 Hello, and welcome to this session. This is Professor Farhad. In this session, we're going to look at process costing and explain process costing a little bit more in details. To start with, we need to be familiar with three concepts to start process costing. And the first thing is, in process costing, each department needs to calculate two numbers for financial reporting purposes. What are those two numbers? The cost of ending inventory. That's one thing we need to know. Ending inventory, which is ending work and process inventory. And the cost of completed unit that will transfer to the next stage of the production process. Two things. The key-driven of these two numbers is calculating unit costs within each department. So to do so, we have to compute how much does it cost us per unit for each department. We have two ways of performing this computation. We could either use the weighted average or FIFO method. In our example here, we would use the weighted average. And in another session, we would use the FIFO method. Characteristic of the weighted average, here's how it works. There is no distinction between work and process done in the prior and the current period. Simply put, we combine the prior plus the current period cost. We combine those together. It'll blend together unit and cost. Actually, we blend both, the unit and the cost from the prior and the current period. The equivalent unit of production, EUP, which is a term we need to be familiar with for a department, are the number of unit transferred to the next department plus the equivalent unit in the department ending work and process. So the EUP is what's transferred plus ending work and process, which we'll look at that in some numbers. Also, we need to be familiar with something called conversion cost. I hope I'm sure we are familiar with. Direct labor costs are often small in comparison to other product costs. Therefore, what we do is we combine direct labor with manufacturing overhead. And we call those conversion costs. So direct labor plus manufacturing overhead equal to the conversion cost. So simply put, we're going to account only for material and conversion cost, which is conversion cost consists of both labor and manufacturing overhead, direct labor and manufacturing overhead. The third concept is the equivalent unit, which is something we need to know how to compute. What is equivalent unit? It's defined as the product of the number of partially completed unit. Partially completed means they are not fully completed. If they are fully completed, they will not be work and process. They will be done. And the percentage completion of these units. So we might be building a house. So we are building a house. Houses, I'm a contractor. So I completed this house 100%. I completed this house 100%. And the third house only completed it 30%. So this house, I would say, is partially completed. So how many houses that I fully complete? I completed 2.3 houses. 2.3 houses. I did not complete the third house totally. Equivalent unit need to be computed because a department usually has some partially completed unit in its beginning and ending inventory. So what's going to happen when I start? Let's assume this is for one month. Then when I start next month, I'm going to start with this house that 30% completed. Plus I'm going to complete maybe some other additional homes. Then at the end of the period, I will have some that are partially completed. So this is completed 100%. This is completed 100%. This home is completed 100%. Then this home is completed 40%. So I have some partially completed unit in the beginning of the period and some partially completed at the end of the period. Don't worry, we will discuss this concept a little bit more with numbers. So a good illustration of the equivalent unit is something like this. If I have eight glasses that are half full, how many equivalent full glasses do I have? Well, I have four equivalent glasses. That's basically how it works. I have eight, simply I have eight, but each one of them is 50% completed. Therefore I have four full glasses. Let's assume I told you at my university we have 20,000 students. Well, are these 20,000 full-time students? Well, let me see. Let's assume 15,000 are full-time students and what's left of the 15, what's left is 5,000 and 5,000 students are taken only part-time. They're taken half-time. So 5,000 times 50% is 2,500. So 15,000 plus 2,500 is 17,500. I would say I have 17,500 of equivalent full-time students. Although I have 20,000, but the equivalent full-time is only 17,500. So the equivalent unit is the number of partially completed unit, which is they're not fully completed times the percentage completion. Let's assume department A has 500 unit and it's ending work and process. So 500 unit that are not completed. Let's assume those we are producing cars and we still have 500 cars that are not fully completed. If they were fully completed, they will not be work and process. And as far as the completion, they are 60% completed. So if I ask you, what is the equivalent unit of these cars, you would say I have 500 cars, they are 60% completed. I have 300 equivalent unit of production, equivalent unit, which is 300 cars. Although I have 500, but 300 is the equivalent unit. Let's take a look at this exercise. Jones started the period, started 15,000 units and completed 10,000. So of 15,000, of 15,000, Jones completed 10,000. What's remaining is 5,000, leaving 5,000 that are 30% completed. Those are 30% completed, which is 1,500. How many equivalent unit of production? Well, I have that 1,000 already completed and 1,500 equivalent unit. I should have 11,500 equivalent units of production. So now we're gonna work a complete example to show you how we assign cost to equivalent unit of production. So first thing we're gonna compute the equivalent units of production. Then we're gonna compute cost per equivalent unit. Then we're gonna assign the cost to the unit. Let's start with this example. Let's assume Smith company reported the following activity in the assembly department for the month of June. So the month of June, they have 300 unit when they started the month of June 1st that are work in process. They are not fully completed. And to be more specific, they are 40% completed as to material and 20% completed as to conversion. They started this period, they started this period, 6,000 unit. Well, guess what? If they already have 300 and they started 6,000, simply put, we have to account for 6,300 units. Then we are told they transferred out out of department A 5,400. So they transferred 5,400. What's left then is 900. And those 900 are partially completed. Partially means they are not fully completed. And to be more specific, they are 60% completed as far as to material and 30% completed as far as to conversion cost. So the first thing we're gonna do is compute, begin by calculating the equivalent unit completed and transferred out. What are the equivalent unit completed and transferred out? Well, we know we transferred out 5,400 unit. Why 5,400 unit? Let's look at this. It's unit completed and transferred out 5,400. So we completed 5,400 unit. And if they are completed, they are 100% completed as to material, 100% completed as to conversion cost. Otherwise they will not leave us. So we still have 900 unit in work in process of which 60% completed as to material, which just gives us equivalent of 5,40. And we have 900 unit, 30% completed as far as conversion cost, which will give us 270 unit. Now if we take 5,400 plus 5,400, we'll give us equivalent units of production as far as material with respect to material, 5,940. As far as conversion cost, equivalent unit of production is 5,670. Now always remember that the equivalent unit of production should always equal to what was transferred out plus the work in process partially completed. Those two together will give you the equivalent unit of production. Another way to look at this is this. We started this period, 6,000 unit. We started with 6,000 unit. And what's left from the 6,000 is 900. What does that mean? If left 900, that means we completed 5,100 from the unit we started plus we completed the other 300 that were partially completed. So the 5,400 that were fully completed 100% plus the 550 units as far as material, 550 units as far as material. So it's this 5940. This is the same thing. This is the same computation as right here, right here. Let's do the same thing for conversion. We started 6,000 unit and we transferred out 5,400. It means we are left with, if we started 600 and if we started 6,000 and we are left with 900, means from the unit that we started, we transferred out 5,100 plus we finished the other 300 units. So we completed 5,400 as far as conversion 100% and we still have 900 unit times 30%. So equivalent unit of production as far as conversion is 5670, which is the same thing. This is another way of saying the same thing as right here. Right here. Now we're gonna compute the cost per equivalent unit using the weighted average. Here's the data that we are giving. For the 300 unit that we started the month with, we already have in material invested in that 300 units, $6,119 and as far as conversion cost, we have 3,920 invested from the prior period in those 300 units. Cost added to production in June. In June, we spent 118,621 and for the conversion cost, we spent $81,130. And we still have 900 units left as far as material 60% completed. As far as conversion cost, 30% completed. So how do we compute the equivalent unit of production using the weighted average? Very simple. We'll take the cost of beginning work and process plus we add to what the cost added this period divide them by the equivalent units of production. This we already calculated. We already calculated the equivalent units of production. So let's go ahead and do so. The material, from the prior period, we have $6,119 for this period, 118,621 conversion cost from the prior period, 3,920 and this period we added 8,130. This is the total cost as far as the beginning of the period and this is the cost added this period. This is the total cost altogether 209790. The material we spent on the material between the two periods, between the beginning of the period and the cost added this period 120, 124,740 and for the conversion cost, total everything $85,050. Now all we have to do is take the dollar amount that invested as far as material divided by the equivalent unit as far as material. So the cost per equivalent unit for the material is $21 right here and the same computation is done for the cost of conversion cost. Taken the dollar amount divided by the equivalent unit and this is why we had to compute the equivalent unit first because we wanted to know how many equivalent units do we have? Now we find the cost per equivalent unit, $21 as the material, $15 as the conversion. Now the next step is basically to assign those dollar amount to what we transferred out and how much we have left in ending inventory. So now we need to assign cost to units using the weighted average. Units ending work and process inventory equivalent units are $540 as far as to material and 270 as far to conversion. This is what's left in ending inventory, equivalent units. Remember we had 900 units but the equivalent are 540 to material and 270 as far as to conversion. Now we multiply them by the dollar amount. We said the dollar per cost, per equivalent unit as far as material, 21, the conversion is 15. So the cost of ending inventory work and process, $11,340 as far as material and $4,050 as far as the conversion cost. The total cost in ending inventory is $15,390. And remember we needed this number to compute our ending inventory, $15,390. $15,390. Now unit transferred, we transferred 5,400 unit. Again, the unit cost is 21 for material and we transferred 5,400 equivalent unit as far as conversion. And the unit cost as far as conversion is 15. So cost of unit transferred, 113,400 for material and 81,000 as far as conversion cost. As far as conversion cost, the total of 194,400. Now we wanna make sure when we add those two numbers up they add up to our total cost. When we add the what's left, what's work and process plus what's transferred, sorry, my screen, keep on skipping, it should equal to the total cost. So let's do so. So cost of beginning inventory was 10,039, cost added during the period, 199,751. So total cost to account for is 209,790. And what we did is ending inventory, we assigned to ending inventory, 15,390, which we saw this on the previous screen and the cost that's transferred out 194,400, which equal to 209,790. What we did here is a cost reconciliation to make sure all the cost that we incurred plus the cost of beginning inventory was properly allocated to ending work and process and finished goods as well. So this is basically an illustration of process costing. Now the best, what's the best way to learn this is to work examples, which I will work an example or two just to kind of reinforce the concept of computing equivalent units of production, assigning a dollar amount, a unit cost, then assigning the unit cost to work and process and unit transferred out. If you have any questions, any comments by all means, email me or see me in class. If you're studying for your CPA or your CMA exam, make sure to study hard, it's worth it.