91Ó°ÊÓ

Transferred-in costs, weighted-average method. Trendy Clothing, Inc. is a manufacturer of winter clothes. It has a knitting department and a finishing department. This exercise focuses on the finishing department. Direct materials are added at the end of the process. Conversion costs are added evenly during the process. Trendy uses the weighted-average method of process costing. The following information for June 2017 is available. $$\begin{array}{|l|l|c|c|c|c|} \hline & \multicolumn{1}{|c|} {\text { A }} & \multicolumn{1}{c|} {\text { B }} & \multicolumn{1}{c|} {\text { C }} & \multicolumn{1}{c|} {\text { D }} & \multicolumn{1}{c|} {\text { E }} \\ \hline & & \begin{array}{c} \text { Physical Units } \\ \text { (tons) } \end{array} & \begin{array}{c} \text { Transferred-In } \\ \text { costs } \end{array} & \begin{array}{c} \text { Direct } \\ \text { Materials } \end{array} & \begin{array}{c} \text { Conversion } \\ \text { costs } \end{array} \\ \hline 2 & \text { Work in process, beginning inventory (June 1) } & 60 & \$ 60,000 & \$ & 0 & \$ 24,000 \\ \hline 3 & \text { Degree of completion, beginning work in process } & & 100 \% & 0 \% & 50 \% \\ \hline 4 & \text { Transferred-in during June } & 100 & & & \\ \hline 5 & \text { Completed and transferred out during June } & 120 & & & \\ \hline 6 & \text { Work in process, ending inventory (June 30) } & 40 & & & \\\ \hline 7 & \text { Degree of completion, ending work in process } & & 100 \% & 0 \% & 75 \% \\ \hline 8 & \text { Total costs added during June } & \$ 117,000 & \$ 27,000 & \$ 62,400 \\ \hline \end{array}$$ 1\. Calculate equivalent units of transferred-in costs, direct materials, and conversion costs. 2\. Summarize the total costs to account for, and calculate the cost per equivalent unit for transferred-in costs, direct materials, and conversion costs. 3\. Assign costs to units completed (and transferred out) and to units in ending work in process.

Step by step solution

01

Transferred-in costs equivalent units

The degree of completion for transferred-in costs, for beginning inventory is 100%, and for ending inventory is 100%. Equivalent units for transferred-in costs are: Beginning WIP units: 60 tons Transferred-in during June: 100 tons Total tons in process: 160 tons Equivalent units = Total tons in process Equivalent units = 160 tons

02

Direct materials equivalent units

The degree of completion for direct materials, for beginning inventory is 0%, and for ending inventory is 0%. Equivalent units for direct materials are: Beginning WIP units: 0 tons (0% completed) Transferred-in during June: 100 tons Total tons in process: 100 tons Equivalent units = Total tons in process Equivalent units = 100 tons

03

Conversion costs equivalent units

The degree of completion for conversion costs, for beginning inventory is 50%, and for ending inventory is 75%. Equivalent units for conversion costs are: Beginning WIP units: 60 tons × 50% = 30 tons Transferred-in during June: 100 tons Total tons in process: 130 tons Equivalent units = Total tons in process Equivalent units = 130 tons #Step 2: Summarize total costs to account for and cost per equivalent unit#

04

Total costs to account for

From the table, we have the total costs added during June for transferred-in costs, direct materials, and conversion costs. Add them all up to get the total costs to account for: Total costs to account for = Transferred-in costs + Direct materials + Conversion costs Total costs to account for = \(117,000 + \)27,000 + $62,400 Total costs to account for = $206,400

05

Cost per equivalent unit

To calculate the cost per equivalent unit for transferred-in costs, direct materials, and conversion costs, divide the total costs added during June by their respective equivalent units: Cost per equivalent unit (Transferred-in costs) = Transferred-in costs / Equivalent units Cost per equivalent unit (Transferred-in costs) = $117,000 / 160 tons Cost per equivalent unit (Transferred-in costs) = $731.25/ton Cost per equivalent unit (Direct materials) = Direct materials / Equivalent units Cost per equivalent unit (Direct materials) = $27,000 / 100 tons Cost per equivalent unit (Direct materials) = $270/ton Cost per equivalent unit (Conversion costs) = Conversion costs / Equivalent units Cost per equivalent unit (Conversion costs) = $62,400 / 130 tons Cost per equivalent unit (Conversion costs) = $480/ton #Step 3: Assign costs to units#

06

Completed and transferred out units cost

To find the cost of completed and transferred out units, multiply the cost per equivalent unit for each cost component (transferred-in costs, direct materials, and conversion costs) by the number of units completed and transferred out (120 tons) and then sum them up: Cost of completed and transferred out units = (Transferred-in cost per unit × 120) + (Direct materials cost per unit × 120) + (Conversion costs per unit × 120) Cost of completed and transferred out units = (\(731.25 × 120) + (\)270 × 120) + ($480 × 120) Cost of completed and transferred out units = \(87,750 + \)32,400 + $57,600 Cost of completed and transferred out units = $177,750

07

Ending work in process inventory cost

To find the cost of ending work in process inventory, multiply the cost per equivalent unit for each cost component (transferred-in costs, direct materials, and conversion costs) by the number of tons in ending work in process inventory (40 tons) and the respective degree of completion, then sum them up: Cost of ending WIP inventory = (Transferred-in cost per unit × 40) + (Direct materials cost per unit × 0) + (Conversion costs per unit × 40 × 75%) Cost of ending WIP inventory = (\(731.25 × 40) + (\)270 × 0) + ($480 × 40 × 75%) Cost of ending WIP inventory = \(29,250 + \)0 + $14,400 Cost of ending WIP inventory = $43,650 1. The equivalent units for transferred-in costs, direct materials, and conversion costs are 160 tons, 100 tons, and 130 tons respectively. 2. The total costs to account for are \(206,400 and the cost per equivalent unit for transferred-in costs, direct materials, and conversion costs are \)731.25/ton, \(270/ton, and \)480/ton respectively. 3. The costs assigned to units completed (and transferred out) and to units in ending work in process are \(177,750 and \)43,650 respectively.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Equivalent Units

Equivalent units are a crucial concept in process costing. They help to allocate costs accurately in manufacturing processes. In essence, equivalent units are a measure of the work done during a period, expressed in complete units of output.
For the exercise above, we calculate equivalent units for three components: transferred-in costs, direct materials, and conversion costs.

• **Transferred-in costs:** Since these costs are assumed to be 100% complete when they enter the department, all the units in both beginning and ending work in process are considered fully complete for transferred-in costs.
• **Direct materials:** These are added at the end of the process. Therefore, no units in the beginning work in process are considered complete. All units transferred during the month are used to calculate equivalent units.
• **Conversion costs:** These occur evenly throughout the process. Therefore, a percentage completion is applied to units based on their stage of completion.

Understanding equivalent units helps in determining accurate cost per unit, which is critical for financial reporting and decision-making.

Transferred-In Costs

Transferred-in costs are those that have been incurred in a preceding department or process and carried forward to the next. Think of these as the costs accumulated from the previous step of the production process.
In our example of Trendy Clothing, Inc., the finishing department receives the transferred-in costs from the knitting department. These costs are always considered 100% complete as they are already 'in-process' or finished in the previous stage before arriving in the new department.
Effectively managing transferred-in costs means:

• Tracking and allocating them accurately to avoid doubling costs.
• Ensuring that every unit moving from one department to another carries forward its fair share of the accumulated costs.

This helps in understanding the total product cost, especially in multi-stage production processes.

Conversion Costs

Conversion costs are all the costs required to convert raw materials into finished goods, excluding direct materials. These consist of direct labor and manufacturing overhead, distributed evenly throughout the production process.
In Trendy Clothing's finishing department scenario, conversion costs are incomplete during the process. This means that beginning and ending inventories are only partially finished.
A few key points to note:

• **Cost allocation:** Conversion costs are assigned based on the completion percentage of the work in process.
• **Efficiency measurement:** Proper calculation helps in assessing how efficiently resources like labor and overhead are being utilized.

By calculating proper equivalent units for these costs, managers can pinpoint area efficiencies and help control overall manufacturing expenses.

Process Costing

Process costing is a methodology used to assign production costs to units of output in industries where production is continuous. It is widely applied in sectors like chemicals, textiles, and clothing production, where similar products are produced en masse.
With process costing, costs are aggregated and averaged over all units produced within a period. This involves a flow of costs through the stages or processes the product passes, ensuring an accurate reflection of the cost at each step.
The exercise from Trendy Clothing reflects the weighted-average method, which considers the costs of both current and prior periods. The weighted-average method makes it easier to calculate equivalent units and cost per unit, providing a more straightforward view for financial evaluations.
By understanding process costing deeply, businesses better allocate their costs and streamline operations to improve profitability.

Direct Materials

Direct materials are a major cost in the manufacturing process, representing the raw inputs transformed into final products. In process costing, they are distinct from conversion costs.
For Trendy Clothing's finishing department:

• **Timing of addition:** Direct materials are added at the end of the production process. Hence, units in progress do not incur direct material costs until they reach this final stage.
• **Allocation:** The total direct material costs incurred are distributed across units fully completed during the period.

Since direct materials are added at a specific time, it's essential to account for them accurately to reflect true costs devoid of approximation. This precise allocation helps ensure proper product pricing and inventory valuation.