C

Syst
em Desi
gn:JobOr
hapt

der
erThr
ee

andPr
oductCost
ingSystem

Productcost i
ngistheprocessofassi
gningcostst
ot heproductsandser vi
cesprovided
byacompany .Anunderstandi
ngofthi
scostingprocessisv i
talt
omanager s,because
thewayi nwhi chapr oductorservi
cei scostedcanhav easubst antialimpacton
repor
tedpr ofi
ts,aswellasonkeymanagementdeci sions.Companiesf r
equentlyadopt
oneoft het wocostingsystemstoassigncoststoproductsorservices.AreJobor der
costi
ngsy stem andProcesscosti
ngsystem.

Jobor dercost ingsy stem i susedi nsituati

onswher emanydi f
ferentproduct sare
produced each per iod.Forexampl e cl
othing fact
or y woul dtypicall
y made many
diff
erenttypesofj eansf orbot hmenandwomendur ingamont h.Inaj obordercosting
system,cost sar etracedt ot hejobsandt hent hecost soft hejobar edividedbyt he
numberofuni t
si nt hej obt oar r
iveatanav eragecostperuni t
.Jobor dercost ing
system i sal so ext ensiv el
yused i n serviceindustries.Hospi t
als,law fi
r ms,mov i
e
studios,account ingf ir
ms, advert
isi
ngagenci esandr epai rshopsalluseav ar i
etyofjob
ordercost ingsy st
em t oaccumul atecost sforaccount i
ngandbi l
li
ngpur poses.The
detail
sher edealwi thamanuf acturi
ngfirm, t
hesameconceptandpr ocedur
esar eused
bymanyser viceor ganizat i
ons.Ingener albusinessthatusej obordercostingincludes
Const r
uctioncompani es,Fur nit
uremanuf acturers,Pr
intingfirms,Repairshops,Ser vi
ce
givi
ngor ganizationandGar agesetc.

Ther ecordkeepi ngandcostassi gnmentpr obl

emsar emorecompl exinaj oborder
costi
ngsy stem whenacompanysel l
smanydi ff
erentproductsandser vi
cesthanwhen
i
thasonl yasi ngleproductorservi
ce.Sincethepr oductsaredi f
ferent,thecost
sar e
typi
call
ydi ff
erent.Consequently
,costrecor dsmustbemai ntai
nedf oreachdisti
nct
productorj ob.Forexampl eanat tor
neyinal ar
gecriminallawpr act
icewoul dordi
nari
ly
keepsepar aterecordsofthecostsofadv i
singanddef endi
ngeachofhercl i
ent
s.Anda
cl
othingf actorywoul dkeepsepar atetr
ackoft hecost soffill
i
ngor der sforpart
icul
ar
styl
es,sizes, andcolorsofjeans.

Ajob ordercost i
ng syst
em requi
resmoreeffor
tthan a pr
ocesscosting sy
stem.
Companies classi
fy manufact
uri
ng cost
sintothree br
oad categor
ies (
1)di rect
mater
ial
s,(2)dir
ectlabor
,(3)manuf
act
uri
ngover
head.

Account
ingPr
ocedur
esf
orJobOr
derCost
ing

1
Jobordercost
ingsyst
em requi
resasubsidi
aryledgerforeachjoborderandgener
alledger
(cont
rol
li
ngaccount
)forthetot
alamount.Entr
iesinsubsidiar
yledgerwil
lbemadefrequentl
y
andsummar i
zedincontr
olaccounti
nweeklyormont hl
yinter
val.

Maj
oraccount
ingpr
ocedur
esi
njobor
dercost
ingsy
stem

 Receivi
ngj oborderandpur chaseofr awmat er
ial
s
 Transferr
ingrawmat er
ialt
owor kinpr ocess
 Recordinglabortowor kinprocess
 Recordingactualmanuf acturi
ngov erheadcostincurr
ed
 All
ocatingmanuf acturi
ngov erheadcostwor kinprocess
 Transferr
ingwor kinprocesst ofi
nishedgood
 Transferr
ingfi
nishedgoodst ocustomer s.

Measur
ingDi
rectMat
eri
alsCosti
nJobOr
derCost
ingSy
stem:
Bi
l
lofMateri
als:

Atthebeginningofpr oducti
onprocessadocumentknownasbi llofmateri
alsisused
forst
andardpr oduct Abi
s." l
lofmateri
alsisadocumentt hatli
ststhetypeandquantit
y
ofeachit
em ofmat eri
alsneededtocompleteaunitofstandardproduct"
.Incasewhere
i
tisnotpossibletouseabi l
lofmater
ial
s,thepr
oductionstaffdeter
minesthemat er
ial
s
requi
rementsfrom thebluepri
ntssubmitt
edbythecust omer.

Mat
eri
alsRequi
sit
ionFor
m:

Whenanagr eementi
sreachedwi tht
hecustomerconcerni
ngthequantit
ies,pr
iceand
shipmentdatef
ortheorder,aproducti
onorderi
sissued.Theproduct
iondepar t
ment
thenprepar
esamateri
alsrequi
sit
ionf m."
or Themateri
alsrequi
sit
ionf
ormi sadet ai
l
ed
sourcedocumentthatspeci
fi
esthetypeandquanti
tyofmat
eri
alst
obedrawnf
rom t
he
stor
eroom,andidenti
fi
esthejobtowhichthecost
softhemater
ial
sar
etobechar
ged".
Thef ormisusedt ocont r
oltheflow ofmateri
alsi
ntoproduct i
onandal soformaki ng
ent
riesintheaccountingr ecor
ds.Thecompl etedfor
mi spr esent
edt ot hest
oreroom
cl
erkwhot henissuesthenecessar yrawmat er
ial
s.Thestoreroom clerkisnotal
lowed
toreleasemateri
alswithoutsuchaf orm beari
nganauthori
zedsi gnature.Fol
l
owingi s
anexampl eofamat er
ialsrequi
sit
ionform.

Sampl
eofMat
eri
alsRequi
sit
ionFor
m:
Mater
ial
sRequi
si
ti
onNumber
14873 Dat
eMar
ch2
JobNumbertoBeChar
ged
2B47

2
 Depar
tment:
Mil
l
ing

Descr
ipt
ion Quanti
ty Uni
tCost TotalCost
M46Housi ng 2 Br124 Br248
G7Connect or 4 103 412
$660
Aut
hor
izedSi
gnat
ure:W/
tMel
atTenay
eTadesse

JobCostSheet
:

Afterbeing noti
fi
ed t hatthe production orderhas been issued,the Accounti
ng
Departmentpreparesaj obcostsheet .Aj obcostsheeti saf or
m prepar
edf oreach
separat
ej obthatrecordsthemat eri
als,laborandoverheadcostschargedtot hejob.
Afterdi
rectmateri
alsareissued,
theAccount i
ngdepar
tmentrecordsthei
rcostsdir
ectly
ont hej
obcostsheet .

Inadditi
ont oservi
ngasameansf orchargingcoststojobs,thejobcostsheetal so
serv
esasakeypar tofaf i
rm'saccountingrecords.Thej obcostsheet sform a
subsidi
aryledgertotheworkinprocess(WI P)account
.Theyar edetai
ledrecordsfor
thejobsinprocessthatadduptothebal
ancei ntheworkinprocess(WIP).Fol
lowingis
anexampl eofajobcostsheet
.

JOBCOSTSHEET
JobNumber:2B47 DateIni
ti
ated March2
Depar
tment:Mi
ll
ing DateCompl et
ed March12
I
tem : Unit
sCompl eted 100Uni
ts
Di
rectMat
eri
als Di
rectLabor Manuf
act
uri
ngOv
erhead
Req.No. Amount Ti
cket Hour
s Amount Hour
s Rat
e Amount
14873 Br660
CostSummar
y Uni
tsShi
pped
Di
rectMat
eri
als $XXX Dat
e Number Bal
ance
Di
rectLabor $XXX
Manuf
act
uri
ngOv
erhead $XXX
Tot
alCost $XXX

$
Uni
tPr
oductCost

Measur
ingDi
rectLaborCosti
nJobOr
derCost
ingSy
stem:

LaborTi
meTi
cket
:Di
rectl
aborcosti
shandl
ed i
nmucht
hesamewayasdi
rect

3
mat eri
alscost .Directlaborconsi st
sofl aborchar gest hatar eeasi lyt raced t oa
parti
cularj
ob.Laborchar gesthatcannotbeeasi lytraceddi rectl
yt oanyj obar etr eated
aspar tofmanuf acturi
ngov erhead.Thel at
ercategor yoflaborcosti sknownasi ndirect
l
aborandi ncl
udest askssuchasmai nt enance,super vi
sion,andcl eanup.Wor ker suse
ti
met i
cket
st orecordthet i
met heyspendoneachj obandt ask.Acompl etedl abort i
me
ti
cketisanhourbyhoursummar yoft heempl oyeesact i
viti
est hroughoutonaspeci fi
c
j
ob,t heempl oyeeent ersthej obnumberont hetimet i
cketandnot est heamountof
ti
mespentont hatjob.Whennotassi gnedt oapar t
icularjob,theempl oy eer ecor dst he
natureofthei ndir
ectlabortask( suchascl eanupandmai ntenance)andt heamountof
ti
mespentont hetask.Thedai lytimet icketsareal sousedast hebasi sf orlaborcost
entri
esintotheaccount ingrecor ds.Followingi sanexampl eofempl oyee’st i
met icket .

Ti
meTi cketNo.843 Dat
eMarch3
Empl
oyee:MeazaFi rewAdmasu St
ati
on4
Started Ended Ti meComplet
ed Rate Amount JobNumber
7:
00 12:00 5.
0 $9 $45 2B47
12:30 2:
30 2.
0 9 18 2B50
2:
30 3:
30 1.
0 9 9 2B52

Appl
i
cat
ionofManuf
act
uri
ngOv
erheadCosti
nJobOr
derCost
ing:

Pr
edet
ermi
nedOv
erheadRat
e:

Manufact
uri
ngover
headmustbei ncl
udedwit
hdi r
ectlaboront hejobcostsheetsince
manufact
uri
ngoverheadisal soaproductcost.Howev er,assigni
ngmanuf actur
ing
ov
erheadtouni
tsofproductcanbeadif
fi
cul
ttask.Therearethreereasonsf
orthis:

1.Manufactur
ing overhead is an indi
rectcost.This means t hatitis either
i
mpossibleordiff
iculttot
racethesecoststoaparti
cul
arpr oductorjob.
2.Manufactur
ing overhead consi
stsofmanydi ff
erenti t
emsr anging f
rom t he
gr
easeusedi nmachi nestotheannualsalar
yofproducti
onmanager .
3.Even though out put may f luct
uat
e due t o seasonal or ot her fact
or s,
manufactur
ingov erheadcostst endt oremai
nr elat
ivel
yconst antduet ot he
pr
esenceoff i
xedcost s.

Givent heseproblems,aboutt heonl ywaytoassignoverheadcoststoproduct i

onisto
use an al l
ocation pr ocess.Thi s all
ocat
ion ofoverhead costis accomplished by
selectinganal locationbaset hatiscommont oal
loft hecompany 'sproductsand
services.Anallocationbasei sameasur esuchasdi r
ectlaborhoursormachi nehours
thatisusedt oassi gnov er
headcost stopr oduct
sandservices.Themostwi delyused

4
all
ocati
onbasesaredi
rectl
aborhours,anddi
rectl
aborcost
,withmachi
nehoursand
evenunitsofpr
oduct(
whereacompanyhasonl yasingl
eproduct)al
sousedt
osome
extent
.Todetermi
nebudget
edrate:

 Est
imatemanufacturi
ngover
headcostforthey ear
.
 Chooseall
ocat
ionbasesuchaslaborhour,dir
ectlaborcostormachi
nehour
.
 Est
imatetheal
locati
onbasefort
hey ear
 Cal
culat
ethebudgetedrat
eusingtheformula.

Theal
l
ocat
ionbaseisusedtocompute"predet
erminedoverheadrate"i
nthefol
l
owi
ng
for
mul
aorequat
ion.For
mulaandCal
culat
ionofPredeter
minedOv erheadRat
e

Pr
edet
erminedOv
erheadRat
e= Esti
matedtotalmanufact
uri
ngoverheadcost
P.O.R Est
imatedtotal
unit
sintheall
ocat
ionbase
Exampl
e:

I
facompanyhasest i
mat edthatit
stotalmanufact
uri
ngov er
headcostwil
lbe$320,
000
f
ortheyearandit
st otaldir
ectlaborhourwillbe40,000.It
spr edet
ermi
nedover
head
r
atefort
heyearwi
llbe$8perdi rectl
aborhour,ascal
culat
edbelow:

$320,
000/40,
000=$8perdi
rectl
aborhour

Predeter
mi nedoverheadrateisbasedonest i
mat esrat
herthanactualresult
s.Thi
sis
becauset hepredetermi
nedov erheadrat
ei scomput edbef
oretheperiodbeginsandis
usedt oapplyoverheadcostthroughouttheperiod.Theprocessofassigningover
head
costt ojobsiscal ledover
headappl i
cation.Formulafordetermi
ningt heamountof
overheadcosttoappl yt
oapar ti
cularj
obis:

Ov
erheadappl
i
edt
oapar
ti
cul
arj
ob=P.
O.R×Amountofal
l
ocat
ioni
ncur
redbyt
hej
ob

Notethatthej obcostsheetintheexamplebel
ow i
ndi
catesthat27l
aborhourshav
ebeen
worked.Theref
oreatotalof$216ofmanufact
uri
ngov
erheadcostwoul
dbeappli
edtothej
ob.
Seethefoll
owingcal
culati
on:

Ov
erheadappl
i
edt
ojob2B47=P.
O.R×Act
ual
dir
ectl
aborhour
schar
gedt
ojob2B47

=$8perDLH×27DLHs
=$216ofov
erheadappl
i
edt
ojob2B47
Sour
ceofdocument
sforj
obor
dercost
ing
Sour
cedocumentsar
etheori
ginal
recor
dthatsuppor
tsjour
nalent
ri
esinaccount
ingsyst
em.
Thekeysour
cedocumenti
njobordercost
ingsyst
em i
sjobcostsheet(
jobcostr
ecord)t
his

5
documentrecor
dsandaccumul
atesal
lthecost(
dir
ectmat
eri
al,
dir
ectl
aborandMOHcost
)
assi
gnedtoaspeci
fi
cjob.

JobOr
derCost
ing-TheFl
owofCost
:

Tounderstandthefl
owofcost sinjobor dercosti
ngsystem, weshallconsi
derasi
nglemont
h's
acti
vit
yforacompany ,aproducerofproductAandpr oductB.Thecompanyhast wojobsin
processduri
ngApr i
l,t
hef i
rstmonthofi tsf i
scalyear
.Job1,of1000uni t
sofproductAwas
star
tedinMar ch.Bytheendofmar ch,$30,000inmanuf act
uringcostshadbeenrecor
dedfor
thejob1.Job2anor derfor10,
000uni t
sofpr oductBwasst art
edinApr i
l
.

ThePur chaseandIssueofMateri
als:OnApr il1,t
hecompanyhad$7,000i
nrawmateri
alson
hand.Dur i
ngthemont h,t
hecompanypur chasedanaddi
ti
onal$60,
000inrawmat
erial
s.The
purchaseisrecor
dedinjournal
entr
y( 1)below:
RawMater
ial
s 60,
000 Dr
.
AccountsPay
abl
e 60,
000 Cr
.

Rawmat er
ial
sar
eanassetaccount.Thus,whenr
awmat
eri
alsar
epur
chased,t
heyar
eini
ti
all
y
recor
dedasanasset
--
notasanexpense.

Work-i
n-pr
ocesscontrol
-i
stheaccountusedtorecorddir
ectmat er
ialanddir
ectlaborcostused
/put/intoproduct
ion.Asdir
ectmat er
ial
sareused,theyarechargedt oi
ndivi
dualjobrecords,
whi
char esubsidi
aryledgeraccountsfortheWor k-
inProcesscont r
olaccountinthegener al
l
edgeraccount.I
tsbalancei
ncreaseswhenindi
rectcost
sar eappli
edtoproducti
on.

I
ssueofDi
rectandI
ndi
rectMat
eri
als:

During April
,$52,
000 i
nr aw mat eri
alswererequisi
ti
oned fr
om the stor
eroom f
oruse in
producti
on.Theserawmat eri
alsincl
udebothdir
ectandindi
rectmat
eri
als.Theupcomingent
ry
recordsissui
ngthemater
ialstotheproduct
iondepar
tment.

Worki
nProcess 50,
000 Dr
.
Manuf
act
uri
ngOv er
head 2,
000 Dr
.
RawMat er
ial
s 52,
000 Cr
.

Themat er
ial
schargedtoworki
nprocess(WI
P)representdi
rectmater
ial
sforspeci
fi
cjobs.As
thesemateri
alsar
eent er
edint
othewor ki
nprocessaccount ,t
heyarealsorecor
dedont he
appropr
iat
ejobcostsheet
s.

The$2,000chargedtomanuf act
uri
ngoverheadinentry(2)repr
esentsindi
rectmat
eri
alsusedin
product
ionduringApril
.Observethatthemanuf acturi
ngov er
headaccounti sseparat
ef r
om
workinprocessaccount.Thepurposeofthemanuf act
uringoverheadaccountist
oaccumulate
al
l manufact
uri
ngoverheadcoststheyar
east heyareincurr
eddur i
ngaperiod.

6
I
ssueofDi
rectMat
eri
alsOnl
y:

Sometimes the mat

eri
als dr
awn fr
om the raw mat
eri
alsi
nventor
yaccountare al
ldi
rect
mater
ials.I
nthi
scase,t
heentryt
orecor
dtheissueoft
hemater
ial
sintopr
oduct
ionwoul
dbeas
fol
l
ows:

Wor
kinpr
ocess XXX Dr
.
Rawmateri
als XXX Cr
.
LaborCost
:
Aswor kisperf
ormedeachdayinv ar
iousdepartmentsofthecompany ,employeet i
metickets
arefil
ledoutbyworkers,col
l
ect
ed,andforwar
dt otheaccounti
ngdepart
ment .Intheaccounting
department,wagesar ecomputedandt her esul
ti
ngcost sareclassi
fiedasei therdi
rector
i
ndirectlabor
.Thiscosti
ngandcl
assif
icat
ionforApri
lresul
tedi
nthefoll
owingsummar yentry
:

60,
000 Dr
.
Worki
npr ocess
Manufact
uringover
head 15,
000 Dr
.
Salar
iesandwagespay
abl
e 75,
000 Cr
.
Onl
ydi
rectl
abori
saddedt
othewor
kinpr
ocessaccount
.i.
e$60,
000f
orApr
il
.

Manuf actur
ingoverheadcont rol-i
st heaccountusedtorecordtheactualcost
si ncurredduri
ng
theper i
odinalltheindividualoverheadcategori
essuchasi ndir
ectmateri
al,i
ndirectlabor
,and
otherindir
ectcosts.Ithasanor maldebi tbal
ancei.
e.i
tincreaseswhenactualindirectcost
sare
i
ncurredanddecr easeswheni ndi
rectcostsareappli
edt oproducti
onprocessont hebasisof
thepredeterminedov erheadrate.

Manufacturi
ngOv erheadCosts:Allcost
sofoper at
ingthefactoryotherthandir
ectmateri
als
anddirectlaborar eclassi
fi
edasmanuf actur
ingov erheadcosts.Thesecost sareentered
dir
ectl
yintothemanuf act
uri
ngov er
headaccountast heyareincur
red.Toil
l
ustrat
e,assumethat
thecompanyi ncur
redthefol
lowinggener
al f
actorycostsduri
ngApr i
l:

Uti
li
ti
es(heat,water,andpower
) $21,000
Rentonf act
oryequipment 16,000
Miscel
laneousfactorycost
s 3,
000
Total $40,000

Thef
oll
owi
ngent
ryr
ecor
dst
hei
ncur
renceoft
hesecost
s:

Manuf
act
uri
ngoverhead 40,
000 Dr
.
AccountsPay
abl
e 40,
000 Cr
.

I
naddi ti
on,letusassumet hatduri
ng Apri
l
,thecompanyrecogni
zed $13,
000 i
naccr
ued
proper
tytaxesandthat$7,
000inprepai
dinsur
anceexpi
redonf
act
orybui
ldi
ngsandequi
pment
.
Thefoll
owingentr
yrecordst
heseit
ems:

7
Manuf
acturi
ngov erhead 20,
000 Dr
.
Pr
opertytaxespay abl
e 13,000 Cr
.
Pr
epaidinsurance 7,000 Cr
.

Fi
nal
lyletus assume thatt
he company r
ecognizes $18,
000 in depreciat
ion on f
act
ory
equi
pmentdur
ingApri
l
.Thefol
l
owi
ngentryr
ecordstheaccrualoft
hisdepreciati
on:

Manuf
acturi
ngover
head 18,
000 Dr
.
Accumul
atedDepreci
ati
on 18,
000 Cr
.

In short,allmanuf acturi
ng overhead costs arer ecorded dir
ectlyintot he manuf acturi
ng
overheadaccountast heyar ei
ncurreddaybydayt hr
oughaper i
od.Itisi
mpor tanttounderstand
thatmanuf acturi
ngov erheadisacont r
olaccountf ormany -
-per
hapst housands--ofsubsidiary
accounts such as indirectmaterial
s,indir
ectl abor,factor
yut il
i
ties,and so f ort
h.As t he
manuf actur
ingov er
headaccounti sdebit
edf orcost sdur i
ngaper i
odt hev ari
oussubsi diary
accountsar ealsodebited.Inthi
sexampl eIomi ttheent r
iestothesubsi di
aryaccount sfort he
sakeofbr evit
y.

Calcul
ati
onofPredet
ermi
nedOv
erheadRat
eandAppl
i
cat
ionofManuf
act
uri
ngOv
erheadt
oWor
kin
Process(WI
P):

Sinceact ualmanuf acturingcostsar echargedtothemanuf act

uringov erheadcontr
olaccount
ratherthanwor kinpr ocessaccount .Howar emanuf acturi
ngcost sassignedt oworkinprocess?
Theansweri s,bymeansoft hepredeterminedoverheadr ate.Apr edeter
mi nedover
headr at
eis
establi
shedatt hebegi nningofeachy ear.Thepredet erminedov erheadr ateiscal
culatedby
dividi
ngt heest i
mat edt otalmanuf act
uri
ngov er
headcostf orthey earbyt heesti
mat edtotal
unitsintheallocati
onbase( measur edinmachinehour s,dir
ectlaborhour s,orsomeotherbase).
Thisrateisthenusedt oappl yoverheadcoststojobs.

Toill
ustrat
eassumet hatt hecompanyhasusedmachi nehour stocomput epr
edetermi
ned
over
headr ateandthatt hisr at
eis$6permachinehour .Al
soassumet hatduri
ngApril
,10,
000
machinehour swer
ewor kedonJob1and5, 000machi nehourswerewor kedonJob2( atotal
of15,000machi nehour s).Thus,$90,
000i
nov erheadcost (15,
000machi nehours $6per
machinehour=$90, 000)woul dbeappli
edt
owor kinprocess.Thefol
l
owi ngent
ryrecor
dsthe
appl
icat
ionofmanuf actur i
ngov er
headt
oworkinpr ocess:

Wor
kinpr
ocess 90,
000 Dr
.
Manufact
uri
ngov
erhead 90,
000 Cr
.
TheConceptofCl
ear
ingAccount
:
Themanuf actur
ingov er
headaccountoper
atesasacl eari
ngaccount.Aswehav enoted,
actualfact
oryoverheadcostsaredebi
tedt
ot heaccountsast heyar
eincurr
eddayby
daythroughthey ear
.Acer t
aini
nter
val
sduri
ngt heyear,usuall
ywhenaj obi
scompl et
ed,
overheadcostisappliedtothej
obbymeansoft hepr
edet er
minedoverheadrat
e,and

8
worki
nprocessisdebi
tedandmanuf
act
uri
ngov
erheadi
scr
edi
ted.Thi
ssequenceof
ev
entsisi
ll
ustr
atedbel
ow:

Manuf
act
uri
ngOv
erhead(
acl
ear
ingaccount
)

Actual
overheadcostsar
echargedt
o Over
headisappli
edt
owor ki
nprocessusi
ng
thi
saccountastheyarei
ncur
red t
hepredet
erminedov
erheadrat
e.
thr
oughouttheperi
od.

Asweemphasi zedear l
i
er,t hepredeterminedov erheadratei sbasedonest imatesofwhat
overheadcostsar eexpectedt obe,andi ti
sest abl
ishedbeforethey earbegins.Asar esul
t,t
he
overheadcostappl i
eddur ingay earwi l
lalmostcer tai
nlyt
urnoutt obemor eorlessthanthe
overheadcostthatisactual l
yincur
red.Anydebi tbalanceinmanuf acturi
ngov er
headaccountis
cal
ledunder-appli
edov erhead.Anycr editbal
ancei nmanuf act
uringov erheadaccountiscall
ed
over-appl
i
edov erhead.Anybal anceint hemanuf actur
ingov er
headaccount( underorov er-
appli
edov er
head)i str
eatedi noneoft hef ol
lowingway stobeseenl ater.Theimport
antpoint:
Actualover
headcostsar
enotchargedt
ojobs;actualover
headcost
sdonotappearonthejob
costsheetnordotheyappeari
ntheworkinprocessaccount.Onl
ytheappl
iedover
headcost
,
basedont hepredet
ermi
nedoverheadrat
e,appearont hejobcostsheetandintheworkin
processaccount
.

Non-
manuf
act
uri
ngCost
s:

Inaddi t
iont omanufact
uringcosts,companiesalsoincurmar ket
ingandsell
i
ngcosts.These
costsshoul dbet r
eat
edasper i
odexpensesandchar geddirect
lytothei
ncomestat
ementand
therefor
eshoul dnotgoi ntothemanuf act
uri
ngov erheadaccount.Toill
ustr
atet
hecor rect
treatmentofnon- manufacturi
ngcosts,assumet hatt hecompany( i
nthi
sexample)incurred
$30,000i nsell
ingandadmi ni
strat
ivesal
arycost
sdur ingamont hs,t
hefol
lowi
ngentr
yr ecords
thesesal ar
ies.

Sal
ari
esexpense 30,
000 Dr
Sal
ari
esandwagespay
abl
e 30,
000 Cr

Depr
eciat
ion on f act
ory equi
pmentis debited t
o manuf acturi
ng over
head accountbut
depr
eciat
ion on offi
ce equi
pmentisconsidered a per
iod expense and i
snoti ncl
uded i
n
manufact
uri
ngov erhead.Assumethatdepr
eciati
onofofficeequipmentduri
ngthemont hwas
$7,
000.Theentryisasfoll
ows.

Depreci
ati
onexpense 7,
000 Dr
Accumulat
eddepreci
ati
on 7,
000 Cr

Fi
nall
yassumethatadv
erti
singwas$42,
000andthatothersell
ingandadmini
str
ati
veexpenses
dur
ingthemont
hwas$8, 000.Thef
oll
owi
ngjour
nalentr
yr ecor
dst hesei
tems:

9
Advert
isi
ngexpenses 42,
000 Dr
.
Othersel
li
ngandadmi ni
str
ati
veexpense 8,
000 Dr
.
Account
spay abl
e 50,
000 Cr
.

Sincet heamount sinent r

iesaboveal lgodi r
ectl
yintoexpenseaccounts,theywil
lhaveno
effectont hecosti
ngofthecompany '
spr oduct
ionforthemonth.Thesamewi l
lbetr
ueofany
other selli
ng and admi nist
rat
ive expenses incurr
ed duri
ng t he monthi ncl
udi
ng sal
es
commi ssi
on,depreci
ati
ononsal esequipment ,r
entonof fi
cef aci
li
ti
es,insur
anceonoffi
ce
facil
it
ies,andrel
atedcosts.

CostofGoodsManuf
act
ured(
COGM)
:

When a job has been compl eted,the f i

nished out putist r
ansferred from t he production
departmentt
ot hefinishedgoodswar ehouse.Byt histime,theaccount ingdepar tmentwi llhave
chargedthejobwi thdi rectmat er
ialsanddi rectlaborcostandmanuf acturingov er
headwi l
l
havebeenappl i
edusingt hepr edeterminedov erheadr at
e.At ransferofcost sismadewi thinthe
costi
ng syst
em t hatpar all
elst he phy sicalt ransferoft he goods t ot he fini
shed goods
warehouse.Thecost soft hecompl et
edj obsar etransfer
redoutoft hewor kinprocess( WIP)
accountandi ntothef inishedgoodsaccount .Thesum ofal lamount st ransf
erredbet ween
thesetwoaccountsr epresentst hecostofgoodsmanuf acturedf ortheperiod.

Letusassumethatt
hejob1wascompl
etedduringtheper
iod.Thef
oll
owi
ngent
ryt
ransf
erst
he
costofj
ob1from worki
npr
ocess(
WIP)t
of i
nishedgoods.

Fi
nishedgoods 158,
000 Dr.
Workinprocess 158,
000 Cr

The$158,000r
epresent
sthecompletedcostofj
ob1,asshownont hej
obcostsheeti
nExhibi
t
1.
3.Sincejob1wast heonl
yjobcompletedduri
ngApri
l
,the$158,
000alsor
epresent
sthecost
ofgoodsmanufactur
edfort
hemont h.

Thejob2wasnotcompl et
edbymonth-
end,soi
tscostwillr
emai
nintheworkinprocess(WIP)
accountandcarr
yovert
othenextmont
h.Ifabalancesheeti
spr
eparedattheendofApril
,the
costaccumul
atedthusf
aronthejob2wil
lappearas"workinpr
ocessinv
entor
y"intheassets
secti
on.

CostofGoodsSol
d(COGS)
:

Asunitsi
nthef i
nishedgoodsareshippedtothecustomers,thei
rcostsaretransf
erred
fr
om thefi
nishedgoodsaccountint
ot hecostofgoodssoldaccount.Ifcompletejobis
shi
pped,asinthecasewher eajobhasbeendonet oacustomer'sspecif
icat
ionthenit
i
sasi mplemat t
ert otr
ansf
ertheentirecostappeari
ngont hejobcostsheeti nt
ot he

10
costofgoodssol daccount.Inmostcases,onlyapor t
ionoft heunitsinv
olv
edina
parti
cul
arj
obwillbeimmedi at
elysol
d.Inthesesi
tuat
ionst heunitcostmustbeusedto
determi
nehowmuchpr oductcostshoul
dber emovedfrom fini
shedgoodsandcharged
tocostofgoodssold.

Assumet hatt
hecompanyhascompleted1000uni t
sand750outof1000uni t
shavebeen
shi
ppedtocustomersf
orapri
ceof$225,000.Theunitproductcosti
s$158.Fol
l
owingj
ournal
ent
rieswouldr
ecor
dthesal
es(
all
sal
esar eonaccount).

Accountsr
ecei
vabl
e 225,
000 Dr
.
Sal
es 225,
000 Cr
.

Costofgoodssold 118,
500* Dr
.
Fini
shedgoods 118,
500 Cr
.

(
$158×750uni
ts=$118,
500*
)

Wi
thent
ryabov
e,t
hef
lowofcostt
hroughourj
obor
dercost
ingsy
stem i
scompl
ete

Manuf act
uri
ngov erheadappli
ed-istheaccountusedtor ecor
dthemanuf act
uri
ngov erhead
al
locatedduringtheperiodtoindivi
dualj
obsont hebasesofthebudgetedrat
emul t
ipli
edby
actualamount/ number/uni
t/all
ocati
onbasesuchasdi r
ectmanufact
uri
nglabor-
hour
s.Itisa
contra-
accounttomanufacturi
ngov er
headaccount
.

Under
-appl
i
edandOv
er-
appl
i
edOv
erhead

Def
ini
ti
onandExpl
anat
ionofOverandUnder
-appl
i
edover
head:

Sincet hepredeter
minedoverheadr at
eisestabl
ishedbefor
eaper i
odbeginsandisbased
entir
elyonest i
mateddata,t
heov erheadcostappli
edtoworkinprocess(
WI P)wi
l
lgener
all
y
di
f f
erf rom t
heamountofov erheadcostactuall
yincur
reddur
ingaper od.Thedi
i f
fer
ence
bet
weentheover
headcostappli
edtowor
kinprocess(
WIP)andtheact
ualover
headcost
sofa
per
iodi
stermedaseitherunderappl
i
edover
headoroverappli
edover
head.Forexampl
eifa
companycalculat
esi t
spr edeter
mi nedov erheadrate$6permachinehour.15,000machi
ne
hoursareactuall
ywor kedandov erheadappl i
edt oproduct
ioni
stheref
ore$90,000(
15,
000
hours×$6).I factualfactoryover headis$95, 000thenunderappl
iedov er
headis$5,
000
($95,
000–$90, 000).I
ft hesit
uationi sreverseandthecompanyapplies$95,
000andactual

11
ov
erheadi
s$90,
000t
heov
erappl
i
edov
erheadwoul
dbe$5,
000.

Causes/Reasonsofunderappl
i
edorov
erappl
i
edov
erhead:

Thecauses/r easonsofunderorov er-appli

edov er
headcanbecompl ex.Nev ert
helesst he
basicproblem ist hatthemet hodofappl yingov erheadt ojobsusi ngapr edet er
mi nedov erhead
rat
eassumest hatact ualov erheadcost swi llbepr oporti
onalt ot heact ualamountoft he
all
ocati
onbasei ncur
reddur i
ngt heper iod.If,forex ampl e,t
hepr edet er
mi nedov erheadr atei s
$6permachi nehour ,theni tisassumedt hatact ualoverheadcosti ncurr
edwi l
lbe$6f orev ery
machinehourt hatisact ual
lywor ked.Ther eareact uallytwor easonswhyt hismaynotbet rue.
Fir
st,muchoft heov erheadof t
enconsi stsoff ixedcost sthatdonotgr ow ast henumberof
machinehour si ncur
redi ncreases.Second,spendi ngonov erheadi temsmayormaynotbe
undercont r
ol.Ifindivi
dualswhoar eresponsi blef oroverheadcost sdoagoodj ob,thosecost s
shouldbel esst hanwer eexpect edatt hebegi nningoft heper iod.Iftheydoapoorj ob,t hose
costswillbemor ethanexpect ed.

Exampl
e:
Supposethattwocompani esAandBhavepr
epar
edt hefoll
owi
ngestimat eddataf or
thecomingyear
Company
A B
Predet
erminedov er
headratebasedon Machine-hours Dir
ectmat eri
alscost
Esti
matedmanuf actur
ingoverhead $300,000 $120, 000
Esti
matedmachi ne-
hours 75,000 --
Esti
mateddirectmateri
alscost $80,000
$4permachi ne 150%ofdi r
ect
Predet
erminedov er
headrate,(
a)÷(b)
hour mat er
ialscost

Nowassumet hatbecauseofunexpectedchangesinov
erheadspendi
ngand
changesindemandf orthecompanies'product
s,heact
t ualover
headcostandt
he
actualact
ivi
tyrecor
dedduri
ngthey earineachcompanyareasfoll
ows:

Company
A B
Act
ual
manufact
uri
ngoverheadcost
s $290,
000 $130,000
Act
ual
machine-
hours 68,
000 -
-
Act
ual
dir
ectmater
ial
scosts -- $90,
000

Foreachcompany ,not
ethatt
heactualdat
af orbot
hcostandactiv
itydi
ff
erf
rom t
he
esti
mat esusedi
ncomput i
ngthepredet
erminedoverheadr
ate.Thi
sresul
tsi
n
underappli
edover
headandoverappli
edover
headasf oll
ows:

Company

12
 A B
Act
ual
manuf
act
uri
ngov
erheadcost
s $290,
000 $130,
000
Manuf
act
uri
ngover
headcostappl
i
edt
o
wor
kinpr
ocessdur
ingt
heyear:
68,
000actualmachinehour
s×$4per
272,
000
machinehour
$90,
000actualdi
rectmater
ial
scost×150%
135,
000
ofdi
rectmater
ial
scost
-
--
--
--
--
--
-- --
--
--
--
--
--
-
Under
-appl
i
ed(
over
-appl
i
ed)ov
erhead $18,
000 $(5,
000)

ForcompanyA,not i
cet hattheamountofov erheadcostt hathasbeenappl iedto
worki n process( $272,000)isl esst han t heact ualov er
head costf orthey ear
($290,000).Ther eforet he ov er
head i s under -
applied.Also not i
ce thator i
ginal
esti
mat e ofov erhead in companyA ( $300,000)i s notdi rect
lyinvol
ved int hi
s
comput ati
on.It
si mpacti sf el
tonlythrought he$4pr edeterminedov er
headr at
ethat
i
sused.
ForB companyt heamountofov erheadcostt hathasbeenappl i
edtowor kin
process( WIP)( $135,000)i sgr eaterthant heact ualov erheadcostf orthey ear
($130,000),andsoov erheadi sover-applied.Asummar yoft heconceptsdiscussed
sofori spr
esentedbel ow:

Atthebeginningoftheperi
od
Estimatedtotal
Estimatedt
otalunit
sin Pr
edeter
mined
manuf actur
ingoverhead ÷ =
theall
ocati
onbase ov
erheadrat
e
cost
Duri
ngt heperiod
Actualt
otal
unit
soft he
Predeterminedov er
head Totalmanufactur
ing
×al
locat
ionbaseincurr
ed =
rat
e overheadappli
ed
duri
ngtheperi
od

Att
heendoft
heper
iod
Totalmanuf
act
uri
ng Under-
appl
i
ed(
over
-
Actualtot
almanuf
act
uri
ng
– overhead = appl
ied)
overheadcost
appli
ed over
head

Disposi
ngoff actor
yov erheadbal ances-
Iftheactualov erheadhadbeenl essthanormor ethan
theappli
edov erhead,then,therewi l
lbeov erheadbal ancest hatshouldbedisposedasoft he
endoft heaccount i
ngper iod.I
fact ualoverheadisl esst hanappliedoverhead,t
hediff
erence
wouldhav ebeencalledov erappli
edov erheadorov erallocatedoverhead.I
ftheactual
overhead
i
smor et hanappli
edov erhead,then,thediff
erenceiscal l
edunderappl i
ed

13
Di
sposi
ti
onofunderappl
i
edorov
erappl
i
edOv
erheadBal
ances:

Whatdisposi
ti
onshoul
dbemadeofanunderappl i
edov er
headoroverappli
edov
erhead
bal
anceremai
ningi
nthemanuf
act
uri
ngov
erheadaccountatt
heendofaper
iod?

I
nanyway s,
companieshav
ethr
eeal
ter
nat
ivest
odi
sposet
heov
erheadbal
ancesatt
heendof
t
heper
iod.Thesear
e:

(
1) Adj ustedal locat i
onr ateappr oach-t hi
sappr oachr estat eallentriesint hegener al
andsubsi di
ar yledger sbyusi ngact ualcostr atest hanbudget edcostr ates.First
thei ndirectcostr at eiscomput edatt heendoft hey ear .Then,ev eryjobt owhi ch
indirectcost swer eal l
ocat eddur i
ngt hey earhasi tsamount sr ecomput edusi ng
theact ualindirect-costr ater athert hant hebudget ed/ estimatedindi r
ectcostr ate.
Thi swi llgiv et hebestaccur acy ,anddeci sionsbasedonaccur atei nformat i
on
coul dbesoundandmor ei mpor tant.Butunl esscomput ersystem i sappl i
ed,itwi l
l
becompl i
cat edandcost l
y.
(
2) Wr ite-offtocostofGoodssol dAppr oach-asi nt hecaseofmostcompani es,the
ov erorunderappl iedov erheadcost smaybecl osedi nt ocostofgoodssol d.
a) Forunderappl iedover headbal ance,bydebi tingCostofGoodssol daccount sand
creditingManuf actur i
ngov erheadaccountbyt heamountoft hedi f
ferenceorby
debi ti
ng costofgoods sol d by t he amountoft he di ff
erence and debi ti
ng
Manuf acturing ov er head appl i
ed account by i t
s bal ance and cr editi
ng
Manuf acturingov er headcont rolaccountbyt het otal amountofi t
sbal ancei .
e.
Costofgoodssol d--
--
----
--
----
--
--
---
--
----
--
---
--
x

Manuf
act
uri
ngov
erheadappl
i
ed-
--
--
--
--
--
--
--
--
xx

Manuf
act
uri
ngov
erheadcont
rol
--
--
--
--
--
--
--
xxx

Orf
ort
hedi
ff
erenceamountCostofgoodssol
ddebi
tedandmanuf
act
uri
ngov
erhead
cr
edi
ted

b)Foroverappl
i
edover
headbal
ance,
bycr
edi
ti
ngCostofGoodssol
daccount
anddebi t
ingtomanuf actur
ingoverheadappl
iedaccountbytheamountofthe
di
f f
erenceorbycreditingcostgoodssoldbytheamountoft hedi
ffer
ence,
credit
ingmanufacturingoverheadcontr
olaccountbyitsbal
anceanddebit
manuf act
uringoverheadappliedaccountbyit
sbalance.

i
.e. Manuf
act
uri
ngov
erheadappl
i
ed-
--
--
--
--
--
--
--
--
--
--
--
--
xxx

Costofgoodssol
d--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
x

Manuf
act
uri
ngov
erheadcont
rol
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-xx

14
Aft
erpassingoneofthesej
ournalent
ri
es,
costofgoodssol
disadjusted.Consequent
lycostof
goodssoldisincr
easedbytheamountofunderappli
edanddecreasedbyt heamountofov er
appl
iedoverhead.

Exampl
e:
CostofGoodsManuf act
ured:
Dir
ectmat er
ial
s $50,
000
Dir
ectlabor $60,
000
Manufacturi
ngoverheadappliedt
owor
kinpr
ocess $90,000*
Total
Manuf actur
ingcost $200,000
Add:Beginni
ngwor kinprocess $30,
000
$230,000
Deduct:Endi
ngworki
npr ocessinvent
ory $72,
000
Costofgoodsmanufactured $158,000
CostofGoodsSold:
Fi
nishedgoodsi
nventor
ybegi nni
ng $10,000
$158,000
Goodsavail
ableforsale $168,000
Deduct
:Fini
shedgoodsi nvent
oryendi
ng $49,500
Unadj
ustedcostofgoodssol d $118,500
Add:Underappli
edov er
head $5,000*
--
--
---
--
-
Adj
ust
edcostofgoodssol
d $123,500
========

*Overheadappl i
ed=$90, 000(15,
000Di r
ectlaborhours×$6.
00Predeter
mined
overheadrate)
Actualoverhead=$95, 000
Underappl i
edov erhead=$95, 000-$90,000=$5, 000
Entrytoclosethe$5, 000ofunderappl i
ed tocostofgoodssoldwouldbeasfoll
ows:
Costofgoodssol d--
--
--
---
---
--
--
--
--
--
--
--5,
000Dr
Manufacturi
ngov erhead---
--
--
--
--
--
--
--
--
--
--
--5,000Cr

3.Pror
ati
onAppr
oach-Al
locat
edBetweenAccount
s:isthedist
ri
but
ion/
all
ocat
ionofoverhead
bal
ancesamongendingworkinpr
ocess,f
ini
shedgoods,andcostofgoodssoldaccountsin
propor
ti
ontotheoverheadappl
i
edduri
ngt hecurr
entper
iodintheendingbal
ancesofthese
account
.Mater
ial
sinv
entori
esar
enotal
locatedanymanuf
actur
ingover
headcosts,
sotheyare
notincl
udedinthisspreadingofunder -
oroveral l
ocatedov erheadamongpr orati
on.Tothis
eff
ect,compani
esmayuset heamountoft hecur r
entperiod’sappliedover
headr emai
ningin
eachaccountasthebasefort hepror
ationprocedure.
All
ocati
onofunderoroverappl i
edoverheadbet weenwor ki
npr ocess( WI
P),f
ini
shedgoodsand
costofgoodssold(COGS)i smor eaccuratethanclosingtheent ir
ebalanceint
ocostofgoods
sol
d.Thereasonisthatal
locationassi
gnsov erheadcost st
owher etheywoul
dhav egoneinthe

15
f
ir
stplacehadi
tnotbeenf
ort
heer
ror
sint
heest
imat
esgoi
ngi
ntot
hepr
edet
ermi
nedov
erhead
r
ate.

Exampl
e:

Exer
cise/
Anot
her

SupposethatAB-Manufactur
ingcompanypr oducestwopr oductsXandY.Assumet hatthe
tot
alact
ualover
headcost si
ncurredbyt
hecompanyandt het ot
al over
headcost sappli
edbyt he
companyduringthey ear2002wer e$18,
400and$18, 000r espectively.Thecurrentperiod
befor
eadjust
mentov erheadbalanceall
ocat
edt oWork-
in-Process,FinishedGoods,I nvent
ory
andCostofGoodssoldaccountsar e$9,
000,
$3,000and$6,000r espectivel
y.Theunderapplied

16
 ov
erheadbal
ance=$18,
600-$18,
000=$600

Thecompanycanpr
ost
atet
hebal
anceof$600amongt
het
hreeaccount
sasf
oll
ows.

Tot
alyearendover
headbal
ancesoft
het
hreeaccount
s(bef
oreadj
ust
ment
)=$9,
000+$3,
000
+$6,
000=$18,000

Thus,
theamountal
l
ocat
edt
oeachaccountshoul
dbe:

Work-
inpr
ocess=$9,
000 × Fi
nishedgoods
$600
i
nventor
y =$3,
000 × Costof
$18,
000 $600
goodssol
d= $6,
000 ×
= $18,
000 $600
$300
=$100 $18,
000

=$200

Theent
ryf
ort
hiscaseshoul
dbe:

Wor
k-i
npr
ocessi
nvent
ory
---
--
--
--
--
--
--
--
--
-300

Fi
nishedgoodsi
nvent
ory
---
--
--
--
--
--
--
--
100

Costofgoodssol
d--
--
--
--
--
--
--
--
--
--
--
--
-200

Manuf
act
uri
ngov
erheadcont
rol
--
--
--
--
--
--
--
600

Thi
sapproachgi
vesusamor eaccurat
efi
gureofworkinprocess,f
ini
shedgoods,andcostof
goodssol
d,buti
tisst
il
lnotassi
mpl easwri
teof
ftocostofgoodssoldmethods.

Adv
ant
agesandDi
sadv
ant
agesofJobOr
derCost
ingSy
stem:

Oneoft heprimaryadvantagesofjobordercost i
ngsy st
em isthatthemanagement
team hasreadyaccesst oallthecost
sincurredf oreachjobbeingcompl eted.This
all
owst heteam toexami neeachcosti ncur
red,f i
ndingoutwhyi thappened,and
determi
nehow itcanbecont r
oll
edbet
terinthef utur
e,ther
ebycontribut
ingtobetter
ongoinglev
elsofprofi
tabil
it
y.Forexample,apr operjobrecor
dcont ainsanyspecial
reworki
ngcosts,
whichamanagercant henuset otracebacktothespecifi
creasonwhy
thereworkwasneeded.

Anot
herr
easonf
orusi
ngj
obor
dercost
ingsy
stem i
sthati
tyi
eldsongoi
ngr
esul
tsf
or

17
eachjob.Int oday'swor l
doff ullycomput er i
zedproduct i
ont r
ackingdatabases, onecan
useajobor dercost i
ngsy stem tot rackcost sastheyar eaddedr atherthanwai t
ingunti
l
thejobhasbeencompl eted.Thi sgi vesacompanysev eraladv antages.Onei sthatthe
accountingst af
fcanmoni torjobaccount st oseeifcostsar ebeingpost edt othewr ong
accountsandcor rectthem r ightaway ,ratherthanwai tingunt ilthej obcl osesand
havi
ng t of r
anticall
yr eview r ecor ds t o see why t he r esults are di f
ferentfrom
expectati
ons.Anot heradv ant
agei st hatacompanycanmoni t
ort hecost sincurredfor
l
ongerj obsandhav eenought i
met omakechangesbef oretheycl ose,basedont he
costi
ngi nformationr evealedbyt hej obcost i
ngsy stem.Yetat hi
rdadv antagesi sthat
changesi nthecostofaj obcanr esul tinnegot i
ati
onswi t
hcost -pluscust omer swhoar e
payi
ngf oral lthecost sincur r
ed,sot hatt heyaref ull
yawar eofcostov err
unswel lin
advanceandar epr eparedt opayt headdi tionalamount s.Al lt
hesef actorsar ethemai n
advantagesofusi ngjobor dercost ingsy stem inacomput er i
zedenv i
ronment .

Ther earealsoseveralproblemswi t
hj obordercost
ingsystem.Onei sthatitfocuses
attenti
on primar
il
yon pr oductsratherthan on depart
ment s oracti
vi
ties.Another
problem isspeci
fi
ct otheuseofnor malcosti
ng.Anotherissueisthatj
obcost i
nghas
l
itt
ler el
evanceinsomeenv i
ronments.Themosti mpor t
antpr obl
em withj oborder
cost i
ng i
sthatitrequir
esamaj oramountofdat aentryanddataaccuracyi norderto
yi
el deff
ecti
veresul
ts.

Af urtherdiff
erencebet weenthetwocost i
ngsystem i
sthatt
hej obor
dercostsheethas
nousei npr ocesscost i
ng,sincet hef ocalpointofthatmet hodisnodepar tment.
Insteadofusi ngjobor dercostsheet,adocumentknownascostofpr oducti
onr eporti
s
prepar edf oreachdepar t
menti nwhi chwor kisdoneonpr oduct
s.Thepr oduct i
on
reportedser vessev eralfunct
ions.Itpr
ov idesasummar yofthenumberofunitsmov i
ng
throughadepar tmentdur i
ngaper iod,andi tal
soprovi
desacomput ati
onofuni tcosts.
Inaddi ti
on,itshowswhatcost swer echar gedtothedepart
mentandwhatdi spositi
on
wasmadeoft hesecost s.Thedepar tmentpr oduct
ionreportisakeydocumenti n
processcost ingsy stem.Themaj ordif
ferencejoborderandprocesscosti
ngsy stemsis
summar izedinthet ablebelow.

Basesofcompar
ison Jobor
dercot
ing Pr
ocesscost
ing
Ty
peofpr
oduct Div
ersi
fied,Heterogeneous, Homogenouspr oductsproduced
anduniqueproducts cont
inuousl
y
CostAccumul
ati
on By Job f or a speci fi
ed Bydepar tmentsorcostcenterf
or
numberofunits aspecif
iedperi
odoft i
me
Work-
in-
Process OneforeachJob OneforeachDepar t
ment
Basi
cdocuments Jobcostsheetforeachjob Cost of pr oduct
ion reportfor
each depar tments or cost
cent
ers
Costperuni
t Cost accumulated by job Cost accumul ated by cost

18
 di
vi
dedbyuni
tsi
njob cent
ersdividedbyequivalentunit
ofproductiondur i
ngaper i
odof
ti
me
Repor
ting Byjob Bycostcent erordepar
tment
Natur
e of cost f
or Eachjobmayusedi ff
erent Each Unit
s pr oduced uses t he
eachcostobj
ect amountofmat eri
al,labor same st andard amount of
andover
headcost materi
als,l abor and ov erhead
cost
s

Iti
simpor tanttor ecognizet hatmuchofwhatwasl earnedi ntheprecedinguni tabout
costi
ngandaboutcostf l
owsequal lyappl i
eswel ltopr ocesscost i
ngi nthischapt er.
Thatiswear enott hr
owi ngoutal lt
hatwehav el earnedaboutcost ingandst art
ingf rom
scrat
chwi thawhol enewsy stem.Thesi milari
ti
est hatexistbetweenj oborderscost ing
andprocesscost i
ngcanbesummar i
zedasf oll
ows:
 Thesamebasi cpur posesexi stinbot hsy stems,whi char etoassi gnmat erial
l
abor ,andov erheadcostt oproductsandt opr ovi
deamechani sm forcomput ing
unitcost.
 Bot hsy st
emsmai ntainanduset hesamebasi cmanuf actur
ingaccountincludi ng
manuf actur
ingov erhead, r
awmat er
ial,wor kinprocessandf i
nishedgoods
 Thef l
ow ofcost sthr ought hemanuf acturingaccount sisbasi cal
lythesamei n
bothsy st
ems.Ascanbeseenf rom thesecompar isons,muchoft heknowl edge
thatwehav eal readyaboutcost i
ngisappl i
cabl etoprocesscost ingsyst
em.

To morei l
l
ustratethe proceduresused i
njob-or
dercosti
ng,we wil
lexamine t
he
account
ing ent
ries made byAl pha-manuf
act
uri
ng co.dur
ing November2003.The
companyusesmachi nehourstoal l
ocat
eover
headcoststotheindi
vi
dualj
obs.I
thas
workedontwopr oducti
onjobsdur i
ngthemont
h.
Job-
1:80del
uxewoodencanoes

Job-
2:80del
uxeal
umi
num f
ishi
ngboat
s

The companyunder
taken t
he f
oll
owi
ng act
ivi
ti
es/
transact
ion dur
ing t
he mont
h of
November

Transact
ion-
1:Acqui
sit
ionofdir
ectmateri
als:
4000-squar
ef eetofr
oll
edal
uminum sheetmetal
werepurchasedonaccountfor$10,
000.Thepurchaseisrecordedwit
hthefol
l
owingjournal
entr
y.

Raw-
mat
eri
alI
nvent
ory
---
--
--
--
--
--
--
--
--
--
-10,
000

Account
spay
abl
e--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
10,
000

Transact
ion-
2:Useofdi
rectmat
eri
al:
OnNov
ember-
1,t
hef
oll
owi
ngmat
eri
alr
equi
sit
ionswer
e
fi
l
ed.

19
Requi
sit
ionnumber
-001(
forj
ob-
1)-
--
--
--
--
8,000boar
dfeetoflumber,at$2per
boardfoot
,foratotal
of$16,
000

Requi
sit
ionnumber
-002(
forj
ob-
2)-
--
--
--
--
7,200squaref
eetofal
uminum sheetmet
al,
at$2.
50persquar
efoot,f
oratot
alof$18,
000

Thef
oll
owi
ngj
our
nal
ent
ryr
ecor
dst
her
eleaseoft
heser
awmat
eri
alst
opr
oduct
ion.

Wor
k-i
n-pr
ocessi
nvent
ory
---
--
--
--
--
--
--
34,
000

Raw-
mat
eri
ali
nvent
ory
---
--
--
--
--
--
--
--
--
-34,
000

Transact
ion-
3:Useofi
ndi
rectmat
eri
al:
OnNov
ember15,
thef
oll
owi
ngmat
eri
alr
equi
sit
ionwas
fi
l
ed.

Requi
sit
ion-003:5-gal
l
onsofbondingglue,at$10pergall
on,f
orat
otal
costof$50
Manufact
uri
ngoverhead-
--
--
--
--
--
--
--
--
--
50
Manufact
uri
ngsuppli
esinventor
y--
--
--
--
--
50

Sinceonl ysmal lamount sofbondinggluear eusedi nt heproducti

onofal lclassesof
boatsmanuf act
uredbyt hecompany ,thecost sincur r
edissmal l
,andnoat tempti s
madet ot racethecostofgl uet ospecif
icjobs.Instead,glueisconsi der
edani ndi
rect
mat eri
al,andi t
scosti sincl
udedinmanuf acturi
ngov erhead.Thecompanyaccumul ates
allmanuf acturi
ng-overhead costi n Manuf acturi
ng Ov erhead account.Al lact ual
overhead costar er ecorded bydebiting theaccountwhen i ndirectmat eri
alsar e
requisi
tioned,wheni ndi
rect-
laborcostsarei ncurr
ed,whenut i
l
itybill
sarepai d,when
depreciationisrecordedonmanuf act
uri
ngequi pment ,andsoon.

Tr
ansact
ion-
4:Useofdi
rectl
abor

AttheendofNov
ember,t
hecost-
accounti
ngdepartmentusedt
helaborti
met
icket
sfi
l
ed
dur
ingt
hemonthtodet
erminet
hefoll
owingdi
rect-
laborcost
sofeachjob.

Di
rectl
abor
:Job-
1--
--
--
--
--
--
--
--
$9,
000

Di
rectl
abor
:Job-
2--
--
--
--
--
--
--
12,
000

Tot
aldi
rectl
abor
--
--
--
--
--
--
--
--
--
$21,
000

Thej
our
nal
ent
ryusedt
orecor
dthesecost
sshoul
dbe

Wor
k-i
n-pr
ocessI
nvent
ory
---
--
--
--
--
--
--
21,
000

Wagespay
abl
e--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
21,
000

Tr
ansact
ion-
5:Useofi
ndi
rectl
abor

20
Theanalysi
soflar
geti
mecar dunder
takenonNovember-
30alsoreveal
edthefol
l
owi
nguseof
i
ndi
rectl
aborthati
snotchar
gedtoeit
herofthepr
oduct
sspeci
fical
l
y,amountst
o$14,
000.

Thi
scosti scompri
sedoftheproduct
ionsuper
visor’
ssalaryandthewagesofv ar
ious
employeeswhospentsomeoft heirt
imeonmai ntenance,gener
alcl
eanupdut
iesand
sal
aryofguardsandst
orekeeper
sduringNovember.
Manuf
act
uri
ngov
erhead-
--
--
--
--
--
--
--
--
--
-14,
000

WagesPay
abl
e--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
14,
000

Noentryismadeonanyj obcostsheet
,sincei
ndi
rect
-l
aborcost
sarenottr
aceabl
etoany
par
ti
cul
arjob.Inpr
act
ice,j
our
nalent
ri
es(4)and(
5)areusual
lycombi
nedi
ntoonecompound
ent
ryasfol
lows:

Wor
kinpr
ocessi
nvent
ory
---
--
--
--
--
--
--
--
-21,
000

Manuf
act
uri
ngov
erhead-
--
--
--
--
--
--
--
--
--
--
14,
000

Wagespay
abl
e--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
35,
000

Tr
ansact
ion-
6:Ot
hermanuf
act
uri
ngov
erheadcost
s

Duri
ngNov ember
,thecompanyincurr
edthef ol
lowingothermanuf
act
uri
ngov
erhead
costbesi
desthei
ndir
ectmat
eri
alsandindi
rectl
aborscost
s.
Rentonf
act
orybui
l
ding(
expi
redpr
epai
drent
)--
--
--
--
--
--
$3,
000

Depr
eci
ati
ononequi
pment
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-5,
000

Ut
il
it
ies(
elect
ri
cit
y,wat
er,
tel
ephone)-
--
--
--
--
--
--
--
--
--
--
--
4,000

Pr
oper
tyt
axes-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
2,000

I
nsur
ance(
amountexpi
redur
ingt
hemont
h)-
--
--
--
--
--
--
--
--
1,000

Tot
al-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$15,
000

Thef
oll
owi
ngcompoundent
ryi
smadeonNov
ember
-30,
tor
ecor
dthesecost
s.

Manuf
act
uri
ngov
erhead-
--
--
--
--
--
--
--
--
--
--
--
-15,
000

Pr
epai
dRent
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
3,000

Accumul
ateddepr
eci
ati
on-
Equi
pment
--
--
--
--
--
--
--
--
5,000

Account
sPay
abl
e(ut
il
it
iesandpr
oper
tyt
ax)-
--
--
--
-6,
000

21
 Pr
epai
dInsur
ance-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
1,000

Appl
i
cat
ionofmanuf
act
uri
ngov
erhead

Variousmanufactur
ing-over
headcost swereincurredduri
ngNov ember,andthesecost swer e
accumulat
edbydebi tingtheManuf actur
ing-
Overheadaccounts.Howev er
,nomanuf act uri
ng-
overheadcosthaveyetbeenaddedt oWor k-i
n-ProcessInvent
oryorrecordedonthej ob-cost
sheets.Theappli
cation ofoverhead tot hefir
m’ sproductsisbased on a predetermi ned
overheadrat
e.Thi
sratecomput edbytheaccountingdepartmentatthebeginni
ngoftheper iod.

Tr
ansact
ion-
7:Al
l
ocat
ionofov
erheadcost
s

Factor
ymachi
ne-
usager
ecor
dsi
ndi
cat
ethef
oll
owi
ngusageofmachi
nehour
sdur
ing
November
.

Machi
nehourused:Job-
1--
--
--
--
--
--
--
--
--
--
--
--
--
--
-1,
200hour
s

Machi
nehourused:
Job-
2--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-2,
000hour
s

Tot
almachi
nehour
s--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
3,200hour
s

Thetotalmanufact
uri
ngoverheadappl
i
edt oWor
k-i
n-Pr
ocessI
nvent
orydur
ingNov
emberi
s
cal
culatedasfol
lows(r
eferforpr
edeter
minedr
ate)

Job Machi
nehourx Manufact
uri
ngov
erhead
Pr
edet
erminedOv
erheadr
ate appl
i
ed

Job-
1 1,
200 × $9.
00 = $10,
800

Job-
2 2,
000 × $9.
00 = $18,
000

Tot
almanuf
act
uri
ngov
erheadappl
i
ed $28,
800

Thefoll
owingj
our
nal
ent
ryi
smadet
oappl
ymanuf
act
uri
ngov
erheadt
oWor
k-i
n-Pr
ocess
I
nventory
.

Wor
k-i
n-Pr
ocessI
nvent
ory-
--
--
--
--
--
--
--
--
--
--
-28,
800

Manuf
act
uri
ngov
erhead-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
28,
800

NB.Ast hef
oll
owi ngti
melineshows,t
hreeconcept
sar eusedi
naccounti
ngfor
over
head.Overheadisbudgetedatt
hebeginni
ngoftheaccount
ingperi
od,i
tisappl
i
ed
duri
ngtheperi
od,andactualover
headismeasuredattheendoftheper
iod.
Begi
nni
ngof Endof

Account
ingper
iod account
ing

22
per
iod

TI
ME

Budget
edov
erhead

(
andcal
cul
ati
onof Appl
i
ed Act
ual

Pr
edet
ermi
ned ov
erhead ov
erhead

Ov
erheadr
ate)

Transact
ion-
8:Sel
l
ingandadmi
nistr
ati
vecost
s
DuringNovember,
Alpha-
manuf
acturi
ngco.i
ncur
redt
hef
oll
owi
ngsel
l
ingandadmi
nist
rat
ive
costs.

Rent
alofsal
esandadmi
nist
rat
iveof
fi
ces-
--
--
--
--
--
--
--
--
--
--
--
--
-$1,
500

Sal
ari
esofsal
esper
sonnel
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-4,
500

Sal
ari
esofmanagement
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
8,000

Adv
ert
isi
ng -
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
1,000

Of
fi
cesuppl
i
esused-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-300

Tot
al -
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
$14,
800

Sincethesearenotmanufact
uri
ngcosts, t
heyarenotaddedt oWork-
in-
ProcessInvent
ory
.
Sell
ingandadminist
rat
ivecost
sareperiodcosts,notproductcost
s.Theyaretr
eatedas
expensesoftheaccounti
ngperi
od.Thef ol
lowi
ngj our
nalentr
yismade

Sel
l
ingandAdmi
nist
rat
iveExpenses-
--
--
--
--
--
--
--
--
--
--
14,
800

WagesPay
abl
e--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-12,
000

Account
spay
abl
e--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-1,
000

Pr
epai
dRent
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-1,
500

Of
fi
ceSuppl
i
esi
nvent
ory
---
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-300

Tr
ansact
ion-
9:Compl
eti
onofpr
oduct
ionj
ob

Job-2wascompl eteddur
ingNov ember,whereasj
ob-1remainedinpr ocess.Thejob
sheetindi
cat
esthatt het
otalcostofjob-2was$48,000.Thef ol
lowingjournalentr
y
recor
dst hetr
ansferofthesejobcostsf rom Work-
in-
ProcessInventorytofini
shed

23
goodsi
nvent
ory
.

Fi
nishedgoodsi
nvent
ory
---
--
--
--
--
--
--
--
--
-48,
000

Wor
k-i
n-Pr
ocessi
nvent
ory
---
--
--
--
--
--
--
--
--
48,
000

Tr
ansact
ion-
10:
Sal
esofgoods

Si
xtydeluxealuminum f
ishi
ngboatsmanufact
uredi
njob-
2weresol
dfor$900each
dur
ingNov ember
.Thecostofeachuni
tsol
dwas$600asshownonthej
obcostsheet
.
Thefol
l
owi ngj
ournalent
ri
esweremade
a) Account
sRecei
vabl
e--
--
--
--
--
--
--
--
--
54,
000

Sal
esRev
enue-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
54,
000

b)Costofgoodssol
d--
--
--
--
--
--
--
--
--
--
--
-36,
000

Fi
nishedgoodsi
nvent
ory
---
--
--
--
--
--
--
--
36,
000

Thereminderofthemanufact
uri
ngcostofj
ob-
2remainsinFi
nished–goodsinvent
ory
unt
ilsomesubsequentaccounti
ngperi
odwhentheunit
saresold.Ther
efor
et hecost
bal
anceforjob-
2r emai
ningi
ninvent
oryi
s$12,
000(20unit
sremainingt
imes$600per
uni
t.
)

Tr
ansact
ion-
11:Di
sposi
ti
onofov
erheadbal
ances

Duri
ng Nov ember
,Al pha-
Manufacturi
ng co.incur
red totalact
ualmanuf acturing-
overheadcostsof$29,050,butonl y$28,800ofoverheadwasappl i
edt oWor k-i
n-
ProcessInvent
ory
.Theamountbywhi ch t
hecompany ’
sactualoverhead exceeds
appli
edover
head,cal
l
edunderappliedoverhead,
andi
scalculat
edbelow.
Act
ual
manuf
act
uri
ngov
erhead*-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$29,
050

Appl
i
edmanuf
act
uri
ngov
erhead+-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-28,
800

Underappl
i
edov
erhead-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
$250

Thecompanydi sposesit
soverheadbalancesatt heendofthey earbydir
ectl
ywr i
ti
ng
theamounttocostofgoodssol dduringt heperi
od.Accordi
ngly,t
hefoll
owingjournal
entr
yi smadebyt hecompany .Thisent r
yreducesthebal anceofManuf acturi
ng
Overheadaccountstozeroandincr
easet hebalanceofcostofgoodssoldaccountby
$250.
Costofgoodssol
d--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
250

Manuf
act
uri
ngOv
erheadcont
rol
--
--
--
--
--
--
--
250

Schedul
eofcostofgoodssol
d

24
Scheduleofcostofgoodssol dforAlpha-manuf
act
uri
ngCompanyisdi
splayedin
exhi
bit3-9.Thisscheduleshowst heNov embercostofgoodssol
danddetai
ledthe
changesinFinished-
GoodsInventor
yduri
ngt hemonth.
Exhi
bit3-
9:Schedul
eofcostofgoodsmanuf
actured

Al
pha-
Manuf
act
uri
ngcompany

Schedul
eofcostofGoodsManuf
act
ured

Fort
hemont
hofNov
ember
,2003

Di
rectmat
eri
al:

Raw-
mat
eri
ali
nvent
ory
,Nov
ember
-1-
--
--
--
--
--
--
--
--
--
--
--
$30,
000

Add:
Nov
emberpur
chaseofr
awmat
eri
al-
--
--
--
--
--
--
--
--
--
10,
000

Rawmat
eri
alav
ail
abl
eforuse-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
$40,
000

Deduct
:Raw-
mat
eri
ali
nvent
ory
,Nov
ember
-30-
--
--
--
--
--
--
-6000

Rawmat
eri
alused-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$34,
000

Di
rectl
abor-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
21,
000

Manuf
act
uri
ngov
erhead:

I
ndi
rectmat
eri
al-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
- $50

I
ndi
rectl
abor
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
14,
000

Rentonf
act
orybui
l
ding-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-3,
000

Depr
eci
ati
ononequi
pment
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-5,
000

Ut
il
it
ies-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-4,
000

Pr
oper
tyt
axes-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-2,
000

I
nsur
ance-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-1,
000

Tot
alact
ual
manuf
act
uri
ngov
erhead-
--
--
--
--
--
--
--
--
--
-$29,
050

Deduct
:Underappl
i
edov
erhead-
--
--
--
--
--
--
--
--
--
--
--
-- 250*

Ov
erheadappl
i
edt
owor
kinpr
ocess-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-28,
800

Tot
almanuf
act
uri
ngcost
s--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--$83,
800

25
 Add:
Wor
kinpr
ocessi
nvent
ory
,Nov
ember
-1-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-4,
000

Subt
otal
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$87,
800

Deduct
:Wor
kinpr
ocess,
Nov
ember
-30,
---
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-39,
800

Costofgoodsmanuf
act
ured-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$48,
000

 Theschedul
eofcostofgoodsmanuf
act
uredl
i
stst
hemanuf
act
uri
ngcost
sappl
i
edt
o
Wor
kinPr
ocess.Ther
efor
e,t
heunderappl
i
edov
erheadof$250mustbededuct
edf
rom
t
otalact
ualov
erheadt
oar
ri
veatt
heamountofov
erheadappl
i
edt
owor
kinpr
ocess
dur
ingNov
ember
.Ift
her
ehadbeenov
erappl
i
edov
erhead,
thebal
ancewoul
dhav
ebeen
addedt
otot
alact
ual
manuf
act
uri
ngov
erhead.

Exhi
bit3-
10:Schedul
eofcostofgoodssol
d

Al
pha-
Manuf
act
uri
ngcompany

Schedul
eofcostofgoodssol
d

Fort
heMont
hofNov
ember
,2003

Fi
nishedgoodsi
nvent
ory
,Nov
ember
-1-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$12,
000

Add:
Costofgoodsmanuf
act
ured*
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-48,
000

Costofgoodsav
ail
abl
eforsal
e--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$60,
000

Deduct
:Fi
nished-
goodsi
nvent
ory
,Nov
ember
-30-
--
--
--
--
--
--
--
--
--
--
--
-24,
000

Costofgoodssol
d(bef
oreadj
ust
ment
)--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
$36,
000

Add:
Underappl
i
edov
erhead+-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-- 250

Costofgoodssol
d(adj
ust
edf
orunderappl
i
edov
erhead)-
--
--
--
--
--
--$36,
250

*Thecostofgoodsmanuf
act
uredi
sobt
ainedf
rom t
heschedul
eofcostgoodsmanuf
act
ured
i
nexhi
bit.

+Thecompanycl
osesover
headbalancestocostofgoodssoldaccount.Hencet
he$250
bal
ancei
nunder appli
edover
headi saddedtocostofgoodssoldforthemonth.

Exhi
bit3-
11:I
ncomest
atement
s

26
 Al
pha-
Manuf
act
uri
ngcompany

I
ncomest
atement

Fort
heMont
hofNov
ember
,2003

Sal
esr
evenue-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$54,
000

Less:
Costofgoodssol
d*-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--36,
250

Gr
ossmar
gin-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$17,
750

Sel
l
ingandadmi
nist
rat
iveexpenses-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
14,
800

I
ncomebef
oret
axes-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
$2,
950

I
ncomet
axexpenses-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
- 1,
420

NetI
ncome-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-- $1,
530

*
Thecostofgoodssol
disobt
ainedf
rom t
heschedul
eofcostofgoodssol
dinexhi
bit3-
10.

Post
ingj
our
nal
ent
ri
est
othel
edger

Alloft
hej ournalentri
esintheAl
pha-
Manufactur
ingil
lust
rati
onarepost
edtot
heledgeri
n
exhibi
t3-12asf ollows.Anexami
nati
onoftheseT-accountsprov
idesasummaryofthecost
fl
owsdi scussedt hroughoutt
hei
ll
ust
rat
ion.

Exhi
bit3-
12:
Ledgeraccount
sforAl
pha-
Manuf
act
uri
ngCompany
’si
l
lust
rat
ion.

Account
sRecei
vabl
e Rawmat
eri
alI
nvent
ory WagesPay
abl
e

10,
000Bal
.

Bal
. 11,
000 Bal
.30,
000 34,
000(
2) 21,
000 (
4)

(
10a)54,
000 (
1) 10,
000 14,
000 (
5)

12,
000 (
8)

27
 Pr
epai
dInsur
ance Wor
k-i
n-Pr
ocessI
nvent
ory Of
fi
ceSuppl
i
esi
nvent
ory

Bal
. 4,
000 48,
000 (
9)Bal
.900 300 (
8)

Bal
.2,
000 1,
000 (
6) (
2) 34,
000

(
4)21,
000

(
7)28,
800 Accumul
atedDepr
eci
ati
on-

Pr
epai
dRent equi
pment

Fi
nishedGoodsi
nvent
ory

Bal
.5,
000 3,
000 (
6) Bal
.12,
000 36,
000 (
10b) 105,
000Bal
.

1,
500 (
8) (
9) 48,
000 5,
000 (
6)

Account
spay
abl
e Manuf
act
uri
ngOv
erhead

Manuf
act
uri
ngsuppl
i
es 3,
000 Bal
. (
3) 50 28,
000 (
7)

I
nvent
ory 6,
000 (
6) (
5)14,
000

10,
000 (
1) (
6)15,
000

Bal
.750 50 (
3) 1000 (
8)

250 (
11)

Sel
l
ingandadmi
nist
rat
ive

CostofGoodssol
d Expenses Sal
esRev
enues

(
10b)36,
000 (
8)14,
800 54,
000 (
10a)

(
11) 250

*Thenumberinpar
ent
hesesr
elat
esT-accountentr
iest
otheassoci
atedj
our
nal
ent
ri
es.The
gi
venbal
ancesaret
heNovember-
1accountbalances.

28
Anot
herExer
cise3.
1:t
hef
oll
owi
ngbudget
eddat
aisgi
venf
orXYZt
ext
il
efact
oryf
ort
hey
ear
2004

Est
imat
edMOHcost
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-$450,
000

Est
imat
ednoofshi
rt
spr
oduced-
--
--
--
--
--
--
--
--
--
-200,
000shi
rt
s

Est
imat
edDM costf
ort
hey
ear
--
--
--
--
--
--
--
--
--
--
-$300,
000

Est
imat
edDLcost-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
$900,
000

Est
imat
edDLhour
s--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
-300,
000hr
s

Est
imat
edmachi
nehour
s--
--
--
--
--
--
--
--
--
--
--
--
--
--
90,
000hr
s

Comput
ethepr
edet
ermi
nedMOHr
ateont
hef
oll
owi
ngal
l
ocat
ionbase

1. phy
sical
out
putmet
hod
2. di
rectmat
eri
alcostbase
3. di
rectl
aborbase
4. di
rectl
aborhour
sbase
5. machi
nehour
sbase
Assumeal
li
nfor
mat
ioni
nabov
eandt
hef
oll
owi
ngi
nabov
eandt
hef
oll
owi
ngaddi
ti
onal
i
nfor
mat
ion

Act
ual
dat
aforj
ob201i
sgi
venbel
ow

Act
ual
shi
rt
scompl
etedf
orj
ob201-
--
--
2,000shi
rt
s

Act
ual
DM used-
--
--
--
--
--
--
--
--
--
--
--
--
-$30,
000

Act
ual
DLcost-
--
--
--
--
--
--
--
--
--
--
--
--
--
-$20,
000

Act
ual
DLhour
s--
--
--
--
--
--
--
--
--
--
--
--
--
--
400hr
s

Act
ual
machi
nehour
s--
--
--
--
--
--
--
--
--
--
--
240hr
s

Det
ermi
net
het
otal
costofj
ob201undereachoft
hef
ivebasesofal
l
ocat
ion

Exer
cise3.2:Acor
por
ati
onusesj
obordercostsy
stem.Thefactor
yov erheadrat
eesti
matedfor
theyear2001was$8perDLhour
;thei
nventor
yaccounthadthefol
lowingbalancesonDec.1

Rawmat
eri
al-
--
--
--
--
--
--
--
--
--
--
--
--
-$7,
000

WI
P(j
ob210)-
--
--
--
--
--
--
--
--
--
--
--
--
$6,
500

FG(
job209)-
--
--
--
--
--
--
--
--
--
--
--
--
--
$7,
000

29
Dur
ingDecember
,thef
oll
owi
ngev
ent
soccur
red

1.mat eri
al purchasedonaccount$18, 000
2.di r
ectmat erial
sandf actorysuppl ieswer eissuedasfoll
ows
 j ob211- --
---
---
---
---
--
---
-$4,
500
 j ob212- -
---
--
---
----
--
--
---
-$5,300
 j ob213- -
---
--
---
----
--
--
---
-$6,200
 i ndirectmat erial--
---
--
--
-$1,800
3.t heDecemberdi rectcostwer e
 j ob210- ---
---
---
---
--
---
--
--
--150hr s@ $6perhour
 j ob211- ---
---
---
---
--
---
--
--
--400hr s@ $6perhour
 j ob212- ---
---
---
---
--
---
--
--
--350hr s@ $6perhour
 j ob213- ---
---
---
---
--
---
--
--
--100hr s@ $6perhour
4.f actoryindirectlaborf orDecemberwas$2, 400
5.ot herov erheadcosti ncurreddur ingDecember
 Ut i
lit
ypai dincash- --
--
----
---
--
---
---
--$2,500
 Fact orydepr ecation--
--
----
---
---
---
---
-$1,000
 Repai randmai ntenance- --
---
---
--
----
-$500
 Tot al $4,
000
6.j ob210, 211and212wer ecompl etedandt ransfer
redtoFG
7.j ob209and211wer esol donaccountf or 120%ofcost
Requi
red:
1.Jour nali
zet heabov etransact i
ons
2.deter minet heunderorov erappl i
edov erhead

Exer
cise3.3Robinsonmanufact
uri
ngcompanyusesajobor
dercosti
ngsystem.It
sjoborder
cost
ingsystem hastwodir
ectcost
s(DM andDL)andonei
ndi
rectcostcat
egoryonJanuary1,
2004,thef
ollowi
nginvent
ori
esareavai
l
able

 Rawmat eri
al-
--
--
--
--
--
--
--
--
-$10,000
 WIP--
--
--
--
--
--
--
--
--
--
--
--
--
--
$5,000
 Fi
nishedgoods---
--
--
--
--
--
--
-$15,000

Robi
nsonbudget
edthe2004manufactur
ingov
erheadtobe$1,
280,
000andt
hebudgetquant
it
y
ofmachi
nehours(al
l
ocat
ionbase)ar
e16,000machinehour
s.

Thef
oll
owi
ngt
ransact
ionoccur
sdur
ingt
hemont
hofJanuar
y

1.Purchaseofmat eri
al(di
rectandi ndirect
), $89,000onaccount
2.rawmat er
ialsenttomanuf acturi
ngpl antf looris$85,000outofwhich$4,000i
sindir
ect
materi
al
3.manuf acturi
nglaborwagesl iabil
i
t yincur
r edi s$54,000outofwhich$15,000i
sindi
rect
4.Theact ualmachi nehoursusedi nt heper i
odwer e1,000machinehours.The
manuf acturi
ngov erheadisallocatedusi ngt hisactualmachinehour.

30
 5.addi ti
onalmanuf act
uri
ngoverheadcostincurreddur i
ngthemont his$75,000thi
scost
consistsofutil
it
yandrepai
rs,
$23,000insuranceexpired$2,000,depreci
ati
onexpense
$50,000
6.costoff i
nishedgoodsofei
ghtindivi
dualjobscompl etedandtransferr
edoutis
$188,800
7.f i
nishedgoodscost i
ng$180,000wassol dfor$300,000oncash
Requi
red:

a)journal
izet heabovetransacti
ons
b)postusi ngt -
account
c) computet heunderorov erappli
edMOHcost
d)closetheamountusi ngdirectwri
te-
offt
ocostofgoodssol
d

Exer
cise3.
4ABCCompanyusesnor
mal cost
ingwi
thsi
ngl
emanuf
act
uri
ngover
headcostpool
andmachinehour
sast
hecostal
l
ocati
onbase.Thefol
l
owi
ngsdat
aaref
or2004.

 Budget edmanufact ur
ingov erhead---
---
--
---
--
--
--
--
---
--
--
-$4,800,000
 Ov erheadal
locati
onbase- -
--
--
---
--
--
--
--
--
---
--
---
--
--
--
--
---
-machi nehour
 Budget edmachinehour- --
--
---
--
--
---
--
--
--
---
--
---
--
--
--
--
---
$80,000
 Act ualmanufact
uringov erheadincurred---
--
--
--
--
---
--
--
--
--$4,900,
000
 Act ualmachinehour----
--
--
--
---
--
--
---
--
--
--
---
--
---
--
--
--
--
---
$75,000
Machinehour’sdat
aandt heendi ngbalance( beforeperorat
ionofunderorov
erappl
i
edMOH
cost
)areasf oll
ows

Act
ual
machi
nehour
s Endofy
earbal
ance

Costofgoodssol
d 60,
000 8,
000,
000

Fi
nishedgoods 11,
000 1,
250,
000

Wor
kinpr
ocess 4,
000 750,
000

Requi
red:

a)Comput et
hebudgetedmanuf act
uringover
headrat
efor2004
b)Comput et
heunderorov erappli
edMOHcost
c) Cl
osetheamountusing
I. Di
rectwri
teofftocostofgoodssold
II
. Pr
oratebasedonendingbalanceofWIP,CGSandFG
II
I. Pr oratebasedontheallocat
edMOHcostamounti nt
heendi
ngbal
anceof
WIP,
CGSandFG

Pr
ocesscost
ingsy
stem

Pr
ocesscost
ingsy
stem i
sapr
oductsy
stem whi
chi
sappl
i
edwheni
dent
icaluni
tsar
e

31
producedinmass.I dent
icalunit
sar eassumedt ot akethesameamountofdi r
ect
material
,dir
ectlabor&manuf act
uri
ngov er
head.Thesecost sareaccumulat
edovera
peri
odoft i
meandt hetot
alcostisassignedtounit
spr oducedintheperi
odthecostis
accumulated.Unitcost
sar ethencomputedbydiv
idi
ngt ot
alcost
sbyt henumberofuni
ts
pr
oduced.Thi
smet
hodi
susedbycompani
est
hatpr
oducei
dent
ical
product
sorser
vices.
Inpr ocesscost ing sy stem,eachuni tisassumed tot akeequalamountofdi rect
mater i
al,directlaborandmanuf act
uringoverhead.Thedi ff
erencebet weenj obor der
andpr ocesscost ingsy stem is,t
hus,theextentoftheav eragingusedt ocomput eunit
cost.Injobor dercost ingeachj obdi f
fersi
ntermedofmat eri
alused, l
aborincurredand
manuf acturingov er head.Hence,i ti
simpossibletoassignt hesamecostf ordiff
erent
j
obs.Ont hecont rary,i dent
icalunitsproducedinmasst akeequalamountofdi rect
mater i
al,directlabor ,andmanuf acturi
ngoverhead.Thus,theuni tcostcanbef oundby
di
vidingt otalcostbyt henumberofuni tsproduced.

Whenaf irm producesi denticallotsofgoodsr epet it

ivel
y,maintainingfi
ll
edf rom a
continuousf low ofv i
rt
uallyi denticalunit
sf rom t hepr oduct
ionline.Underpr ocess
costing,weaccumul atecost sbydepar tment ,rathert hanbyor der,andassi gnt hese
costsequal l
ytoal lunitst hatpasst hrought hedepar t
mentdur i
ngt heperiod.The
dif
ferencebet weenj obor derandpr ocesscost i
ngar i
sef r
om twofactor s:
-
1.Thef lowofuni t
si nprocesscost ingsy stem ismor eorlesscont i
nuous, and
2.Theuni t
sar eindisti
nguishablef r
om oneanot her.
Underpr ocesscost i
ng,itmakesnosenset ot ryt oident i
fymateri
al,l
aborandov erhead
costswi t
hapar t
icul
aror derf r
om cust omer saswedi dinjobor dercostingsi nce
systems,si nceeachj obor deri sjustoneoft hemanyt hatarefil
l
edf r
om acont inuous
fl
ow ofv ir
tuall
yi denti
caluni tsf rom thepr oduct ionl i
ne.Underpr ocesscost ing,we
accumul atecost sbydepar tment ,rathert
hanbyor der ,andassignthesecost sequal l
yto
thatent i
repasst hrought hedepar tmentdur ingt heper iod.

Inprocesscost i
ngsyst
em DM,DL,andMOHar eaccumul atedi
nthesamewayasj ob
ordercostingsystem.However,thecostsareaccumulatedbydepartmentoversome
peri
odoft i
met hanbyindiv
idualjobs.Thetimeperiodov erwhichthecostistobe
accumul at
eddependsont heinformati
onneedsofthecompany .I
tcanbeaweek,but
nol ongerthanamont hmostof ten.Costaccumul
ationi smuchsimplerinprocess
costingsystem t
haninj
obordercost i
ng.

Toi l
lustr
at e,letconsidert hecaseofGl obalDefenseInc.
,manuf act
uri
ngthousandsof
component sf ormissilesandmi li
taryequipment.Thesecomponent sareassembl edin
theAssembl yDepartment .Uponcompl eti
on,theunitsareimmedi at
elytr
ansferredto
theTest i
ngDepar tment .Wewi l
lfocusont heAssembl yDepartmentProcessforoneof
thesecomponent s,DG- 19.Ev eryeffor
ti smadet oensuret hatallDG-19uni tsare
i
dent i
cal andmeetasetofdemandi ngperformancespecifi
cat
ions.Theprocess-costi
ng
system forDG- 19intheassembl yDepar tmenthasasi ngl
edir
ect–costcategory(dir
ect
mat eri
al)andasi nglei ndirect
-costcategory(conversi
oncosts).Conversi
oncost sare

32
al
lmanuf
act
uri
ngl
abor
,indi
rectmat
eri
al,
ener
gy,
plantdepr
eci
ati
on,
andsoon.

Dir
ectmat
eriali
saddedatthebeginni
ngoftheprocessinAssembly
.Conv
ersioncost
s
ar
eaddedevenlydur
ingassembl
y.Thefol
lowinggraphsummarizest
hesef
acts:

Conv
ersi
oncost
saddedev
enl
ydur
ingpr
ocess

Assembl
y
Tr
ansf
er Test
ing
Depar
tment
Depart
ment

Di
rectmat
eri
alsaddedatt
hebegi
nni
ngoft
hepr
ocess

Processcost i
ngsy st em separ at ecost si ntocostcat egor i
esaccor dingt othet i
mi ngof
whencost sar ei ntroducedi nt ot hepr ocess.Of ten,asi nt hecaseofGl obalDef ense
exampl e,onl yt wo costcl assi fi
cations,di rectmat eri
aland conv ersion cost s,ar e
necessaryt oassi gncost st opr oduct s.Thesear ebecause,al ldi r
ectmat erialsar e
addedt othepr ocessatonet imeandal lconv ersi oncost sar egener allyaddedt ot he
processuni forml yt hrought ime.I fhowev er,t wodi f f
erentdi rectmat erialsar eaddedt o
theprocessatdi ffer entt imes, twodi ffer entdi rectmat erialcat egor ieswoul dbeneeded
toassignt hesecost st opr oduct s.Si mi larly,ifmanuf acturingl abori saddedt ot he
processatat imet hati sdi f
ferentf rom ot herconv ersioncost s,anaddi t
ionalcost
category(directmanuf acturingl aborcost s)woul dbeneededt osepar atelyassi gnt hese
coststopr oduct s.
Toi l
lustr
ate,wewi l
luset hepr oduct ionoft heDG- 19componenti nt heAssembl y
Departmentt oillust ratepr ocesscost ingi nt hreecases:
 Case- 1:Pr ocesscost i
ngwi thzer obegi nni ngandzer oendi ngwor k-in-process
invent or yofDG- 19,t hati s,alluni tsar est artedandf ull
ycompl etedbyt heend
oft heaccount ingper i
od.Thi scasepr esent st hemostbasi cconcept sof
processcost ingandi l
lustratest hekeyf eat ureofav eragi ngofcost s.
 Caes- 2:Pr ocesscost ingwi thzer obegi nni ngwor k-in-pr ocessi nvent oriesbut
someendi ngwor k-
in-processi nv entoryofDG- 19,t hati s,someuni tsofDG- 19
star t
eddur i
ngt heaccount i
ngper i
odar ei ncompl et eatt heendoft heper iod.
Thi scasebui ldsont hebasi csandi ntroducest heconcept sofequi val
entuni ts.
 Case- 3:Pr ocesscost i
ngwi t
hbot hbegi nni ngandsomeendi ngwor k-in-process
invent or yofDG- 19uni ts.Thi scaseaddsdet ailanddescr i
best heef fectof
wei ght ed- av erageandf irst–i n-first-out( FIFO)costf low assumpt i
onsoncost
ofuni tscompl etedandcostofwor k-in-processi nv entory .

Case-
1:Pr
ocesscost
ingwi
thzer
obegi
nni
ngandzer
oendi
ngwor
k-i
n-pr
ocess
i
nvent
ori
es

33
OnJanuar y1,2001,t her ewasnobegi nningi nventoryofDG- 19unitsint heAssembly
Department s.Dur i
ngJanuar y2001,Gl obalDef ensest art
ed,completeassembl y,and
t
ransferredoutt otheTest i
ngDepar t
ment ,400DG- 19uni t
s
DataforAssembl ydepar tmentf orJanuar yar e:
Phy sicalunitsf orJanuar y2001
Wor k-i
n-pr ocessbegi nningi nventory( Januar y-
1) 0units
Starteddur ingJanuar y 400units
Compl etedandt r
ansf erredoutdur ingJanuar y 400uni ts
Wor ki npr ocess, endingi nvent oryJanuar y-31 0uni ts
Total costsf orJanuar y2001
Dir
ectmat erialcostsaddeddur ingJanuar y $32, 000
Conv ersioncost saddeddur i
ngJanuar y 24,000
Total Assembl yDepar tmentcost saddeddur i
ngJanuary $56, 000
Gl
obalDef ense r ecor ds di rectmat er
ials and conv ersi
on costsi nt he Assembly
Departmentast hesecost sar ei ncurred.Byav eraging,theassemblycost sperunitof
DG-19ar e$56, 000÷400uni ts=$140, it
emi zedasf oll
ows:
Di r
ectmat eri
alcost speruni t
s( $32, 000÷400uni t
s) $80
Conv er sioncost speruni t
s( $24, 000÷400) 60
Assembl yDepar tmentcost speruni t $140

Thiscaseshowst hat ,inapr ocess- cost i

ngsy stem,uni tcost scanbeav eragedby
dividingt otalcost si nagi venaccount ingper iodbyt otalunitspr oducedi nt hatper iod.
Because,eachuni tisi dent ical,weassumeal luni t
sr eceivet hesameamountofdi rect
mat er i
aland conv ersion cost s.Thi sappr oach can beused byanycompanyt hat
producesahomogeneouspr oductorser v
icebuthasnoi ncompl et euni tswheneach
account ingper i
odends.Thi ssit uationf r
equent l
yoccur sinser vi
ce-sect oror gani zat
ions.
Case- 2: Processcost ingwi thzer obegi nningbutsomeendi ngwor k-in-processi nventory
E.g.I nFebr uar y2001, Gl obalDef ensepl acedanot her400- unitofDG- 19i ntopr oduction.
Unitspl acedi nt opr oduct i
oni nJanuar y2001wer ecompl etelyassembl edi .e.ther eisno
begi nning i nv ent ory ofpar ti
ally compl eted uni tsi nt he Assembl y Depar tmenton
Febr uar y1,2001.Cust omerdel aysi npl acingor dersf orDG- 19pr eventt hecompl ete
assembl yofal luni tsst artedi nFebr uar y.Onl y175- unitsarecompl et edandt ransferred
outt ot heTest ingDepar t
ment .Dat af ortheAssembl yDepar tmentf orFebr uar y2001ar e:
Phy sical Unitsf orFebr uary2001
Wor k–i n- process, begi nni ngi nvent ory( February-1) 0uni ts
Start
eddur ingFebr uar y 400uni ts
Compl etedandt r
ansf err
edout 175uni ts
Wor kinpr ocess, endi ngi nv ent ory( Februar y28) 225uni ts
The225uni tspar tial
lyassembl eduni tsasofFebr uary28,2001,ar ef ul l
ypr ocessed
withr espectt odi rectmat erials.Thi si sbecauseal ldi r
ectmat erialsi nt heAssembl y
Depar tmentar eaddedatt hebegi nni ngoft heassembl yprocess.Conv ersioncost sar e
addedev enlydur ingt heassembl ypr ocess.Basedont hewor kcompl etedr elativetot he
totalwor kr equi redt ocompl et et heDG- 19uni tsst il
lint hepr ocess,anAssembl y
super v i
sorest imat est hatt hepar ti
allyassembl eduni t
s,areonav er age,60%compl ete
ast oconv ersi oncost s.

34
Tot
alcostsforFebruar
y2001:-
Dir
ectmat er
ial
scostsaddedduri
ngFebruar
y $32,
000
Conversi
oncostsaddedduringFebr
uary 18,
600
TotalAssemblyDepart
mentcostsaddedduri
ngFebr
uar
y $50,600

Theaccur acyoft hecompl etionper centagesdependsont hecar eandski llofthe

esti
matorandt henat ureoft heprocess.Est i
matingthedegr eeofcompl etionisusually
easi
erfordirectmat eri
alsthani tisforconv ersi
oncost s.Thisisbecause; themat eri
als
forpart
iall
ycompl et eduni t
scanbemeasur edmor eeasi l
y.I
ncont rast,theconv ersi
on
sequenceusual l
yconsi stsofanumberofbasi coper ationsforaspeci fi
ednumberof
hours,daysorweeks,f orv ari
ousst epsi nassembl y,testi
ng,andsof orth.Thus,the
degreeofcompl etionf orconv ersioncost sdependsonwhatpr opor t
ionoft hetotal
eff
ortneededt ocompl eteoneuni torbot hofproductionhasbeendev otedt ounitsstil
l
i
n process.Thi sest i
mat ei smor edi ffi
cultto makebecauseoft hedi f
fi
cult
iesin
esti
matingconv ersioncostcompl et
ionper centages,depar t
mentsuper visorsandl i
ne
manager s–indi
vidual mostf ami li
arwi ththeprocessof t
enmaket heseest imat es.

Thekeypoi ntst onot eincase- 2ar ethatapar ti

allyassembl eduni ti snott hesameasa
ful
lyassembl eduni t
.Whenev ert herear esomef ullyassembl edandsomepar ti
all
y
assembl edunits,ast ohowshoul dGl obal Def ensecal culat e:
A.Thecostoff ul
lyassembl eduni tsinFebr uary2001, and
B.Thecostoft hepar ti
all
yassembl eduni tsst i
l
li npr ocessatt heendof
February2001i sav eryimpor tantpoi ntt obenot icedher e.
GlobalDefensecal culatest hesecost sbyusi ngt hef ol l
owi ngf ivest eps:
 St ep-1: Summar izet hef l
owofphy sical unitsofout puts
 St ep-2: Comput eout puti nt ermsofequi v alentuni ts
 St ep-3: Comput eequi valentuni tcost s
 St ep-4: Summar izet ot alcost stoaccountf or
 St ep-5:Assi gnt otalcost st ouni t
scompl etedandt ounitsinendi ng
wor kinpr ocess.
Physicalunit
sandEqui val entuni ts( Step- 1and2)
Step-
1:Thi sstept rackst hephy sicaluni tsofout put .Itident ifiesorshowsf rom wher e
theunitscomef r
om andwher et heuni t sgo.Thephy sicaluni tcol umn:
i) 400uni t
sar est art
eddur ingFebr uar y2001
ii
) 175uni t
sar ecompl etedandt ransf err
edout
ii
i) 225uni t
sar er emai nedi nwor k-i
n- processi nv ent ory
Step-
2:Focusesonhowt heout putf orFebr uar yshoul dbemeasur ed.Theoutputi s175
ful
lycompl eteduni tspl us225uni tspar t
iall
yassembl eduni ts.Si nceal l400phy si
cal
unit
sar enotuni for
ml ycompl eted,out puti nst ep-2iscomput edi nequi v
alentunits,not
i
nphy sicalunit
s.
Equivalentunits-isader ivedamountofout putuni tst hatt akest hequant it
yofeach
i
nput( f
actorofpr oduction)i nuni t
scompl etedori nwor kinpr ocess, andconv ert
sitinto
theamountofcompl etedout putuni tst hatcoul dbemadewi tht hatquant i
tyofinput.
Forexampl e,if50phy sicaluni tsofapr oducti nendi ngwor k-in-pr ocessi nvent
oryar e

35
70%compl et
ewi threspecttoconv ersioncost s,thereare35( 70%×50)equi v
alentunit
s
ofout putf
orconv ersi
oncost s.Thati s,i
falltheconv ersioncost sinputi
nt he50-unit
sin
i
nv entorywereusedt omakecompl et
edout putunits,thecompanywoul dbeabl eto
make35compl etedunitsofout put .Equivalentuni t
sar ecal cul
atedseparatelyforeach
i
nput( costcategory).
Step-1:Summar izesoutputphy sical unit
s
Step2: Comput eEquival
entuni ts
Assembl yDepar t
mentofGl obal Def ense, I
nc..,forFebruar y2001.
(Step-1) (
Step-2)
Phy sical Equivalentunit
s
units
Direct Conv er
sion
Fl
owofpr oducti
on mat eri
als costs

-Work-in-
process,beginni
ng 0
-Startedduringcurrentperi
od 400
-Toaccountf or 400
-Compl et
edandt r
ansferr
edout
dur i
ngcur r
entper i
od 175 175 175
-Wor k-i
n-pr
ocessendi ng* 225
225×100%; 225×60% 225 135
-Accountf or 400
-Workdonei ncur r
entperiodonl
y 400 310

*
Degr
eeofcompl
eti
oni
nthi
sdepar
tment
:di
rectmat
eri
al,
100%;
conv
ersi
oncost
s,60%.

Whencal culatingequivalentuni tsi nst ep-2,focusonquant i

ti
es.Thedol laramount s
shouldbedi sregardedunt ilaft
erequi val entunitsar ecomput ed.IntheGlobalDef ense
example:
1.Al l400- physi
caluni tsi.e.t he175uni tsf ul l
yassembl edonesandt he225
partiall
yassembl edonesar ecompl et
ei nt er msofequi val
entunitsofdi rect
mat erials.Thisi s because;di rectmat erials are added i nt he assembl y
Depar tmentatt hei niti
alstageoft heprocess.Exhi bit7-1showsout putas400
equiv alentunit
sf ordi rectmat er i
alsbecauseal l400- unit
sar efull
ycompl ete
wi t
hr especttodi r
ectmat eri
als.
2.The 175 f ull
yassembl ed units ar e compl etelypr ocessed wi t
hr espectt o
conv ersioncost s.Thepar t
iall
yassembl eduni t
sinendi ngwor kinpr ocessar e
60%compl ete(onav er
age) .Ther efore,t
heconv ersi
oncost sinthe225par t
iall
y
assembl edunitsar eequi valentt oconv ersioncost sin135( 60% of225)f ull
y
assembl edunits.Hence,exhi bit7- 1showsout putas310equi val
entuni t
swi th
respectt oconversioncost si.e.175equi valentuni tsassembl edandt ransferred
outand135equi valentuni t
sendi ngwor k-i
n-pr ocessi nventory.

Cal
cul
ati
onofpr
oductcost
s(St
ep3,4and5)
:-st
eps3,4,and5.Toget
her
,theyar
e

36
call
edt hepr oduct ioncostwor ksheet .
Step-3cal cul at esequi valent-uni t
scost sbydi v
idingdi rectmat erialandconv ersion
costsaddeddur ingFebr uar ybyt her el
atedquant i
tyofequi v alentuni tsi nendi ngwor k-i
n
-pr
ocessi nv ent or y.Her e,theuseofequi valentuni ti
ncal cul ati
nguni tcost scanbeseen
by compar ing conv ersion cost s f or t he Mont h of Januar y and Febr uary
2001.Accor dingl yi tispossi bl
et oobser vet hat :
1.Thet ot alconv ersioncost sof$18, 600f ort he310uni t swor kedondur ing
Febr uar yar el esst hant heconv ersioncost sof$24, 000f orthe400uni ts
wor kedoni nJanuar y.Howev er ,theconv ersioncost stof ullyassembl eauni t
ar e$60i nbot hJanuar yandFebr uar y.
2.Tot alconv ersioncost sar eloweri nFebr uar ybecausef ewerequi valentuni ts
ofconv er sioncost swor kwer ecompl etedi nFebr uar y( 310)t hanwer ei n
Januar y( 400) .Ifhowev er,wehadusedphy sicaluni tsi nst eadofequi valent
uni t
si nt heperuni tcal culati
on,wewoul dhav eer roneousl yconcl udedt hat
conv er sion cost s per uni t decl ined f rom $60 i n Januar yt o $46. 50
($18, 600÷400) i n Febr uary. Such i ncor r
ect cost ing mi ght pr ompt ed
compani est olowert hesel l
ingpr iceoft heirpr oduct sinappr opr i
ately.
Step-4summar izest otalcost st oaccountf or.Becauset hebegi nni ngbal anceoft he
work-in-processi nvent or yi szer o,totalcost st oaccountf or( t
hati s,t otalchar gesor
debitst o wor k-in-pr ocess- Assembl y)consi sts oft he cost s added dur ing Febr uary
–directmat er i
al of$32, 000, andconv ersioncost sof$18, 600, f
orat ot alof$50, 600.
Step-5assi gnst hesecost stouni tscompl et edandt ransf er r
edoutandt ouni tsst il
lin
processatt heendofFebr uar y2001. Thekeyi deai st oat tachdol l
aramount st ot he
equivalentout put suni t
sf ordi rectmat erialsandconv ersioncost si n
I. Uni tscompl et edandt ransf err
edout
I
I. Endi ngwor ki npr ocesscal culatedi n,st ep-2.Todoso,t heequi valentout put
uni tsf oreachi nputar emul ti
pliedbyt hecostperequi valentuni tcal culatedi n
step- 3
Steps3, 4, and5: Comput eEqui v alent-
uni tscost s,Summar izeTot al cost stoAccount
for,
andAssi gncost st ouni t
scompl etedandt ouni t
si nendi ngWor k-i
n- process: -
Assembl yDepar tmentofGl obal Def ense, I
nc. ,forFebr uar y2001.
Total Direct Conv ersion
Product ioncost s mat erials
costs

(
Step-
3)-Cost saddeddur ingFebr uary $50, 600 $32,000 $18,
600
Di v
idedbyequi valentunits
-
Wor kdonei ncurrentper i
od ÷400 ÷310
-Costperequi valent---
---
--
--
--
--
--
--
--
---
--
--
---
--
- $80 $60
(
Step-
4)- Total costtoaccountf or $50,600
(
Step-
5)Assi gnmentofcost s
-Compl etedandt ransferr
ed
out( 175units)--
---
--
---
--
--
--
-$24,500- -
--
--
--
-175a×$80)+(
( 175a×$60)
-Wor kinprocessendi ng(225uni t
s)
Di
rectmat er
ial
s 18,000 (225b×$80)

37
 Conversi
oncost s 8,
100 135b×$60
Totalworkinprocess 26,
100
Tot
alcostaccount
edf or $50,
600

a.Equi
val
entuni
tscomplet
edandt
ransfer
redout
b.Equi
val
entuni
tsinendi
ngworki
nprocess

Journalentri
es
Journalentriesinprocess-cost i
ngsy stemsar ebasicall
yli
kethosemadei nj
ob- costi
ng
systemswi t
hr especttodir
ectmat eri
alsandconv er
sioncosts.Themai ndifferencei s
that
, i
nprocesscost ing,t
herei softenmor ethanoneWor k-
in-
Processaccounts, onef or
eachpr ocess-inourexampl e,Wor kinPr ocess-AssemblyandWor ki nProcess-Testing.
GlobalDef ensepur chasesdi rectmat eri
alsasneeded.Thesemat eri
alsaredel iv
er ed
dir
ectlytot he Assembl yDepar t
ment .Summar yj our
nalentri
es fort he mont h of
FebruaryatGl obalDefense,Inc.,ar
e:

Worki
nprocess-Assembly 32,
000
Accountspayablecont
rol 32,
000
[
Tor
ecorddi
rectmateri
alpurchasedandusedi
nproduct
iondur
ingFebr
uar
y]

Worki
nprocess-Assembly 18,
600
Vari
ousaccount s 18,
600
[
Torecordassemblydepartmentconv ersi
oncost
sforFebr
uar
yexamplei
ncl
udeener
gy,
manufact
uri
nglabor,
andpl antdepreciati
on.

Workinprocess-Testi
ng 24,
500
Wor kinProcess-
Assembly 24,
500
[
Torecordcostofgoodscompl et
edandtransf
err
edf
rom assembl
ytot
est
ingdur
ing
Febr
uary
]

Case 3:Pr ocess cost ing wi th both some begi nni

ng and endi ng work-
in-pr
ocess
i
nv ent or
y
Att hebegi nningofMar ch2001,Gl obalDef ensehad225par t
ial
lyassembledDG- 19
unitsi ntheAssembl yDepar t
ment .Duri
ngMar ch2001,Gl obalDefenseplacedanother
275uni t
sintopr oduction.Dat af ortheAssembl yDepartmentf orMar ch2001are:
Phy sicaluni
tsf orMar ch2001
Wor ki nprocess, beginningi nventory(march-1) 225units
Dir
ectmat eri
als( 100%compl ete)
Conv ersioncost s( 60%compl ete)
Starteddur i
ngMar ch 275uni ts
Compl etedandt ransferredoutdur i
ngMar ch 400uni ts
Wor ki nprocess, endinginv entory(March31) 100uni t
s
Directmat er i
als(100%compl et
e)

38
 Conversioncosts( 50%compl ete)
Tot
alcostsforMar ch2001
Workinprocess,beginninginventory
Dir
ectmat eri
al(225equi valentunit
s×$80perunits) $18,
000
Conversioncost s(135equiv al
entunits×$60peruni
ts) 8,100 $26,100
Dir
ectmat eri
alcost saddeddur ingMar ch 19,
800
Conversioncost saddeddur ingMar ch 16,380
Totalcoststoaccount sfor $62,280

Wenowhav eincomplet
eunitsi nbot hbegi nningandendi ngwor k-in-
processinvent
ory
toaccountfor.Ourgoalistouset hef ivest epswedescr i
besear l
iertocalculat
e
1)Thecost sofunitscompl etedandt ransferredout,and
2)Thecostofendi ngwor kinpr ocess.
Toassi gncoststoeachoft hesecat egories,howev er,weneedt ochooseani nvent
ory
cost-
fl
ow met hod.Wenextdescr ibet hef ive-st
epappr oachtopr ocesscostingusing
twoalternat
iveinvent
orycost-
flowmet hods- theweight edaveragemet hodandt hefi
rst
-
i
n-fi
rst
-outmet hod.Thediff
erentassumpt ionwi llassigndi f
ferentamount sofcost sto
uni
tscompl etedandtounitsinendi ngwor ki nprocess.

WEI GHTED AVERAGE METHOD: -The wei ght ed av er age pr ocess cost ing met hod
calculate-uni tcostoft hewor kdonet odat e( regar dlessoft heper iodi nwhi chitwas
done)andassi gnst hiscostt oequi valentuni tscompl etedandt ransferredoutoft he
processandt oequi v alentuni tsinendi ngwor k-i
n- processi nvent ory.Thewei ghted
–av eragecosti st het ot alofal lcost sent er ingt heWor ki npr ocessaccount( regardless
ofwhet heri tisf rom begi nningwor ki npr ocessorf orm wor kst art
eddur i
ngt heper i
od)
divi
dedbyt otalequi v alentuni t
sofwor kdonet odat e.Wenow descr ibethef i
ve-step
procedur ei ntroducedi ncase- 2usingwei ght edav eragemet hod.
Step-1: Summar i
zet hef l
owofphy sical uni ts-
i) 225-uni tsar ef rom begi nni ngi nv entor y
ii) 275uni tsar est art
eddur ingt hecur rentper iod
iii) 400uni tsar ecompl etedandt ransf erredout, and
iv ) 100uni tsar einendi ngwor kinpr ocessi nvent or y
.
Step-2:Comput eout puti nt ermsofEqui v alentuni ts-aswecanseef r
om case- 2abov e
thatev enpar tiall
yassembl eduni t
sar ecompl etedi nt ermsofdi r
ectmat eri
al sbecause
dir
ectmat erialsar ei nt roducedatt hebegi nningoft hepr ocess.Forconv er sioncost s,
thef ull
yassembl edphy sicaluni tstransf er redoutar e,ofcour se,f ull
ycompl et
ed.The
Assembl yDepar tmentsuper vi
sorest i
mat est hepar t
ial l
yassembl edphy sicaluni tsin
Mar ch31wor ki nprocesst obe50%compl et e( onav erage) .
Theequi valentuni tscol umnsshowt heequi valentuni tsofwor kdonet odat e- equival
ent
unitscompl et edandt r ansf erredoutandequi valentuni tsi nendi ngwor ki npr ocess( 500
equivalentuni tsofdi rectmat eri
alsand450equi val entuni tsofconv ersioncost s).
Not i
cet hatt heequi v alentuni tsofwor kdonet o dat eal so equalt hesum oft he
equivalentuni tsi nbegi nningi nvent ory( wor kdonei nt hepr ev i
ousper iod)andt he

39
equi
val
entunitsofwor kdoneinthecurrentper
iod,because:
Equiv
alentunits Equi
valentunit
s Equi
valentuni
ts Equival
ent
inbeginni
ng + ofworkdone = compl etedand + uni tsin
Workinpr ocess curr
entperiod tr
ansferr
edout endingwork
i
ncur r
entperi
od i
nprocess

Theequi v
alentuni t
scal culat
ioni ntheweight edav er
agemet hodi sonlyconcer nedwi t
h
tot
alequivalentunitsofwor kdonet odat
er egar dlessof(1)whet herthewor kwasdone
duri
ngt hepr eviousper iodandi spar tof begi nningworkinpr ocess,or( 2)whet herit
wasdonedur ingt hecur rentper iod.Thati st heweightedav eragemet hodmer ges
equi
valentuni t
si nbegi nni
ngi nvent or
y(workdonebef or
eMar ch)withequivalentuni t
s
ofworkdonei ncur r
entper i
od.Thus,t hest ageofcompl eti
onoft hecur rentper i
od
begi
nningwor kinpr ocessper centageisir
relev antandnotusedi nt hecomput ation.

Steps1and2:Summar izeOut
putinphy si
calunit
sandcompar eEqui valentunit
s
Wei ght ed-Average Met hod ofprocess costing:-Assembl y DepartmentofGl obal
Defense, i
nc., f
orMar ch2001:
(Step-1 (
Step-2)
Physicalunit
’s Equi
valentunits
(
Giv en)
Dir
ect Conversion
FlowofPr oduction Mat eri
als Cost
s
-Wor ki nprocess, beginning 225
-Star teddur i
ngcur rentper iod 275
-Tot al account edfor 500
-Compl et
edandt ransferredout
dur ingcur rentperiod 400 400 400
-Wor k-in-
process, endinga 100
(100×100%; 100×50%) 100 50
-Account edf or 500
-Wor kdonet odate 500 450
a
Degr eeofcompl et
ioni nt hisdepartmentdi rectmat i
al s,
100%; Conv ersi
oncosts,50%
Step-3:Comput eEqui valent -
unit
scost s-step- 3,showst hecomput ati
onofequi v
alent
–units costs separatelyf ordi rectmat eri
als and conv ersion cost s.The weighted-
averagecostperequi v al
entuni tisobt ainedbydi vi
dingt hesum ofcost sforbeginning
wor kinprocessandcost sf orwor kdonei nt hecur r
entper i
odbyt otalequiv
alentunits
ofwor kdonet odate.Whencal culati
ngt hewei ghted-
av erageconv ersioncostsperunit.
forexampl e,wedi v i
det otalconv ersioncost s,$24, 480( begi nningwor kinpr ocess,
$8,100,pluswor kdonei ncur rentper iod,($16,380) ,byt otalequi val
entunits,450
(equival
entunitsofconv ersioncost si nbegi nningwor kinpr ocessandi nwor kdonei n
currentperi
od),togetawei ghted-averagecostperequi valentuni tof$54.40

40
 i
.e.[
($8,
100+$16,
380)÷450uni
ts]=$54.
40

Step-4:Summar i
zeTot alcoststoAccountf or-begi nni
ngwor ki nprocess,$26, 100
(di
rectmat er i
als,$18, 000andconv ersioncost ,$8,100)plus$36,180( dir
ectmat erials
costsaddeddur i
ngMar ch,$19,
800,andconv ersioncost s,$16,
380).Thet otalofthese
costsis$62, 280.
Step-5:Assigncost st ounitscompl etedandt ouni tsinendingwor ki
npr ocess-Thekey
pointinthi
sst epi stocostal lworkdonet odatei.e.
1)Thecostofuni tscompl etedandt r
ansf erredoutoftheprocess,and
2)Thecostofendi ngwor ki npr ocess.
Step-5Theequi valentunitscompl etedandt ransferredoutandequi val
entuni tsi n
endingwor kinpr ocesscal cul
atedi nst ep-2andat t
achesdollaramount st othem.
Thesedol laramount saret hewei ght ed-averagecost sperequivalentunitf ordirect
mat eri
alandconv ersioncostscalculatedi nstep-3.

Forexampl e,not ethatthet

otalcostofthe100phy si
calunit
sinendi ngwor
ki npr
ocess
consist
sof :
Directmat er
ials:
100equi valentunit
s×weighted-
averagecostperequival
entunitof$75.
60=$7, 560
Conv ersioncost s:
50- equivalentunit’
s×weighed-aver
agecostperequivalentunitof$54.
40= 2,720
Total costsofendi ngworkinprocess---
--
--
--
--
--
--
--
--
--
--
--
--
--
---
--
--
--
--
--
---
- $10, 280

The fol
lowing table summar i
zes the t
otalcostst o accountf orand t he $62,
280
account
edbel ow.Thear rowindicat
ethatthecost sofunit
scompl et
edandt ransf
erred
outandi nendingwor ki nprocessinprocessarecalculat
edusingav eragetotalcosts
obtai
nedaf t
ermer gi
ngcostsofbeginningcostsofbeginningwor kinprocessandcost s
addedinthecur r
entperiod.
Costsaccountedfor
Cost
st oAccountfor cal
culatedatweighed-averagecost

Beginni
ngworkinprocess $26,100 Completedandtr
ansfer
redout$52,000
Costsaddedincurr
entperi
od 36,180 Endingworkinpr
ocess 10,
280
Totalcost
stoaccountfor $62,280 Total
costsaccount
edfor $62,
280

Steps3,4,and5:Comput eEquivalent-
uni
tcosts,summar i
zest otalcostst oAccountfor
,
andassi gncoststouni tscompletedandt ouni
tsinEndingWor kinpr ocessWei ght
ed-
averagemet hodofpr ocesscosti
ng
Total
Producti
on Di
rect Conv er
sion
Costs Materi
al s costs
Step-3:
-Wor kinprocess,begi
nning$26, 100-
--
--
--
--
--
--
--
--
--
-$18,000---
--
--
---$8,
100
-Costsaddedincur r
entperiod36,180-
--
--
--
--
--
--
--
--
--
19,800 - --
--
--
---
-16,380
-Costsincurr
edt odate $37,180 $24,480

41
 Dividedbyequi valentuni t
wor kdonet odat e ÷500 ÷450
-Cost sperequi valentuni tofwor kt odat e $75.60 $54.40
(St
ep-
4)Tot alcoststoaccount sf or $62, 280
(St
ep-
5)Assi gnmentofcost s:
-Compl etedandt ransf erredout
(400uni t
s) 52,000 (400a×$75.60) + (400a×$54.40)
-Wor ki nprocess, ending( 100uni ts)
 Di r
ectmat erials 7,560 100b×$75.60
 Conv ersi oncost s 2, 720 50b×$54.40
Totalworki npr ocess 10,280
Total costsaccount edf or $62,280
a
Equi
valentuni tscompl et edandt ransferredout -
step-2.
b
Equi
valentuni tsi
nendi ngwor kinprocess- step-2.

Usingdol l
aramount s,summar yjour nalentr
iesundert hewei ght
ed–av eragemethodf or
themont hofMar chatGl obalDef enseInc.,are:
1.Wor kinpr ocess- Assembl y 19, 800
Account spay ablecont rol 19,800
[Tor ecor ddirectmat eri
alspur chasedandusedi npr oduct i
ondur ingMar ch]
2.Wor kinPr ocess- Assembl y 16,360
Vari
ousaccount s 16,380
[Tor ecordassembl ydepar t
mentconv ersioncost sf orMar ch;exampl esincl
ude
energy ,manuf acturingsuppl i
es,allmanuf actur
ingl abor,andpl antdepreci
ati
on]
3. Wor kinpr ocess- Testing 52,000
Wor kinpr ocess- Assembl y 52,000
[
Tor ecordcostofgoodscompl etedandt ransferredfrom Assembl ytoTest ing during
Mar ch]
ThekeyT- account ,Wor ki npr ocess-Assembl y,undert hewei ghted- aver
agemet hod
woul dshowt hefollowi ng:
Work-inprocess-Assembl y

Beginni
nginvent
ory,
March-
1, 26,
100 i
i
i)Complet
edandtransf
err
edout
i)Dir
ectmateri
al 19,800 toworki
nprocess–Testi
ng 52,000
i
i)Conversi
oncosts 16,380

Endi
ngi
nvent
ory
,Mar
ch-
31 10,
280

FIRST-IN,FI RST-OUT( FIFO)METHOD: -Incontrasttothewei ghed-aver

agemet hod,the
fi
rst-i
n,f i
rst-out(FIFO)pr ocesscost i
ng met hod assignst hecost soft hepr evious
peri
od’sequi v
alentunitsi n beginning wor kin processi nventor
yt othef irstuni t
s
compl etedadt ransfer
redoutoft hepr ocess,andassi gnthecost sofequivalentuni t
s
workedondur ingthecur r
entper iodfirsttocompl etebegi
nni nginvent
ory,t
hent ost art
andcompl etenew units,andf inall
yt ounitsinendi ngwork-in-pr
ocessinventory.This
met hodassumest hattheear l
iestequi valentunitsinthewor kinprocess-Assembl y

42
account
sar
ecompl
eted.
Adisti
ncti
vefeatur
eoftheFI
FOprocess-
cost
ingmethodisthatworkdoneonbeginning
i
nventorybeforethecurr
entperi
odiskeptseparatefr
om wor kdonei nthecurrent
per
iod.Costsincur
redi
nthecurr
entperi
odanduni
tsproducedinthecurr
entper
iodar e
usedt ocal cul at ecost sperequi val
entuni tofwor kdonei nt hecur rentper iod.I n
contrast ,equi val ent-uni tand cost sperequi v alentuni tcal culat i
on i nt he wei ght ed
averagemet hodmer get heuni tsandcost si nbegi nni ngi nv ent orywi thuni tsandcost s
ofwor kdonei nt hecur rentper iod.
Wenowdescr i
bet hef i
v e-steppr oducedi ncase- 2usi ngt heFI FOmet hod
Step-1:Summar i
zet hef low ofphy sicaluni ts-st ep,t racest hef low ofphy si caluni tsof
product ion.Thef oll
owi ngobser vat i
onhel pexpl ai nst hephy sical unit’scal cul ation
1.Thef irstphy si caluni t
sassumedt obecompl et edandt ransf erredoutdur i
ngt he
periodar et he225uni tsf rom t hebegi nningwor k-in- processi nv ent or y.
2.Oft he275phy sicaluni tsst arted, 175ar eassumedt obecompl et ed.Recal lf r
om
theMar chdat at hat400phy sicaluni t
swer ecompl eteddur ingMar ch.FI FO
met hodassumest hatt hef ir
st225oft heseuni tswer ef rom begi nni ngi nv ent ory;
thus175( 400- 225)phy sicaluni tsmusthav ebeenst artedandcompl eteddur i
ng
Mar ch.
3.Endi ng wor k-in-pr ocess i nv entor y consi sts of 100 phy sicaluni ts-the 275
phy sical uni tsst artedmi nust he175oft hesephy si cal unitscompl et ed.
4.Not et hatt hephy sicaluni t s“toaccountf or ”equalt hephy sicaluni ts“ account ed
for”( 500- uni t
s)
Step-2: Comput eout puti nt ermsofequi val entuni ts-al sopr esent sthecomput at i
onsf or
step-2undert heFI FOmet hod.Theequi v alent -uni t
scal cul atedf oreachcostcat egor y
focusont heequi valentuni t
sofwor kdonei nt hecur rentper i
od( Mar ch)onl y .
UnderFI FOmet hodt hewor kdonei nt hecur rentper i
odi sassumedt of irstcompl etet he
225uni tsi nbegi nningwor kinpr ocess.Theequi valentuni t
sofwor kdonei nMar chon
thebegi nningwor k-in-pr ocessi nv entor yar ecomput edbymul tiplyingt he225phy sical
unitsbyt heper cent ageofwor kr emai ni ngt obedonet ocompl et et heseuni ts.i .e.0%
fordi rectmat er ial,becauset hebegi nni ngwor ki npr ocessi s100% compl etewi th
respectt odi rectmat erials,and40%f orconv er sioncost s,becauset hebegi nni ngwor k
i
n pr ocessi s60% compl ete wi thr espectt o conv ersi on cost s.The r esul tsar e0
(0%×225)equi v alentuni ts ofwor kf ordi rectmat erialsand90( 40%×225)equi valent
unitsorwor kf orconv er sioncost s.
Next ,thewor kdonei nt hecur rentper iodi sassumedt ost artandcompl et est henext
175uni ts.Theequi v alentuni tsofwor kdoneont he175phy sicaluni tsst artedand
compl et edar ecomput edbymul ti
ply i
ng175uni tsby100%f orbot hdi rectmat er i
alsand
conv ersioncost s, becauseal l wor kont heseuni tsi sdonei nt hecur rentper iod.
Finally
, thewor kdonei nt hecur rentper iodi sassumedt ost ar tbutl eav ei ncompl et et he
fi
nal100uni tsasendi ngwor kinpr ocess.Theequi valentuni t
sofwor kdoneont he100
unitsofendi ngwor ki npr ocessar ecal cul atedbymul tiplying100phy sical uni tsby100%
fordi r
ectmat er ials( becauseal ldi rectmat er i
alshav ebeenaddedf ort heseuni tsi nt he
currentper iod)and50%f orconv ersioncost s( because50%ofconv ersi oncost swor k
hasbeendoneont heseuni tsint hecur rentper i
od)
Steps1and2:Summar izeout puti nphy sicaluni tsandcomput edEqui v alentFI FO

43
met hodofpr ocesscost ing–Assembl ydepar t
mentofGl obalDef ense,Inc.,forMar ch
2001 (
Step- 1)
Step-2
Physical Equi
valentunits
units Di r
ectmat erial
s Conv ersions
cost s
Fl
owofpr oduction
-Wor kinpr ocess, begi nning 225 (workdonebef orecur r
entper iod)
-Start
eddur i
ngcur rentper i
od 275
-Toaccountf or 500
-Compl etedandt r ansf erredout
duri
ngcur rentper iod:
-Form begi nningwor ki npr ocessa 225
(225×( 100%- 100%) ;225×( 100%-60%) 0 90
b
-Start
edandcompl et ed 175
(175×100%; 175×100% 175 175
c
-Wor kinpr ocessendi ng 100
100×100%; 100×50% 100 50
-Account edf or 500
-Wor kdonei ncur rentper iodonly 275 315
a
Degreeofcompl et i
oni nt hisdepart
ment :di
rectmateri
als,
100%;conv ersi
oncost s,60%
b
400Phy sicalunitscompl etedandt r
ansf erredoutminus225phy sicalunitscompl eted
andt ransferredoutf or m beginningwork- i
n-processi
nventory.
c
Degreeofcompl et i
oni nt hisdepart
ment :di
rectmateri
als,
100%;conv ersi
oncost s,50%

Step-3:Comput eequi valent -

unitscost s–st ep-3comput ati
onofequi v alent-
unitscost s
forwor kdonei nt hecur r
entper i
odonl yfordi r
ectmat er i
alsandconv er sioncost s.
Forexampl e,wedi vi
decur rentper iodconv ersioncost sof$16, 380bycur rent–per i
od
equiv alentuni tsforconv er sioncost sof315t oobt aincostperequi valentuni tof$52.
Step-4:Summar i
zet ot
alcostt o accountf or -
Thet otalpr oduct ioncost scol umni n
present sst ep-4andsummar i
zet het ot alcostst oaccountf orinMar ch2001( beginning
worki npr ocessandcost saddedi nt hecur rentper iod) of$62, 280
Step-5: Assi gncost stouni tscompl etedandt ouni tsinendi ngwor ki npr ocess–Fi nal
ly,
Thest ep- 5assi gnmentofcost sundert heFI FOmet hod.Thecostofwor kdonei nthe
currentper iodar ef i
rstassi gnedt ot headdi t i
onalwor kdonet ocompl etet hebegi nning
worki npr ocess,t hent ot hewor kdoneonuni t
sst artedandcompl eteddur i
ngt he
currentper iod,andf i
nall
yt ot heendi ngwor ki npr ocess.Theeasi estwayt ofollowst ep
5ist ot akeeachoft heequi valentuni tscalcul atedinst ep2,andat t
achdol l
aramount s
tot hem ( usingt hecost -per-equiv alent-unitscal culat i
onsi nst ep- 3).Thegoali sto
determi net hetotalcostofal lunitscompl etedf rom begi nninginv ent oryandf rom wor k
startedandcompl etedint hecur rentper i
od,andt hecost sofendi ngwor kinpr ocess
donei nt hecur rentper i
od.
Step3,4and5:Comput eequi valent-uni tcost s,summar izetotalcost st oAccountf or,
andAssi gncost st ouni tscompl etedandt ouni tsi nendi ngwor ki npr ocess- FI
FO-
met hodofpr ocesscost ing-Assembl ydepar tmentofGl obalDef ense,I nc.forMar ch

44
2001.
Total Dir
ect Conv ersi
on
Product i
oncost s mater i
als costs
-
Wor kinpr ocess, begi nning $26,100 (Cost sofwor kdonebef or
e
Cur r
entper i
od)
(Step-3)Cost saddedi ncur rentper iod 36,180 $19,
800 $16,380
-
Div i
dedbyequi valentuni tsofwor kdone
i
ncur rentper i
od ÷275 ÷315
-
Cost sperequi valentuni tofwor kdonei ncurrentper i
od $72 $52
(Step-4)Tot al cost st oaccountf or $62,280
(Step-5)Assi gnmentofcost s:
-Compl et
edandt ransf erredout( 400uni ts):
 Wor ki npr ocess, begi nning( 225uni ts) $26, 100
 Di rectmat erialsaddedi ncur rentperi
od 0 0×$72
 Conv ersioncost saddedi ncur r
entperiod 4, 680 90×$52
 Tot al from begi nningi nv entory 30, 780
 St ar tedandcompl et ed( 175uni t
s) 21,700 ( 175b×$72) ( 175b×$52)
 Tot al cost sofuni tscompl etedand
tr
ansf erredout 52,480
 Wor ki npr ocess, endi ng( 100uni t
s):
Directmat eri
al s 7,200 100×$72
Conv ersioncost s 2,600 50c×$52
Total wor ki npr ocess, endi ng 9,800
Total cost saccount edf or $62, 280
a
Equivalentuni t
susedt ocompl etebegi nningwor kinpr ocessf rom step-
2
b
Equivalentuni t
sst art
edandcompl etedf rom,st ep2.
c
Equivalentuni t
si nendi ngwor kinpr ocessexhi bit
,step2

NB.Not i
cet hatt he400compl eteduni t
sareoft wot ypes.Thesear e:
1.225 uni ts come f rom begi nning inv entory,and 175 uni ts ar e st art
ed and
compl eteddur ingMar ch.TheFI FOmet hodst artsbyassi gningt hecost soft he
beginni ngwor k-i
n-pr ocessi nv entoryof$26, 100t ot hefir
stuni t
scompl etedand
transferredout .Thi s$26, 100i st hecostoft he225equi valentuni tsofdi rect
mat erialand135equi val
entuni tsofconv ersioncost soft he225equi v al
entuni ts
ofdi rectsmat erialsand135equi val
entuni tsofconv ersi
oncost sthatcompr ise
beginni ngi nventor y.Thewor kt hatgener atedt hesecost swasdonei nFebr uar y
,
sot heseuni t
sar ecost ed( seedat aoncost s[(225×$80)+( 135×60)=$26, 100] .
Aswesaw i nst ep-2,anaddi ti
onal90equi val
entuni tsofconv ersioncost sar e
neededt ocompl et et heseuni tsint hecur r
entper iod.
2.The cur rentper iod conv ersion cost s perequi v al
entuni t
si s $52,so $4, 680
(90×$52)ofaddi tionalcost sar eneededt ocompl etethebeginningi nv entory
.The
totalpr oductioncost sf ortheuni tsstartedandcompl etedint hecur rentper i
od
consi stof175equi v alentuni tsofdi rectmat eri
al sand175equi valentunitsof
conv ersioncost s.Theseuni tsar ecost edatt hecostperequi valentuni tint he

45
 current per i
od,(direct mat erials,$72 and conv ersion cost s,
$52) for a t otal
productioncostof$21, 700.
3.UnderFI FOmet hodt heendi ngwor k-in-processi nvent or ycomesf rom uni tsthat
werest artedbutnotf ullycompl eteddur i
ngt hecur rentper iod.Thet otalcostof
the100par t
ial
lyassembl edphy sicalunitsi nendingwor kinpr ocessconsi st
sof:
Directmat eri
als:
-
100equi val
entuni ts×costperequi valentunitinMar chof$72 $7, 200
Conv ersioncost s
-
50equi val
entuni t
s×costperequi valentunitsinMar chof$52 2, 600
Tot alcost sofwor ki
npr ocessonMar ch31 $9, 800
Thef ollowingt abl
esummar i
zest het otalcost st oaccountf orandt hecost saccount ed
forof$62, 280i nexhibit7- 6.Not icehowundert heFIFOmet hod, thel ayersofbegi nning
wor ki npr ocessandcost saddedi nt hecur r
entper iodar ekeptsepar ate.Thear r
ows
i
ndi cat ewher et hecost sineachl ay ergo( t
hati s,tounitscompl etedandt ransf err
edout
ort oendi ngwor kinprocess) .Besur et oincludet hecost sofbegi nni ngwor kinpr ocess
($26,100)whencal culatingt hecost sofuni tscompl etedf rom begi nninginv entor y
.
Cost stoaccountf or Cost saccount edf orcal cul
at edonaFI FObases

Begi
nni
ngwor
kinprocess $26,
100 Compl etedandt r
ansfer
redout:
Cost
saddedi
ncur
rentperi
od36,
180 Begi nni
ngwor kinprocess $26, 100
Usedt ocompl etewor kbeginni
ng
wor kinpr ocess 4,680
Startedandcompl eted 21, 700
Endingwor dinpr ocess 9,800
Totalcost
saccount
edfor $62,
280 Tot alcostsaccount edfor $62,280
NB.Thej our
nalentr
iesundertheFIFO met hodpar allelthejournalentri
esundert he
weighted–aver
agemethod.Theonlydi
fferencei sthatt heentryt
or ecor
dundercostof
goodscompl et
edandt r
ansferr
edoutwoul dbef or$52, 480undert heFI FO met hod
i
nsteadoffor$52,
000undertheweight
ed-averagemet hod.

Compar i
sonofwei ght ed–av erageandFI FOmethods
Thef ol l
owingt abl
esummar i
zest hecostsassi
gnedt ounitscomplet
edandtounitsst
il
l
i
npr ocessundert hewei ghted-averageandFI FO process-
cost
ingmethodsf orour
exampl e:
Weightedav erage FIFO Dif
ference
-Cost sofunitscompl eted
andt ransferredout $52,000 $52,480 +$480
-Wor k-in-
process,endi ng 10,280 9,800 -480
-Total costsaccount edf or $62, 280 $62,280

Fr
om theabovesummar yitcanbeseent hatt
hewei ghted–aver
ageendi
ngi nventoryis
hi
gherthan theFIFO ending i
nventoryby$480,or4. 9% (
$480÷$9,
800).Thi si sa
si
gni
fi
cantdiffer
encewhenaggr egatedov erthemanyt housandsofpr oductst hat
Gl
obalDefensemakes.Thewei ghted-aver
agemet hodi nourexamplealsor esultsin
l
owercostofgoodssol dandhencehi gheroper
ati
ngi ncomeandhigheri
ncomet axes

46
thandoest heFI FOmet hod.Di ff
erencesi nequi valent-unitcost sofbegi nningi nv ent or y
andwor kdonedur ingt hecur rentper i
od,accountf orthedi ffer
encei nwei ghted- av erage
and FI FO cost s.Di rectmat eri
als costs perequi valentuni tsi n begi nning wor k-in
–pr ocessi nvent oryis$80, andconv ersi
oncostperequi valentuni tinbegi nningwor k-in-
processi nventoryis$60. .Thesecost saregr eaterthant he$72di r
ectmat erialsand$52
conv ersioncost sperequi valentuni tofwor kdonedur i
ngt hecur rentper iod.
Thisr educt i
oncoul dbeduet oadecl i
neint hepr i
cesofdi rectmat eri
al sandconv er sion
costi nput sorcoul dbear esul tofGl obalDef ensebecomi ngmor eef ficient.
ForAssembl ydepar t
ment ,FIFOassumest hatallthehi gher -costuni t
sf rom t hepr ev i
ous
periodi nbegi nningwor ki npr ocessar ethef ir
sttobecompl etedandt ransfer r
edoutof
thepr ocess,andendi ngwor k-i
n-processconsi stofonl yt hel ower -
costcur r
ent -per iod
units.Thewei ght ed-averagemet hod, howev er,smoot hesoutcostperequi valentuni tby
assumi ngt hatmor eoft hel ower -costuni tsar ecompl etedandt ransf err
edout ,and
someoft hehi gher -costuni tsar epl acedi nendi ngwor ki npr ocess.Hence,i nt his
exampl e,thewei ghted-av eragemet hodr esultsinal owercostofuni t
scompl etedand
transferredoutandahi gherendi ngwor k-
in-processi nvent oryr el
ativet oFI FO.

Costofuni tscompl et
edandhenceoper ati
ngi ncomecandi ffermat erial
l
ybet weent he
weighted-aver
ageandFI FOmet hodswhen:
A.Thedi rectmat erial
sorconv er
sioncost sperunitvarysignif
icantlyf r
om per i
od
toperi
od,and
B.Thephy si
calinventorylev el
sofwor kinpr ocessarelargeinr el
ationt othet otal
numberofuni tstransferredoutofthepr ocess.
Thus,as compani es mov et owar ds long-t
er m procurementcont r
actt hatr educe
di
fferenceinunitcostsf rom periodtoper i
od,andr educeinventoryl
ev els,thedi f
ference
i
ncostofuni t
scompl etedundert heweighted-averageandFI FOmet hodwi ll
decr ease.

Manager sneedi nformationfrom process- costingsy st

emst oaidt hem int hepr i
cing
andpr oductmixdeci sionsandt oprov idethem wi thfeedbackaboutt heirperformance.
Themaj oradv antageofFI FO isthati tpr ov i
desmanager swi thi nformationabout
changesi nthecost speruni tfr
om oneper iodt ot henext .Manager scanuset his
i
nformat i
on to ev aluatet heirperformance i nt he currentper iod compar ed toa
benchmar korcompar edt othei
rper formancei nt hepreviousper iod.Byf ocusingon
workdoneandt hecost sofwor kdonedur ingthecur r
entper i
od,t heFI FO met hod
provideusefuli nformationf orthesepl anning and cont rolpurposes.Thewei ghed-
averagemet hodmer gesuni tcostsf rom di f
ferentper i
odsandsoobscur esper i
od-to-
peri
odcompar i
sons.Themaj oradvantagesoft hewei ghted–av eragemet hodhowev er
areitscomput ationalsimplici
tyandi t
sr eportingofamor erepr
esent ati
veav erageuni t
costwheni nputpr i
cesf l
uctuatemar kedlyfrom mont htomont h.

Fi
nall
y,notet hatunlike i
nj ob-costing syst
ems,act i
vit
y-based costi
ng has less
appli
cat
ion in process costing env i
ronment. This is because; product
s ar e
homogeneousandhenceuser esour cesi nasimilarway.Further
more,eachprocess-
assembly,test
ing,and so on-corresponds tot he di
ff
erent( pr
oducti
on)activi
ti
es.
Managersreducethecostsofacti
v i
ti
esbycont rol
l
ingthecostsofindi
vidualpr
ocesses.

47
Journalentr
iesi
nprocesscost
ingsyst
em ar
esimil
artoent
ri
esinajob-
cost
ingsyst
em.The
maindi f
fer
enceist
hatinprocesscost
ingsy
stem,ther
eisasepar
ateWIPaccountforeach
department.

Thewei ghtaverageprocesscost i
ngmet hodcomput estransferredincost
speruni tbyfocusi
ng
ont otaltr
ansferredincosts&t otalequiv alenttransf
erredi nuni tscomplet
edt odate,and
assignsthisaveragecostt ouni t
scompl etedandt ouni t
sinendi ngWIPinventory.TheFIFO
processcost i
ngmet hodassi gnstransferredi ncost sinbegi nningWI Ptounitscompl et
edin
costs,andt hecoststransf
er redinduringt hecur r
entper i
odf irsttocomplet
ebegi nni
ngWI P
unit
s,thentostartandcompl etenewuni ts,andf inall
ytounitsinendi ngWIPinventor
y

Tr
ansf
err
edi
ncost
sinpr
ocesscost
ing
 Manypr ocess costing syst
ems hav et wo ormor e depart
mentorpr ocesses inthe
producti
oncy cle
 Tr ansfer
red in cost( al
so call
ed previousdepar
tmentcost )aret he costi ncur
red i
n
previ
ousdepar tmentthatar ecarr
iedf orwardasthepr oductcostwheni tmov etoa
subsequentpr ocessintheproducti
oncy cle.
 Tr ansfer
redincostar etreat
edasi ftheyareaseparatetypeofdirectmat er
ialaddedat
thebeginningoft heprocess.
Example5:Transferredincostinprocesscost i
ng

Theassembl ydepartmentofgl obaldefenset r

ansfersDG-19unitstoit
st est
ingdepar
tment.
Heretheunitsreceiv
eaddi ti
onaldi
rectmat eri
alsuchascr at
ingandotherpackingmater
ialto
prepar
et heunitsforshipmentatt heendoft hepr ocess.Conver
sioncostsareaddedev enl
y
duri
ng the process.As uni t
s are completed i
nt esti
ng depart
mentt heyar eimmediatel
y
tr
ansfer
redfini
shedtofinishedgoods

Phy
sical
uni
ts

WI
Pbegi
nni
ng………………………………….
.240TI
C(100%compl
ete)andDM (
0%compl
ete)

CC(
62.
5%compl
ete)

Tr
ansf
err
edi
ndur
ingMar
ch…………………….
. 400uni
t

Compl
eteddur
ingMar
ch………………………… 440uni
t

WI
Pendi
ng ……………………………………….
.200uni
t

TI
C(100%compl
ete)
,DM (
0%compl
ete)
andCC(
80%compl
te)

Costf
ort
est
ingdepar
tmenti
nMar
ch

WI
Pbegi
nni
ng

48
 TI
C………………………………………………….
33,
600

DM …………………………………………………. 0

CC………………………………………………….
.18,
000

Tr
ansf
err
edi
ndur
ingMar
ch

WA(
Ex3)……………………………………………52,
000

FI
FO(
Ex3) ………………………………………….
52,
480

Di
rectmat
eri
alcostaddeddur
ingMar
ch……………….
.13,
200

Conv
ersi
oncostdur
ingMar
ch ………………………….
.48,
600

Requi
rement
s:usi
ngWA&FI
FO

a)summar i
zetheflowofphy si
calunit
b)comput eoutputintermsofequi v al
entuni
t
c) computeequivalentunitcost
d)summar i
zetotalcosttoaccountf or
e) assignt
otalcostunitscompl et
edandt ouniti
nendi
ngWI
P
f) comparetheresultunderWA&FI FO
g)r ecordt
hejournalentry

Chapt
erTwoEndExer
cises
[
Q1]
.Acompany ’
sgrossprof
iti
s50%ofcostofgoodssoldandi
tsneti
ncomeis40%of
grossprof
it
.Ifthetot
alsal
esr ev
enuesdur
ingaperi
odareBr600,
000,whati
sthe
operat
ingexpensei
ntheperiod?

[
Q2]
.Inaproduct
ionprocess,t
hetotalpr
imecostincur
redisBr400, 000andt
het
otal
conv
ersi
oncostisBr320,000.I
fthesum ofdi
rectmater
ialcostandMOHcosti
sBr
500,
000,thet
otal
costincurr
edintheper
iodwil
lbe_____
_____?

[
Q3]
.Thef oll
owingdat aareforMar v
inDepart
mentSt or
e.Theaccountbal
ances(in
t
housands)arefor2011.
Market
ing,di
str
ibut
ion,
andcustomer-
ser
vicecost
s $37,000

49
 Mer chandiseinventor
y ,
January1,2011 27, 000
Util
i
t i
es 17,000
Gener alandadmi ni
strati
vecosts 43, 000
Mer chandiseinventor
y ,
December31, 2011 34, 000
Purchases 155,000
Miscel l
aneouscosts 4,000
Transpor t
ati
on- i
n 7,000
Purchaser eturnsandallowances 4,000
Purchasedi scounts 6,000
Revenues 280,000
Requir
ed:
A.Comput ethecostofgoodspur
chasedand
B. Thecostofgoodssold.
C. Prepar
etheincomestat
ementfor2011.

[
Q4]Af iredest royedXYZmanuf act
uringcompanycomplet
elyonJanuary29,2011.
Fortunatelycer tai
naccount ingr ecor
dswerekeptinanotherbui
ldi
ng.I
trev
ealed
thef ol
lowingf ortheperiodfrom January1,2011t
oJanuary29,2011.
Directmat erialused Br160,
000
WI PJanuar y1 34,
000
Directmat erialJanuary1,2011 16,
000
Finished Goods I
nventor
y 36,
000
Januar y1,
2004
MOHcost 40%ofconver
sioncost
Rev enue 500,
000
Directlaborcost 180,
000
Primecost 294,
000
Grosspr ofitbasedonsal es 20%
CostofGoodsav ai
labl
ef orsale 450,
000

Requi
red:

a)Di rectmat er
ialdest roy ed
b)Costofgoodsmanuf actured
c)Fi nishedgoodsdest roy ed
d)WI Pdest royed
[
Q5]Melatrecent lyt ookov erast hecont roll
erofJohnsonBrothersManufacturi
ng.Last
mont h,thepr eviouscont rollerl eftthecompanywi t
hl it
tl
enoticeandl ef
tt he
accountingr ecor dsi ndi sar r
ay .Mel at needst heendingi nv
entor
ybal ancest o
reportfi
rstquar ternumber s.Fort hepr evi
ousmont h(
Mar ch2011)Mel atwasabl e
topiecet oget hert hef ol
lowingi nformation:
Directmat eri
alspur chased $240, 000
Wor k-i
n- pr
ocessi nv entory,3/1/2011 70,
000

50
 Directmat eri
alsi
nvent ory
, 3/
1/2011 25,000
Finishedgoodsi nventory,3/1/2011 320,000
Conv ersi
onCost s 660,
000
Total manufactur
ingcost saddeddur i
ngtheper
iod 840,000
Costofgoodsmanuf actured 4ti
mesdir
ectmater
ialsused
Grossmar gi
nasaper centageofrevenues 20%
Revenues 1,
037,500

Cal
cul
atethecostof:
1.Fi
nishedgoodsinventory
,3/31/2011
2.Work-i
n-pr
ocessinventor
y,3/31/2011
3.Di
rectmateri
alsi
nventory,3/
31/2011

51