Cost Accounting (14th Edition)

DECISION POINTS 631
2. The FIFO method uses equivalent units of work done in the current period only to
compute cost per equivalent unit. The calculations of equivalent units follow:
A
B
C
D
E
1
2
(Step 1)
(Step 2)
Equivalent Units
3
Flow of Production
Physical
Units
Transferred-In
Costs
Direct
Materials
Conversion
Costs
4 Work in process, beginning (given) 50,000
5 Transferred in during current period (given) 200,000
6
7
8
To account for
Completed and transferred out during current period:
From beginning work in process a 250,000
50,000
9
10
[50,000 × (100% – 100%); 50,000 × (100% – 0%); 50,000 × (100% – 80%)]
Started and completed 160,000 b 0 50,000 10,000
11
12
(160,000 × 100%; 160,000 × 100%; 160,000 × 100%)
Work in process, ending c
40,000 d
160,000 160,000 160,000
13 ( 40,000 × 100%; 40,000 × 0%; 40,000 × 40%)
40,000
0 16,000
14
15
Accounted for
Equivalent units of work done in current period
250,000
200,000 210,000 186,000
16
17
a Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.
b 210,000 physical units completed and transferred out minus 50,000 physical units completed and transferred out from beginning
18
19
20
work-in-process inventory.
c Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%.
d
250,000 physical units to account for minus 210,000 physical units completed and transferred out.
Decision Points
The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a
key question related to a learning objective. The guidelines are the answer to that question.
Decision
1. Under what conditions
is a process-costing system
used?
2. How are average unit
costs computed when no
inventories are present?
3. What are the five steps in
a process-costing system
and how are equivalent
units calculated?
Guidelines
A process-costing system is used to determine cost of a product or service when
masses of identical or similar units are produced. Industries using process-costing
systems include food, textiles, and oil refining.
Average unit costs are computed by dividing total costs in a given accounting
period by total units produced in that period.
The five steps in a process-costing system are (1) summarize the flow of physical
units of output, (2) compute output in terms of equivalent units, (3) summarize
total costs to account for, (4) compute cost per equivalent unit, and (5) assign total
costs to units completed and to units in ending work in process.
Equivalent units is a derived amount of output units that (a) takes the quantity of
each input (factor of production) in units completed or in incomplete units in work
in process and (b) converts the quantity of input into the amount of completed output
units that could be made with that quantity of input.