Soap Production Company’s Mixing department shows the following information for the 1,000 units of product remaining in work in process at the end of the period. In the first stage of production, Coca-Cola mixes direct materials—water, refined sugar, and secret ingredients—to make the liquid for its beverages. The second stage includes filling cleaned and sanitized bottles before placing a cap on each bottle.
Works-in-Progress vs. Finished Goods
The full process cost report can be found byclicking Jax_process cost). First, it reduces costs for us, because we’re shipping more orders a much shorter distance. Second, and maybe equally as important, it’s reducing the time that customers have to wait to get packages.
4 Weighted Average Rates and Cost Allocation (STEP #2 and STEP #
The cost of purchasing a product factors into what it costs to make it (e.g., raw materials, labor, and production). Thus, your ending WIP inventory is essential to know for inventory accounting. Period costs are expensed during the period in which they are incurred; this allows a company to apply the administrative and other depreciation schedule for computers expenses shown on the income statement to the same period in which the company earns income. Under generally accepted accounting principles (GAAP), separating the production costs and assigning them to the department results in the costs of the product staying with the work in process inventory for each department.
Steps of Process Costing
- A Total costs to be accounted for (step 2) must equal total costs accounted for (step 4).
- FIFO doesn’t intermingle work from last period with this period’s costs and this period’s rates.
- Using a simple example to explain this concept, assume 30 students attend school and each takes half a full load of classes.
- This is why, when doing periodic inventory, it may be desirable to first finish all manufacturing orders so the ending WIP would be zero.
We willcontinue the discussion under the weighted average method andcalculate a cost per equivalent unit. The total of the cost per unit for material ($1.17) and for conversion costs ($2.80) is the total cost of each unit transferred to the finishing department ($3.97). Both process costing and job order costing maintain the costs of direct material, direct labor, and manufacturing overhead. The process of production does not change because of the costing method.
Financial and Managerial Accounting
Then, throughout the current period, the department incurs more costs that are debited to WIP. Identify whether each business listed in the following would use job costing or process costing. We return to Desk Products, Inc., throughout the chapter to explain how process costing systems work.
The problem will providethe information related to beginning work in process inventorycosts and units. ‘Work in process’ inventory refers to unfinished products that are somewhere in the manufacturing process, and are therefore unsellable. Businesses that sell highly custom products (e.g., hand-made products on Etsy) are more likely to oversee the WIP inventory process than a business that purchases finished goods directly from a supplier or manufacturer.
Since the combs are only partially completed, all costs are posted to WIP. When the combs are completed, the costs are moved from WIP to finished goods, with both accounts being part of the inventory account. Costs are moved from inventory to cost of goods sold (COGS) when the combs are eventually sold. What makes this method a “weighted average” is that performance last period affects costs in future periods (it will at least affect costs this period and next period). Let’s say the firm was not very cost-effective last period and $15,000 in beginning WIP is a lot of conversion costs for the 360 equivalent units in beginning WIP.
Each month, the data at the top are changed to reflect the current month’s activity, and the production cost report takes care of itself. A Total costs to be accounted for (step 2) must equal total costs accounted for (step 4). The concept of an equivalent unit can be applied to determine the number of full-time equivalent students (FTES) at a school. Colleges use FTES data to plan and make decisions about course offerings, staffing, and facility needs.