21.4 Explain and Compute Equivalent Units and Total Cost of Production in a Subsequent Processing Stage

Multi-Stage Processes

Many manufacturing processes have multiple stages. Each stage is a separate process, and units flow from one stage to the next.

Example: Bread Production:

• Stage 1: Mixing Department
• Stage 2: Baking Department
• Stage 3: Packaging Department

Cost Flow in Multi-Stage Processes

Stage 1 (Mixing):

• Costs: Direct materials, direct labor, overhead
• Output: Partially completed units
• Transferred to Stage 2

Stage 2 (Baking):

• Costs: Additional materials (if any), direct labor, overhead
• Input: Units from Stage 1 (with costs already attached)
• Output: Further processed units
• Transferred to Stage 3

Stage 3 (Packaging):

• Costs: Packaging materials, direct labor, overhead
• Input: Units from Stage 2
• Output: Finished goods

Transferred-In Costs

Transferred-in costs are the costs accumulated in previous processing stages that are transferred to the current stage along with the units.

Important:

• Transferred-in costs are like materials added at the beginning
• They represent all costs from previous stages
• Units transferred in are 100% complete for transferred-in costs

Example: Subsequent Processing Stage

Luxembourg Bakery - Baking Department (Stage 2):

Physical Flow:

• Units transferred in from Mixing: 800
• Units completed: 750
• Units in process (end): 50 (100% complete for transferred-in, 80% complete for materials added here, 70% complete for conversion)

Costs:

• Transferred-in costs: €824 (from Mixing Department)
• Materials added in Baking: €100
• Direct labor: €150
• Manufacturing overhead: €100
• Total: €1,174

Step 1: Calculate Equivalent Units

Transferred-In:

• Completed: 750 × 100% = 750
• In process: 50 × 100% = 50
• Total: 800

Materials Added in Baking:

• Completed: 750 × 100% = 750
• In process: 50 × 80% = 40
• Total: 790

Conversion:

• Completed: 750 × 100% = 750
• In process: 50 × 70% = 35
• Total: 785

Step 2: Calculate Cost per Equivalent Unit

Transferred-In: €824 ÷ 800 = €1.03 per equivalent unit

Materials Added: €100 ÷ 790 = €0.127 per equivalent unit (rounded)

Conversion: €250 ÷ 785 = €0.318 per equivalent unit (rounded)

Total Cost per Unit: €1.03 + €0.127 + €0.318 = €1.475 per equivalent unit

Step 3: Allocate Costs

To Completed Units (750):

• Transferred-in: 750 × €1.03 = €772.50
• Materials: 750 × €0.127 = €95.25
• Conversion: 750 × €0.318 = €238.50
• Total: €1,106.25

To Units in Process (50):

• Transferred-in: 50 × €1.03 = €51.50
• Materials: 40 × €0.127 = €5.08
• Conversion: 35 × €0.318 = €11.13
• Total: €67.71

Verification: €1,106.25 + €67.71 = €1,173.96 ≈ €1,174 ✓ (rounding)

Process Cost Report - Subsequent Stage

═══════════════════════════════════════════════════════
PROCESS COST REPORT - BAKING DEPARTMENT
Period: November 2024
═══════════════════════════════════════════════════════

PHYSICAL FLOW:
───────────────────────────────────────────────────────
Units transferred in                               800
Units completed                                     750
Units in process (end)                               50
───────────────────────────────────────────────────────
Total units accounted for                          800

EQUIVALENT UNITS:
───────────────────────────────────────────────────────
              Transferred-In    Materials    Conversion
Completed         750             750          750
In Process (50)    50              40           35
───────────────────────────────────────────────────────
Total             800             790          785

COSTS:
───────────────────────────────────────────────────────
              Transferred-In    Materials    Conversion    Total
Costs to Account For:
  Transferred-in   €824            €0          €0        €824
  Current Costs      0            100         250         350
───────────────────────────────────────────────────────
Total Costs       €824           €100        €250      €1,174

COST PER EQUIVALENT UNIT:
───────────────────────────────────────────────────────
Transferred-in:  €824 ÷ 800 = €1.03
Materials:       €100 ÷ 790 = €0.127
Conversion:      €250 ÷ 785 = €0.318
───────────────────────────────────────────────────────
Total Cost per Unit: €1.475

COST ALLOCATION:
───────────────────────────────────────────────────────
Completed Units (750):
  Transferred-in:  750 × €1.03  = €772.50
  Materials:       750 × €0.127 = €95.25
  Conversion:      750 × €0.318 = €238.50
  Total                           €1,106.25

Units in Process (50):
  Transferred-in:   50 × €1.03  = €51.50
  Materials:        40 × €0.127 = €5.08
  Conversion:       35 × €0.318 = €11.13
  Total                           €67.71
───────────────────────────────────────────────────────
Total Costs Accounted For              €1,174
═══════════════════════════════════════════════════════

Weighted-Average Method vs. FIFO Method

Weighted-Average Method:

• Combines beginning WIP costs with current costs
• Simpler calculation
• More commonly used
• Used in examples above

FIFO Method:

• Separates beginning WIP from current costs
• More complex
• Assumes beginning WIP is completed first
• More accurate if costs change significantly

This chapter focuses on weighted-average method (most common).

Cost Accumulation Across Stages

Total Cost per Unit:

• Stage 1 cost: €1.03
• Stage 2 cost: €0.445 (€0.127 + €0.318)
• Total: €1.475

For Completed Units:

• All costs from all stages are included
• Transferred-in costs accumulate through stages
• Final cost includes all processing

Luxembourg Compliance Note

In Luxembourg:

• Multi-stage processes require careful cost tracking
• Transferred-in costs must be properly accounted for
• Equivalent units calculated for each stage
• Process cost reports for each stage
• Use PCN accounts for each department/process
• Cost accumulation supports inventory valuation

Think It Through

How do costs accumulate as units move through multiple processing stages? Why are transferred-in costs treated differently from materials added in the current stage?

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