For the Assembly Department. started and completed equals 7.000 units (10.000 – 3.000. or 8.000 – 1.(00), For these 7.000 units. 100% of each resource was added during the month of March, Total jini.yluiti units transferred to Packaging equal the 7,000 started and completed in March plus the 1.000 units from beginning work in process. or a total of 8.000. units, .
The ending work in process required 100% of cutting and trim materials and 100% of direct labor to be added in March. However, because the 3,000 units left in ending work in process were only two -thirds complete at the end of March, not all relevant overhead. particularly the chemical bath, has been added.
The equivalent units of overhead for those 3.000 units are 2.000 equivalent units (667’3% X 3,(00), Cost per Equivalent Unit To determine the amount of cost to assign to the three types of inventories-beginning work in process. ending work in process, and started and completed=-managers compute the cost per equivalent Unit. This simple averaging technique divides the cost accumulated
for each reso. urce in ‘a given time frame by the associated total equivalent The 3.000 units in ending work in process are assigned $ DR.OOO. which wiII be the April beginning Work in Process balance.
During the month of March, $410.000 of costs arc transferred from Assembly to Packaging. The following journal entry would be made to summarize the transfer of costs from Assembly to Packaging:Notice th,at the $200.000 transferred from Cutting to Assembly is now being.passed on to the Packaging Department as the goods flow through the production process. In some automated manufacturing environments, units pass through ‘production processes ve1)’ quickly-often within several minutes or less. Thus the number of units “in process” at anyone time can be insignificant in relation to the number of units processed during the month. For this reason. some companies simply ignore beginning and ending Work in Process and assign all production costs to those units completed and transferred during the month.
Assigning all costs to units completed and transferred greatly simplifies process costing. In this case. accountants need only. make a series of month-end entries transferring the total costs of each Work in Process account to the next (or from the final Work in
Process account to Finished GOods Inventory).
Flow of Costs in Process Costing: An Illustration Assume that RainTree Cola produces a bottled soft drink. The company has two production deoartrnents: the Syrup Department, which mixes the cola syrup; and the Bottling Department, which bottles a mixture of this cola syrup and carbonated water.
In the current month, the Syrup Department produced 75,000 gallons of syrup, which was used by the Bottling Department in producing 10 million bottles of RainTree Cola. The flow of manufacturing costs through Rain’Trees Work in Process accounts is illustrated on the following page.
These cost-transfer entries must be made in sequence, beginning with the first Work in Process account. because each entry increases the costs charged to the next department.The entries in red represent the costs of materials, direct labor, and overhead charged to production during the month. These entries to record materials used and direct labor were made throughout the period. based on materials requisitions and employees’ time cards.
Overhead was applied at month-end. using a separate overhead application rate for each department. The entries’ shown in green and in blue arc the entries made at month-end to transfer the cost of units processed during the ‘period from one department to the next.
Using Unit Costs Per-unit processing costs are easily computed using process costing methods-not just for the finished products but also for the output of each department. For example. the cost of finished goods emerging from the Bottling Department this month was $0.08 per bottle ($800,000 + 10 million bottles produced); the cost of syrup produced in the Syrup Department wall $5 per gal/on ($375.000 + 75,000 gallons).
Rain Tree’s management will use the unit cost data provided by process costing for many purposes. including the following:
• Setting sales prices “Notice that in each of our two departments. “units” of output are defined differently.
In the .Syrup Department. units are expressed in terms of gallons syrupy, whereas in the Bottling Department defined its bottles of cola .Evaluating Compartmental Efficiency ” In evaluating the efficiency of u department, management should consider only those incurred as a result of that department’s ductless. Costs transferred in from other processing departments should not be allowed to “cloud the picture.” To illustrate, consider the Bottling Department in our example.
As shown on page 762. a total of $800;()OO was charged to the Bottling Department during the current month. But $375.000 of this cost was transferred in from the Syrup Department.
This not the cost of bounding cola. Manufacturing costs resulting from activities include only the direct nutcrackers, direct labor, and over charged to the Bottling Department. For Bottling Department, these cost total $415,()OO. (W $O.()425 per unit ($425,000 10 million bottles produced).
In costs 11> the product passes from one in department to the next. These total unit costs arc used in valuing inventory. measuring the cost of goods sold, and evaluating the overall efficiency of manufacturing operation But in evaluating the efficiency, of u pancreatic processing department management should look primarily at the costs incurred within that department. Of course, managers can-also compute the per-unit. costs of the materials, direct labor, and overhead incurred within each department. This detailed cost information should assist them in quickly identifying ‘the cause of any change in a product’s total unit cost.’