Five-Step Procedure for Process Costing With Spoilage

Spreadsheet screenshot shows physical units, direct materials, conversion costs, and total costs which is the sum of direct materials and conversion costs.

Details of the spreadsheet are as follows:

  1. Work in process, beginning inventory (July 1)

    • Physical units: 1,500

    • Direct materials: $12,000

    • Conversion costs: $9,000

    • Total costs: $21,000

  2. Degree of completion of beginning work in process

    • Direct materials: 100%

    • Conversion costs: 60%

  3. Started during July

    • Physical units: 8,500

  4. Good units completed and transferred out during July

    • Physical units: 7,000

  5. Work in process, ending inventory (July 31)

    • Physical units: 2,000

  6. Degree of completion of ending work in process

    • Direct materials: 100%

    • Conversion costs: 50%

  7. Total costs added during July

    • Direct materials: $76,500

    • Conversion costs: $89,100

    • Total costs: $165,600

  8. Normal spoilage as a percentage of good units

    • Physical units: 10%

  9. Degree of completion of normal spoilage

    • Direct materials: 100%

    • Conversion costs: 100%

  10. Degree of completion of abnormal spoilage

    • Direct materials: 100%

    • Conversion costs: 100%.

We slightly modify the five-step procedure for process costing used in Chapter 18 to include the costs of Anzio Company’s spoilage.

  1. Step 1: SUMMARIZE THE FLOW OF PHYSICAL UNITS OF OUTPUT. Identify the number of units of both normal and abnormal spoilage.

TotalSpoilage=(Units in beginningwork-in-process inventory+Unitsstarted)−(Good unitscompleted andtransferred out+Units in endingwork-in-process inventory)=(1,500+8,500)−(7,000+2,000)=10,000−9,000=1,000 units

  1. Normal spoilage equals 10% of 7,000 units of good output, or 700 units. Hence,

Abnormal spoilage=Totals poilage − Normal spoilage=1,000 units−700 units=300 units

  1. Step 2: COMPUTE OUTPUT IN EQUIVALENT UNITS. Equivalent units for spoilage are computed the same way as equivalent units for good units. All spoiled units are included in the computation of output units. Because Anzio’s inspection point is at the completion of production, the amount of work done on each spoiled and each completed good unit is the same.
  2. Step 3: SUMMARIZE TOTAL COSTS TO ACCOUNT FOR. The total costs to account for are all costs debited to Work in Process. The details for this step are similar to Step 3 in Chapter 18.
  3. Step 4: COMPUTE COST PER EQUIVALENT UNIT. This step is similar to Step 4 in Chapter 18.
  4. Step 5: ASSIGN COSTS TO UNITS COMPLETED, SPOILED UNITS, AND TO UNITS IN ENDING WORK-IN-PROCESS INVENTORY. This step computes the cost of spoiled units and good units.

We illustrate these five steps of process costing for the weighted-average and FIFO methods next. The appendix to this chapter illustrates the standard-costing method.