Robert Reas
Sinclair Community College
What is a process cost system?
What are equivalent units?
Why do we need to calculate equivalent units?
Why do work in process accounts in process cost systems have ending balances?
What is a process cost system?
A process cost system is an accounting system used by companies that manufacture large numbers of identical units. One product cannot be distinguished from another product. Under this system, costs are accumulated in each department through which the product passes.
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What are equivalent units?Equivalent units represent the number of units that could have been completed, from beginning to end of manufacture, using the costs incurred for the period. They are calculated for both direct materials costs and conversion costs. The calculation of direct materials equivalent units and conversion cost equivalent units consist of three parts: beginning inventory, units transferred in and completed during the month, and ending inventory. When calculating equivalent units, keep in mind that it is based upon the work done during the current period. To illustrate:
Smith Company's Work in Process-Baking Department units in October are as follows:
Beginning inventory: | 5,000 units, 2/5 complete |
From Blending Department: | 10,000 units |
Transferred to Finished Goods: | 11,000 units |
Ending inventory: | 4,000, 3/4 complete |
Materials are placed in production at the beginning of the process
To calculate materials in production at the beginning of the process
Beginning inventory: | 0 |
Transferred and completed: | 6,000 |
Ending inventory: | 4,000 |
Equivalent units: | 10,000 |
To calculate conversion units:
Beginning inventory: 5,000 x 3/5 | 3,000 | ||
Transferred and completed | 6,000 | ||
Ending inventory: 4,000 x 3/4 | 3,000 | ||
Equivalent units: | 3,000 | ||
12,000 |
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Why do we need to calculate equivalent units?Equivalent units must be calculated in order to allocate manufacturing costs to both the completed units and the units still in inventory.
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Why do work in process accounts in process cost systems have ending balances?Once a department finishes one batch of a product, it immediately begins producing the next batch. There is no idle time. The manufacturing process is ongoing or continuous. At the end of a period, there will usually be unfinished units in inventory.
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Describe the distinctive characteristic of FIF0 computations in assigning costs to units completed and to units in ending work in process.
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Alright, all right. We will discuss the papal competitions here. Right, that's correct. The cost of the previous accounting periods were assigned to them. Right, right? The cast of the previous, previous accounting, previous accounting period was assigned. Right, that's correct. The previous accounting period. Right, that's correct. equivalent units in beginning work in process inventory to the past units completed and transferred out of the process and assign the cast up equal into units, work around during the current period was passed to completely beginning inventory. Right, right? To start in complete new units and to end the work with two units. It's ending the working process. Right, the process is working. The process went to rewrite. The weighted average method cast units were completed and transferred out while the same rich cast ended the working process. Right, right? People computations are distinctive because they are. People are competing with computation. Right, right? It was our best computation. Thank you for your kind words. Right, that's correct.