Cost Accounting Exam 2

Job & Process Costing

Process costing

A costing system that accumulates production costs by department or process and assigns average costs to units produced.

Indirect materials issued to production Account

MOH Overhead, not an additional direct charge to the job WIP

Materials Control (T Account)

Debit beginning materials inventory and purchases

Credit all materials used—both direct and indirect.

Work-in-Process Control (T Account)

Debit beginning WIP, direct materials used, direct labor, and applied overhead (Production of product)

Credit the cost of completed goods transferred to Finished Goods.

MOH Control (T Account)

Debit actual indirect factory costs, such as indirect materials, indirect labor, factory taxes, and factory insurance

leave credits blank before closing because applied overhead goes into the separate MOH Allocated account.

Finished Goods Control (T Account)

Debit beginning finished goods inventory and the cost of completed goods received from WIP (WIP Credit)

Credit the manufacturing cost of goods sold—not their selling price.

EU for “Completed and Transferred Out” (WA)

100% - they are fully finished and have been completed and transferred out

Cost for “Completed and Transferred Out” (WA)

=completed and transferred out # * “DM/CC/TI” EU

“Beginning WIP Completed” DM and CC EU (FIFO)

= Beginning WIP# * %Left to complete (not completion%)

Focusing on this period work to be done, not completion from last

Cost per EU (FIFO)

= cost added this period / EU

TI Beginning WIP completed (FIFO)

TI are always 100%, so the Beg WIP Completed TI = 0

Total Cost Completed and Transferred Out (FIFO)

= Beginning WIP cost carried forward + Costs to finish beginning WIP + Started and completed Cost

Indirect materials used

credit (right) side of the Materials Control T-account, reduces the inventory you have on hand

debit Manufacturing Overhead Control

When is process costing used?

When a company produces large quantities of similar or identical products through repeated processes.

Work in Process (WIP)

Inventory consisting of units that have entered production but are not yet fully completed.

Beginning WIP

Units partially completed at the beginning of an accounting period, along with costs already assigned to them.

Ending WIP

Units still incomplete at the end of the accounting period.

Units started

Units entering a production process during the current period. In a receiving department, these may be units transferred in from another department.

Units completed and transferred out

Units that have finished the department's production process and moved to another department or Finished Goods.

Physical units

The actual number of units being produced, regardless of their percentage of completion.

Equivalent units of production (EUP)

The number of fully completed units represented by the amount of production work performed (includes partially completed)

Why calculate equivalent units?

To account for partially completed units when determining production costs per unit and assigning costs accurately.

Direct materials (DM)

Materials directly incorporated into the product during manufacturing.

Conversion costs (CC)

DL + manufacturing overhead, representing the costs of converting materials into finished products.

Transferred-in costs (TI)

Costs accumulated in a previous department and carried into the next department with the transferred units.

Cost per equivalent unit

The cost assigned to one equivalent unit of production for a particular cost category.

Cost reconciliation

Verifying that total production costs accounted for = the total costs assigned to completed units and ending WIP.

Total physical units to account for =

Beginning WIP units + Units started or transferred in during the period.

New units to account for

Total physical units accounted for =

Units completed and transferred out + Ending WIP units.

They’re done and accounted for

Physical-flow reconciliation (checking)

Beginning WIP + Units started = Units completed and transferred out + Ending WIP.

Units completed =

Beginning WIP + Units started − Ending WIP.

Units started and completed under FIFO =

Total units completed − Beginning WIP units completed.

In HW7, beginning WIP is assumed to be completed first. Within period.

Equivalent units =

Physical units × Percentage of completion.

EU of 400 units that are 30% complete

400 × 30% = 120

Accounting for unfinished/partially completed units

Why are EU calculated separately for DM and CC?

Materials and conversion work may have different completion percentages %

Materials and conversion activities can progress at different rates.

Are completed units always 100% complete?

Yes, for every applicable cost category in the department they have finished.

Step 1 in process costing

Count and track the actual units.

Add Beg. WIP units + units started this period.

Add units completed and transferred out + End. WIP units.

Check that both totals match

Weighted-Average process costing

Method combining beginning-WIP costs and current-period costs to calculate average costs per equivalent unit.

How does WA treat beginning WIP?

It combines prior-period work and costs with current-period production rather than tracking them separately.

WA equivalent-unit =

Units completed and transferred out + Ending WIP equivalent units.

WA equivalent units for DM =

Units completed + (Ending WIP units × Ending DM completion %).

WA equivalent units for CC =

Units completed + (Ending WIP units × Ending CC completion %).

WA equivalent units for TI =

Units completed + Ending WIP units

(assuming all units have been fully transferred into the department)

WA total costs for each input =

Beginning WIP costs + Current-period costs added.

WA cost per equivalent unit =

(Beginning WIP costs + Current-period costs added) ÷ WA equivalent units.

Does WA separately calculate the remaining work needed on beginning WIP?

No. Beginning-WIP work is combined with current-period work.

Why is WA simpler than FIFO?

It does not require separating the work performed in prior periods from work performed in the current period.

Main disadvantage of WA

Combining prior and current costs can obscure changes in current-period production costs.

FIFO (First-In, First-Out) process costing

A method that separates beginning-WIP work and costs from current-period work and costs

Main assumption of FIFO

Beginning WIP units are completed before units started during the current period.

How does FIFO treat beginning-WIP costs?

It preserves prior-period costs separately and adds only the current-period cost of completing those units.

FIFO equivalent units =

Work needed to finish beginning WIP + Units started and completed + Equivalent units in ending WIP.

FIFO work needed to finish beginning WIP

Beginning WIP units × (100% − Beginning completion percentage)

FIFO started and completed units

Total completed units − Beginning WIP units completed.

FIFO ending WIP equivalent units

Ending WIP units × Ending completion percentage

FIFO cost per equivalent unit

Current-period costs added ÷ Current-period equivalent units

Are beginning-WIP costs included in the FIFO cost-per-EU numerator?

No. FIFO uses only current-period costs added to calculate current-period cost per equivalent unit.

Why does FIFO isolate current-period costs?

Its numerator includes only current costs and its denominator includes only work performed during the current period.

Why might managers prefer FIFO?

It gives a clearer picture of current production costs when material, labor, or overhead costs change.

Common FIFO mistake

Counting the entire beginning-WIP unit as current-period work instead of only its remaining unfinished percentage.

Biggest difference between WA and FIFO

WA blends beginning and current-period costs and work;

FIFO separates prior-period costs and counts only current-period work in its equivalent units.

Which method uses beginning-WIP costs in the cost-per-EU calculation?

Weighted-Average

Which method uses only current-period costs for its cost-per-EU calculation?

FIFO

Which method calculates work needed to complete beginning WIP?

FIFO

Which method is generally easier to calculate?

Weighted-Average.

Which method better isolates current-period cost changes?

FIFO

Which method is more useful when production costs fluctuate sharply?

FIFO, because it provides a clearer measure of current-period production costs

Does FIFO always assign higher costs than WA?

No. The result depends on prior-period costs, current-period costs, completion percentages, and production flows.

Do WA and FIFO necessarily produce different physical-unit totals?

No. The same physical units must be accounted for; the difference is how equivalent units and costs are calculated.

Why can WA and FIFO produce different ending WIP valuations?

They can use different cost-per-EU rates because they treat prior-period work and costs differently.

What are transferred-in units?

Physical units received by one production department from a preceding department.

What are transferred-in costs?

The production costs accumulated on those units in the preceding department.

When are transferred-in costs added?

When units arrive from the preceding department.

Why is ending WIP 100% complete for TI?

The units have already completed the previous department's work, even if additional materials or conversion work remain in the current department.

Can a unit be 100% complete for TI but 25% complete for CC?

Yes. Its previous department's costs are fully transferred in, but only 25% of the receiving department's conversion work has been completed.

WA equivalent units for TI

Completed units + Ending WIP units

FIFO equivalent units for TI

Units started and completed + Ending WIP units

because beginning WIP already received its transferred-in work in a prior period.

What happens to TI costs in the receiving department?

They become part of the receiving department's WIP cost and are combined with its additional production costs.

Step 1 (Process-Costing Schedule)

Physical flow: Account for all physical units

beginning WIP + started = completed + ending WIP.

Step 2 (Process-Costing Schedule)

Equivalent units: Calculate equivalent units separately for TI (when applicable), DM, and CC using WA or FIFO.

Step 3 (Process-Costing Schedule)

Costs to account for: Identify beginning WIP costs and costs added during the period for each input category.

Step 4 (Process-Costing Schedule)

Cost per equivalent unit: Divide the appropriate cost amount by the equivalent units for each cost category.

Step 5 (Process-Costing Schedule)

Cost assignment and reconciliation: Assign costs to completed units and ending WIP, then verify total assigned costs equal total costs to account for.

WA cost assigned to completed units

Completed physical units × Total cost per completed unit where total rate is the sum of applicable TI, DM, and CC rates.

WA ending WIP cost

Sum of ending WIP equivalent units × Cost per EU for each applicable input.

FIFO cost to finish beginning WIP

Beginning WIP cost already accumulated + Cost of remaining current-period work needed to complete it.

FIFO cost assigned to units started and completed

Units started and completed × Sum of current-period cost-per-EU rates.

Job costing

Tracks costs for individual, distinct jobs or orders

Normal costing vs. actual costing

Both use actual quantities of the allocation base.

Normal costing uses a budgeted MOH rate

Actual costing uses an actual MOH rate.

PMOH Predetermined manufacturing overhead rate

Budgeted MOH ÷ Budgeted allocation base.

The base could be direct labor-hours, machine-hours, or direct labor dollars

Actual MOH rate applied to a job

= Actual total MOH ÷ Actual total allocation base

Overhead applied to a job

= Appropriate MOH rate × Actual allocation-base usage by the job.

Overallocated Overhead

Applied MOH > actual MOH

Underallocated Overhead

Actual MOH > applied MOH

Actual MOH Incurred JE

D MOH Control

C Cash/Payables/etc

Allocated Overhead JE

D WIP

C MOH Allocated

Activity-Based Costing (ABC)

Assigning overhead costs to activities, then to products based on their consumption of those activities

It can improve cost accuracy compared with one broad allocation rate

Traditional costing vs. ABC

Traditional costing: one volume-based allocation rate, such as DLH

ABC: multiple activity cost pools and cost drivers, helping avoid overcosting or undercosting products

Four levels of the ABC cost hierarchy

Unit-level: each unit produced

Batch-level: each batch produced

Product-sustaining: support for a particular product

Facility-level: support for the entire facility

Transaction drivers

Measures the number of activities (e.g., number of setups)