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Chapter 17: Problem 5

Name the five steps in process costing when equivalent units are computed.

Short Answer

Expert verified
The five steps in process costing when computing equivalent units are: 1. Identify the beginning and ending work-in-process inventories. 2. Determine the degree of completion for both beginning and ending inventories. 3. Calculate equivalent units by multiplying physical units by their respective degrees of completion. 4. Compute cost per equivalent unit by dividing total costs by the number of equivalent units produced. 5. Allocate costs to completed and ending work-in-process inventories using the cost per equivalent unit.

Step by step solution

01

Identify the Beginning and Ending Work-in-Process Inventories

The first step in computing equivalent units is to identify the beginning and ending work-in-process (WIP) inventories for each department. The WIP inventories show the amount of work that was done during the accounting period and serves as the basis for valuing the department's inventory.
02

Determine the Degree of Completion

The next step is to determine the degree of completion for both beginning and ending WIP inventories. This is done by estimating the percentage of work completed on the partially finished units in each inventory. The degree of completion varies from department to department and is determined by each department's production manager.
03

Calculate Equivalent Units

After determining the degree of completion, the equivalent units can be calculated. To do so, multiply the number of physical units in each WIP inventory by their respective degrees of completion. By doing this, we can obtain an equivalent quantity of fully completed units, which helps in allocating the cost between departments.
04

Compute Cost Per Equivalent Unit

In this step, the cost per equivalent unit is calculated by dividing the total costs incurred by the department during the accounting period by the number of equivalent units produced. This cost per equivalent unit will be used to allocate the costs to the units in the respective department's inventory.
05

Allocate Costs to Completed and Ending Work-in-Process Inventories

Finally, costs are allocated to the completed and ending WIP inventories. The cost allocation is done by multiplying the number of equivalent units in each inventory by the cost per equivalent unit. This helps in determining the value of both the completed units, which will be transferred to the next department, and the ending WIP units that remain in the department.

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Key Concepts

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

Equivalent Units Computation
The concept of equivalent units is a cornerstone in process costing, an accounting method used by companies that produce similar or identical units of product in batches through a series of uniform production steps or processes.

When we refer to equivalent units, we are talking about a conversion that enables us to assign a cost to partially completed products, effectively treating them as if they were finished goods. This is crucial because in most production processes, at any given time, there are units that are not fully completed.

Breaking Down the Computation of Equivalent Units

The computation begins with counting the physical units in production, whether they are fully complete or not. From there, each unit's stage of completion is assessed - this could be 50%, 75%, or any other percentage based on how much of the production process has been completed.

To convert these percentages into equivalent units, multiply the physical number of units in each category by their respective completion percentages. Here's a simplified formula: \[\begin{equation} \text{Equivalent Units} = \text{Physical Units} \times \text{Percentage Completion} \end{equation}\] For example, if you have 100 units that are 50% complete, they count as 50 equivalent units. This step is pivotal in ensuring the accurate allocation of production costs to units at various stages of completion.
Work-in-Process Inventories
Knowing and managing work-in-process (WIP) inventory is essential for any business involved in a manufacturing or continuous production process. WIP constitutes the goods that are in various stages of completion on the factory floor.

Understanding WIP Inventories

WIP inventory is pivotal because it represents both an investment and a cost - raw materials costs, direct labor, and allocated overhead all contribute to the value of WIP. Careful tracking of beginning and ending WIP inventories can reveal information about production efficiency and processing time. If you have a high volume of WIP, it could indicate a bottleneck in your production, whereas a lower volume might mean your process is running smoothly. Accountants need to take into account these inventories and assess the progress of the items to accurately reflect their state in financial records. The value of the ending WIP inventory is carried over to the next accounting period as it will only be completed then.
Cost Per Equivalent Unit Calculation
To calculate the cost per equivalent unit, we divide the total costs incurred during a period by the number of equivalent units of production. This metric is invaluable as it bridges the cost of actual production with equivalent units providing insight on the efficiency and effectiveness of the production process.

Calculating Cost Per Equivalent Unit

Here's a glimpse into how this calculation is structured: \[\begin{equation} \text{Cost Per Equivalent Unit} = \frac{\text{Total Costs}}{\text{Equivalent Units}} \end{equation}\] Total costs include all costs necessary to complete units during an accounting period, including direct materials, direct labor, and manufacturing overhead. By knowing the cost per equivalent unit, management can price their products appropriately, manage their inventory levels, and make decisions about process improvements where necessary.

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Most popular questions from this chapter

Standard costing, journal entries. The Warner Company manufactures reproductions of expensive sunglasses. Warner uses the standard-costing method of process costing to account for the production of the sunglasses. All materials are added at the beginning of production. The costs and output of sunglasses for May 2017 are as follows: $$\begin{array}{lcccc} & \begin{array}{c} \text { Physical } \\ \text { Units } \end{array} & \begin{array}{c} \text { \% of Completion for } \\ \text { Conversion costs } \end{array} & \begin{array}{c} \text { Direct } \\ \text { Materials } \end{array} & \begin{array}{c} \text { Conversion } \\ \text { costs } \end{array} \\ \hline \text { Work in process, beginning } & 22,000 & 60 \% & \$ 48,400 & \$ 33,000 \\ \text { Started during May } & 95,000 & & & \\ \text { Completed and transferred out } & 87,000 & & & \\ \text { Work in process, ending } & 30,000 & 75 \% & & \\ \text { Standard cost per unit } & & \$ & 2.20 & \$ & 2.50 \\ \text { costs added during May } & & \$ 207,500 & \$ 238,000 \end{array}$$ 1\. Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule. 2\. Compute the total standard costs of sunglasses transferred out in May and the total standard costs of the May 31 inventory of work in process. 3\. Compute the total May variances for direct materials and conversion costs. 4\. Prepare summarized journal entries to record both the actual costs and standard costs for direct materials and conversion costs, including the variances for both production costs.

Equivalent units, zero beginning inventory. Candid, Inc. is a manufacturer of digital cameras. It has two departments: assembly and testing. In January 2017 , the company incurred \(\$ 800,000\) on direct materials and \(\$ 805,000\) on conversion costs, for a total manufacturing cost of \(\$ 1,605,000\) 1\. Assume there was no beginning inventory of any kind on January 1,2017 . During January, 5,000 cameras were placed into production and all 5,000 were fully completed at the end of the month. What is the unit cost of an assembled camera in January? 2\. Assume that during February 5,000 cameras are placed into production. Further assume the same total assembly costs for January are also incurred in February, but only 4,000 cameras are fully completed at the end of the month. All direct materials have been added to the remaining 1,000 cameras. However, on average, these remaining 1,000 cameras are only \(60 \%\) complete as to conversion costs. (a) What are the equivalent units for direct materials and conversion costs and their respective costs per equivalent unit for February? (b) What is the unit cost of an assembled camera in February \(2017 ?\) 3\. Explain the difference in your answers to requirements 1 and 2

"Transferred-in costs are those costs incurred in the preceding accounting period." Do you agree? Explain.

What problems might arise in estimating the degree of completion of semiconductor chips in a semiconductor plant?

Transferred-in costs, weighted-average method. Spelling Sports, which produces basketballs, has two departments: cutting and stitching. Each department has one direct-cost category (direct materials) and one indirect-cost category (conversion costs). This problem focuses on the stitching department. Basketballs that have undergone the cutting process are immediately transferred to the stitching department. Direct material is added when the stitching process is \(70 \%\) complete. Conversion costs are added evenly during stitching operations. When those operations are done, the basketballs are immediately transferred to Finished Goods. Spelling Sports uses the weighted-average method of process costing. The following is a summary of the March 2017 operations of the stitching department: $$\begin{array}{|l|l|c|c|c|c|} \hline & \multicolumn{2}{|c|} {\text { A }} & \multicolumn{1}{c|} {\text { B }} & \multicolumn{1}{c|} {\text { C }} & \multicolumn{1}{c|} {\text { D }} & \multicolumn{1}{c|} {\text { E }} \\ \hline & & \begin{array}{c} \text { Physical Units } \\ \text { (basketballs) } \end{array} & \begin{array}{c} \text { Transferred-In } \\ \text { costs } \end{array} & \begin{array}{c} \text { Direct } \\ \text { Materials } \end{array} & \begin{array}{c} \text { Conversion } \\ \text { costs } \end{array} \\ \hline 2 & \text { Beginning work in process } & 17,500 & \$ 45,360 & \$ & 0 & \$ 17,660 \\ \hline 3 & \text { Degree of completion, beginning work in process } & & 100 \% & 0 \% & 60 \% \\ \hline 4 & \text { Transferred in during March 2017 } & 56,000 & & & \\ \hline 5 & \text { Completed and transferred out during March 2017 } & 52,000 & & & \\ \hline 6 & \text { Ending work in process, March 31 } & 21,500 & & & \\ \hline 7 & \text { Degree of completion, ending work in process } & & 100 \% & 0 \% & 20 \% \\ \hline 8 & \text { Total costs added during March } & \$ 154,560 & \$ 28,080 & \$ 89,310 \\ \hline \end{array}$$ 1\. Summarize total stitching department costs for March 2017 , and assign these costs to units completed (and transferred out) and to units in ending work in process. 2\. Prepare journal entries for March transfers from the cutting department to the stitching department and from the stitching department to Finished Goods.
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