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© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg& Wolcott’s Cost Management, 2eSlide # 42Q5: What Alternative Methods are Used for Mass Production?•Adaptations to Traditional Process Costing–Match equivalent units calculations more closely to actual production processes–Separate conversion costs into multiple pools•Standard costs simplify the accounting•Just-in-time production•Hybrid costing, or operation costing© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg& Wolcott’s Cost Management, 2eSlide # 43Q7: Accounting for Spoilage in Process Costing•Costs of normal spoilage are absorbed by the good units transferred out.•Costs of abnormal spoilage are charged to a Loss from abnormal spoilage account.•Costs attach to spoilage depending on when spoilage is detected.© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg& Wolcott’s Cost Management, 2eSlide # 44Hollidazemakes molded plastic party decorations. In June, there were 800 units in beginning WIP inventory that were 40% complete and the 500 units in ending WIP were 30% complete. The company completed 3,000 units in June, but 200 of these were defective and were discarded. The defective units are located upon inspection before transfer to finished goods. It was determined that 50 of these defective units should be considered normal spoilage. The remaining spoilage occurred because of a rare machine malfunction and should be considered abnormal spoilage. All direct materials are added at the beginning of processing. Compute the June EUP for DM and CC using both methods.Q7: Process Costing & Spoilage ExampleFirst, compute the # of units started & completed:2,700BI units800S&C units2,200Completed units3,000800WIP Inventory -Units5003,000this includes 200 defective units© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg& Wolcott’s Cost Management, 2eSlide # 45Q7: Process Costing & Spoilage ExampleNow, compute the EUP for DM & CC (recall that BI & EI were 40% & 30% complete, respectively; DM costs are incurred at the start of processing).BI units800S&C units2,200Completed units3,0002,700800WIP Inventory -Units5003,000PhysicalEquivalent Equivalent Units SummaryUnitsUnits (DM)Units (CC)Beginning WIP800800100%32040%This Period’s Work Complete Beg WIP800-0%48060% Good Units Start & Complete2,0002,000100%2,000100% Ending WIP500500100%15030% Spoiled Units: Normal Spoilage5050100%50100% Abnormal Spoilage150150100%150100%FIFO Equivalent Units3,5002,7002,830 Less Spoilage:(200)Total Good Units 3,300WA Equivalent Units (with Beg WIP)3,5003,150© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg& Wolcott’s Cost Management, 2eSlide # 46You are given the cost information below. Compute the cost per EUP under both methods. Under WA, the numerator includes BI and current costs:Q7: Process Costing & Spoilage ExampleDM cost/EUP = $11,375/3,500 EUP =$3.25/EUPCC/EUP = $7,245/3,150 EUP = 2.30/EUPTotal manufacturing cost/EUP $5.55/EUPDMCCTotalWork in process, June $2,735$1,302$4,037Costs added in June$8,640$5,943$14,583Total$11,375$7,245$18,620© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg& Wolcott’s Cost Management, 2eSlide # 47You are given the cost information below. Compute the cost per EUP under both methods. Q7: Process Costing & Spoilage ExampleDM cost/EUP = $8,640/2,700 EUP =$3.20/EUPCC/EUP = $5,943/2,830 EUP = 2.10/EUPTotal manufacturing cost/EUP $5.30/EUPDMCCTotalWork in process, June $2,735$1,302$4,037Costs added in June$8,640$5,943$14,583Total$11,375$7,245$18,620Under FIFO, the numerator includes only current costs:Next, complete the process cost report using both methods….Cost AssignmentUnitsWA CostBeginning WIPCost to Complete BI Direct Materials Conversion CostsTotal Cost BINormal Spoilage278Good Units Started & Completed2,80015,540$ Total Transferred Out2,80015,818$ Abnormal Spoilage833Ending WIP500 Direct Materials1,625 Conversion Costs345Total Ending WIP Cost1,970$ Total Units and Cost Accounted For3,30018,620$ © John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg& Wolcott’s Cost Management, 2eQ7: WAProcess Costing & Spoilage ExampleThe WA journal entry to record the costs transferred out is:FG inventory15,81.50Loss from abnormal spoilage832.50WIP inventory16,650.00Note the total good units accounted for is the total units to account for less the spoiled units.© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg& Wolcott’s Cost Management, 2eSlide # 49Q7: FIFOProcess Costing & Spoilage ExampleCost AssignmentUnitsFIFO CostBeginning WIP8004,037$ Cost to Complete BI Direct Materials- Conversion Costs1,008Total Cost BI5,045Normal Spoilage265Good Units Started & Completed2,00010,600 Total Transferred Out2,80015,910$ Abnormal Spoilage795Ending WIP500 Direct Materials1,600 Conversion Costs315Total Ending WIP Cost1,915$ Total Units and Cost Accounted For3,30018,620$ The FIFO journal entry to record the costs transferred out is:FG inventory15,910Loss from abnormalspoilage795WIP inventory16,705© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg & Wolcott’s Cost Management 2eSlide # 50Q8: Process Costing Uses for Decision Making•Used to determine valuation for inventory and cost of goods sold at the end of each period•Required for financial statements and income tax returns•Helps managers evaluateif the production processesare operating as expected •Compare actual results to budget, standards, or prior periods•Identify areas for process improvements •Analyze benefits of quality improvements© John Wiley & Sons, 2011Chapter 6: Process CostingEldenburg & Wolcott’s Cost Management, 2eSlide # 51Q8: Process Costing Limitations & Impacts on Managers’ Decision Making•Process cost information is generally not useful for many short-term decisions because unavoidable fixed costs are allocated to the products.•Need to determine incremental or marginal costs•Separating conversion costs into fixed and variable pools would help•Requires use of estimates:•The point of the production process when DM costs or CC are incurred.•Stage of completion for all units in

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