Process costing becomes more complicated when there are both beginning and ending work in process (BWIP and EWIP) inventories. The costs stored in BWIP were incurred during the prior period. A decision must be made about how to handle those costs.
There are two methods for treating BWIP costs when computing the unit cost for the current period: the weighted average costing method and the FIFO costing method. The primary difference between the two methods is in the calculation of cost per equivalent unit—specifically, what costs are included in the numerator and what units are included in the denominator.
Under the weighted average method, the costs in BWIP are treated as though they are part of the manufacturing costs for the current period. Therefore, the BWIP costs are added to the manufacturing costs for the current period to determine the numerator for the cost per equivalent unit. The number of units in BWIP is also assumed to be started and completed during the current period. The denominator has three parts:
Actual number of units in BWIP (100%)
Actual number of units started and completed during the period
Equivalent units for the work on EWIP
Under the FIFO method, BWIP costs are not included in the calculation of cost per equivalent unit. Only the manufacturing costs incurred during the current period are used as the numerator. The FIFO method assumes that the units in BWIP are completed first and are measured as equivalent units (contrary to the weighted average method, which counts BWIP units at 100%). Thus, the denominator has three parts:
Equivalent units for the work to be completed on BWIP
Actual number of units started and completed during the period
Equivalent units for the work on EWIP
Answer the following:
| Select the costing method that includes costs for beginning work in process in the calculation of cost per equivalent unit. selectFIFOWeighted averageCorrect 1 of Item 1 |
| Select the costing method that counts units for the completion of the beginning work in process as equivalent units. selectFIFOWeighted averageCorrect 2 of Item 1 |
Because the first-in, first-out (FIFO) method is often the same as the physical flow of units, most companies use the FIFO method. Regardless of the method used, there are five steps in process costing calculations. These calculations allocate costs to inventories at the end of each period.
Step 1: Analyze the Physical Flow
The purpose of this step is to provide a summary of all units for which some work had been done during the period. This step is the same for both costing methods. Basically, this step accounts for the BWIP and the units started. This step determines if those units are completed (and transferred out) or in EWIP. The key is that these must be equal. Complete the following formula to illustrate this relationship:
| BWIP | + | selectUnits StartedUnits CompletedCorrect 1 of Item 2 | = | selectUnits StartedUnits CompletedCorrect 2 of Item 2 | + | EWIP |
APPLY THE CONCEPTS: Step 1
Analyze the physical flow for In the Doghouse
In the Doghouse produces wooden doghouses with shingled roofs. At the beginning of June, there were 500 units in BWIP with costs of $19,132. During the month, the company completed work on the BWIP and began production on 1,100 units. In the Doghouse incurred $88,020 in manufacturing costs during June. At the end of the month, 200 units of those started during the month were in EWIP. In the table to the below, account for the units for June.
| Physical flow for June | |||
| Completed from BWIP | |||
| Started and completed | |||
| Total units completed | |||
| EWIP | |||
| Total units accounted for | |||
Step 2: Calculate the Equivalent Units for the Period
The units in BWIP and EWIP are not 100% complete. This step allows BWIP and EWIP to be stated in terms of completed units, which are called equivalent units. This step must be completed before the cost per unit can be calculated.
Under the weighted average method, BWIP is considered to be started and completed during the period when calculating equivalent units. Therefore, BWIP units are included at 100%. Under the FIFO method, the BWIP units are measured by the percentage of work required to complete those units. Therefore, the percentage of work that needs to be done to complete the units must be multiplied by the number of units in BWIP.
APPLY THE CONCEPTS: Step 2
Using the data from above, calculate the Equivalent Units for June. (Note: In the Doghouse’s production manager has estimated that the units in BWIP were 80% complete at the beginning of June. The BWIP units were completed during the month. That is, 20% of the work to complete the units was done in the current period (100% – 80% = 20%). The manager has also estimated that EWIP was 40% complete at the end of month. Refer to the analysis of the physical flow.)
| Equivalent units for June | Weighted average | FIFO |
| BWIP | ||
| Units started and completed | ||
| EWIP | ||
| June equivalent units |
Step 3: Compute the Cost per Equivalent Unit
The calculation for cost per equivalent unit is a simple calculation:
| Manufacturing Costs |
| Equivalent Units |
Under the weighted average method, the numerator is the sum of the manufacturing costs in BWIP and the manufacturing costs for the period. Under the FIFO method, the beginning inventory costs are excluded from this calculation. The numerator is the manufacturing costs for the current period only.
Equivalent units for the period were computed in step 2.
APPLY THE CONCEPTS: Step 3
Recall that the BWIP had costs of $19,132. During June, In the Doghouse incurred $88,020 in manufacturing costs. Complete the formula and cost per equivalent unit for the weighted average method and for the FIFO method to the below. If required, round the cost per equivalent unit amount to the nearest cent.
Compute the Weighted Average Cost per Equivalent Unit for June
| Weighted Average Cost per Equivalent Unit = |
$ |
| = | $ |
Compute the FIFO Cost per Equivalent Unit for June
| FIFO Cost per Equivalent Unit = |
|
| = | $ |
Step 4: Valuation of Inventories
In this step, the cost of the units transferred out of the current process to Finished Goods is computed by using the information calculated in steps 2 and 3.
Recall that the weighted average method assumes that BWIP units are started and completed during the current period. Because of this assumption, BWIP costs were included in the cost per equivalent unit. Therefore, costs transferred out (to Finished Goods) are calculated by multiplying the units started and completed (step 2) times the weighted average cost per equivalent unit (step 3).
The FIFO method requires the BWIP equivalent units to be added to the units started and completed to determine the units transferred out (step 2). These units are multiplied times the FIFO cost per equivalent unit (step 3). This amount is added to the costs in BWIP to determine the costs transferred out (to Finished Goods). If required, round the cost per equivalent unit amounts to the nearest cent.
APPLY THE CONCEPTS: Step 4
Valuation of Inventories for June
| Inventory Valuation for June |
Weighted average | FIFO | ||
| Finished Goods: | ||||
| BWIP equivalent units | ||||
| Started and completed | ||||
| Units transferred out | ||||
| x Cost per equivalent unit | $ | $ | ||
| $ | $ | |||
| + BWIP costs | ||||
| Costs transferred out | $ | $ | ||
| EWIP: | ||||
| EWIP equivalent units | ||||
| x Cost per equivalent unit | $ | $ | ||
| Costs in EWIP | $ | $ | ||
Step 5: Cost Reconciliation
The purpose of cost reconciliation is to confirm that costs have been fully allocated to inventories. The total costs to account for are the sum of the costs in BWIP and the manufacturing costs for the period. This sum is reconciled by showing that it has been allocated to Finished Goods (units transferred out) and EWIP.
APPLY THE CONCEPTS: Step 5
Cost Reconciliation for June
| Weighted average | FIFO | ||
| Costs to account for: | |||
| Costs in BWIP | $ | $ | |
| Manufacturing costs during June | |||
| Total costs to account for | $ | $ | |
| Cost reconciliation: | |||
| Costs transferred out | $ | $ | |
| Costs in EWIP | |||
| Total costs accounted for | $ | $ | |
