Many process-costing systems have two or more departments or processes in the production cycle. As units move from department to department, the related costs are also transferred by monthly journal entries. Transferred-in costs (also called previous-department costs) are costs incurred in previous departments that are carried forward as the product’s costs when it moves to a subsequent process in the production cycle.
We now extend our Pacific Electronics example to the testing department. As the assembly process is completed, the assembly department of Pacific Electronics transfers SG-40 units to the testing department. Conversion costs are added evenly during the testing department’s process. At the end of the testing process, the units receive additional direct materials, including crating and other packing materials. As units are completed in testing, they are transferred to Finished Goods. The testing department costs consist of transferred-in costs, as well as direct materials and conversion costs added during testing.
The following diagram represents these facts:
The details are as follows:
Goods are transferred from assembly department to testing department, where conversion costs are added evenly throughout the process.
At the end of the process at the testing department, the goods are transferred to finished goods department.
The data for the testing department for March 2020 are as follows:
Details of the physical units, transferred-in costs, direct material, and conversion costs are as follows:
Work in process, beginning inventory (March 1)
Physical units (SG- 40s): 240
Transferred-in costs: $33,600
Direct costs: $0
Conversion costs: $18,000
Degree of completion, beginning work in process
Transferred-in costs: 100%
Direct costs: 0%
Conversion costs: 62.5%
Transferred-in during March
Physical units (SG- 40s): 440
Completed and transferred out during March
Physical units (SG- 40s): 440
Work in process, ending inventory (March 31)
Physical units (SG- 40s): 200
Degree of completion, ending work in process
Transferred-in costs: 100%
Direct costs: 0%
Conversion costs: 80%
Total costs added during March
Direct materials and conversion costs
Direct costs: $13,200
Conversion costs: $48,600
Transferred-in (Weighted average from Exhibit 18-5) (refer to note a)
Transferred-in costs: $52,000
Transferred-in (FIFO from Exhibit 18-7) (refer to note a)
Transferred-in costs: $52,480
Note a: The transferred-in costs during March are different under the weighted-average method (Exhibit 18-5) and the FIFO method (Exhibit 18-7). In our example, beginning work-in-process inventory, $51,600 (which is $33,600 plus $0 plus $18,000) is the same under both the weighted-average and FIFO inventory methods because we assume costs per equivalent unit to be the same in both January and February. If costs per equivalent unit had been different in the two months, work-in-process inventory at the end of February (beginning of March) would be costed differently under the weighted-average and FIFO methods. The basic approach to process costing with transferred-in costs, however, would still be the same as what we describe in this section.
Transferred-in costs are treated as if they are a separate type of direct materials added at the beginning of the process. The transferred-in costs represent assembly department costs, which are always 100% complete at the beginning of the testing department process. When successive departments are involved, the transferred units from one department become all or a part of the direct materials of the next department; however, they are called transferred-in costs, not direct materials costs.
To examine the weighted-average process-costing method with transferred-in costs, we use the five-step procedure described earlier (see Case 2: Process Costing With Zero Beginning and Some Ending Work-in-Process Inventory) to assign costs of the testing department to units completed and transferred out and to units in ending work in process.
Exhibit 18-8 shows Steps 1 and 2. The computations are similar to the calculations of equivalent units under the weighted-average method for the assembly department in Exhibit 18-4. The one difference is that we have transferred-in costs as an additional input. All units, whether completed and transferred out during the period or in ending work in process, are always 100% complete with respect to transferred-in costs. In contrast, the direct materials costs have a zero degree of completion in both beginning and ending work-in-process inventories because, in the testing department, direct materials are introduced at the end of the process.
Details of the flow of production are as follows:
Work in process, beginning inventory (given on page 727)
Physical units: 240
Transferred-in during current period (given on page 727)
Physical units: 440
To account for
Physical units: 640
Completed and transferred out during current period
Physical units: 440
Transferred-in costs: 440
Direct costs: 440
Conversion costs: 440
Work in process, ending inventory (given on page 727)
Physical units: 200
Transferred-in costs (product of 200 and 100%): 200
Direct costs (product of 200 and 0%): 0
Conversion costs (product of 200 and 80%): 160
Degree of completion, ending work in process
Transferred-in costs: 100%
Direct costs: 0%
Conversion costs: 80%
Accounted for
Physical units: 640
Equivalent units of work done to date
Transferred-in costs: 640
Direct materials: 440
Conversion costs: 600
Note a: Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.
Exhibit 18-9 describes Steps 3, 4, and 5 for the weighted-average method. Beginning work in process and work done in the current period are combined for the purposes of computing the cost per equivalent unit for the transferred-in costs, direct materials costs, and conversion costs.
Assignment of costs to the units completed and units in ending work-in-process inventory using the weighted-average method for the testing department for March 2020.
Details of the spreadsheet are divided into step 3, step 4, and step 5, which are as follows:
Step 3
Work in process, beginning (given on page 727)
Total production costs (sum of transferred-in costs, direct materials, and conversion costs): $51,600
Transferred-in costs: $33,600
Direct materials: $0
Conversion cost: $18,000
Costs added in current period (given on page 727)
Total production costs (sum of transferred-in costs, direct materials, and conversion costs): $113,800
Transferred-in costs: $52,000
Direct materials: $13,200
Conversion cost: $48,600
Total costs to account for
Total production costs (sum of transferred-in costs, direct materials, and conversion costs): $165,400
Transferred-in costs: $85,600
Direct materials: $13,200
Conversion cost: $66,600
Step 4
Costs incurred to date
Transferred-in costs: $85,600
Direct materials: $13,200
Conversion cost: $66,600
Divide by equivalent units of work done to date (Exhibit 18-8)
Transferred-in costs: 640
Direct materials: 440
Conversion cost: 600
Cost per equivalent unit of work done to date (quotient of costs added and equivalent units of work done):
Transferred-in costs: $133.75
Direct materials: $30.00
Conversion cost: 111.00
Step 5: Assignment of costs
Completed and transferred out (400 units)
Total production costs (sum of transferred-in costs, direct materials, and conversion costs): $120,890
Transferred-in costs: product of 440 and $133.75 (refer to note a)
Direct materials: product of 440 and $30 (refer to note a)
Conversion cost: product of 440 and $111 (refer to note a)
Work in process ending (200 units)
Total production costs (sum of transferred-in costs, direct materials, and conversion costs): 44,510
Transferred-in costs: product of 200 and $133.75 (refer to note b)
Direct materials: product of 0 and $30 (refer to note b)
Conversion cost: product of 160 and $111 (refer to note b)
Total costs accounted for
Total production costs (sum of transferred-in costs, direct materials, and conversion costs): $165,400
Transferred-in costs: $85,600
Direct materials: $13,200
Conversion cost: $66,600
Note a: Equivalent units completed and transferred out from Exhibit 18-8, Step 2.
Note b: Equivalent units in ending work in process from Exhibit 18-8, Step 2.
The journal entry for the transfer from testing to Finished Goods (see Exhibit 18-9) is shown below:
The table depicts the journal entry for the transfer from testing to finished goods. The details of the table are as follows:
1. Finished goods control: 120,890
2. Work in process, testing: 120,890
3. To record cost of goods completed and transferred from testing to Finished Goods.
Entries in the Work in Process—Testing account (see Exhibit 18-9) are as follows:
The table depicts T-account for work in process: testing. The details of the table are as follows:
1. Beginning inventory, March 1: 51,600
Transferred-in costs: 52,000
Direct materials: 13,200
Conversion costs: 48,600
Transferred out: 120,890
2. Ending inventory, March 31: 44,510