Cost Chapter 11

what are the cost flow methods used

LIFO

FIFO

Average cost

the last two are process costing

what does FIFO account for

unitys and costs beginning with beginning inventory

what does average cost account for

total all costs and unitys and compute average cost

process costing considerations

multiple WIP inventory accounts (each department/process)

must calculate equivalent units of production

have several categories/inputs

have several levels of costs

why must we calculate EUP

not all units started in current period will be completed in the current period

partially complete units in beginning and ending inventory

what are the several categories/inputs

DM

conversion costs: DL and MOH

transferred in costs

what are the several levels of costs

beginning inventory

costs to complete beginning inventory (current period)

costs started and completed current period

when working problems, ask

“tips”

transaferred in costs are treated like

DM. considered 100% complete once enter new department

at what point is input added to process

draw a timeline

consider for each DM, CC (DL and MOH)

if beginning wip is 70% complete then

30% needs to be done this period to complete

how to account for units in production

WIP beginning inventory + started = WIP ending inventory + tranferred out

what is the overview of job costing

discrete jobs or batches

tailored costs for each job or batch

what is the overview of process costing

homogenous products

continuious process

same cost per unit

types of ledger accounts for job costing

each job has separate WIP inventory sub ledger acct

WIP inv - client A

Wip inv - client b

type of ledger accounts for process costing

each process has a separate WIP inventory account

WIP inv- assembly

WIP inv - Packaging

when is job costing typically used

unique products

easily distinguishable unit costs

when is process costing typically used

impossible or impractical to distinuish the costs of one unit from another

what is the production path of job costing

jobs can, but might not, follow the same path through production

what is the production path for process costing

units all follow the same path through production

how is inventory costed for job costing

actual costing or normal costing

standard costing

how is inventory costed with process costing

FIFO or weighted average method

process costing

the process is the basis of costing

continuious flow of products through several/many departments

what is the key feature of process costing

averages production costs over all units produced

no matching od costs with particular units

each unit receives the same or similar amounts of DM, DL, and MOH

broad averages are used = total costs/total units

what does process costing focus on

individual units

cost components (beg. WIP + currently added)

point at which costs are introduced into the process

percentage of completion of beginning and ending inventories

at the end of every period, not every unit will

be completley finished

unfinished units have fewer costs associated with them

biggest costing problems

determining how much work has been done and how much remains

spreadinng costs over partially completed units and fully completed units

amoutn of MOH to allocate to each department

proper cost allocations between WIP inventory, FG inventory and COGS important

overstating ending WIP/FG would decrease COGS and increase NI

understating ending WIP/FG would increase COGS and decrease NI

what is step one pf process costing

verify physical units in the period and degree of completion

• must understand physical units

  • summarize flow of physical units of output

total to account for

BI + transferred in and/or started

total accounted for

EI plus transferred out

if units are incomplete at period end,

their degree of completion must be assessed

what is step 2

calculate equaivalent units of production

equivalent units of production

• If all given costs had been used to only make completed units, how many completed units would have been made?

• Measure production in terms of how much of an input has been added so far.

• Partially completed units expressed as fully completed units

• Calculated separately for each input: DM and CC (DL, MOH)

• Look at how costs are introduced and at what stage in the process.

• # of partially completed units x % of completion = EUP

must estimate how much of a resource was applied to units in process

units will be in various stages

simplify estimation: most companies decide that all WIP be deemed a certain %

incomplete units are converted to equivalent units of production to accurately determine how much work was done

EUs are reported separately for

DM and conversion costs

FIFO

distinguishes current period work from previous work done

assigns cost of previous period EU in WIP beginning inventory to first units completed and transferred out and

costs computed for work durring current period to:

complete begining WIP inventory

started and completed new units this period

wip ending inventory

work done on beginning wip inventory is

kep separate from work done in current period

weighted average costs computed

completed this period and transferred out of wip inventoey

ending wip inventory

weighted average calculates

EU and cost per EU to all work done to date regardless of the accounting period in which work is done

average of beginning wip and current costs

focus on total work done to date

beginning wip inventory is treated as started in current period

step 3

determine total costs incurred to date for the wip inventory account

step 3 is

the same under both methods

total costs accounted for = BI + started (transferred in)

what is step 4

determine cost per EU

step 4 proces

different under each method

determine cost incurred for work done

categorize by input type and % complete

calculate cost per EU for each input type: unit cost = total cost/EU

what is step 5

assign costs to units completed ad to ending WIP inventory

step 5 process

attaching cost to EU outputs in step 2

sumary of costs accounted for = costs to account for

for FIFO, total cost of units completed will be sum of

costs already in WIP beginning inventoy

costs added to complete the units in WIP beginning inv (DM and CC)

costs added to start and complete a new grouping of units (both DM and CC)

for FIFO, cost of units in wip ending inventory =

number of EU x cost per EU

weighted average total costs of units completed =

number of EU completed x cost per EU

for weighted average, cost of units in wip ending inventory =

number of EU x cost per EU

products completed by one department and carried forward to a subsequent department

transferred in

added at the beginning of the process

separate column in production report

considerations for department 2

transfered in - from previous department (100% finished in previous department)

DM - new added

CC: DL and MOH - new added

points to remember when dealing with transferred in costs

they are treated like DM: added at the beginning of the process - 100% complete

remember to include TI costs in calculations

when using FIFO, do not oerlook TI costs assigned to beginnig wip inventory

costs fluctuate between periods, therefire transferred batches may contain batches accumulated at diffeerent costs

units may be measured differently in different departments

product transferred out to another production deparmtnet is not finished goods; it remains in wip

operation costing

compromise between job costing and process costing

blends characteristics of both systems

individual wip inventory accounts are kept for each unit to house DM and CC

what kind of method is operation costing

standardized method or technique that is performed repetitively, often on different materials, resulting in different finished goods

operations costing process has

some customized compoenent/processes and

some standardized components/processes