18.3.2: Calculating Product Costs (Steps 3, 4, and 5)

Calculating Product Costs (Steps 3, 4, and 5)

Exhibit 18-2 shows Steps 3, 4, and 5. Together, they are called the production cost worksheet.

Spreadsheet screenshot shows the total costs to account for, cost per equivalent unit, and assignment of costs to the units completed and units in ending work-in-process inventory for the assembly department for February 2020.

Details of the spreadsheet are divided into step 3, step 4, and step 5, which are as follows:

Step 3
1. Costs added during February
  - Total production costs (sum of direct materials and conversion costs): $50,600
  - Direct materials: $32,000
  - Conversion cost: $18,600
2. Total costs to account for
  - Total production costs (sum of direct materials and conversion costs): $50,600
  - Direct materials: $32,000
  - Conversion cost: $18,600
Step 4
1. Costs added in current period
  - Direct materials: $32,000
  - Conversion cost: $18,600
2. Divide by equivalent units of work done in current period (Exhibit 18-1)
  - Direct materials: 400
  - Conversion cost: 310
3. Cost per equivalent unit (quotient of costs added and equivalent units of work done):
  - Direct materials: $80
  - Conversion cost: $60
Step 5: Assignment of costs
1. Completed and transferred out (175 units)
  - Total production costs (sum of direct materials and conversion costs): $24,500
  - Direct materials: the product of 175 and $80 (refer to note a)
  - Conversion cost: product of 175 and $60 (refer to note a)
2. Work in process, ending (225 units)
  - Total production costs (sum of direct materials and conversion costs): 26,100
  - Direct materials: the product of 225 and $80 (refer to note b)
  - Conversion cost: product of 135 and $60 (refer to note b)
3. Total costs accounted for
  - Total production costs (sum of direct materials and conversion costs): $50,600
  - Direct materials: $32,000
  - Conversion cost: $18,600
Note a: Equivalent units completed and transferred out from Exhibit 18-1, step 2.
- Note b: Equivalent units in ending work in process from Exhibit 18-1, step 2.

Step 3 summarizes total costs to account for. Because the beginning balance of work-in-process inventory is zero on February 1, total costs to account for (that is, total charges or debits to Work in Process—Assembly account) consist only of costs added during February: $32,000 in direct materials and $18,600 in conversion costs, for a total of $50,600.

In Step 4, managers calculate the cost per equivalent unit separately for direct materials costs and conversion costs. This is done by dividing direct material costs and conversion costs added during February by their related quantities of equivalent units of work done in February (calculated in Exhibit 18-1).

To understand the relevance of equivalent unit calculations, compare conversion costs for January and February 2020. The $18,600 in total conversion costs for the 400 units worked on during February are lower than the $24,000 in total conversion costs for the 400 units worked on in January. However, the conversion costs to fully assemble a unit are the same: $60 per unit in both January and February. Total conversion costs are lower in February because fewer equivalent units of conversion-costs work were done (310 in February versus 400 in January). Note that using physical units instead of equivalent units would have resulted in a conversion cost per unit of just $46.50 $inline style begin inline style left parenthesis $ text 18,600 end text divided by 400 thin space text units end text right parenthesis end style$ for February versus $60 in January. This incorrect costing would mislead managers to conclude that the assembly department had achieved efficiencies when in fact conversion cost per unit was the same.

Step 5 assigns total direct materials and conversion costs to units completed and transferred out and to units still in process at the end of February 2020. As Exhibit 18-2 shows, this is done for each input by multiplying the equivalent output units by the cost per equivalent unit. For example, total costs (direct materials and conversion costs assigned to the 225 physical units in ending work-in-process inventory) are as follows:

A table shows total costs of ending work-in-process inventory

The table depicts. The details of the table are as follows:

1. Direct material costs of 225 equivalent units, calculated in Step 2, times 80 dollars cost per equivalent unit of direct materials, calculated in Step 4: 18,000 dollars

2. Conversion costs of 135 equivalent units, calculated in Step 2, times 60 dollars cost per equivalent unit of conversion costs, calculated in Step 4: 8,100 dollars

3. Total cost of ending work-in-process inventory: 26,100 dollars

Total costs to account for in Step 3 ($50,600) equal total costs accounted for in Step 5.