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Cost Allocation to Completed Units and Units in Process

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Thus far, we know that Navarro's Melting Department incurred total cost of $9,469,500 in producing output that entailed 775,000 equivalent units of material and 750,000 units of conversion. We also know the average cost per equivalent unit. Of course, the end objective is to allocate the total costs between work in process at the end of the month and units that were completed and transferred out during the month. This causes us to revisit the equivalent units calculations, this time applying the per unit cost to the proportion of equivalent units completed and those still in process:

If you carefully examine the above, you will see that the cost assigned to completed units totals $8,012,403. This amount is the per unit cost of $12.3268 multiplied times the 650,000 units that were completed and transferred on. The ending work in process is $1,457,097, determined as 125,000 equivalent units of material at $8.9768 each, plus 100,000 equivalent units of conversion at $3.35 each. A check mark is placed beside the total cost allocation ($9,469,500 = $8,012,403 + $1,457,097) as a reminder that this schedule must allocate the entire cost incurred within the Melting Department. If the total cost allocation does not equal the total cost incurred, an error has been made.

Cost of Production Report

The preceding schedules are combined into a single report called a cost of production report. The report summarizes the activity within Navarro's Melting Department for the month of June, as shown on the facing page.

A similar report would be prepared for each Department. These reports are used for many management purposes, such as inventory control, efficiency studies, incentive pay plans, and the like. They also provide the basis for the entries that are needed to update the ledger accounts for the inventory cost allocations.

Cost of Production Report

Journal Entries

These journal entries are needed to record the June activity within the Melting Department:

6-30-X5	Work in Process Inventory - Melting	7,365,000
	Raw Materials Inventory		5,355,000
	Salaries Payable		1,350,000
	Factory Overhead		660,000
	To record material, labor, and overhead for the month of June for the Melting Department (see cost of production report)

6-30-X5	Work in Process Inventory - Skim/Alloy	8,012,403
	Work in Process Inv. - Melting		8,012,403
	To transfer completed units from Melting Department to Skim/Alloy Department

The journal entries, along with the beginning work in process of $2,104,500, result in an ending work in process of $1,457,097. The following T-account portrays the cost flow through the Work in Process account of the Melting Department:

WORK IN PROCESS MELTING DEPARTMENT

Beginning Balance	2,104,500	8,012,403	Transfer to Skim/Alloy
June Costs	7,365,000
Total Debits	9,469,500	8,012,403	Total Credits
Ending Balance	1,457,097

Subsequent Departments

It is very important for you to notice that the journal entry to transfer $8,012,403 out of the Melting Department (credit) is offset with an increase in the Work in Process of the Skim/Alloy Department (debit). The Skim/Alloy Department's T-account for June might look something like this (amounts are assumed):

The Skim/Alloy Department's T-account for June might look something like this (amounts are assumed):

The corresponding journal entries for the Skim Alloy Department for June are as follows (don't forget, a debit to Work in Process of the Skim/Alloy unit was also recorded in the earlier entry):

6-30-X5	Work in Process Inventory - Skim/Alloy	5,000,000
	Raw Materials Inventory		2,000,000
	Salaries Payable		1,500,000
	Factory Overhead		1,500,000
	To record material, labor, and overhead for the
	month of June for the Skim/Alloy Department
	(amounts are assumed/note that overhead can be
	applied on a different basis in each department!)

6-30-X5	Work in Process Inv. - Mold/Extrude	14,505,400
	Work in Process Inventory - Skim/Alloy		14,505,400
	To transfer completed units from Skim/Alloy
	Department to Mold/Extrude Department

And, the Mold/Extrude Department has this T-account and related entries:

Notice that the costs transferred from the Mold/Extrude unit go to the finished goods inventory, since this is the final process.

6-30-X5	Work in Process Inv. - Mold/Extrude	7,000,000
	Raw Materials Inventory		3,000,000
	Salaries Payable		3,000,000
	Factory Overhead		1,000,000
	To record material, labor, and overhead for the month of June for the Mold/Extrude Department (amounts are assumed/note that overhead can be applied on a different basis in each department!)
6-30-X5	Finished Goods Inventory	20,000,000
	Work in Process Inv. - Mold/Extrude		20,000,000
	To transfer completed units from Mold/Extrude Department to finished goods inventory

The Big Picture

You have probably heard it said "not to lose site of the forest for the trees." This means that the details sometimes obscure the big picture. Here, the "big picture" is to remember that we are trying to assign money spent to items produced (and still in production). By examining the schedule below of work in process, you will see that Navarro assigned $19,365,000 to work in process and transferred $20,000,000 to finished goods during June. As a result, total work in process inventory should have declined by $635,000 ($19,365,000 minus $20,000,000); a fact that can be verified by comparing the beginning and ending work in process balances ($7,604,500 - $6,969,500 = $635,000). Navarro's balance sheet at June 30, 20x5, would include $6,969,500 as the work in process inventory category.

FIFO Process Costing

Thus far, the discussion and illustration of process costing has been based upon the weighted-average method. When you consider that the objective is to allocate cost to inventory, it should come as no surprise that other "inventory methods" can be used. One such alternative is the first-in, first-out (FIFO) method.

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