whencal culati
ng
weighted-aver
ageconv er si
oncostperequi valentunitinExhi bit4–5,f orexampl e,wedi videt otal
conversioncosts,$24,480( beginningwor kinpr ocess,$8,
100, pluswor kdonei ncurrentperi
od,
$16,380),bytotalequiv alentunitsofwor kdonet odate,450( equi v
alentuni
tsofconv er
sioncost si n
beginningworki nprocessandi nwor kdonei ncur r
entperiod),t oobtai
nwei ghted-aver
agecostper
equivalentuni
tof$54. 40.
Exhibit4–5St eps3, 4, and5:Summar i
zeTot alCost stoAccountFor ,Comput eCostperEqui val
ent
Unit
,andAssi gnTot alCost st oUni t
sCompl etedandt oUni tsi nEndingWor ki nProcessUsi ng
Weight ed–Av erageMet hodofPr ocessCost ingf orAssembl yDepar tmentofPaci fi
cElectronicsf or
March2012

Tot
al Di
rect Conv
ersi
o
n
Pr
oduct
io Mat
eri
al
n s Cost
s

Cost
s
(St
ep Wor
kinpr
ocess,
begi
nni
ng $26,
100 $18,
000 $8,
100
3)

Cost
saddedi
ncur
rentper
iod 36,
180 19,
800 16,
380

Tot
alcost
stoaccountf
or $50,
600 $37,
800 $24,
480

(St
ep Cost
sincur
redt
odat
e $37,
800 $24,
480
4)

Di
videbyequi
val
entuni
tsofwor
kdonet
odat
e(Exhi
bit4– ÷500 ÷450
4)

Costperequi
val
entuni
tofwor
kdonet
odat
e $75.
60 $54.
40

(St
ep Assi
gnmentofcost
s:
5)

Compl
etedandt
ransf
err
edout(
400uni
ts) $52,
000
400a×
( (
400a×$54.
40)
$75.
60)

Wor
kinpr
ocess,
endi
ng(
100uni
ts)
: 10,
280
(100b× +(100b×
$75.
60) $54.
40)

Tot
alcost
saccount
edf
or $62,
280 $37,
800 +$24,
480
a
Equi
val
entuni
tscomplet
edandt
ransf
erredoutfrom Exhi
bit4–4,st
ep2.
b
Equi
val
entuni
tsinendi
ngworki
nprocessfrom Exhi
bit4–4, st
ep2.

Step5:Assi gnTot alCost st oUni t

sCompl etedandtoUni tsinEndingWor ki
nPr ocess.Step5in
Exhibi
t4–5t akest heequiv alentunit
scompletedandt r
ansferredoutandequival
entuni t
sinendi
ng
workinpr ocesscal culat
edi nExhi bi
t4–4,St ep2,andassi gnsdoll
aramount stot hem usingt
he
weighted-
averagecostperequi val
entuni
tfordir
ectmateri
alsandconv ersi
oncostscalcul
atedinSt
ep
4.Forexampl e,t
otal cost
soft he100physicaluni
tsi
nendingwor ki
npr ocessar
easf oll
ows:
Di
rectmat erials:

100equiv
alentuni
tsxwei
ght
ed-
aver
agecostperequi
val
ent $7,
56
uni
tof$75.60 0

Conv
ersi
oncost
s:

50equival
entuni
tsxwei
ght
ed-
aver
agecostperequi
val
ent 2,
720
uni
tof$54.
40

Tot
alcost
sofendi
ngwor
kinpr
ocess $10,
28
0
Thefol
lowingtabl
esummar izestotalcoststoaccountf or($62,280)andhowt heyareaccount
edf or
i
nExhibit4–5.Thear rowsi
ndicatethatthecostsofunitscompl et
edandt r
ansferr
edoutandunitsin
endi
ngwor kinpr ocessarecalcul
atedusi ngweighted-averaget otalcost
sobt ai
nedaft
ermer ging
cost
sofbeginningwor ki
nprocessandcost saddedint hecur r
entper i
od.

Cost
stoAccountFor Cost
sAccount
edf
orCal
cul
atedona

Wei
ght
ed-
Aver
ageBasi
s

Begi
nni
ngwor
kinpr
ocess $26,
10 Compl
etedandt
ransf
err
ed $52,
00
0 out 0

Costsaddedi
ncur
rent 36,
180 Endi
ngwor
kinpr
ocess 10,
280
per
iod

Tot
alcost
stoaccountf
or $62,
28 Tot
alcost
saccount
edf
or $62,
28
0 0

Beforeproceeding,r
evi
ew Exhi
bit
s4–4and4–5t ocheckyourunderstandi
ngoft heweighted-
averagemet hod.Not
e:Exhi
bit4–4deal
swi
thonl
yphysi
calandequi
val
entunit
s,notcost
s.Exhibi
t4
–5showst hecostamounts.

Usingamountsfr
om Exhi
bit4–5,t hesummaryj
our
nalent
ri
esundert
hewei
ght
edav
eragemet
hod
forMarch2012atPaci
fi
cElect
roni
csareasfol
l
ows:

1.Wor kinPr ocess–Assembl y 19, 800

Account sPay ableControl 19,
800
Torecorddirectmat eri
alspurchasedandusedi nproducti
onduringMarch.
2.Wor kinPr ocess–Assembl y 16,380
Various account s such as Wages Pay able Controland Accumul ated Depr eciat
ion
16,
380
Tor ecordconv ersi
oncost sforMar ch;examplesincludeenergy,manufacturingsuppl i
es,al
l
manufacturi
ngl abor,andplantdepreci
ati
on.
3.Wor kinPr ocess–Test i
ng 52,000
Wor kinPr ocess–Assembl y 52,
000
Torecordcostofgoodscompl etedandtransf
erredfr
om assembl yt
otesti
ngdur ingMar ch.

TheT-
accountWor
kinPr
ocess–Assembl
y,undert
hewei
ght
ed-
aver
agemet
hod,
isasf
oll
ows:

Wor
kinPr
ocess–Assembl
y

Begi
nni
ngi
nvent
ory
, 26,
100 Compl et
edandtr
ansf
err
edoutt
oWor
kin 52,
00
March1 Process-Test
ing 0

Di
rectmat
eri
als 16,
380
 Conv
ersi
oncost
s 16,
380

Endi
ngi
nvent
ory
,Mar
ch 10,
280
31

Fi
rst
-I
n,Fi
rst
-OutMet
hod

Thef i
rst
-i
n,fi
rst-out(FIFO)pr ocess-costingmet hod( 1)assignsthecostoft hepr
evi
ousaccounting
peri
od’sequivalentuni t
si nbegi nningwor k-in-
processi nventorytot hefi
rstuni
tscomplet
edand
tr
ansferr
edoutoft hepr ocess,and( 2)assi gnsthecostofequi v
alentuni
tsworkedondur i
ngt he
curr
entperiodfirsttocompl etebeginningi nv entor
y,nextt ostartandcompletenewunit
s,andfinall
y
tounitsinendingwor k-
in-processinventory .TheFI FOmet hodassumest hattheear
li
estequiv
alent
unit
sinwor kinpr ocessar ecompl et
edf i
rst.

Adist
inct
ivef
eatur
eoftheFI
FOpr ocess-
cost
ingmethodi
sthatworkdoneonbegi nni
nginvent
ory
bef
orethecur
rentper
iodi
skeptseparat
efrom wor
kdoneinthecur
rentper
iod.Costsi
ncurr
edand
uni
tsproducedint hecurrentper
iodar
eusedtocal
cul
atecostperequival
entunitofworkdoneint
he
curr
entperi
od.I ncontrast,equi
val
ent-
uni
tandcostper–equivalent–uni tcalcul
ati
onsundert
he
weight
ed-aver
agemet hodmer geuni
tsandcost
sinbegi
nni
nginventorywithunit
sandcostsofwork
doneinthecurrentperi
od.

Wenowdescr ibet heFI FOmet hodusi ngthef i

v e–st eppr ocedure.
Step1:Summar izet heFl ow ofPhy sicalUni t
sofOut put.Exhibit4–6,St ep1,t racest heflow of
physi
calunitsofpr oduct ion.Thef ol l
owi ngobser vat
ionshel pexpl ainthecalculati
onofphy si
calunits
undertheFIFOmet hodf orPaci f
icEl ectroni
cs.
 Thef ir
stphy sical uni t
sassumedt obecompl etedandt ransf err
edoutdur ingtheper iodare225
unitsfrom begi nni ngwor k-in-pr ocessinv entory.
 TheMar chdat ai ndicat et hat400phy si
caluni tswer ecompl etedduringMar ch.TheFI FO
met hodassumest hatoft hese400uni t
s, 175uni t
s( 400uni ts225uni tsfrom begi nni
ngwor k-
in-pr
ocessi nv entor y)musthav ebeenst artedandcompl eteddur ingMarch.
 Endingwor k-in-processi nv ent oryconsi stsof100phy sicaluni ts– the275phy si
calunits
startedmi nust he175uni t st hatwer est artedandcompl eted.
 Thephy sical units“ toaccountf or”equal thephy sicalunits“account edfor”(500uni ts)
.
Step2:Comput eOut puti nTer msofEqui valentUni ts.Exhibit4–6al sopresentst hecomput ati
ons
forSt
ep2undert heFI FOmet hod.Theequi valent–uni tcal
culationsf oreachcostcat egoryfocuson
equi
val
entuni
tsofwor
kdonei
nthecur
rentper
iod(
Mar
ch)onl
y.

Undert heFI FOmet hod, equi

valentuni t
sofwor kdonei nMar chont hebeginni
ngwor k–in–pr ocess
i
nv entoryequal225phy si
calunitst imest heper centageofwor kremai ni
ngt obedonei nMar chto
compl etetheseuni ts:0%f ordirectmat er
ials,becausebeginningwor kinprocessis100%compl ete
withrespectt odi r
ectmat eri
als,and40%f orconv er
sioncosts,becausebeginningworkinprocessis
60%compl etewi t
hr especttoconv ersioncost s.Ther esul
tsare0( 0%225)equi val
entuni
tsofwor k
fordirectmat erial
sand90( 40%225)equi v
alentunitsofwor kforconv er
sioncosts.Theequival
ent
unitsofwor kdoneont he175phy sicalunitsstartedandcompl etedequals175uni t
stimes100%f or
bothdi rectmat erial
sandconv ersioncost s,becauseal lwor kont heseunitsisdoneinthecur r
ent
period.

Theequi
val
entuni
tsofworkdoneonthe100unit
sofendi
ngwor kinprocessequal100phy
sical
units
ti
mes100%f ordi
rectmat
eri
als(
becauseal
ldi
rectmater
ial
sfortheseunitsareaddedint
hecurrent
peri
od)and50%f orconv ersioncost s( because50%oft heconv ersi
on-costsworkont heseunitsi s
donei nthecur r
entperiod) .
Step3:Summar izeTot alCost st oAccountFor .Exhibi
t4–7pr esent sStep3andsummar izestot al
costst oaccountf ori
nMar ch2012( begi nningwor kinprocessandcost saddedinthecur rentperiod)
of$62, 280.
Step4:Comput eCostperEqui valentUni t.Exhibi
t17-7showst heSt ep4comput ati
onofcostper
equivalentunitforworkdonei nthecur rentper iodonlyfordirectmat eri
alsandconversioncosts.For
exampl e,conversioncostperequi valentuni tof$52isobt ai
nedbydi v i
dingcurr
ent-
periodconv ersion
costsof$16, 380bycur r
ent-per i
odconv er sioncostsequivalentuni t
sof315.
Step5:Assi gnTot alCost stoUni t sCompl etedandt oUnitsinEndi ngWor ki
nProcess.
Exhi
bi t4–7showst heassi gnmentofcost sundertheFI FO met hod.Cost sofwor kdonei nt he
curr
entper iodareassigned( 1)fir
stt ot headdi t
ionalworkdonet ocompl et
ethebeginning

Exhi
bit4–6Steps1and2:SummarizeOut
putinPhysi
calUni
tsandComput
eOutputinEqui
val
ent
Unit
sUsingFI
FO Met
hodofProcessCosti
ngforAssemblyDepart
mentofPaci
fi
cElect
roni
csfor
March2012

(
Step1) (
Step2)

Equi
val
entUni
ts

Fl
owofPr
oduct
ion Physi
ca Di
rect Conv
ersi
o
lUni
ts n
Mat
eri
al
(SG- s Cost
s
40s)(
1)
(
2) (
3)

Wor
kinpr
ocess,
begi
nni
ng 225

St
art
eddur
ingcur
rentper
iod 275

Toaccountf
or 500

Complet
edandt
ransf
err
edoutdur
ingcur
rent
per
iod:

Fr
om begi
nni
ngwor
ki ocessa
npr 225
 [
225×(
100%–100%)
;225×(
100%–60%)
] 0 90

St
art
edandcompl
eted 175b

(
175×100%;
175×100%) 175 175

Wor
kinpr
ocess, ngc
endi 100

(
100×100%;
100×50%) _
__ 100 50

Account
edf
or 500 _
_ _
__

Equi
val
entuni
tsofwor
kdonei
ncur
rentper
iod 275 315
a
Degreeofcompl
eti
oni
nthi
sdepar
tment
;di
rectmat
eri
als,
100%;
conv
ersi
on
costs,60%.
b
400physi
caluni
tscompl
etedandt ransf
err
edoutmi nus225physi
caluni
ts
compl
etedandtr
ansf
err
edoutf
rom beginni
ngwor
k-i
n-pr
ocessi
nvent
ory
.
c
Degreeofcompl
eti
oni
nthi
sdepar
tment
:di
rectmat
eri
als,100%;conv
ersi
on
costs,50%.

workinprocess,
then(
2)towor
kdoneonunit
sstar
tedandcomplet
eddur
ingthecur
rentperi
od,and
f
inal
l
y( 3)toendingworki
nprocess.St
ep5takeseachquant
it
yofequival
entuni
tscalcul
atedin
Exhi
bit4–6,St
ep2,andassi
gnsdoll
aramount
stothem (
usi
ngt
hecost–per–equival
ent–uni
t
cal
cul
ati
onsi
nStep4).Thegoali
stousethecostofwor
kdonei
nthecur
rentper
iodtodet
ermi
ne
t
otalcostsofalluni
tscomplet
edfr
om begi
nni
nginvent
oryandf
rom wor
kst
art
edandcompl
etedi
n
t
hecurrentper
iod,andcost
sofendi
ngworkinpr
ocess.

Oft he400compl eteduni ts,225uni tsar efrom begi nningi nventoryand175uni t

sar est artedand
compl eteddur i
ngMar ch.TheFI FO met hodst artsbyassi gningt hecost sofbegi nningwor k-in-
processi nv
entoryof$26, 100t othef i
r stunitscompl etedandt ransferredout .Aswesawi nSt ep2, an
additi
onal90equi v alentuni t
sofconv er si
oncost sar eneededt ocompl etetheseuni tsinthecur rent
peri
od.Cur rent
-periodconv ersioncostperequi valentuniti s$52, so$4, 680( 90equiv al
entuni t
sx$52
perequi val
entunit)ofaddi t
ionalcostsar eincur
redt ocompl etebegi nningi nventory
.Totalpr oduct ion
costsf orunitsinbegi nningi nventoryar e$26, 100=$4, 680+$30, 780.The175uni tsstar tedand
compl etedinthecur rentper iodconsi stof175equi valentunitsofdi rectmat eri
alsand175equi valent
unit
sofconv ersi
oncost s.Theseuni t
sar ecostedatt hecostperequi v alentunitinthecur r
entper iod
(di
rectmat eri
als,$72, andconv ersioncost s,$52)f orat otalproduct i
oncostof$21, 700[175x( $72+
$52)].

Exhi
bit4–7St eps3,
4,and5:Summar
izeTot
alCost
stoAccountFor,
Comput
eCostperEqui
val
ent
Unit
,andAssi
gnTotalCost
stoUnit
sComplet
edandtoUni
tsinEndingWor
kinPr
ocessUsingFI
FO
Met
hodofPr
ocessCost
ingf
orAssembl
yDepar
tmentofPaci
fi
cEl
ect
roni
csf
orMar
ch2012

Tot
al Di
rect Conv
ersi
o
n
Pr
oduct
io Mat
eri
al
n s Cost
s

Cost
s

(St
ep Wor
kinpr
ocess,
begi
nni
ng $26,
100 $18,
000 $8,
100
3)

Cost
saddedi
ncur
rentper
iod 36,
180 19,
800 16,
380

Tot
alcost
stoaccountf
or $62,
280 $37,
800 $24,
480

(St
ep Cost
saddedi
ncur
rentper
iod 36,
180 19,
800
4)

Divi
debyequi
val
entuni
tsofwor
kdonei
ncur
rentper
iod ÷275 ÷315
(Exhi
bit4–6)

Costperequi
val
entuni
tofwor
kdonet
odat
e $72 $52

(St
ep Assi
gnmentofcost
s:
5)

Compl
etedandt
ransf
err
edout(
400uni
ts)
:

Wor
kinpr
ocess,
begi
nni
ng(
225uni
ts) $26,
100 $18,
000 + $8,
100

Costsaddedt
obegi
nni
ngwor
kinpr
ocessi
ncur
rent 4,
680 (
0a×$72) +(
90a×
per
iod $52)

Tot
alf
rom begi
nni
ngi
nvent
ory 30,
780

St
art
edandcompl
eted(
175uni
ts) 21,
700 175b×
( 175b×
+(
$72) $52)

Tot
alcost
sofuni
tscompl
etedandt
ransf
err
edout $52,
480

Wor
kinpr
ocess,
endi
ng(
100uni
ts)
: 9,
800 100c× + (
( 50c×
$72) $52)

Tot
alcost
saccount
edf
or $62,
280 $37,
800 +
$24,
480

a
Equi
val
entuni
tsusedtocomplet
ebeginni
ngworkinpr
ocessfrom Exhi
bit4–6,
Step2.
b
Equi
val
entuni
tsstar
tedandcomplet
edfrom Ex
hibi
t4–6,Step2.
c
Equi
val
entuni
tsi
nendi
ngwor
kinpr
ocessf
rom Exhi
bit4–6,
Step2.

UnderFIFO,endi
ngwork–i n–processi
nvent
orycomesfrom uni
tsthatwer
estar
tedbutnotful
l
y
complet
eddur i
ngthecurr
entperi
od.Tot
alcostsofthe100parti
all
yassembledphysi
caluni
tsi
n
endi
ngwor kinpr
ocessar
easfol
lows:

Di
rectmat
eri
als:

100equi
val
entuni
tsx$72costperequi
val
entuni
tinMar
ch $7,
200

Conv
ersi
oncost
s:

50equi
val
entuni
tsx$52costperequi
val
entuni
tinMar
ch 2,
600

Tot
alcostofwor
kinpr
ocessonMar
ch31 $$9,
80
0

Thefoll
owi ngtablesummar i
zestotalcostst oaccountforandcost saccountedforof$62,280i n
Exhi
bit4–7.Not icehowundert heFI FOmet hod,t
helayersofbeginningworkinprocessandcost s
addedint hecur rentper
iodar ekeptseparate.Thear r
owsi ndi
catewher ethecost si
neachl ayer
go—thatis,tounitscompl et
edandt ransfer
redoutort oendingwor kinprocess.Besuretoincl
ude
costsofbegi nningwor ki nprocess( $26,
100)whencal cul
ati
ngcost sofuni tscomplet
edf rom
begi
nninginventory.
Costst oAccountFor Cost sAccountedforCalcul
atedona

FI
FOBasi
s

Compl
etedandt
ransf
err
edout

Begi
nni
ngwor
kinpr
ocess $26,
10 Begi
nni
ngwor
kinpr
ocess $26,
10
0 0

Costsaddedi
ncur
rent 36,
180 Usedtocompl
etebegi
nni
ngwor
kin 10,
280
per
iod pr
ocess
21,
700
St
art
edandcompl
eted
52,
480
Compl
etedandt
ransf
err
edout

_
___
__ Endi
ngwor
kinpr
ocess 9,
800

Tot
alcost
stoaccountf
or $62,
28 Tot
alcost
saccount
edf
or $62,
28
0 0

Befor
epr oceedi
ng,r
evi
ewExhi
bit
s4–6and4–7t ocheckyourunder
standingoftheFI
FOmet
hod.
Note:Exhibi
t4–6deal swi
thonlyphysi
calandequi
val
entunit
s,notcosts.Exhi
bit4–7showsthe
costamount s.

Thejournalentr
iesundertheFIFOmethodareident
icalt
ot hejour
nalent
ri
esundertheweight
ed-
aver
agemet hodexceptf oronedif
fer
ence.Theentr
yt orecor
dt hecostofgoodscompl
etedand
tr
ansfer
redoutwoul dbe$52,480undertheFIFO methodinst
eadof$52,000undertheweight
ed-
aver
agemet hod.
Compari
sonofWei ght
ed–Av er
ageandFI FOMethods
Consi
derthesummar yoft
hecostsassignedtounit
scompl
etedandtounit
sstil
linpr
ocessunder
thewei
ghted-
aver
ageandFIFOprocess-
costi
ngmethodsi
nourexampl
eforMarch2012:

Wei
ght
edAv
erage FI
FO

(
from Exhi
bit4–5) (
from Exhi
bit4– Di
ff
erenc
7) e

Costofuni
tscompl
etedandt
ransf
err
ed $52,
000 $52,
480 +$480
out

Wor
kinpr
ocess,
endi
ng 10,
280 9,
800 -$480

Tot
alcost
saccount
edf
or $62,
280 $62,
280

Thewei ght ed-av erageendi nginventoryi shi gherthant heFI FO endi nginventoryby$480or4. 9%
($480/ $9,800=0. 049,or4. 9%).Thiswoul dbeasi gni
ficantdifferencewhenaggr egat edov ert he
manyt housandsofpr oductsthatPacif icElectronicsmakes.Whencompl etedunitsar esold,t he
weighted-av eragemet hodinourexampl el eadst oal owercostofgoodssol dand,theref ore,higher
operati
ngi ncomeandhi gherincomet ax esthant heFI FOmet hod.Toseewhyt hewei ght ed-average
met hodyieldsal owercostofuni tscompl eted.Directmat eri
alcostperequi val
entuniti nbegi nning
work–i npr ocessi nventoryis$80,andconv ersi
oncostperequi valentunitinbeginningwor k–i n
processinv ent or
yi s$60.Thesecost sar egr eater,r
espectively
, t
hant he$72di rectmaterialscostand
the$52conv ersi
oncostperequi val
entuni tofwor kdonedur i
ngt hecur rentper
iod.Thecur rent-
period
costscoul dbel owerduet oadecl i
neint hepr i
cesofdi r
ectmat eri
alsandconv er
sion-
costi nputs,or
asar esultofPaci ficElect
ronicsbecomi ngmor eeffici
entinitspr ocessesbyusi ngsmal lerquant iti
es
ofinputsperuni tofout put,orboth.

Fortheassembl ydepar t
ment ,FIFO assumest hat(1)allthehigher-
costuni t
sf rom theprevious
peri
odi nbeginningwor kinprocessar ethef i
rsttobecompl etedandt r
ansfer
redoutoft heprocess
and(2)endingwor kinpr ocessconsistsofonl yt helower-
costcurrent-
peri
oduni ts.Theweighted-
aver
agemet hod,howev er,smoot hsoutcostperequi val
entunitbyassumi ngt hat( 1)moreoft he
l
ower-costuni t
sar ecompl etedandt r
ansf err
edoutand( 2)someoft hehigher–costuni t
sareplaced
i
nendi ngwor ki npr ocess.Thedecl i
nei nt hecurrent–per i
odcostperequi valentunitresul
tsina
l
owercostofuni tscompl et
edandt ransferr
edoutandahi gherendingwor k-
in-processinv
entory
underthewei ghted-averagemet hodcompar edwithFIFO.

Costofuni tscompl et
edand,hence,oper ati
ngi ncomecandi ffermat er
ial
l
ybet weent heweighted-
averageandFI FO methodswhen( 1)dir
ectmat er
ialorconv ersioncostperequi val
entunitvaries
signif
icant
lyf rom peri
odt operiodand( 2)physical-i
nvent
oryl evelsofworki nprocessarelargei n
relat
iontot het ot
alnumberofuni t
st r
ansfer
redoutoft heprocess.Ascompani esmov et owar
dl ong-
term procurementcont ractsthatreducedif
ferencesi nunitcost sfrom per
iodt operi
odandr educe
i
nv entorylevels,thediffer
encei ncostofuni tscompl et
edundert heweighted-
averageandFI FO
met hodswi lldecr
ease.

Manager
suseinf
ormati
onf r
om process-
costi
ngsystemstoai
dt hem i
npri
cingandpr
oduct–mix
deci
si
onsandt
opr ov
idethem wi
thfeedbackaboutthei
rper
for
mance.FIFOprovi
desmanager
swit
h
i
nfor
mati
onaboutchangesincostsperuni tfr
om oneperi
odt othenext
.Managerscanusethi
s
i
nformationtoadj ustsel
li
ngpricesbasedoncurrentcondi
tions( f
orexample,basedont he$72direct
materi
alcostand$52conv er
sioncostinMarch).Theycanal somor eeasi
lyevaluateperf
ormancei n
thecurrentperiodcompar edwi t
habudgetorr el
ati
vetoper f
ormanceinthepr evi
ousperi
od( for
example,recognizingthedecli
neinbothuni
tdirectmateri
alandconv ersi
oncostsr el
ati
vetotheprior
peri
od).Byfocusingonwor kdoneandcostsofwor kdonedur ingthecurr
entperiod,theFI
FOmet hod
provi
desusef ul
informationforthesepl
anni
ngandcont rol
pur poses.

Thewei ghted– av eragemet hodmer gesuni tcostsf r

om di f
ferentaccount i
ngperiods,obscur i
ng
peri
od-to-
peri
odcompar i
sons.Forexample,thewei ghted-av
eragemet hodwoul dleadmanager sat
Pacifi
cElectr
onicst omakedeci si
onsbasedont he$75. 60directmat eri
alsand$54. 40conv ersi
on
costs,rat
hert hanthecost sof$72and$52pr ev ai
li
ngi nthecur rentper i
od.Adv antagesoft he
weighted-
averagemet hod,howev er
,areit
sr el
ati
v ecomput ati
onalsimpl i
cityanditsr eport
ingofa
more-repr
esentati
veav erageunitcostwheninputpricesfluct
uatemar kedlyfrom montht omont h.

Activ
ity
-basedcosti
ngplaysasi gni
fi
cantroleinourstudyofjobcosting,buthowi sacti
vit
y–based
costi
ngr el
atedtopr
ocesscost i
ng?Eachpr ocess–assembly,testi
ng,andsoon–canbeconsi dered
adi f
ferent(pr
oduct
ion)acti
vit
y.Howev er,noaddit
ionalact
ivi
tiesneedt obei denti
fi
edwi t
hineach
process.That’
sbecauseproductsarehomogeneousanduser esourcesofeachpr ocessinauni f
orm
way .The bot t
om line i
st hatactiv
ity-
based costi
ng has less appli
cabil
it
yi n process-
costing
envir
onment s.

Tr
ansf
err
ed-
InCost
sinPr
ocessCost
ing

Manyprocess-
cost i
ngsystemshav etwoormor edepart
ment sorprocessesintheproducti
oncycle.
Asunitsmov efrom depar t
menttodepar t
ment,t
her el
atedcostsar ealsotransf
err
edbymont hly
j
ournalent
ri
es.Tr ansf
erred-i
ncosts(alsocall
edprevi
ous-depar
tmentcost s)arecostsincur
redin
pr
eviousdepart
ment sthatarecarr
iedforwardastheproduct’
scostwheni tmov estoasubsequent
pr
ocessintheproducti
oncy cle.

Wenowext endourPaci fi
cElect r
onicsexampl etothetest i
ngdepar tment.Ast heassembl yprocess
i
scompl eted,theassembl ydepar tmentofPaci ficEl
ectronicsimmedi atel
yt ransfersSG- 40uni tsto
thet est
ingdepar tment.Conversioncostsar eaddedev enlyduri
ngt hetest
ingdepar t
ment ’sprocess.
Att heendoft heprocessint esti
ng,unit
sr eceiveadditi
onaldirectmat eri
als,includingcr at
ingand
otherpacki ngmat erial
stopr epareunitsforshi pment.Asuni tsar ecompl etedi nt esting,theyar e
i
mmedi atel
yt ransfer
redtoFi nishedGoods.Comput ationoft estingdepar t
mentcost sconsi st
sof
transfer
red-incosts,aswellasdi r
ectmaterialsandconv ersi
oncost sthatareaddedi nt esting.

Thef
oll
owi
ngdi
agr
am r
epr
esent
sthesef
acts:
Conversi
oncosts
addedevenl
y
duri
ngprocess

Assembl
y Test
ing Fini
shed
Tr
ansf
er
Depar
tme Depar
tme Goods

Directmateri
als
addedatend
ofprocess

Tr
ansf
err
ed-
incost
sar
etr
eat
edasi
ftheyar
easepar
atet
ypeofdi
rectmat
eri
aladdedatt
he
begi
nni
ngoft
hepr
ocess.Thati
s,t
ransf
err
ed-
incost
sar
eal
way
s100%compl
eteasoft
hebegi
nni
ng
oftheprocessi
nt henewdepar t
ment.Whensuccessi
vedepar
tment
sareinvol
ved,t
ransf
erreduni
ts
from onedepar
tmentbecomeal lorapartofthedir
ectmater
ial
softhenextdepar
tment;however
,
theyarecal
ledt
ransfer
red-
incost
s,notdi
rectmat
eri
alcost
s.

Physi
cal Tr
ansfer
red- Di
rect Conv
ersi
on
Unit
s I
n
Mat
eri
als Cost
s
(
SG–40s) Cost
s

Workinpr
ocess,
begi
nni
ngi
nvent
ory 240 $33,
600 $0 $18,
000
(March1)

Degr
eeofcompl
eti
onofbegi
nni
ngwor
k 100% 0% 62.
5%
i
nprocess

Tr
ansf
err
edi
ndur
ingMar
ch 400

Complet
ed and t
ransf
err
ed outdur
ing 440
March

Worki
npr
ocess,
endi
ngi
nvent
ory(
Mar
ch 200
31)

Degr
eeofcompl
eti
onofendi
ngwor
kin 100% 0% 80%
pr
ocess

Tot
alcost
saddeddur
ingMar
ch

Di
rectmat
eri
alsandconv
ersi
oncost
s $13,
200 $48,
600

Tr
ansf
err
edi
n(Wei
ght
ed-
aver
age) $52,
000

Tr
ansf
err
edi
n(FI
FO) $52,
480

Tr
ansf
err
ed–I
nCost
sandt
heWei
ght
ed-
Aver
ageMet
hod

Toexaminetheweighted-av
erageprocess-cost
ingmethodwi
thtransf
err
ed-
incost
s,weusethefi
ve
–stepprocedur
edescribedearl
iert
oassi gncostsofthet
est
ingdepart
menttouni
tscompl
etedand
tr
ansf
err
edoutandt ounitsi
nendingwor kinprocess.

Exhibit4–8showsSteps1and2.Thecomputati
onsar
esimilart
ot hecalcul
ati
onsofequi
val
ent
uni
tsundert hewei
ght
ed-
aver
agemethodfort
heassemblydepart
mentinExhi bi
t4–4.Theone
di
fferenceherei
sthatwehavetr
ansfer
red– i
ncostsasanaddi ti
onalinput
.Alluni
ts,whet
her
completedandt ransf
erredoutdur i
ngt heper i
odori nendi ngwor kinpr ocess,arealway
sf ul
ly
completewi threspecttot r
ansf
erred-i
ncost s.Thereasoni sthatthet r
ansf er
red-
incost
srefert
o
costsincurr
edi nt heassemblydepartment,andanyuni tsreceiv
edint het esti
ngdepart
mentmust
havefirstbeencompl etedintheassembl ydepartment.Howev er,di
rectmat eri
alcost
shaveazero
degreeofcompl eti
oninbothbeginningandendi ngwor k-
in-
processinventori
esbecause,int
esti
ng,
di
rectmat er
ialsareint
roducedattheendoft heprocess.

Exhi
bit4–9descr ibesSteps3,4,and5fortheweight
ed-averagemethod.Begi
nningworki
nprocess
andwor kdoneinthecurrentper
iodarecombi nedf
orpurposesofcomputingcostperequi
val
entuni
t
fort
ransfer
red-
incosts,
directmater
ial
costs,andconver
sioncosts.

Thej
our
nal
entryforthet
ransf
erf
rom t
est
ingt
oFi
nishedGoods(
seeExhibi
t4–9)i
sasf
oll
ows:
Fi
nishedGoodsContr
ol 120,
89
0

Wor
kinPr
ocess–Test
ing 120,
89
0

To recor
d costofgoods compl
eted and t
ransf
err
ed f
rom t
est
ing t
o
Fi
nishedGoods.

Ent
ri
esi
ntheWor
kinPr
ocess–Test
ingaccount(seeExhi
bit4–9)ar
easf
oll
ows:
WorkinProcess–Test i
ng

Begi
nni
ngi
nvent
ory
, 51,
600 Transf
err
ed 120,
890
March1 out

Tr
ansf
err
ed–i
ncost
s 52,
000

Di
rectmat
eri
als 13,
200

Conv
ersi
oncost
s 48,
600

Endi
ngi
nvent
ory
,Mar
ch 44,
510
31

Exhi
bit4–8St eps1and2:Summar i
zeOutputi
nPhysicalUni
tsandComputeOutputi
nEqui
val
ent
Unit
s Using Wei
ghted-
Aver
age Met
hod ofProcess Costi
ng f
orTesti
ng Depar
tmentofPacif
ic
El
ectroni
csforMar
ch2012

St
ep1 St
ep2

Equi
val
entUni
ts
 Fl
owofPr
oduct
ion Physi
cal Tr
ansfer
red- Di
rect Conv
ersi
on
Unit
s I
n
Mat
eri
als Cost
s
(
SG–40s) Cost
s

Workinpr
ocess,
begi
nni
ngi
nvent
ory 240
(March1)

Tr
ansf
err
edi
ndur
ingMar
ch 400

Toaccountf
or 640

Complet
ed and t
ransf
err
ed outdur
ing 440 440 440 440
March

Worki
npr
ocess,
endi
ngi
nvent
ory(
Mar
ch 200
a
31)

(
200×100%;
200×0%;
200×80%) _
__ 200 0 160

Account
edf
or 640 _
__ _
__ _
__

Equi
val
entuni
tsofwor
kdonet
odat
e 640 440 600
a
Degr
eeofcompl
eti
oni
nthi
sdepar
tment
;tr
ansf
err
ed–i
ncost
s,100%;di
rectmateri
als,0%;
conv
ersioncost
s, 80%.

Exhi
bit4–9Steps3,4,
and5:Summar i
zeTot
alCostst
oAccountFor,
ComputeCostperEqui
val
ent
Unit
,andAssi
gnTotalCost
stoUni t
sCompletedandt oUni
tsinEndingWorkinProcessUsing
Weighted–Aver
ageMethodofProcessCost
ingforTest
ingDepar
tmentofPaci
fi
cElect
roni
csfor
March2012

Tot
al Tr
ansf
err
ed-
In Di
rect Conv
ersi
o
n
Pr
oduct
io Cost
s Mat
eri
al
n s Cost
s

Cost
s

(St
ep Wor
kinpr
ocess,
begi
nni
ng $51,
600 $33,
600 $0 $18,
000
3)

Cost
saddedi
ncur
rentper
iod 113,
800 52,
000 13,
200 48,
600

Tot
alcost
stoaccountf
or $165,
400 85,
600 $13,
200 $66,
600

(St
ep Cost
sincur
redt
odat
e $85,
600 $13,
200 $66,
600
4)

Di
vi
debyequi
val
entuni
tsofwor
kdonet
o ÷640 ÷440 ÷600
 dat
e(Exhi
bit4–8)

Costperequi
val
entuni
tofwor
kdonet
o $133.
75 $30.
00 $111.
00
dat
e

(St
ep Assi
gnmentofcost
s:
5)

Compl
etedandt
ransf
err
edout(
440uni
ts) $120,
890 440a×$133.
( 75) 440a×
( 440a×
(
$30) $111)

Wor
kinpr
ocess,
endi
ng(
200uni
ts)
: 44,
510 200b×$133.
( 75) 0b×$30)
( 160b×
(
$111)

Tot
alcost
saccount
edf
or $165,
400 $85,
600 $13,
200 $66,
600
a
Equi
val
entuni
tscompl
etedandt
ransf
err
edoutf
rom Exhi
bit4–8,
Step2.
b
Equi
val
entuni
tsi
nendi
ngwor
kinpr
ocessf
rom Exhi
bit4–8,
Step2.

Tr
ansf
err
ed-
InCost
sandt
heFI
FOMet
hod

Toexami netheFIFOpr ocess-cost

ingmethodwi t
htransfer
red-
incost
s,weagainusethefive–step
procedure.Exhibi
t4– 10showsSt eps1and2.Ot herthanconsider
ingt
ransf
err
ed– i ncosts,
comput ati
ons ofequivalentunits arethe same as undert he FI
FO method f
ort he assembl
y
departmentshowni nExhibit4–6.

Exhibi
t4–11descr ibesSt eps3, 4,and5.I nSt ep3,tot
alcoststoaccountf orof$165, 880undert he
FIFO methoddi f
fer sf rom t hecor respondingamountundert hewei ghted– av eragemet hodof
$165,400.Thereasoni st hedi ff
erenceincostofcompl etedunitstransferr
edi nfrom theassembl y
departmentundert het womet hods–$52, 480underFI FOand$52, 000underwei ghtedav er
age.Cost
perequival
entunitf ort hecur rentperiodinSt ep4i scal
culat
edont hebasisofcost stransferredin
andwor kdonei nt hecur r entperiodonl y
.St ep5t henaccountsf orthet otalcostsof$165, 880by
assi
gningthem tot heuni tst r
ansferredoutandt hoseinendingwor ki nprocess.Agai n,othert han
consider
ingtransferr ed– i ncost s,thecal culat
ionsmi r
rorthoseundert heFI FO met hodf orthe
assemblydepartmentshowni nExhibit4–7.

Remembert hatinaseri
esofint
erdepar
tmentaltr
ansfer
s,eachdepart
mentisregardedassepar
ate
anddisti
nctforaccounti
ngpurposes.Thejournalentr
yforthetransferf
rom testi
ngtoFini
shed
Goods(seeExhibit4–11)isasf
oll
ows:

Fi
nishedGoodsCont
rol 122,
36
0

Wor
kinPr
ocess–Test
ing 122,
36
0

To recor
d costofgoods compl
eted and t
ransf
err
ed f
rom t
est
ing t
o
Fi
nishedGoods.
Exhi
bit4–10Steps1and2:Summar i
zeOutputi
nPhy si
cal
Unit
sandComput eOutputi
nEquiv
alent
Unit
sUsingFI
FOMethodofProcessCost
ingforTest
ingDepar
tmentofPaci
fi
cElectr
oni
csforMarch
2012

St
ep1 St
ep2

Equi
val
entUni
ts

Fl
owofPr
oduct
ion Physi
cal Tr
ansfer
red- Di
rect Conv
ersi
on
Unit
s I
n
Mat
eri
als Cost
s
(
SG–40s) Cost
s

Workinpr
ocess,
begi
nni
ngi
nvent
ory 240 (
wor
kdonebef
orecur
rentper
iod)
(March1)

Tr
ansf
err
edi
ndur
ingMar
ch 400

Toaccountf
or 640

Complet
ed and t
ransf
err
ed outdur
ing
March:

Fr
om begi
nni
ngwor
ki ocessa
npr 240

0 240 90
[
240×(
100%–100%)
;240×( 100%–0%)
;240×(
100%–
62.
5%)]

St
art
edandcompl
eted 200b

(
200×100%;
200×100%;
200×100%) 200 200 200

Worki
npr
ocess,
endi
ngi
nvent
ory(
Mar
ch 200
c
31)

(
200×100%;
200×0%;
200×80%) _
__ 200 0 160

Account
edf
or 640 _
__ _
__ _
__

Equi
val
entuni
tsofwor
kdonei
ncur
rent 400 440 450
peri
od
a
Degreeofcompl
eti
oni
nthi
sdepar
tment
:tr
ansf
err
ed-
incost
s,100%;
dir
ectmat
eri
als,
0%;
conv
ersi
on
costs,62.
5%.
b
440 physi
calunit
s compl
eted and transf
err
ed outminus 240 phy
sicaluni
ts compl
eted and
t
ransf
err
edoutfr
om begi
nni
ngwor k-
in-
processi
nvent
ory
.
c
Degr
eeofcompl
eti
oni
nthi
sdepar
tment
:tr
ansf
err
ed-
incost
s,100%;
dir
ectmat
eri
als,
0%;
conv
ersi
on
cost
s,80%.

Exhi
bit4–11St eps3,4,and5:Summar i
zeTotalCost
stoAccountFor ,
ComputeCostperEquiv
alent
Unit
,andAssignTotalCoststoUnitsComplet
edandt oUni
tsinEndingWor kinProcessUsi
ngFIFO
MethodofProcessCosti
ngf orTest
ingDepar
tmentofPaci
fi
cElect
ronicsforMarch2012

Tot
al Tr
ansf
err
ed-
In Di
rect Conv
ersi
o
n
Pr
oduct
io Cost
s Mat
eri
al
n s Cost
s

Cost
s

(St
ep Wor
kinpr
ocess,
begi
nni
ng $51,
600 $33,
600 $0 $18,
000
3)

Cost
saddedi
ncur
rentper
iod 114,
280 52,
480 13,
200 48,
600

Tot
alcost
stoaccountf
or $165,
880 86,
080 $13,
200 $66,
600

(St
ep Cost
saddedi
ncur
rentper
iod 52,
480 13,
200 48,
600
4)

Div
idebyequiv
alentuni
tsofwor
kdonei
n ÷400 ÷440 ÷450
curr
entper
iod(
Exhibi
t4–10)

Costperequival
entuni
tofwor
kdonei
n $131.
20 $30.
00 $108.
00
cur
rentper
iod

(St
ep Assi
gnmentofcost
s:
5)

Compl
etedandt
ransf
err
edout(
440uni
ts)

Wor
kinpr
ocess,
begi
nni
ng(
240uni
ts) $51,
600 $33,
600 $0 $18,
000
 Costsaddedt
obeginni
ngwor
kin
pr
ocessin curr
entper
iod
16,
920
0a×$131.
( 20) (240a× 90a ×$108)
(
$30)

Tot
alf
rom begi
nni
ngi
nvent
ory 68,
520

St
art
edandcompl
eted(
200uni
ts) 53,
840 200b×$131.
( 20) 200b×
( 200b×
(
$30) $108)

Tot
alcost
sofuni
tscompl
etedand 122,
360
t
ransf
err
edout

Wor
kinpr
ocess,
endi
ng(
200uni
ts)
: 43,
520 200c×$131.
( 20) 0c×$30)
( 160c×
(
$108)

Tot
alcost
saccount
edf
or $165,
880 $86,
080 $13,
200 $66,
600

a
Equi
val
entuni
tsusedt
ocompl
etebegi
nni
ngwor
kinpr
ocessf
rom Exhi
bit4–10,
Step2.
b
Equi
val
entuni
tsst
art
edandcompl
etedf
rom Ex
hibi
t4–10,
Step2.
c
Equi
val
entuni
tsi
nendi
ngwor
kinpr
ocessf
rom Exhi
bit4–10,
Step2.

Ent
ri
esi
ntheWor
kinPr
ocess–Test
ingaccount(seeExhi
bit4–11)ar
easf
oll
ows:
WorkinProcess–Test i
ng

Begi
nni
ngi
nvent
ory
, 51,
600 Transf
err
ed 122,
360
March1 out

Tr
ansf
err
ed–i
ncost
s 52,
480

Di
rectmat
eri
als 13,
200

Conv
ersi
oncost
s 48,
600

Endi
ngi
nvent
ory
,Mar
ch 43,
520
31

Poi
ntst
oRememberAboutTr
ansf
err
ed–I
nCost
s

Somepointstorememberwhenaccount i
ngf ortr
ansferred-incost sar
easf oll
ows:
1.Besuretoincludet
ransferr
ed–i ncostsfrom previousdepar tmentsi nyourcal
cul
ations.
2.Incalcul
ati
ngcostst obet ransfer
redonaFI FO basi s,donotov erl
ookcostsassi gnedi
nt he
previ
ousperiodtounitsthatwereinpr ocessatt hebegi nningoft hecur r
entperi
odbutar enow
incl
udedintheunit
stransfer
red.Forexampl e,donotov erl
ookt he$51, 600inExhi
bit4–11.
3.Unitcostsmayf l
uct
uat ebetweenper iods.Theref ore,t r
ansferr
eduni t
smaycont ainbatches
 accumulatedatdifferentunitcosts.Forexampl e,the400uni tstransferredinat$52,
480i nExhibit
17-11usingtheFIFOmet hodconsi stofunit
st hathav edi ff
erentunitcost sofdir
ectmat er
ialsand
conversi
oncost swhent heseunitswer eworkedoni nt heassembl ydepar tment(seeExhibit4–
7).Remember ,howev er,thatwhent heseunitsar etransf er
redtot het esti
ngdepartment,theyar e
costedatoneav erageuni tcostof$131.20($52, 480/ 400uni ts)
, asinExhibit4–11.
4.Unitsmaybemeasur ed indi f
ferentdenomi nat i
onsi ndi f
ferentdepar tments.Considereach
depart
mentsepar ately.Forexampl e,unitcost s coul d be based on ki logr
ams int he first
depart
mentandl i
tersint heseconddepar tment .Accor dingly
,asuni tsar erecei
vedinthesecond
depart
ment ,
theirmeasur ement smustbeconv ertedtol iter
s.

St
andar
d–Cost
ingMet
hodofPr
ocessCost
ing

Benef
it
sofSt
andar
dCost
ing

Compani est hatusepr ocess- costi

ngsy stemspr oducemassesofi denticalorsimi l
arunitsofout put.
Insuchcompani es,iti
sf airl
yeasyt osetst andardsf orquant i
ti
esofinput sneededt oproduceout put.
Standardcostperi nputuni tcant henbemul tipl
iedbyi nputquantit
yst andardst odev elopstandar d
costperout putuni t.
Thewei ghted- averageandFI FOmet hodsbecomev erycompl i
catedwhenusedi npr ocessindustries
thatproduceawi dev arietyofsi mil
arpr oducts.Forexampl e,asteel–r oll
ingmi llusesv ari
ousst eel
all
oysandpr oducessheet sofv ari
oussi zesandf inishes.Thediffer
entt ypesofdi rectmat er
ial
sused
andt heoper ationsper formedar efew,butusedi nv ar
iouscombi nati
ons,t heyyieldawi dev ari
etyof
products.Simi lar
ly,compl exconditi
onsar ef r
equent lyfound,forexampl e,inplantst hatmanuf acture
rubberproduct s,textil
es, ceramics,paints,andpackagedf oodproducts.Ineachoft hesecases, i
ft he
broadav er
agi ngpr ocedur eofact ualprocesscost ingwer eused,theresultwoul dbei naccuratecost s
foreachpr oduct .Theref ore,thestandar d–cost i
ngmet hodofpr ocesscost i
ngi swi delyusedi n
theseindustries.

Underthestandard–costi
ngmet hod, t
eamsofdesi gnandprocessengineers,operati
onspersonnel,
andmanagementaccount antswor ktogethertodet er
mineseparatestandardcost sperequivalent
uniton thebasisofdi ff
erenttechnicalprocessi
ng speci
ficat
ionsforeach pr oduct.I
dentifying
standardcostsforeachproductov ercomest hedisadvant
ageofcost ingallproductsatasi ngle
averageamount,asunderactual
costing.

Comput
ati
onsUnderSt
andar
dCost
ing

Wer et
urntotheassemblydepar
tmentofPaci
fi
cElect
roni
cs,butt
hist
imeweusestandar
dcosts.
Assumet hesamest andar
dcostsappl
yinFebruaryandMar chof2012.Dat
afortheassembly
depart
mentareasfol
lows:

Physi
cal Di
rect Conv
ersi
on Tot
al
Unit
s
Mat
eri
als Cost
s Cost
s
(SG-
40s)(
1) (
2) (
3) (
4)=(
2)+(
3)

St
andar
dcostperuni
t $74 $54

Wor
kinpr
ocess,
begi
nni
ngi
nvent
ory(
Mar
ch1) 225
 Degreeofcompl
eti
onofbegi
nni
ngwor
kin 100% 60%
pr
ocess

Begi
nni
ng wor
kin pr
ocess i
nvent
ory at 650a
$16, 290a
$7, $23,
940
st
andar
dcost
s

St
art
eddur
ingMar
ch 275

Compl
etedandt
ransf
err
edoutdur
ingMar
ch 400

Wor
kinpr
ocess,
endi
ngi
nvent
ory(
Mar
ch31) 100

Degreeofcompl
eti
onofendi
ngwor
kin 100% 50%
pr
ocess

Act
ual
tot
alcost
saddeddur
ingMar
ch $19,
800 $16,
380 $36,
180
a
Wor
kinpr
ocess,
begi
nni
ngi
nvent
oryatst
andar
dcost
s

Conv
ersi
oncost
s:225phy
sical
uni
ts×60%compl
eted×$54peruni
t=$7,
290

Di
rectmat
eri
als:
225phy
sical
uni
ts×100%compl
eted×$74peruni
t=$16,
650

We il
l
ustr
atethe st
andar
d-cost
ing met
hod ofpr
ocess cost
ing usi
ng t
he f
ive-
step pr
ocedur
e
i
ntr
oducedear
li
er.

Exhi
bit4–12pr esentsSteps1and2.Thesestepsareidenti
caltot hestepsdescri
bedfortheFIFO
methodinExhibi
t4–6because,asi nFIFO,thestandard-
costingmet hodalsoassumest hatthe
earl
i
estequi
val
entuni t
sinbeginni
ngworkinprocessarecompl etedfir
st.Workdonei nthecurr
ent
peri
odfordi
rectmat eri
alsis275equi
val
entunit
s.Wor kdoneint hecurrentper
iodforconver
sion
costsi
s315equival
entunits.

Exhi
bit4–12St eps1and2:Summar i
zeOutputinPhy
sicalUnit
sandComput
eOutputi
nEqui
val
ent
Unit
sUsi ng St
andar d-
Cost
ing Met
hod ofProcessCosti
ng forAssembl
yDepar
tmentofPacif
ic
El
ectroni
csforMar ch2012

(
Step1) (
Step2)

Equi
val
entUni
ts

Physi
ca Di
rect Conv
ersi
o
lUni
ts n
Fl
owofPr
oduct
ion Mat
eri
al
(SG- s Cost
s
40s)(
1)
(
2) (
3)

Wor
kinpr
ocess,
begi
nni
ng 225
 St
art
eddur
ingcur
rentper
iod 275

Toaccountf
or 500

Complet
edandt
ransf
err
edoutdur
ingcur
rent
per
iod:

Fr
om begi
nni
ngwor
ki ocessa
npr 225

[
225×(
100%–100%)
;225×(
100%–60%)
] 0 90

St
art
edandcompl
eted 175b

(
175×100%;
175×100%) 175 175

Wor
kinpr
ocess, ngc
endi 100

(
100×100%;
100×50%) _
__

Account
edf
or 500 100 50

Equi
val
entuni
tsofwor
kdonei
ncur
rentper
iod 275 315
a
Degreeofcompl
eti
oni
nthi
sdepar
tment
:di
rectmat
eri
als,100%;conv
ersi
on
costs,60%.
b
400physi
caluni
tscompl
etedandt ransf
err
edoutmi nus225physi
caluni
ts
compl
etedandtr
ansf
err
edoutf
rom beginni
ngwor
k-i
n-pr
ocessi
nvent
ory
.
c
Degreeofcompl
eti
oni
nthi
sdepar
tment
:di
rectmat
eri
als,100%;conv
ersi
on
costs,50%.

Exhi
bit4–13St
eps3,
4,and5:Summar
izeTot
alCost
stoAccountFor
,Comput
eCostperEqui
val
ent
Uni
t,andAssi
gnTotalCost
stoUnitsComplet
edandt oUnit
sinEndi
ngWor kinPr
ocessUsi
ng
St
andard–Costi
ngMethodofPr
ocessCost
ingforAssembl
yDepar
tmentofPaci
fi
cEl
ect
roni
csf
or
March2012

Tot
al Di
rect Conv
ersi
o
n
Pr
oduct
io Mat
eri
al
n s Cost
s

Cost
s

(St
ep Wor
kinpr
ocess,
begi
nni
ng
3)

Di
rectmat
eri
als,
225×$74;
Conv
ersi
oncost
s,135×$54 $23,
940 $16,
650 $7,
290

Cost
saddedi
ncur
rentper
iodatst
andar
dcost
s

Di
rectmat
eri
als,
275×$74;
Conv
ersi
oncost
s,315×$54 37,
360 20,
350 17,
010

Tot
alcost
stoaccountf
or $61,
300 $37,
000 $24,
300

(St
ep St
andar
dcostperequi
val
entuni
t $74 $54
4)

(St
ep Assi
gnmentofcost
s:
5)

Compl
etedandt
ransf
err
edout(
400uni
ts)
:

Wor
kinpr
ocess,
begi
nni
ng(
225uni
ts) $23,
940 $16,
650 + $7,
290

Costsaddedt
obegi
nni
ngwor
kinpr
ocessi
ncur
rent 4,
840 (
0a×$74) +(
90a×
per
iod $54)

Tot
alf
rom begi
nni
ngi
nvent
ory 28,
800

St
art
edandcompl
eted(
175uni
ts) 22,
400 175b×
( 175b×
+(
$74) $54)

Tot
alcost
sofuni
tscompl
etedandt
ransf
err
edout $51,
200

Wor
kinpr
ocess,
endi
ng(
100uni
ts)
: 10,
100 100c× + (
( 50c×
$74) $54)

Tot
alcost
saccount
edf
or $61,
300 $37,
000 +
$24,
300

Summar
yofv
ari
ancesf
orcur
rentper
for
mance:
Cost
saddedi
ncur
rentper
iodatst
andar
dcost
s(seest
ep3) $20,
350 $17,
010

Act
ual
cost
sincur
red $19,
800 $16,
380

Var
iance $550(
F) $630(
F)
a
Equi
val
entuni
tsusedt
ocompl
etebegi
nni
ngwor
kinpr
ocessf
rom Exhi
bit4–12,
Step2.
b
Equi
val
entuni
tsst
art
edandcompl
etedf
rom Ex
hibi
t4–12,
Step2.
c
Equi
val
entuni
tsi
nendi
ngwor
kinpr
ocessf
rom Exhi
bit4–12,
Step2.

Exhibit4–13descr i
besSteps3, 4,
and5.InStep3, tot
alcoststoaccountfor(thati
s,thetotaldebits
toWor ki
nProcess–Assembl y)dif
ferfr
om totaldebit
st oWor kinProcess–Assembl yundert he
actual–cost–basedwei ght
ed–av er
ageandFI FOmet hods.That’
sbecause,asi nal lstandard-
costingsyst
ems, t
hedebitstot heWor kinProcessaccountar eatstandardcosts,r
atherthanact ual
costs.Thesest andardcoststot al$61,
300inEx hi
bit4–13.I nStep4,costsperequi val
entunitar e
standardcosts:directmateri
als,$74,andconversioncosts,$54.Theref
ore,costsperequivalentunit
donothavet
obecomput
edast
heywer
efort
hewei
ght
ed-
aver
ageandFI
FOmet
hods.

Exhi
bit4–13,St ep5,assi gnstotalcoststouni tscompl etedandtransferr
edoutandt ounit
si n
endi
ngwor k–inpr ocessinvent
ory,asintheFIFOmet hod.Step5assignsamount sofstandardcosts
toequival
entunitscalculatedinExhi bi
t4– 12.Thesecost sareassigned( 1)fi
rsttocompl ete
begi
nningwork-i
n-processinvent
ory,(2)nexttost artandcompl et
enewuni ts,and(3)fi
nall
ytostart
newunitsthatareinendingwor k-i
n-processinventory.Notehowt he$61,300t ot
alcostsaccounted
fori
nStep5ofExhi bit4–13equal totalcoststoaccountf or.

Hy
bri
dCost
ingSy
stems

Product– cost i
ngsy st
emsdo notal way sf allneat lyi nto ei t
herjob- cost ingorpr ocess-
cost ing
categories.Consi derFordMot orCompany .Aut omobi lesmaybemanuf actur edinacont i
nuousf l
ow
(suit
edt opr ocesscost i
ng),buti ndividualuni t
smaybecust omizedwi thaspeci alcombi nati
onof
enginesi ze,transmi ssi
on,musi csy stem,andsoon( whichr equiresjobcost ing).Ahy brid–cost ing
system bl endschar acter
isti
csf r
om bot hjob-costingandpr ocesscost ingsy stems.Pr oduct–cost ing
systemsof tenmustbedesi gnedt of i
tthepar ticularchar act erist
icsofdi ff
er entpr oducti
onsy stems.
Manypr oduct i
onsy stemsar eahy bri
d:Theyhav esomef eat uresofcust om- or dermanuf acturi
ngand
otherf eaturesofmass- productionmanuf acturing.Manuf act ur
ersofar elativel
ywi dev ari
et yof
closelyrelatedst andardi
zedpr oduct s(forexampl e,tel
ev i
si ons, di
shwasher s,andwashi ngmachi nes)
tendtousehy bri
d–cost i
ngsy stems.Thenextsect ionexpl ainsoperationcost i
ng,acommont ypeof
hybridcost i
ngsy stem.

Ov
erv
iewofOper
ati
on–Cost
ingSy
stems

Anoper ati
onisast andar
dizedmet hodort echni
quethatisperfor medrepetit
ivel
y,oft
enondi f
ferent
mat er
ial
s,resul
tingi ndif
ferentfini
shedgoods.Mul ti
pleoperati
onsar eusuallyconductedwithina
department.Forinstance,asui tmakermayhav eacutti
ngoper ationandahemmi ngoperat
ionwithin
asingledepartment .Theterm oper at
ion,however
,isoftenusedl oosel
y.Itmaybeasy nonymf ora
departmentorpr ocess.Forexampl e,somecompani esmaycal ltheirfi
nishi
ngdepar t
mentaf i
nishing
processoraf i
nishingoperation.
Anoper ation– cost ingsy st
em isahy bri
d-costi
ngsy stem appli
edt obatchesofsi mil
ar,butnot
i
dentical,products.Eachbat chofproductsisof t
enav ari
ati
onofasi ngl
edesi gn,anditproceeds
thr
oughasequenceofoper ati
ons.Withi
neachoper ati
on,allproductuni
tsar etr
eatedexactl
yalike,
usi
ngi denticalamount softheoperat
ion’
sresources.Akeypoi nti
ntheoperationsystem i
sthateach
batchdoesnotnecessar i
lymov ethr
ought hesameoper ati
onsasot herbatches.Batchesarealso
cal
ledpr oductionruns.

Inacompanyt hatmakessuits,managementmaysel ectasinglebasi

cdesignforeverysui
tt obe
made,butdependingonspeci f
icati
ons,eachbat chofsui
tsv ar
iessomewhatfrom otherbatches.
Bat
chesmayv arywit
hrespecttot hemat er
ialusedort
hetypeofstit
chi
ng.Semiconductor
s,t
ex t
il
es,
andshoesar
eal somanufact
uredi nbatchesandmayhav esi
milarvar
iat
ionsf
rom batchtobat
ch.

Anoper at
ion–cost ingsy st
em useswor kor derst hatspecifytheneededdi rectmat erialsandst ep–
by– st epoperations.Productcost sarecompi ledf oreachwor kor der.Di r
ectmat eri
alst hatare
uniquet odi f
fer
entwor kordersarespeci f
ical
lyident if
iedwi t
htheappr opriatewor kor der,asi njob
cost i
ng.Howev er,eachuni tisassumedt ouseani denti
calamountofconv ersi
oncost sf oragi ven
oper at
ion,asinprocesscost ing.
Asi ngleaverageconv ersi
oncostperuni tiscalcul
at edf oreachoper at
ion,bydiv i
dingt otalconv er
sion
cost sfort hatoperationbyt henumberofuni t
st hatpasst hroughi t.Thisav er
agecosti sthen
assignedt oeachuni tpassingt hr
oughtheoper ation.Uni tsthatdonotpasst hroughanoper ationare
notal l
ocatedanycost soft hatoperat
ion.Ourexampl esassumeonl yt wocostcat egor i
es–di r
ect
mat eri
alsandconv ersioncost s–butoper at
ioncost i
ngcanhav emor ethant wocostcat egories.
Cost sineachcat egor yareidenti
fi
edwi thspecifi
cwor kor dersusingjob-costingorpr ocesscost i
ng
met hodsasappr opr i
ate.

Managersfi
ndoperati
oncosti
ngusefuli
ncostmanagementbecauseoper at
ioncosti
ngfocuseson
cont
rolofphysi
calpr
ocesses,oroper
ati
ons,ofagivenproduct
ionsystem.Forexample,i
nclothi
ng
manufact
uri
ng,managersareconcer
nedwithfabr
icwaste,howmanyf abri
clayer
sthatcanbecutat
onetime,andsoon.Oper at
ioncosti
ngmeasur es,i
nf i
nanci
alter
ms,how wel lmanagershave
cont
rol
ledphysi
calpr
ocesses.