Chapter 4

Process Costing
and Hybrid
ProductCosting Systems
McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Learning
Objective
1

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Comparison of Job-Order Costing

and Process Costing
Process
Process
Costing
Costing

Job-order
Costing

Used for production of small,

identical, low cost items.
Mass produced in automated
continuous production process.
Costs cannot be directly traced to
each unit of product.

Comparison of Job-Order Costing

and Process Costing
Process
Process
Costing
Costing

Job-order
Costing

Typical process cost applications:

Petrochemical refinery
Paint manufacturer
Paper mill

Comparison of Job-Order Costing

and Process Costing
Job-order costing

Process costing

Costs accumulated by
the job.

Costs accumulated by
department or process.

Work in process has a

job-cost sheet for each
job.

Work in process has a

production report for
each batch of products.

Many unique, high cost

jobs.

A few identical, low cost

products.

Jobs built to customer

order.

Units continuously
produced for inventory in
automated process.

Differences Between Job-Order

and Process Costing
The work-in-process
account consists of
individual jobs in a
job-order cost system.

Direct Material

Direct Labor

Manufacturing
Overhead

Jobs

Finished
Goods

Cost of
Goods
Sold

Differences Between Job-Order

and Process Costing
Direct Material
Direct Labor
& Overhead
(Conversion)

The work-in-process
account consists of
individual products in a
process cost system.

Products

When direct labor is a relatively small amount

compared to material and overhead, it is often
combined with overhead.

Finished
Goods

Cost of
Goods
Sold

Learning
Objective
2

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Process Cost Flows

Process Cost Flows

Learning
Objective
3

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Equivalent Units: A Key Concept

Costs
Costs are
are accumulated
accumulated for
for aa period
period of
of time
time for
for
products
products in
in work-in-process
work-in-process inventory.
inventory.
Products
Products in
in work-in-process
work-in-process inventory
inventory at
at the
the
beginning
beginning and
and end
end of
of the
the period
period are
are only
only
partially
partially complete.
complete.
Equivalent
Equivalent units
units is
is aa concept
concept expressing
expressing these
these
partially
partially completed
completed products
products as
as aa smaller
smaller
number
number of
of fully
fully completed
completed products.
products.

Equivalent Units Example

Two one-half completed products are
equivalent to one completed product.

So, 10,000 units 70 percent complete

are equivalent to 7,000 complete units.

Equivalent Units Question 1

For the current period, Jones started
15,000 units and completed 10,000 units,
leaving 5,000 units in process 30 percent
complete. How many equivalent units of
production did Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000

Equivalent Units Question 1

For the current period, Jones started
15,000 units and completed 10,000 units,
leaving 5,000 units in process 30 percent
complete. How many equivalent units of
production did Jones have for the period?
a. 10,000
10,000 units + (5,000 units .30)
b. 11,500
= 11,500 equivalent units
c. 13,500
d. 15,000

Equivalent Units Question 2

If Jones incurred $27,600 in
production costs for the 11,500
equivalent units. What was Joness
cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90

Equivalent Units Question 2

If Jones incurred $27,600 in
production costs for the 11,500
equivalent units. What was Joness
cost per equivalent unit for the period?
a. $1.84
b. $2.40
$27,600 11,500 equivalent units
c. $2.76
= $2.40 per equivalent unit
d. $2.90

Calculating and Using Equivalent

Units of Production
To calculate the direct materials and conversion
costs per equivalent unit for the period:
Materials
cost per
equivalent
unit
Conversion
cost per
equivalent
unit

Materials cost for the period

Materials equivalent units for
the period
Conversion cost for the period
Conversion equivalent units for
the period

Departmental Production Report

Analysis of

Calculation

physical flow
of units.

of equivalent
units.

Production
Report

Computation
of unit costs.

Analysis of
total costs.

Equivalent Units of Production

Weighted-Average Method
The weighted-average method . . .
Makes no distinction between work done in the
prior period and work done in the current period.
Blends together units and costs from the prior
period and the current period.

The FIFO method is a more

complex method and is
rarely used in practice.

Production Report Example

MVP Sports Equipment Company makes baseball gloves
in two departments, Cutting and Stitching.
MVP uses the weighted-average cost procedure.
Material is added at the beginning of the Cutting
Department, and conversion is incurred uniformly
throughout the process.
Using the following information for the month of March,
lets prepare a production report for the Cutting
Department.

Production Report Example

Work in process, March 1: 20,000 units
Materials:
100% complete.
Conversion:
10% complete.

Cost
$ 50,000
7,200

Units started into production in March:

Units completed and transferred out in March:

30,000 units
40,000 units

Work in process, March 31:

Materials
100% complete.
Conversion
50% complete.

10,000 units

Costs incurred during March

Materials cost
Conversion costs:
Direct labor
Applied manufacturing overhead
Total conversion costs
Total costs to account for

90,000
$ 86,000
107,500
193,500
$ 340,700

Production Report Example

Analysis of Physical Flow of Units

Production Report Example

Calculation of Equivalent Units

Physical
Units

Conversion
Percentage
Complete

Work in process, March 1

Units started during March
Total units to account for

20,000
30,000
50,000

10%

Units completed and transferred

Work in process, March 31
Total units accounted for
Total equivalent units

40,000
10,000
50,000

100%
50%

Equivalent Units
Direct
Material Conversion

50% of 10,000 units

40,000
10,000

40,000
5,000

50,000

45,000

Beginning inventory % is not used in weighted-average method.

Production Report Example

Calculation of Equivalent Units

100% of 10,000 units, all

material added at beginning

Learning
Objective
4

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Production Report Example

Computation of unit costs

$140,000 50,000 equivalent units

$200,700 45,000 equivalent units

$2.80 + $4.46

Learning
Objective
5

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Production Report Example

Analysis of total costs

Production Report Example

Analysis of total costs

Production Report Example

Analysis of total costs

All costs
accounted for

Learning
Objective
6

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Actual Costing

Actual costs of
manufacturing overhead
are entered in Work-inProcess Inventory

vs.

Normal Costing
Manufacturing
overhead is
applied
to Work-inProcess Inventory
using a
predetermined
overhead rate

Departmental Production Report

Analysis of
physical flow
of units.

Calculation
of equivalent
units.

Computation
of unit costs.

Analysis of
total costs.

Learning
Objective
7

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Operation Costing
Operation costing employs some aspects
of both job-order and process costing.
Job-order
Costing

Operation Costing
(Products produced in batches)

Process
Costing

Operation Costing
Operation costing employs some aspects
of both job-order and process costing.
Job-order
Costing

Operation Costing
(Products produced in batches)

Material Costs charged

to batches as in
job-order costing.

Process
Costing

Conversion costs
assigned to batches
as in process costing.

End of Chapter 4
Im ready to process
some leisure time.