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Chapter 12

Chapter 12. Average Costing of Work in Process. Introduction. Normally, in continuous process industries, the producing departments: Carry forward inventories from one month to another These balances must be included when determining total costs and unit costs.

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Chapter 12

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  1. Chapter 12 Average Costing of Work in Process

  2. Introduction • Normally, in continuous process industries, the producing departments: • Carry forward inventories from one month to another • These balances must be included when determining total costs and unit costs

  3. Accounting for Beginning Work in Process • First in, first out costing • Partially processed units carried over from the previous month are costed separately from units in the current month • When finished, cost of beginning units will contain a mixture of last and current month’s cost • Units started in the current month will only have current month’s cost • Transfers are costed on the assumptions of that oldest units will move out first

  4. Accounting for Beginning Work in Process (cont’d) • Average costing • Combines the costs of carried-over and new production • Cost of beginning work in process inventory is added to cost incurred in the current month • Single cumulative total and unit cost if obtained • One unit cost figure is used for costing unit transferred out of the department

  5. Applying the Average Cost Method (cont’d) • Sample Cost data for beginning Work in Process (from Cost of Production Report) • Current month costs

  6. Applying the Average Cost Method (cont’d) • Production data

  7. Applying the Average Cost Method (cont’d) • Compute equivalent units

  8. Theory of Constraints (TOC) • A problem solving method that focuses on finding and solving core problems • Slowest process in a set of sequential steps is the one that will govern the rate of output • Constraints can take many forms such as: • Physical – limitations on machine, material, and labor • Company policies

  9. Combined Cost of Production Report • A single report is preferred by accountants over separate reports for each department • Simple to prepare • Permits quicker cross checking • Makes it simpler to trace transfer from department to department more easily

  10. Accounting for Sales and Cost of Goods Sold • Process cost System – goods manufactured are usually for stock and stored in the warehouse • Both cost and selling price are recorded in the sales journal Cost of Goods Sold dr. Finished Goods cr. Accounts receivable/ Cash dr. Sales cr.

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