Horngren financial managerial accounting 6th by nobles 3

974

chapter 18
To assign the costs of the two inputs to the two outputs, this step must be repeated four
times to assign:
■■

Direct materials costs to:
• Completed units
• In process units

■■

Conversion costs to:
• Completed units
• In process units

Direct Materials:
Completed 40,000 EUP × \$ 2.80 per EUP = \$ 112,000
10,000 EUP × \$ 2.80 per EUP =

28,000
In Process
\$ 140,000
Total
Conversion Costs:
Completed 40,000 EUP × \$ 1.60 per EUP = \$ 64,000
4,000
In Process
2,500 EUP × \$ 1.60 per EUP =
\$ 68,000
Total

We have accomplished our goal of splitting the \$208,000 total cost between the completed
units and the in process units and can record these costs on the production cost report.
Exhibit 18-9 shows the completed production cost report for the Assembly Department.
Exhibit 18-9

| Production Cost Report—Assembly Department—Costs Accounted For
PUZZLE ME
Production Cost Report—ASSEMBLY DEPARTMENT
Month Ended July 31, 2018
Equivalent Units

UNITS

Physical
Units

Units to account for:
Beginning work-in-process
Started in production
Total units to account for

8,000
42,000
50,000

Units accounted for:
Completed and transferred out
Ending work-in-process

Total units accounted for

40,000
10,000
50,000

Costs to account for:
Beginning work-in-process
Total costs to account for
Divided by: Total EUP
Cost per equivalent unit

M18_HORN6833_06_SE_C18.indd 974

40,000
10,000
50,000
Direct
Materials

COSTS

Costs accounted for:
Completed and transferred out
Ending work-in-process
Total costs accounted for

Direct
Materials

Step 4: Costs
accounted for

Conversion
Costs

40,000
2,500
42,500
Conversion
Costs

Total
Costs

\$

9,800
130,200
140,000
÷ 50,000
\$
2.80

\$ 3,910
64,090
68,000
÷ 42,500
\$ 1.60

\$ 13,710
194,290
\$ 208,000

\$ 112,000
28,000
\$ 140,000

\$ 64,000
4,000
\$ 68,000

\$ 176,000
32,000
\$ 208,000

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Process Costing

975

Try It!
The Blending Department for CenTex Paints started October with 1,000 gallons in process and started in production 9,500
gallons. During the month, 7,000 gallons were completed and transferred to the next department. Ending work-in-process was
3,500 gallons (100% complete with respect to direct materials and 30% complete for conversion costs). The department uses the
weighted-average method. The Blending Department incurred the following costs:
Beginning WIP—Direct materials costs

\$    500

Beginning WIP—Conversion costs

1,210

Direct materials added during the month

5,800

Conversion costs added during the month

5,230

Total

\$ 12,740

7. Prepare a production cost report for the Blending Department for the month of October.
For more practice, see Short Exercises S18-7 through S18-10.

MyAccountingLab

HOW IS A PRODUCTION COST REPORT PREPARED FOR
SUBSEQUENT DEPARTMENTS?
We have now accounted for all units and costs for the Assembly Department, and it is time to
complete the same process for the Cutting Department.

Production Cost Report—Second Process—Cutting Department

Learning Objective 4
Prepare a production cost report for
subsequent departments using the
weighted-average method

The Cutting Department receives the puzzle boards from the Assembly Department and
cuts the boards into puzzle pieces before inserting the pieces into the box at the end of the
process. Operations for this department include three inputs:
• Glued puzzle boards with pictures are transferred in from the Assembly Department at the
beginning of the Cutting Department’s process.
• The Cutting Department’s conversion costs are added evenly throughout the process.
• The Cutting Department’s direct materials (boxes) are added at the end of the process.
Keep in mind that direct materials in the Cutting Department refers to the boxes added in that
department and not to the materials (cardboard, pictures, and glue) added in the A
­ ssembly
Department. The costs of the materials from the Assembly Department that are transferred
into the Cutting Department are called transferred in costs. Likewise, conversion costs in the
Cutting Department refers to the direct labor and manufacturing overhead costs incurred
only in the Cutting Department. The conversion costs incurred in the Assembly Department are also transferred in costs for the Cutting Department.

M18_HORN6833_06_SE_C18.indd 975

Transferred In Costs
Costs that were incurred in a
previous process and brought into a
later process as part of the product’s
cost.

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976

chapter 18
Listed below is the cost information for Puzzle Me’s Cutting Department:
Cutting Dept.
Units
Beginning WIP

5,000

Transferred in from Assembly Dept.

40,000

Transferred out to Finished Goods

38,000

Ending WIP:
Units

???

Percent Complete:
Direct materials

0%

Conversion costs

30%

Costs
Beginning WIP:
Transferred in
Direct materials costs
Conversion costs

\$ 22,000
0
1,200
19,000

Direct labor

3,840
11,000
\$ 14,840

The data show that Puzzle Me’s Cutting Department started the July period with 5,000
puzzle boards partially completed through work done in the Cutting Department in June.
During July, the Cutting Department started work on 40,000 additional puzzle boards that
were received from the Assembly Department. Let’s prepare a production cost report for
the Cutting Department using the weighted-average method and the same four-step procedure we used for the Assembly Department.
Remember: Units and costs that are transferred out for the Assembly
Department become transferred in for the Cutting Department.

Step 1: Summarize the Flow of Physical Units The Cutting Department had 5,000
units in process on July 1 and received 40,000 units during the month from the Assembly
Department. Therefore, to account for is 45,000 units.
To account for = Beginning balance + Amount transferred in = 5,000 units + 40,000 units = 45,000 units

The Cutting Department completed the cutting and boxing process on 38,000 units
of the 45,000 units to account for and transferred those units to Finished Goods Inventory.
Therefore, 7,000 units must still be in process and we have accounted for all units.
Accounted for = Transferred out + in process = 38,000 units + 7,000 units = 45,000 units

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Process Costing

977

To account for equals accounted for, so we are ready to record this information on the production cost report. Just as we did with the Assembly Department, we start with completing
the UNITS section of the report. At this point, we are not yet assigning costs to units.
Exhibit 18-10 shows the units to account for and units accounted for. Notice that because
this is a subsequent department we must account for units that are transferred in. We show
this by having a Transferred In column on the production cost report.
Exhibit 18-10

| Production Cost Report—Cutting Department—Physical Units
PUZZLE ME
Production Cost Report—CUTTING DEPARTMENT
Month Ended July 31, 2018
Equivalent Units
Physical
Units

UNITS
Units to account for:
Beginning work-in-process
Transferred in
Total units to account for

5,000
40,000
45,000

Units accounted for:
Completed and transferred out
Ending work-in-process
Total units accounted for

38,000
7,000
45,000

Transferred
In

Direct
Materials

Conversion
Costs

Step 1: Physical flow of units

Step 2: Compute Output in Terms of Equivalent Units of Production The Cutting
Department would start with the units transferred in from the Assembly Department. The
Cutting Department adds direct materials at the end of the process, and conversion costs
are incurred evenly throughout the process. Thus, we must compute equivalent units of
production separately for direct materials and conversion costs. Additionally, the units have
costs that were transferred in with them that must be accounted for.
The Cutting Department worked on 45,000 puzzle boards during July. We have already
determined that 38,000 puzzles are completed and have been transferred to Finished Goods
Inventory. If they are completed and transferred out, then they are 100% complete for transferred in, direct materials, and conversion costs in this department. The remaining 7,000 puzzle
boards are only 30% complete for conversion costs and 0% complete for direct materials. How
many equivalent units of production did the Cutting Department produce during July?
Equivalent Units of Production for Transferred In The Cutting Department is
the second department in the process system, so it receives units from the Assembly
Department. These units are the transferred in units. The equivalent units of production for
transferred in are always 100%. Why? Because these units came in with costs assigned
to them from the previous department, which was calculated on the production cost
report for the Assembly Department. If they were not 100% complete with respect
to the previous process, then they would not have been transferred in. They would
still be in process in the previous department. Therefore, any costs associated with
the work done in the Assembly Department stay with them at 100% EUP.

Why is EUP for
transferred in always
100%?

Completed units: 38,000 units * 100% = 38,000 EUP for transferred in
In process units: 7,000 units * 100% =
Total EUP for transferred in

M18_HORN6833_06_SE_C18.indd 977

7,000 EUP for transferred in

= 45,000 EUP for transferred in

12/21/16 8:45 PM

978

chapter 18
Equivalent Units of Production for Direct Materials  Equivalent units of production for
direct materials total 38,000 for the completed units because they are 100% complete. However,
the units that are in process do not yet have any direct materials added in this department
because the box is added at the end of the process. Because they are still in process, the box has
not yet been added. To calculate the equivalent units of production for direct materials:
Completed units: 38,000 units * 100% = 38,000 EUP for direct materials
In process units: 7,000 units *
0% =
0 EUP for direct materials
Total EUP for direct materials
= 38,000 EUP for direct materials

Equivalent Units of Production for Conversion Costs  Conversion costs are complete for
the 38,000 puzzles completed and transferred out to Finished Goods Inventory, but only 30%
of the conversion work has been done on the 7,000 puzzle boards in ending Work-in-Process
Inventory. To calculate the equivalent units of production for conversion costs:
Completed units: 38,000 units * 100% = 38,000 EUP for conversion costs
In process units: 7,000 units * 30% = 2,100 EUP for conversion costs
Total EUP for conversion costs
= 40,100 EUP for conversion costs

We can now add this information to the production cost report as shown in Exhibit 18-11.

Exhibit 18-11

| Production Cost Report—Cutting Department—EUP

PUZZLE ME
Production Cost Report—CUTTING DEPARTMENT
Month Ended July 31, 2018
Equivalent Units
Physical
Units

UNITS
Units to account for:
Beginning work-in-process
Transferred in
Total units to account for

Transferred
In

Direct
Materials

Conversion
Costs

5,000
40,000
45,000
Step 2: EUP

Units accounted for:
Completed and transferred out
Ending work-in-process
Total units accounted for

38,000
7,000
45,000

38,000
7,000
45,000

38,000
0
38,000

38,000
2,100
40,100

Step 3: Compute the Cost per Equivalent Unit of Production Now that we have completed the UNITS section of the report, it is time to complete the COSTS section. The
formulas to compute the cost per equivalent unit of production are the same as used for
the Assembly Department; we just need to add the calculation for the transferred in costs.
The Cutting Department has three inputs and therefore must make three calculations for
cost per equivalent unit of production.
Total transferred in costs
Equivalent units of production for transferred in
Total direct materials costs
Cost per EUP for direct materials =
Equivalent units of production for direct materials
Total conversion costs
Cost per EUP for conversion costs =
Equivalent units of production for conversion costs
Cost per EUP for transferred in =

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Process Costing

979

The Cutting Department has \$233,040 of costs to account for, as illustrated in Exhibit 18-12.
Exhibit 18-12

| Cutting Department: Costs to Account For
Transferred
In

Beginning balance in Work-in-Process
Inventory—Cutting, July 1

\$ 22,000

Transferred in from Assembly
Department during July

Direct
Materials
\$

0

Conversion
Costs

Totals

\$ 1,200

\$ 23,200
176,000

176,000

during July
Totals

\$ 198,000

19,000

14,840

33,840

\$ 19,000

\$ 16,040

\$ 233,040

The beginning balances and the additional costs incurred were given in the original
data. The amount transferred in from the Assembly Department, \$176,000, is the amount
calculated on the production cost report for the Assembly Department for July as the
amount completed and transferred out in the costs accounted for section.
Our next task is to split these costs between the 38,000 completed puzzles transferred out to Finished Goods Inventory and the 7,000 partially complete puzzle boards that
remain in the Cutting Department’s ending Work-in-Process Inventory.
In Step 2, we computed equivalent units of production for transferred in as 45,000
EUP, direct materials as 38,000 EUP, and conversion costs as 40,100 EUP. Because the
equivalent units of production differ, we must compute a separate cost per unit for each
input.
The cost per equivalent unit of production for transferred in is \$4.40, which is calculated as follows:
Total transferred in costs
Equivalent units of production for transferred in
+198,000
=
45,000 EUP
= +4.40 per EUP

Cost per EUP for transferred in =

The cost per equivalent unit of production for direct materials is \$0.50, which is calculated
as follows:
Total direct materials costs
Equivalent units of production for direct materials
+19,000
=
38,000 EUP
= +0.50 per EUP

Cost per EUP for direct materials =

The cost per equivalent unit of production for conversion costs is \$0.40, which is calculated
as follows:
Total conversion costs
Equivalent units of production for conversion costs
+16,040
=
40,100 EUP
= +0.40 per EUP

Cost per EUP for conversion costs =

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980

chapter 18
These calculations are added to the production cost report as shown in Exhibit 18-13.
Exhibit 18-13

| Production Cost Report—Cutting Department—Costs to Account For
PUZZLE ME
Production Cost Report—CUTTING DEPARTMENT
Month Ended July 31, 2018
Equivalent Units
Physical
Units

UNITS
Units to account for:
Beginning work-in-process
Transferred in
Total units to account for

5,000
40,000
45,000

Units accounted for:
Completed and transferred out
Ending work-in-process
Total units accounted for

38,000
7,000
45,000

Transferred
In

Transferred
In
\$ 22,000
176,000
198,000
÷ 45,000
\$
4.40

Step 3: Costs
to account for

Conversion
Costs

38,000
0
38,000

38,000
7,000
45,000

COSTS
Costs to account for:
Beginning work-in-process
Total costs to account for
Divided by: Total EUP
Cost per equivalent unit

Direct
Materials

Direct
Materials
\$

0
19,000
19,000
÷ 38,000
\$
0.50

38,000
2,100
40,100
Conversion
Costs
\$

1,200
14,840
16,040
÷ 40,100
\$
0.40

Total
Costs
\$ 23,200
209,840
\$ 233,040

Costs accounted for:
Completed and transferred out
Ending work-in-process
Total costs accounted for

Step 4: Assign Costs to Units Completed and Units in Process The last step on the
production cost report is to determine how the \$233,040 total costs accounted for by the
Cutting Department should be assigned to the following:
• The 38,000 completed puzzles that have been transferred out to Finished Goods
Inventory.
• The 7,000 partially completed puzzle boards remaining in the Cutting Department’s
ending Work-in-Process Inventory.
This is accomplished by multiplying the cost per equivalent unit of production times the
equivalent units of production. To assign the costs of the three inputs to the two outputs,
this step must be completed six times to assign:
■■

M18_HORN6833_06_SE_C18.indd 980

Transferred in costs to:
• Completed units
• In process units

■■

Direct materials cost to:
• Completed units
• In process units

■■

Conversion costs to:
• Completed units
• In process units

12/21/16 8:45 PM

Process Costing

981

Transferred In

Total

38,000 EUP × \$ 4.40 per EUP = \$ 167,200
30,800
7,000 EUP × \$ 4.40 per EUP =
\$ 198,000

Direct Materials
Completed
In Process
Total

38,000 EUP × \$ 0.50 per EUP = \$ 19,000
0 EUP × \$ 0.50 per EUP =
0
\$ 19,000

Completed
In Process

Conversion Costs
Completed 38,000 EUP × \$ 0.40 per EUP = \$ 15,200
840
In Process
2,100 EUP × \$ 0.40 per EUP =
\$ 16,040
Total

We have accomplished our goal of splitting the \$233,040 total cost between the completed units and the in process units and can record these costs on the production cost
report. The completed report is shown in Exhibit 18-14.
Exhibit 18-14

| Production Cost Report—Cutting Department—Costs Accounted For
PUZZLE ME
Production Cost Report—CUTTING DEPARTMENT
Month Ended July 31, 2018
Equivalent Units

UNITS

Physical
Units

Units to account for:
Beginning work-in-process
Transferred in
Total units to account for

5,000
40,000
45,000

Units accounted for:
Completed and transferred out
Ending work-in-process
Total units accounted for

38,000
7,000
45,000

Costs to account for:
Beginning work-in-process
Total costs to account for
Divided by: Total EUP
Cost per equivalent unit

M18_HORN6833_06_SE_C18.indd 981

Step 4: Costs
accounted for

Direct
Materials

Conversion
Costs

38,000
2,100
40,100

38,000
0
38,000

38,000
7,000
45,000
Transferred
In

COSTS

Costs accounted for:
Completed and transferred out
Ending work-in-process
Total costs accounted for

Transferred
In

Direct
Materials

Conversion
Costs

Total
Costs

\$ 22,000
176,000
198,000
÷ 45,000
\$
4.40

\$

0
19,000
19,000
÷ 38,000
\$
0.50

\$

1,200
14,840
16,040
÷ 40,100
\$
0.40

\$ 23,200
209,840
\$ 233,040

\$ 167,200
30,800
\$ 198,000

\$ 19,000
0
\$ 19,000

\$ 15,200
840
\$ 16,040

\$ 201,400
31,640
\$ 233,040

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982

chapter 18

Try It!
The Finishing Department started the month with 500 units in process, received 2,000 units from the Assembly Department, and
transferred 2,100 units to the finished goods storage area. All direct materials are added at the beginning of the process. The units
in process at the end of the month are 45% complete with respect to conversion costs. The department uses the weighted-average
method. The Finishing Department incurred the following costs:

Transferred In
Direct Materials
Conversion Costs
Total
8.
9.
10.
11.

Beginning WIP

Total

\$ 6,250

\$ 25,000

\$ 31,250

500

2,000

2,500

1,250

5,590

6,840

\$ 8,000

\$ 32,590

\$ 40,590

How many units are still in process at the end of the month?
Compute the equivalent units of production for the Finishing Department.
Determine the cost per equivalent unit for transferred in, direct materials, and conversion costs.
Determine the cost to be transferred to Finished Goods Inventory.

For more practice, see Short Exercises S18-11 and S18-12.

MyAccountingLab

WHAT JOURNAL ENTRIES ARE REQUIRED IN A
PROCESS COSTING SYSTEM?
Learning Objective 5
Prepare journal entries for a process
costing system

As costs flow through the process costing system, we go through a four-step process to
accumulate, assign, allocate, and adjust. This is the same process that was illustrated in the previous chapter for job order costing. Remember, the primary differences between the two
costing systems are how costs are accumulated and when costs are assigned. In a process
costing system, costs are accumulated in the following accounts: Raw Materials Inventory,
the various Work-in-Process Inventory accounts, and Manufacturing Overhead. At the end
of the month, when the production cost reports are prepared, the costs are assigned to
units. The costs assigned to the units completed in each process are transferred from one
Work-in-Process Inventory account to the next and eventually to Finished Goods Inventory and Cost of Goods Sold. Following is a description of the journal entries associated
with Puzzle Me’s process costing system for July.

Transaction 1—Raw Materials Purchased
During July, the company purchased materials on account for \$175,000.
Ac
RMc

Lc
=

A/Pc

+

E

Date
Trans. 1

Accounts and Explanation
Raw Materials Inventory
Accounts Payable

Debit

Credit

175,000
175,000

Purchased materials, accumulated in RM.

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Process Costing

983

Transaction 2—Raw Materials Used in Production
During July, direct materials were assigned to the two production departments: \$130,200 to
the Assembly Department and \$19,000 to the Cutting Department; \$2,000 in indirect materials was accumulated in Manufacturing Overhead.
Date

Accounts and Explanation

Debit

Trans. 2 Work-in-Process Inventory—Assembly

Credit

Work-in-Process Inventory—Cutting

19,000

2,000

Raw Materials Inventory

AT
RMT
WIP—Assemblyc
WIP—Cuttingc

130,200

L

+

=

ET
MOHc

151,200

Used materials, direct materials assigned to WIP, indirect
materials accumulated in MOH.

Transaction 3—Labor Costs Incurred
During the month, Puzzle Me assigned \$22,090 in direct labor costs to the Assembly Department and \$3,840 in direct labor costs to the Cutting Department. \$1,500 in indirect labor
costs were accumulated in Manufacturing Overhead.
Date
Trans. 3

Accounts and Explanation
Work-in-Process Inventory—Assembly

Debit

Credit

WIP—Assemblyc
WIP—Cuttingc

22,090

Work-in-Process Inventory—Cutting

3,840

1,500

Wages Payable

Ac

Lc
=

+

ET
MOHc

Wages
Payablec

27,430

Incurred labor, direct labor assigned to WIP, indirect
labor accumulated in MOH.

In addition to the indirect materials and indirect labor costs, Puzzle Me incurred \$30,000 in
machinery depreciation and \$19,000 in indirect costs that were paid in cash, which included
rent and utilities. These costs are accumulated in the Manufacturing Overhead account.
Date
Trans. 4

Accounts and Explanation

Debit

Credit

30,000

Accumulated Depreciation—Machinery

30,000

AT
Accumulated
Depreciationc

L

+

ET
MOHc

=

Incurred overhead, costs accumulated in MOH.

AT
Cash

19,000

CashT

L
=

+

ET
MOHc

19,000

Incurred overhead, costs accumulated in MOH.

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chapter 18

Puzzle Me used a predetermined overhead allocation rate to allocate indirect costs
to the departments: \$42,000 to the Assembly Department and \$11,000 to the Cutting
Department.
Ac

L

WIP—Assemblyc
WIP—Cuttingc

+

=

Ec

Date

MOHT

Trans. 5

Accounts and Explanation

Debit

Work-in-Process Inventory—Assembly

42,000

Work-in-Process Inventory—Cutting

11,000

Credit

53,000

Transaction 6—Transfer from the Assembly Department to the
Cutting Department
At the end of July, when the production cost report for the Assembly Department was
prepared, Puzzle Me assigned \$176,000 to the 40,000 units transferred from the Assembly
Department to the Cutting Department.
AcT

L

+

E

=

WIP—AssemblyT
WIP—Cuttingc

Date
Trans. 6

Accounts and Explanation
Work-in-Process Inventory—Cutting

Debit

Credit

176,000

Work-in-Process Inventory—Assembly

176,000

Transferred costs assigned to units transferred.

Transaction 7—Transfer from Cutting Department to Finished
Goods Inventory
At the end of July, when the production cost report for the Cutting Department was prepared, Puzzle Me assigned \$201,400 to the 38,000 units transferred from the Cutting Department to Finished Goods Inventory. This is the cost of goods manufactured.
AcT
FGc
WIP—CuttingT

L
=

+

E

Date
Trans. 7

Accounts and Explanation
Finished Goods Inventory
Work-in-Process Inventory—Cutting

Debit

Credit

201,400
201,400

Completed units, costs assigned to FG.

Transaction 8—Puzzles Sold
During July, Puzzle Me sold 35,000 puzzles. The production cost report for the C
­ utting
Department, Exhibit 18-13, shows that the total production cost of manufacturing a
puzzle is \$5.30 (\$4.40 per EUP for transferred in, \$0.50 per EUP for direct ­materials,
and \$0.40 per EUP for conversion costs). Therefore, the cost of 35,000 puzzles is
\$185,500 (35,000 puzzles * \$5.30 per puzzle). The puzzles were sold on account for
\$8.00 each, which is a total of \$280,000 (35,000 puzzles * \$8.00 per puzzle).

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Process Costing
Date
Trans. 8

Accounts and Explanation
Accounts Receivable

Debit

Credit

280,000

Sales Revenue

Ac
A/Rc

L

985

+

Ec
Sales Revenuec

=

280,000

Sold units, entry reﬂects sales price, not costs.

AT
Cost of Goods Sold

185,500

Finished Goods Inventory

FGT

L

+

ET
COGSc

=

185,500

Sold units, costs assigned to COGS.

The actual manufacturing overhead costs incurred were \$50,500, which includes the indirect materials in Transaction 2, the indirect labor in Transaction 3, and the accumulated
depreciation and other indirect costs in Transaction 4. The amount of manufacturing overhead allocated to the two departments was \$53,000, as shown in Transaction 5.
Trans. 2
Trans. 3
Trans. 4
Trans. 4

2,000 53,000
Trans. 5
1,500
30,000
19,000
500

The T-account for Manufacturing Overhead shows that the amount of manufacturing
overhead allocated was \$500 more than the actual costs incurred. This means the overhead was overallocated. To adjust for the overallocation, Manufacturing Overhead must be
debited to bring the account to zero. The credit is to Cost of Goods Sold to decrease the
expense account for the amount the puzzles were overcosted.
Date

Accounts and Explanation

Debit

Credit

500

Cost of Goods Sold

A

L
=

500

+

EcT
COGST
MOHc

The adjusting entry for overallocated or underallocated
manufacturing overhead is usually prepared at the end of the year. We are
showing it here at the end of the month so we can illustrate all journal entries
for a process costing system.

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chapter 18
After posting, the key accounts appear as follows:
Work-in-Process Inventory—Assembly
Bal., June 30
Trans. 2
Trans. 3
Trans. 5
Bal., July 31

13,710 176,000
130,200
22,090
42,000
32,000

Trans. 6

Work-in-Process Inventory—Cutting
Bal., June 30
Trans. 2
Trans. 3
Trans. 5
Trans. 6
Bal., July 31

23,200 201,400
19,000
3,840
11,000
176,000
31,640

Trans. 7

Finished Goods Inventory
Bal., June 30
Trans. 7
Bal., July 31

0 185,500
201,400
15,900

Trans. 8

Cost of Goods Sold
Trans. 8
Bal., July 31

185,500
185,000

500

Trans. 9

Notice these are the amounts on the
production costs reports for ending WIP for
each department. Find these amounts
in Exhibits 18-9 and 18-14.

Try It!
12. Castillo Company has three departments: Mixing, Bottling, and Packaging. At the end of the month, the production cost
reports for the departments show the costs of the products completed and transferred were \$75,000 from Mixing to Bottling, \$50,000 from Bottling to Packaging, and \$65,000 from Packaging to Finished Goods Inventory. Prepare the journal
entries for the transfer of the costs.
For more practice, see Short Exercises S18-13.

MyAccountingLab

HOW CAN THE PRODUCTION COST REPORT BE USED
TO MAKE DECISIONS?
Learning Objective 6
Use a production cost report to
make decisions

M18_HORN6833_06_SE_C18.indd 986

So far in the chapter, you have learned how to prepare the production cost report. Now let’s
consider how managers can use production cost reports to make decisions for their companies.
• Controlling costs. Puzzle Me uses product cost data to look for ways to reduce costs. A
manager may decide that the company needs to change suppliers to reduce the cost of
its direct materials. Or a manager may change a component in the production process to
reduce direct materials costs. To reduce labor costs, a manager may need employees with
different skill levels paid at different hourly rates. Perhaps more skilled employees would
require a higher pay rate but be more efficient. The increase in cost per labor hour may be
more than offset by the increased productivity of the workers. Managers may also evaluate the efficiency of the production equipment. Newer, more efficient equipment may
• Evaluating performance. Managers are often rewarded based on how well they meet
the budget. Puzzle Me compares the actual direct materials and conversion costs with
expected amounts. If actual costs are too high, managers look for ways to cut them. If
actual costs are less than expected, the managers may receive a bonus.

12/21/16 8:45 PM

Process Costing

987

DECISIONS
Can we cut these costs?
The management team of Puzzle Me is looking at the production
cost reports for July, and discussing opportunities for improvement. The production manager thinks the production process is
very efficient, and there is little room for cost savings in conversion
costs. The purchasing manager tells the team that he was recently
approached by a supplier with an excellent reputation for quality.
This supplier submitted a bid for cardboard that was a little thinner
but would allow the company to decrease direct materials costs by
5%. What should the team do?

Solution
The production cost reports for the Assembly and Cutting Departments show direct materials costs of \$2.80 and \$0.50 per puzzle,
respectively, for total direct materials cost of \$3.30 per puzzle. A
decrease of 5% in direct materials costs would result in a savings

of \$0.165 per puzzle (+3.30 * 5%) and decrease total costs from
\$5.30 to \$5.135 per puzzle. Based on the completed production
of 38,000 puzzles in July, the total cost savings would be \$6,270
per month (+0.165 per puzzle * 38,000 puzzles). The purchasing
manager recommends using the new supplier.

Alternate Solution
The marketing manager has a different perspective. He points
out that most of the puzzles produced are for toddlers. Based
on market research, the adults who purchase these puzzles like
the sturdy construction. If Puzzle Me changes materials and the
puzzles do not stand up well to the treatment they receive by
young children, the company could rapidly lose market share.
The marketing manager does not recommend using a thinner
cardboard.

• Pricing products. Puzzle Me must set its sales price high enough to cover the manufacturing cost of each puzzle plus selling and administrative costs. The production cost
report for the Cutting Department, Exhibit 18-13, shows that the total production cost
of manufacturing a puzzle is \$5.30 (\$4.40 per EUP for transferred in, \$0.50 per EUP for
direct materials, and \$0.40 per EUP for conversion costs). Obviously, the puzzle must be
priced more than this for the company to be profitable.
• Identifying the most profitable products. Sales price and cost data help managers
­figure out which products are most profitable. They can then promote these products to
help increase profits.
• Preparing the financial statements. Finally, the production cost report aids financial
reporting. It provides inventory data for the balance sheet and cost of goods sold for the
income statement.

Try It!
13. Describe some ways managers use production cost reports to make business decisions.
For more practice, see Short Exercise S18-14.

MyAccountingLab

APPENDIX 18A: Process Costing: First-In,
First-Out Method
The chapter illustrated how to complete the production cost reports for Puzzle Me using
the weighted-average method. In the weighted-average method, the costs from the beginning balance in Work-in-Process Inventory are combined with the current period costs
when determining the costs per equivalent unit of production. In this appendix, we will

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988 chapter 18
First-In, First-Out Method (for
Process Costing)
Determines the cost of equivalent
units of production by accounting
for beginning inventory costs
separately from current period costs.
It assumes the first units started in
the production process are the first
units completed and sold.

Learning Objective 7

look at another method for assigning production costs—the first-in, first-out method
(for Process Costing)—in which the costs from the beginning balance in Work-in-Process Inventory that were incurred in the prior period are accounted for separately from the
current period costs. The first-in, first-out method is also known as FIFO.

HOW IS A PRODUCTION COST REPORT PREPARED
USING THE FIFO METHOD?
The data related to Puzzle Me’s Assembly Department is listed below:

Prepare a production cost report
using the first-in, first-out method

Assembly Dept.
Units
Beginning WIP:
Units

8,000

Appendix 18A

Percent Complete:
Direct materials

100%

Conversion costs

60%

Started in production in July

42,000

Transferred out in July

40,000

Ending WIP:
Units

???

Percent Complete:
Direct materials

100%

Conversion costs

25%

Costs
Beginning WIP:
Materials costs
Conversion costs

\$     9,800
3,910
130,200

Direct labor

22,090

42,000

\$ 64,090

We will use the same four-step procedure to complete the production cost report for the
Assembly Department for July using the FIFO method:
1.
2.
3.
4.

Summarize the flow of physical units.
Compute output in terms of equivalent units of production.
Compute the cost per equivalent unit of production.
Assign costs to units completed and units in process.

Step 1: Summarize the Flow of Physical Units The Assembly Department had 8,000
units in process on July 1 and started 42,000 units during the month. Therefore, to account for
is 50,000 units. This is the same as the weighted-average method.

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Process Costing 989
To account for = Beginning balance + Amount started
= 8,000 units + 42,000 units
= 50,000 units

Using the FIFO method creates three groups of units to be accounted for:
• Units in beginning inventory that were started in June and completed in July
• Units started in July and completed in July
• Units started in July but not completed in July. These units are still in process at the
end of July and will be completed in August.
The information for the Assembly Department shows 8,000 units in beginning inventory and 40,000 units transferred out. If 40,000 units were completed and transferred, this
would include the 8,000 units in beginning inventory plus another 32,000 units that were
started in July. Remember, FIFO stands for first-in, first-out. Therefore, it is assumed that
the first units in (those in beginning inventory) are the first units out. We must account for
50,000 units. If 40,000 were transferred out, then that leaves 10,000 still in process at the
end of July. We have now accounted for all units.
Accounted for = Beginning balance + Started and completed + In process
= 50,000 units

Exhibit 18A-1 illustrates the three groups of units accounted for.
Exhibit 18A-1

| July Units Accounted For

Appendix 18A

= 8,000 units + 32,000 units + 10,000 units

Started in July—42,000 units

Started and
Completed
in July
32,000 units
Beginning
Inventory
8,000 units

Ending
Inventory
10,000 units

Completed in July—40,000 units

Units Accounted For—50,000 units

To account for equals accounted for, so we are ready to record this information on the
­production cost report. Just as we did with the weighted-average method, we start with completing the UNITS section of the report. At this point, we are not yet assigning costs to units.
Exhibit 18A-2 (on the next page) shows the units to account for and units accounted for.

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990 chapter 18
Exhibit 18A-2

| Production Cost Report—Assembly Department—FIFO Method—Physical Units
PUZZLE ME
Production Cost Report—ASSEMBLY DEPARTMENT
Month Ended July 31, 2018
Equivalent Units for Current Period
Physical
Units

Appendix 18A

UNITS
Units to account for:
Beginning work-in-process
Started in production
Total units to account for

8,000
42,000
50,000

Units accounted for:
Beginning work-in-process
Started and completed
Transferred to Cutting Department
Ending work-in-process
Total units accounted for

8,000
32,000
40,000
10,000
50,000

Direct
Materials

Conversion
Costs

Step 1: Physical flow of units

Step 2: Compute Output in Terms of Equivalent Units of Production In the FIFO
method, costs from the previous period are not merged with the costs from the current
period. Therefore, the EUP calculation is for the current period. The Assembly Department
adds direct materials at the beginning of the process, and conversion costs are incurred
evenly throughout the process. Thus, we must compute equivalent units of production
separately for direct materials and conversion costs.
Equivalent Units of Production for Direct Materials  Because Puzzle Me adds materials
at the beginning of the process, no additional direct materials will be added to complete the
beginning work-in-process units. The completed units and ending WIP are 100% complete
for direct materials.
Beginning WIP units: 8,000 units *
0% =
0 EUP for direct materials
Started and completed units: 32,000 units * 100% = 32,000 EUP for direct materials
In process units: 10,000 units * 100% = 10,000 EUP for direct materials
Total EUP for direct materials
= 42,000 EUP for direct materials

Equivalent Units of Production for Conversion Costs  This is the section where the
difference between the weighted-average and FIFO methods is most obvious.
• Beginning WIP. The 8,000 units that were in process at the beginning of July were 60%
complete. That means 60% of the work was done in June. We are concerned with the
work completed in July. If 60% of the work was done in June and the units were completed in July, then 40% of the work was done in July (100% - 60% = 40%). Therefore, the EUP for these units is 8,000 units * 40% = 3,200 EUP.
• Started and Completed. For the 32,000 units started and completed in July all (100%)
of the work done on the units started and completed was done in July, so the equivalent
units of production are 32,000 units * 100% = 32,000 EUP.
• In Process. Only 25% of the conversion work has been done on the 10,000 puzzle
boards in ending Work-in-Process Inventory. Equivalent units of production are
10,000 units * 25% = 2,500 EUP.

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Process Costing 991
To calculate the equivalent units of production for conversion costs:
Beginning WIP units: 8,000 units * 40% = 3,200 EUP for conversion costs
Started and completed units: 32,000 units * 100% = 32,000 EUP for conversion costs
In process units: 10,000 units * 25% = 2,500 EUP for conversion costs
Total EUP for conversion costs
= 37,700 EUP for conversion costs

Exhibit 18A-3 illustrates the timing of the incurrence of conversion costs. Exhibit 18A-4
shows the production cost report with the EUP calculations added.
Exhibit 18A-3

| Timing of Conversion Costs
June

Beginning Inventory

July

60%

40%

Started and Completed

100%

Ending Inventory

25%

75%

| Production Cost Report—Assembly Department—FIFO Method—EUP
PUZZLE ME
Production Cost Report—ASSEMBLY DEPARTMENT
Month Ended July 31, 2018
Equivalent Units for Current Period

UNITS
Units to account for:
Beginning work-in-process
Started in production
Total units to account for
Units accounted for:
Beginning work-in-process
Started and completed
Transferred to Cutting Department
Ending work-in-process
Total units accounted for

Physical
Units

Direct
Materials

Appendix 18A

Exhibit 18A-4

August

Conversion
Costs

8,000
42,000
50,000
Step 2: EUP
8,000
32,000
40,000
10,000
50,000

0
32,000
32,000
10,000
42,000

3,200
32,000
35,200
2,500
37,700

Step 3: Compute the Cost per Equivalent Unit of Production Now that we have completed the UNITS section of the report, it is time to complete the COSTS section. The
Assembly Department has two inputs and therefore must make two calculations for cost
per equivalent unit of production.

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992 chapter 18
Current period direct materials costs
Current period cost per EUP for
=
direct materials
Equivalent units of production for direct materials
Current period conversion costs
Current period cost per EUP for
=
conversion costs
Equivalent units of production for coversion costs

The Assembly Department has \$208,000 of costs to account for, as illustrated in Exhibit 18A-5.
Exhibit 18A-5

| Assembly Department: Costs to Account For
Direct
Materials

Beginning balance in Work-in-Process
Inventory—Assembly July 1
during July

Appendix 18A

Totals

\$

9,800

Conversion
Costs

Totals

\$ 3,910

\$ 13,710

130,200

64,090

194,290

\$ 140,000

\$ 68,000

\$ 208,000

Our next task is to split these costs between the 40,000 completed puzzle boards
transferred out to the Cutting Department and the 10,000 partially complete puzzle boards
that remain in the Assembly Department’s ending Work-in-Process Inventory.
In Step 2, we computed equivalent units of production for direct materials as 42,000
EUP, and conversion costs as 37,700 EUP. Because the equivalent units of production differ, we must compute a separate cost per unit for each input. Also, the numerator for each
calculation is the cost incurred in the current period, not total costs, because of the FIFO
method. We need to calculate the cost per EUP for the current period.
The cost per equivalent unit of direct materials is \$3.10, which is calculated as follows:
Current period direct materials costs
Current period cost per EUP for
=
direct materials
Equivalent units of production for direct materials
+130,200
=
42,000 EUP
= +3.10 per EUP

The cost per equivalent unit of production for conversion costs is \$1.70, which is calculated
as follows:
Current period conversion costs
Current period cost per EUP for
=
conversion costs
Equivalent units of production for conversion costs
+64,090
=
37,700 EUP
= +1.70 per EUP

The costs to account for calculations are added to the production cost report as shown in
Exhibit 18A-6.

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Process Costing 993
Exhibit 18A-6

| Production Cost Report—Assembly Department—FIFO Method—Costs to Account For
PUZZLE ME
Production Cost Report—ASSEMBLY DEPARTMENT
Month Ended July 31, 2018
Equivalent Units for Current Period

UNITS

Direct
Materials

Physical
Units

Units to account for:
Beginning work-in-process
Started in production
Total units to account for

8,000
42,000
50,000

Units accounted for:
Beginning work-in-process
Started and completed
Transferred to Cutting Department
Ending work-in-process
Total units accounted for

8,000
32,000
40,000
10,000
50,000

0
32,000
32,000
10,000
42,000
Direct
Materials

COSTS

Divided by: EUP this period
Cost per equivalent unit this period

Step 3:
Costs to
account for

3,200
32,000
35,200
2,500
37,700
Conversion
Costs

\$

9,800
130,200
\$ 140,000

\$

3,910
64,090
\$ 68,000

\$ 130,200
÷ 42,000
\$
3.10

\$ 64,090
÷ 37,700
\$
1.70

Total
Costs

\$ 13,710
194,290
\$ 208,000

Cost
per Unit
Appendix 18A

Costs to account for:
Beginning work-in-process
Total costs to account for

Conversion
Costs

Costs accounted for:
Beginning work-in-process
Costs to complete beginning WIP
Total costs for beginning WIP
Started and completed
Transferred to Cutting Department
Ending work-in-process
Total costs accounted for

Step 4: Assign Costs to Units Completed and Units in Process The last step on the
production cost report is to assign the \$208,000 total costs to be accounted for by the
Assembly Department to the following:
• The 8,000 puzzle boards from beginning inventory that have now been completed and
transferred to the Cutting Department.
• The 32,000 started and completed puzzle boards that have also been transferred to
Cutting Department.
• The 10,000 partially completed puzzle boards remaining in the Assembly Department’s ending Work-in-Process Inventory.

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994 chapter 18
This is accomplished by multiplying the cost per equivalent unit of production times the
equivalent units of production. To assign the costs of the two inputs to the three groups of
outputs, this step must be repeated six times to assign:
■■

■■

Direct materials cost to:
• Complete beginning units
• Started and completed units
• In process units

Conversion costs to:
• Complete beginning units
• Started and completed units
• In process units

In addition, the costs in beginning WIP must be added to the above calculations for
costs incurred in the current period.

Direct Materials
Beginning WIP
To complete beginning WIP
Started and Completed
Transferred to Cutting
In process
Total
Appendix 18A

■■

Conversion Costs
Beginning WIP
To complete beginning WIP
Started and Completed
Transferred to Cutting
In process
Total

\$

9,800
0
99,200
109,000
31,000
10,000 EUP × \$3.10 per EUP =
\$ 140,000
0 EUP × \$3.10 per EUP =
32,000 EUP × \$3.10 per EUP =

\$

3,910
5,440
54,400
63,750
4,250
2,500 EUP × \$1.70 per EUP =
\$ 68,000

3,200 EUP × \$1.70 per EUP =
32,000 EUP × \$1.70 per EUP =

We have accomplished our goal of splitting the \$208,000 total cost between the completed units and the in process units and can record these costs on the production cost
report. The completed report is shown in Exhibit 18A-7.

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Process Costing 995
Exhibit 18A-7

| Production Cost Report—Assembly Department—FIFO Method—Costs Accounted For
PUZZLE ME
Production Cost Report—ASSEMBLY DEPARTMENT—FIFO Method
Month Ended July 31, 2018
Equivalent Units for Current Period

UNITS

Physical
Units

Units to account for:
Beginning work-in-process
Started in production
Total units to account for

8,000
42,000
50,000

Units accounted for:
Beginning work-in-process
Started and completed
Transferred to Cutting Department
Ending work-in-process
Total units accounted for

8,000
32,000
40,000
10,000
50,000

0
32,000
32,000
10,000
42,000

Divided by: EUP this period
Cost per equivalent unit this period

Step 4:
Costs
accounted for

3,200
32,000
35,200
2,500
37,700
Total
Costs

\$

9,800
130,200
\$ 140,000

\$ 3,910
64,090
\$ 68,000

\$ 13,710
194,290
\$ 208,000

\$ 130,200
÷ 42,000
\$
3.10

\$ 64,090
÷ 37,700
\$ 1.70

\$

\$ 3,910
5,440
9,350
54,400
63,750
4,250
\$ 68,000

9,800
0
9,800
99,200
109,000
31,000
\$ 140,000

\$ 13,710
5,440
19,150
153,600
172,750

Cost
per Unit
Appendix 18A

Costs to account for:
Beginning work-in-process
Total costs to account for

Conversion
Costs

Conversion
Costs

Direct
Materials

COSTS

Costs accounted for:
Beginning work-in-process
Costs to complete beginning WIP
Total costs for beginning WIP
Started and completed
Transferred to Cutting Department
Ending work-in-process
Total costs accounted for

Direct
Materials

\$ 2.39(a)
4.80(b)

35,250
\$ 208,000

(a) Beginning WIP: \$19,150 / 8,000 units = \$2.3938 per unit
(b) Started and completed: \$153,600 / 32,000 units = \$4.80 per unit

Notice the cost per unit for the units that were in beginning WIP is \$2.39 (\$19,150 /
8,000 units) and the cost per unit for the units started and completed in July is \$4.80
(\$153,600 / 32,000 units). This indicates that costs varied from June to July. Exhibit 18A-8
(on the next page) shows the completed production cost report for July for the Assembly
Department using the weighted-average method. This is a duplicate of Exhibit 18-9 from
the chapter. Take a moment to study the reports. Find the similarities and differences.

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996 chapter 18
Exhibit 18A-8

| Production Cost Report—Assembly Department—Weighted-Average
Method

PUZZLE ME
Production Cost Report—ASSEMBLY DEPARTMENT—Weighted-Average Method
Month Ended July 31, 2018
Equivalent Units
Physical
Units

UNITS
Units to account for:
Beginning work-in-process
Started in production
Total units to account for

8,000
42,000
50,000

Units accounted for:
Completed and transferred out
Ending work-in-process
Total units accounted for

40,000
10,000
50,000

Conversion
Costs

40,000
10,000
50,000
Direct
Materials

COSTS
Appendix 18A

Direct
Materials

40,000
2,500
42,500
Conversion
Costs

Total
Costs

Costs to account for:
Beginning work-in-process
Total costs to account for
Divided by: Total EUP
Cost per equivalent unit

\$

9,800
130,200
140,000
÷ 50,000
\$
2.80

\$ 3,910
64,090
68,000
÷ 42,500
\$ 1.60

\$ 13,710
194,290
\$ 208,000

Costs accounted for:
Completed and transferred out
Ending work-in-process
Total costs accounted for

\$ 112,000
28,000
\$ 140,000

\$ 64,000
4,000
\$ 68,000

\$ 176,000
32,000
\$ 208,000

Comparison of Weighted-Average and FIFO Methods
Notice the differences in the completed and transferred out costs and ending work-in-­
process costs under each method.

Completed and transferred out
Ending work-in-process
Total costs accounted for

Weighted-Average

FIFO

\$ 176,000

\$ 172,750

32,000

35,250

\$ 208,000

\$ 208,000

The total costs are the same regardless of which method is used. The difference between
the two methods relates to how the total costs of \$208,000 is split between completed and
transferred out and ending work-in-process. A company would choose to either use the
weighted-average method or the FIFO method. How does a manager decide which method
to use?

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Process Costing 997
If a business operates in an industry that experiences significant cost changes,
it would be to its benefit to use the FIFO method. The weighted-average method
merges costs from the prior period with the current period. This creates a s­moothing
effect, where cost changes are not as exposed. The FIFO method would create b
­ etter
month-­to-month cost comparisons. This would be especially evident when there are
­substantial ­quantities of units in process at the end of the period. The more detailed cost
information obtained from the FIFO method would allow managers to make better p
­ ricing
and product mix decisions.
If a business operates in an industry that does not experience significant cost
changes, the weighted-average method would be appropriate. This method is easier
to use, and the additional benefit derived from more detailed calculations would not outweigh the cost of obtaining them.

Which method
is better:
weighted-average
or first-in,
first-out? Why?

Try It!
Bishop Company uses the FIFO method in its process costing system. The Mixing Department started the month with 500 units
in process that were 20% complete, started in production 2,000 units, and transferred 2,100 units to the finished goods storage
area. All materials are added at the beginning of the process and conversion costs occur evenly. The units in process at the end of
the month are 45% complete with respect to conversion costs. The department incurred the following costs:

Conversion Costs
Total

Total

\$   500

\$ 2,000

\$ 2,500

1,250

5,450

6,700

\$ 1,750

\$ 7,450

\$ 9,200

Appendix 18A

Direct Materials

Beginning WIP

14A. How many units are still in process at the end of the month?
15A. Compute the equivalent units of production for the Mixing Department for the current month.
16A. Determine the cost per equivalent unit for the current period for direct materials and conversion costs.
17A. Determine the cost to be transferred to the next department.
For more practice, see Short Exercises S18A-15 and S18A-16.

MyAccountingLab

REVIEW
> Things You Should Know
1. How do costs flow through a process costing system?
■■

■■

■■

Process costing systems accumulate costs by process and are most likely used in
­companies that manufacture large quantities of similar products.
Process costing systems have multiple Work-in-Process Inventory accounts—one for
each process or department.
Costs flow from one Work-in-Process Inventory account to the next until production
is complete.

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998 chapter 18
■■

■■

Costs flow from the last Work-in-Process Inventory account to Finished Goods
Inventory.
When the products are sold, costs flow from Finished Goods Inventory to Cost of
Goods Sold.

2. What are equivalent units of production, and how are they calculated?
■■

■■

Equivalent units of production are a way of expressing partially completed units in
terms of completed units.
For example, assuming conversion is uniform throughout the process, units that are
halfway through a production process will have incurred half of the conversion costs.
Therefore, 10 units that are one-half complete have the equivalent costs of 5 units
that are complete: 10 * 50% = 5 * 100%.

3. How is a production cost report prepared for the first department?
■■

The production cost report for the first department can be prepared by following four
steps.
•Step 1: Summarize the flow of physical units.
•Step 2: Compute output in terms of equivalent units of production.

CHAPTER 18

•Step 3: Compute the cost per equivalent unit of production.
•Step 4: Assign costs to units completed and units in process.
■■

Review Exhibit 18-9 for an example of a complete cost production report.

4. How is a production cost report prepared for subsequent departments?
■■

■■

The production cost report for subsequent departments is the same as the first
department with the exception of an additional Transferred In column. The production cost report is still completed using the four step process.
Units that are received from a previous department are considered transferred in
units. These units are always considered 100% complete in terms of equivalent units
because the costs were assigned to them in the previous department.

5. What journal entries are required in a process costing system?
■■

Date

M18_HORN6833_06_SE_C18.indd 998

Costs incurred during the period are added to each Work-in-Process Inventory account
Accounts and Explanation

Debit

Work-in-Process Inventory—Department 1

XXX

Work-in-Process Inventory—Department 2

XXX

Credit

Raw Materials Inventory (for amount of direct materials used)

XXX

Wages Payable (for amount of direct labor incurred)

XXX

XXX

12/21/16 8:45 PM

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