CHAPTER 15

PROCESS COSTING
TRUE/FALSE
1. Process costing systems are suitable for firms that produce customized products
in small amounts.
LO1 False Process costing systems are suitable for environments that involve
mass production of like products.
2. The need to distribute the cost of making the batch of units that are still in
process and to units that have been completed during the period is central to
process costing.
LO1 True
3. In a process costing system, in-process units are converted to physical units.
LO1 False In a process costing system, in-process units are converted to
equivalent units.
4. For units still in process, when using the weighted average method multiply the
physical units by the percentage completion and add this amount to the units
completed to obtain total equivalent units for the period.
LO1 True
5. One difference in job costing and process costing is that we do not need to
allocate costs between completed and in-process units in a job-costing system.
LO1 True
6. An advantage of process costing is that all inputs are required at the beginning
of the process.
LO2 False Processes often require inputs at different stages.
7. Conversion cost includes both direct material and indirect material.
LO2 False Conversion cost includes labor plus overhead costs.
8. Typically in process costing, separate rates are computed for materials costs and
for conversion costs.
LO2 True
9. Most process costing systems use weighted average process costs which do not
distinguish between the costs from the prior period and costs incurred during the
current period.
LO2 True
10.A process costing system can accommodate more than two cost pools by
calculating a separate equivalent unit basis for each cost pool.
LO2 True

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11.Because the predetermined rates in process costing come from company

budgets, we refer to these rates as budgeted rates and to the system as a
budgeted costing system.
LO3 False Because the predetermined rates in process costing come from
company standards, we refer to these rates as standard rates and to the system as
a standard costing system.

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Process Costing
12.An advantage of standard process costing is that it is cost effective and
relatively simple to compute standard costs.
LO3 False It takes considerable resources and effort to compute standard costs.
13.A firm should employ standard costing only in those production environments
where a firm makes similar or identical units in large quantities.
LO3 True.
14.Standard costing is simple to adapt to a job shop environment where each job is
unique.
LO3 False Standard costing has less appeal in a job shop environment because
each job is unique and would require a fresh set of standards.
15.To apply a standard process costing system, we use the standards for materials,
labor and overhead to value Cost of Goods Manufactured and Work In Process.
LO3 True

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Balakrishnan/Managerial Accounting, 2e
MULTIPLE CHOICE
16.In manufacturing settings with large batches, different units of the same batch
might be at different stages of completion. Because we still track costs for the
entire batch, we need to distribute the costs of making the batch of units still in
process to:
A. Work in process inventory.
B. Cost of goods manufactured.
C. Finished goods inventory.
D. A and B only.
E. A, B and C.
LO1 D
17.Which of the following only applies to process costing?
a. Separate and distinct jobs
b. The use of equivalent units
c. The use of predetermined overhead rates
d. Averaging
LO1-Self test-B
18.When using the weighted average method, equivalent units are:
a. The number of units completed in a period
b. The number of units completed in a period plus the number of units in
process at the end of the period multiplied by the percentage of which the
units have been completed
c. The number of units in beginning inventory plus the number of units
completed in a period
d. The number of units produced in a period less the number of units in process
at the end of the period
LO1-Self test-B
19.The Custer Company began the period with no units in process and 80,000 units
in finished goods inventory. During the period they sold 280,000 units and also
had the following at the end of the period:
Finished goods (units)
40,000
Work-in-process (50% conversion complete)
12,000
Equivalent units for the period totaled:
a. 314,000
b. 280,000
c. 240,000
d. 246,000
LO1-Self test-D

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Process Costing
20.The Carmello Company began the period with no units in process and or in
finished goods inventory. During the period they began 96,000 units and
completed 80,000 units. If equivalent units for the period totaled 90,000 then
the units in process were what percent complete? (rounded)
a. 62.5%
b. 83.3%
c. 88.9%
d. 75%
LO1-Self test-A
21.Which of the following companies would be most likely to use process costing:
a. A catering company
b. A custom yacht maker
c. A tire manufacturer
d. An attorneys office
LO1-Self test-C
22.The Jetson Company began the month of May with no units completed or inprocess. During the month the company began 210,000 units but only
completed 185,000 units. The units still in process are 40% complete. The
company incurred $1,575,600 in manufacturing costs. The cost per equivalent
unit is: (rounded to the nearest cent)
a. $8.08
b. $8.52
c. $7.50
d. $15.92
LO1-Self test-A
23.The Shickman Company provided the following information for the packaging
department for the month of October:
Units
Materials Cost
Beginning work-in-process
20,000
$6,000
Began in October
55,000
$21,000
Units completed and transferred to finished goods 48,000
Ending work-in-process
27,000
The company adds material costs at the beginning of the production process.
Using the weighted-average method, the cost per equivalent unit for materials
is: (rounded)
a. $.38
b. $.49
c. $.36
d. $.56
LO2-Self test-C

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24.Suppose Hill Manufacturing began production in January with zero units in
process. During January, Hill started production of 18,000 units and completed
15,500 units by January 31. Manufacturing costs totaled $68,800 ($43,200 for
materials and $25,600 for labor and overhead). How much cost is allocated to
WIP ending inventory?
A. $59,245
B. $19,600
C. $9,555
D. $68,800
E. None of the above.
LO1 C
25.In the mechanics of process costing, why is an allocation that computes costs
based on the number of physical units not accurate?
A. A number based on physical units does not include fixed costs.
B. A number based on physical units does not include overhead costs.
C. It attaches too much variable costs to each unit.
D. It attaches the same value to a unit whether the unit is in process or is
complete.
E. None of the above.
LO1 D
26.Suppose Smith started 100,000 units during the period, transfers 75,000 units to
finished goods and estimates that 25,000 units still in process are only 20
percent complete. What is the number of equivalent units in WIP inventory at
the end of the period?
A. 20,000
B. 5,000
C. 15,000
D. 60,000
E. 80,000
LO1 B
27.Which of the following is not a step in preparing a process costing report?
A. Trace materials cost to individual jobs.
B. Track the physical flow.
C. Compute equivalent units.
D. Collect costs to allocate.
E. Calculate the rate per equivalent unit.
LO1 A
28.Suppose Smith started 100,000 units during the period, transfers 75,000 units to
finished goods and estimates that 25,000 units still in process. Smith has issued
all the needed materials, but has completed only 20% of the assembly work.
What is the number of total equivalent units in work in process for material and
conversion at the end of the period?
A. 100,000 material/25,000 conversion.
B. 25,000 material/5,000 conversion.
C. 25,000 material/25,000 conversion.
D. 75,000 material/75,000 conversion.

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Process Costing
E. 100,000 material/100,000 conversion.
LO2 B
29.The Ortho Company began the month of September with 30,000 units in process
which had a total materials cost of $120,000 and conversion costs of $300,000.
During September 220,000 units were begun and 215,000 were completed and
transferred to finished goods. The units in process were 30% complete. Material
and conversion cost s for September were $280,000 and $647,100, respectively.
Cost of goods manufactured for September totals:
a. $1,158,506
b. $1,347,100
c. $1,247,000
d. $857,769
LO2-Self test-C
30.The Ortho Company began the month of September with 30,000 units in process
which had a total materials cost of $120,000 and conversion costs of $300,000.
During September 220,000 units were begun and 215,000 were completed and
transferred to finished goods. The units in process were 30% complete. Material
and conversion cost s for September were $280,000 and $647,100, respectively.
The ending balance in the work-in-process inventory account totals:
a. $188,594
b. $100,100
c. $69,331
d. $129,794
LO2-Self test-B
31.If a company which use predetermined rates for materials and conversion costs
overestimates its materials cost per equivalent unit then:
a. Cost of goods manufactured will be overstated
b. Cost per equivalent unit will be understated
c. Net income will not be affected
d. The ending balance in work-in-process will be understated
LO2-Self test-A
32.The Holtz Company uses a process costing system. Data from the Fabrication
Department for the month of December is as follows:
Units
Percent
Complete
Beginning work in process inventory
12,000
70%
Transferred in from the prior department
25,000
Completed and transferred to the next department 29,000
Ending work-in-process inventory
8,000
20%
The equivalent units for conversion costs in the Fabrication Department for
December are:
a. 25,400
b. 26,600
c. 29,000
d. 30,600
LO2-Self test-D

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33.Conversion costs include:
a. Labor and overhead
b. Materials and labor
c. Materials and overhead
d. Labor, overhead, and materials
LO2-Self test-A
34.Most process costing systems use weighted average process costs. Which of the
following is a characteristic of weighted average process costs systems?
A. These systems account only for costs incurred during the current period.
B. These systems are not appropriate for environments that involve mass
production.
C. The weighted average process cost system is required by GAAP.
D. These systems do not distinguish between the costs from the prior period and
costs incurred during the current period.
E. None of the above is a characteristic of weighted average process costs
systems.
LO2 D
35.Under the weighted average process cost method, we ignore:
A. When costs are actually incurred.
B. Whether costs are material costs or conversion costs.
C. Equivalent units.
D. Both A and B
E. A, B and C.
LO2 A
36.Smith Manufacturing uses the weighted average process costs method. Smith
has provided the follow data:
Total
Material
Conversio
Units/Cost
n
Beginning inventory
25,000
Units started during
175,000
period
Units completed during
185,000
period
Costs from beginning
$641,250
$80,00
inventory
$561,250
0
Costs incurred during
$6,868,750
$4,038,75 $2,830,000
period
0
Units still in process at the end of the period are 100% complete as to
material and 60% complete as to conversion. What is the cost per equivalent
unit for conversion costs?
A. $24.18
B. $34.34
C. $15.00
D. $14.55
E. $15.29
LO2 C

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Process Costing
37.Smith Manufacturing uses the weighted average process costs method. Smith
has provided the follow data:
Total
Material
Conversio
Units
n
Beginning inventory
25,000
Units started during period
175,000
Units completed during
185,000
period
Costs from beginning
$641,250
$561,2
$80,00
inventory
50
0
Costs incurred during period
$6,868,75 $4,038,75 $2,830,000
0
0
Units still in process at the end of the period are 100% complete as to
material and 60% complete as to conversion. What is the cost of materials
allocated to units completed during the period?
A. $4,255,000
B. $4,600,000
C. $4,038,750
D. $6,868,750
E. None of the above.
LO2 A
38.The Vegas Company began the month of March with no units in process or in
finished inventory. During March 160,000 units were begun and 150,000 were
completed and transferred to finished goods. The units in process were 60%
complete. Material costs totaled $480,000 and conversion costs totaled
$702,000. The materials and conversion cost per equivalent unit, respectively,
is: (rounded)
Material
a. $3.20
b. $3.00
c. $3.08
d. $3.00
LO2-Self test-D

Conversion
$4.39
$4.39
$4.50
$4.50

39.Which of the following is not a difference in a job-cost environment and a

process-cost environment?
A. In a job-cost environment, only physical units are computed whereas in a
process cost environment, equivalent units are computed.
B. In a job-cost environment, firms compute a predetermined rate for overhead
costs alone as these are the only costs that the firm allocates whereas in a
process cost environment a firm must also allocate the cost of materials and
conversion.
C. A job-cost environment is appropriate for firms that produce customized
products in small amounts whereas a process-cost environment is suitable in
settings that involve mass production of like products.
D. In a job-cost environment, costs are assigned only to finished goods and cost
of goods sold whereas in a process-cost environment costs are assigned to
work-in-process, finished goods, and cost of goods sold.

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Balakrishnan/Managerial Accounting, 2e
E. All of the above are differences in a job-cost environment and a process-cost
environment.
LO3 D
40.Which of the following is a reason to use standard process costing?
A. Record keeping is easier because the method attaches the same value to
each completed unit without regard to the period in which the unit was made.
B. The standard cost of work done provides a natural benchmark for actual
costs.
C. The natural benchmark provided in a standard process costing system helps
firms determine variances from expectations.
D. B and C only.
E. A, B and C.
LO3 E
41.In a process costing system, when manufacturing overhead is charged, what
account is debited?
a. Manufacturing overhead
b. Cost of goods sold
c. Work in process inventory
d. Finished goods inventory
LO3-Self test-C
42.A company should use process costing over job-order costing when:
a. Many different products are manufactured
b. The product requires several different manufacturing processes to be
completed
c. Products are manufactured as soon as orders are received
d. Most of the products are alike and can be mass-produced
LO3-Self test-D
43.When using a standard process costing system, under-applied overhead is:
A. Carried over to the next period.
B. Combined with period costs.
C. Disposed of.
D. Ignored.
E. None of the above.
LO3 C
44.When using the weighted average costs method, the cost of beginning inventory
is:
a. Added to the cost for the current month to determine the cost per equivalent
unit.
b. Considered separately from costs incurred during the current month.
c. Ignored in calculating the cost per equivalent unit for the current month.
d. Added only to the units completed during the period.
e. None of the above.
LO3 A

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Process Costing
45.Smith Manufacturing uses a standard costing system. For the current period,
Smith allocated the following costs using a predetermined overhead rate:
Material
Conversio
Total
n
Allocated Costs:
Units completed
$40,000
$20,000
$60,000
Units in process end of
$5,000
$3,000
$8,000
period
$45,000
$23,000
$68,000

A.
B.
C.
D.
E.
LO2

Actual Costs:
$50,000
$22,000
$72,000
What are Smiths material and conversion variances for the month?
$10,000 Unfavorable materials variance/$2,000 Unfavorable conversion
variance.
$20,000 Unfavorable materials variance/$2,000 Favorable conversion
variance.
$5,000 Unfavorable materials variance/$1,000 Favorable conversion variance.
$12,000 materials variance/$50,000 conversion variance.
None of the above.
C

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Balakrishnan/Managerial Accounting, 2e
Problems
1. Blue Computers began the current month with zero units of its Model XFD in
work in process inventory. During the month Blue started 2,500 units into
production, completing 1,800 units by the end of the month. Blue estimates that
the 700 units still in process are 10% complete with respect to materials and
conversion costs. The company uses the weighted average method for
processing costs. Blue spent $20,000 on materials cost and $8,000 on
conversion costs during the month.
Required:
a. Complete steps 1 through 5 of Blues process costing report for the month.
b. What are total equivalent units?
c. What is the total cost in Blues ending inventory?
d. What is the total cost in Blues cost of goods manufactured?
2. Blue Computers began the current month with 100 units of its Model XFD in work
in process inventory. During the month Blue started 2,500 units into production,
completing 1,900 units by the end of the month. Blue estimates that the 700
units still in process are 100% complete with respect to materials and 30%
complete with respect to conversion costs. The company uses the weighted
average method for processing costs. Blues beginning WIP had $1,000 ($900 of
material cost and $100 conversion cost) in the account and Blue spent $20,000
on materials cost and $8,000 on conversion costs during the month.
Required:
a. Complete steps 1 through 5 of Blues process costing report for the month.
b. What are total equivalent units for Blues conversation costs?
c. What are Blues total costs to account for?
d. What is Blues equivalent unit cost of materials?

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Process Costing
3. Wingos Furniture Manufacturing Company uses the weighted average costing
method and produces furniture by using an assembly-line process. All direct
materials are introduced at the start of the process. Conversion costs are
incurred evenly throughout manufacturing. The Work-in-Process account for the
current month has the following information:
Number of units in beginning WIP
inventory
Value of beginning inventory
Production started during month
Direct material used during month
Conversion cost incurred during
month
Number of units completed
Number of units in ending WIP
inventory

900, 30% complete

$128,300*
3,000 units
$250,000
$149,940
2,000
1,900, 80%
complete

*Consists of $90,000 direct material and $38,300 of conversion cost.

Required:
a.

Determine the number of equivalent units in the ending work-in-process

inventory for material and conversion costs.

b. Calculate the total equivalent units with respect to conversion.

c. Calculate the cost per equivalent unit with respect to conversion for the
month.
d. Determine the cost of the ending work-in-process inventory.

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Balakrishnan/Managerial Accounting, 2e
Solutions to Problems
1. Mechanics of Process Costing (LO1)
a. Steps 1 through 5
Step 1: Track Physical Flow
Started during period
Total physical units to
account for
Step 2: Compute Equivalent
Units
Units completed during
period
Units in process end of
period
Total
Step 3: Collect Cost to
Allocate
Cost incurred during period
Total costs to account for

2,500
2,500

1,800

1,800

700

70

2,500

1,870

$28,000
$28,000

$28,000
$28,000

Step 4: Calculate the Rate

per Equivalent Unit
Cost per equivalent unit
Step 5: Allocate Costs
Units completed during
period
Units in process end of
period
Total costs accounted for

$14.973

$28,000/1,87
0

$26,952

$14.973 x
1,800
$14.973 x 70

$ 1,048
$28,000

b. Total equivalent units 1,870

c. Total cost in Blues ending inventory - $1,048
d. Total cost in Blues cost of goods manufactured - $26,952

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Process Costing
2. Process Costing (LO2)
a. Steps 1 through 5
Material Convers
ion
Step 1: Track Physical Flow
Beginning inventory
Started during period
Total physical units to
account for

100
2,500
2,600

Step 2: Compute Equivalent

Units
Units completed during
period
Units in process end of
period
Total
Step 3: Collect Cost to
Allocate
Cost from beginning
inventory
Cost incurred during period
Total costs to account for
Step 4: Calculate the Rate
per Equivalent Unit
Cost per equivalent unit
Units completed during
period
Units in ending inventory

1,900

1,900

1,900

700

700

210

2,600

2,600

2,110

$1,000

$900

$100

$28,000
$29,000

$20,000
$20,900

$8,000
$8,100

$22,567

$8.038
$15,273

$3.838
$7,294

6,433
$29,000

5,627
$20,900

806
$8,100

b. Total equivalent units for conversation costs 2,110

c. Total costs to account for - $29,000
d. Equivalent unit cost of materials $8.038
3. (LO3)
Material Convers
ion
Step 1: Track Physical Flow
Beginning inventory
Started during period

900
3,000

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Balakrishnan/Managerial Accounting, 2e
Total physical units to
account for

3,900

Step 2: Compute Equivalent

Units
Units completed during
period
Units in process end of
period
Total

15-16

2,000

2,000

2,000

1,900

1,900

1,520

3,900

3,900

3,520

Process Costing
Step 3: Collect Cost to
Allocate
Cost from beginning
inventory
Cost incurred during period

$128,300

$90,000

$38,300

$399,950

$149,950

Total costs to account for

$528,250

$250,00
0
$340,00
0

$87.179
$174,36
0
165,64
0
$340,00
0

$53.48
$106,960

Step 4: Calculate the Rate

per Equivalent Unit
Cost per equivalent unit
Units completed during
period
Units in ending inventory

$281,320
246,930
$528,250

$188,250

81,290
$188,250

a. Number of units in the ending work-in-process inventory -2,000

material/1,520 conversion
b. Total equivalent units with respect to conversion 5,520.
c. Cost per equivalent unit with respect to conversion - $53.48.
d. Cost of the ending work-in-process inventory - $246,930.

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Balakrishnan/Managerial Accounting, 2e
End of Chapter Content
Short Answer
1. What production environments are most suitable for process costing?
2. What is the key difference between process costing and job costing?
3. What is an equivalent unit?
4. Why is the concept of an equivalent unit important in process costing?
5. Why is the concept of equivalent units not relevant for job costing?
6. What are the five steps in a process-costing report?
7. Why do many process-costing systems use multiple cost pools?
8. Suppose a factory accumulates costs in five separate cost pools. Would the
equivalent units be different for each of these cost pools?
9. Consider the cost of materials. Why is the percentage completion for units that
are finished during the period always 100%?
10.Consider the cost of materials added at the end of the process. Why is the
percentage completion for units that are still in process always zero?
11.Why do most process-costing systems need to rely on an inventory cost flow
assumption?
12.How does the weighted average process-costing system treat the costs of items
in beginning inventory?
13.What is the key distinction between standard process costing and process
costing using actual rates?
14.What are the two primary reasons firms use standard process costing?
15.How could you use standard process costing to obtain information that helps
improve the efficiency of the process?

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Process Costing
Short Answer Solution
1. (LO-1)

Firms that mass produce relatively identical products.

2. (LO-1)
In process costing, different units of the same batch might be at
different stages of completion (either in WIP or FG), whereas in job costing a job
is either in process or completed. This means that under process costing, we
need to allocate the costs of a batch between completed and in-process units.
3. (LO-1)
The amount of output stated in terms of completed units e.g., 100
units that are 50% complete represent 50 equivalent units.
4. (LO-1)
footing.

It allows us to put units at different stages of completion on equal

5. (LO-1)
Because a job is either in process or fully completed. Thus, all of the
units and the costs stay in the WIP account until the job is complete. When the
job is done, we transfer the units (and the associated costs) to the FG inventory
account.
.
6. (LO-1)
(1) Track the physical flow, (2) compute equivalent units, (3) collect
costs to allocate, (4) calculate the rate per equivalent unit, and (5) allocate
costs.
7. (LO-2)
Because processes often require inputs at different stages. Materials
may be added at the beginning of the process, whereas conversion costs are
incurred uniformly throughout the process.
8. (LO-2)
Depending on the stage of completion, equivalent units certainly could
be different for each cost pool. For example, units that are 50% complete would
have 100% equivalent units with respect to materials added at the start of the
process and 0% complete with respect to materials added at the end of the
process.
9. (LO-2)
Units that are finished during the period are fully complete with respect
to every input thus, they are 100% equivalent.
10.(LO-2)
By definition, units still in process are less than 100% complete. As
such, they will not contain materials added at the end of the process thus, they
will be 0% complete with respect to this input.
11.(LO-2)
Because of the presence of beginning inventory the units in inventory
produced in a prior period might have different costs than units produced during
the current period.

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Balakrishnan/Managerial Accounting, 2e
12.(LO-2)
Weighted average systems do not distinguish between the costs from
the prior period and the costs incurred during the current period.
13.(LO-3)
Standard process costing uses predetermined rates for materials,
labor, and overhead.
14.(LO-3)
(1) record keeping is easier, and (2) the standard cost of work done
provides a natural benchmark for actual costs.

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Process Costing
15.(LO-3)
Standard costs provide benchmarks that firms could use to determine
variances from expectations. Such information might lead to the efficient use of
materials, labor, and overhead.

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Balakrishnan/Managerial Accounting, 2e
Short Essay
1. Why is process costing suitable for a soft drink company but not well suited for a
firm that makes luxury yachts?
2. What is the role for process costing in a Just-in-Time (JIT) production
environment, where work-in-process inventories are negligible? For example, at
any given point in time a JIT plant might only have 2 hours worth of production in
process.
3. Why do we need process costing in industries that produce large batches of
goods but not in firms that make their products in small batches?
4. Can you describe a revenue recognition setting in financial accounting that
employs the concept of equivalent work?
5. Process-costing systems involve steps where we allocate costs such as materials
and labor that are directly traceable to a batch. Why do we need steps that
allocate direct costs?
6. When calculating equivalent units, we assume that cost is proportional to work
done. Why does this assumption make sense?
7. Who in the factory would be best equipped to provide estimates of the percent
completion for work in process?
8. Suppose your production manager tells you that one-half the WIP is 20%
complete in terms of conversion, and that the remainder is 70% complete. How
would you modify the process costing report to include this information?
9. The chapter illustrates how the process-costing template could be modified to
include many kinds of materials, added at different points in the production
process. How could you modify process costing to include multiple overhead
rates? Comment on the usefulness of such a modification for decision making.
10.How could we implement process costing in a plant that has a sequential
production process? For example, assume a plant has two separate departments
parts are fabricated in department 1 and assembled in department 2.
11.Consider a multidepartment (or multi-station) production environment in which
not all products go though all processes. Why would we use process costing on a
station-by-station basis in this setting? Does this setting reflect a blend of both
job- and process costing systems?
12.When you have beginning work-in-process inventory, why is the weighted
average method preferred in practice over the First-In-First-Out (FIFO) and LastIn-First-Out (LIFO) methods?
13.In process costing, the volume of production for a period is likely to be much
greater than the volume in inventory at any given point in time. This feature

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means that the value of inventory is a small fraction of the value of output. How
does this feature help firms justify the use of the weighted average method for
process costing?

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14.How does standard process costing relate to variance analysis? Is variance
analysis likely to be more or less informative in a process-costing setting relative
to a job-costing setting?
15.How could you modify standard process costing so that individual batches
generally follow the same process, but some batches have some unique steps
(e.g., extra finishing)?

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Short Essay Solutions
1. (LO-1) For a firm that makes luxury yachts, each yacht takes time to build.
Most costs can be directly traced to each yacht, with only few indirect costs
requiring allocations. In contrast, making a soft drink is a continuous process. We
can only track costs for the entire batch, and we need to distribute the cost of
making the batch to units in the batch that are still in process (work-in-process
or WIP inventory) and the portion that has been completed (cost of goods
manufactured). Such allocations are typical of process costing.
2. (LO-1)
In a JIT inventory environment which has minimal work-in-process
inventory, there is really no need to distribute the cost of production to work-inprocess or WIP inventory. Consequently, cost accounting is much simpler than
process costing because there is no need to define equivalent in-process units
and so on. Nevertheless, we might still be producing many identical units, which
require that we allocate the costs among the completed units. This leads to a
simple allocation of costs (total costs / total units = cost per unit)
3. (LO-1)
When goods are produced in large batches and these batches take a
long time to process, it is generally the case that a part of the batch is
completed while work is still going on another part of the same batch.
Consequently, allocations are needed to spread the cost of the batch in a
proportionate manner to the completed and uncompleted portions. This is what
process costing does. In contrast, when batch sizes are small, each batch is
either work-in-process or finished, meaning that such allocations are not
necessary.
4. (LO-1)
The percentage-of-completion method of revenue recognition that you
may have learned in your financial accounting class is an example that is
conceptually similar to process costing. Under that method, revenues on a longterm project --that takes several fiscal periods to complete are recognized in a
fiscal period in proportion to the percentage of work done on the project during
that period. This percentage is usually calculated as costs incurred on the project
during the period as a fraction of the total expected cost of the project.
5. (LO-1)
The reason why we need to allocate even direct costs in process
costing is that it is generally the case that a part of the batch is completed while
work is still going on another part of the same batch. Since directs costs can only
be measured at the batch level, it must be allocated appropriately to the portion
that is still in process and to the portion that is completed; otherwise the workin-process and finished goods inventory accounts will not reflect the correct
amounts.
6. (LO-1)
This assumption makes sense because organizational resources are
consumed only when work gets done. For instance, direct material is
requisitioned only when it is needed. Labor input and machine time are needed
only when units are processed.
7. (LO-1)
The production/line manager or the line supervisor will usually be best
able to assess the percent completion for work in process.

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8. (LO-1)
Let us say that there are X units in WIP. Then, we would say that WIP
has 0.45X = ([0.20 0.50 + 0.70 0.50] X) equivalent completed units for work
that is continuously done. We might need to track these two pieces of WIP
inventory separately if they involve materials added at specific points in the
production process (e.g., if we add materials at the 50% completion stage, one
part will have the materials and another will not).
9. (LO-2)
We can add additional columns for each overhead rate, much like we
add additional columns for calculating equivalent units for different materials.
We would not support using multiple overhead rates in a process costing system.
The primary purpose of the system is to value inventory and not decision
making.
10.(LO-2)
We would consider each department as a separate process. The cost of
the completed parts from department 1 would be considered as material costs
for department 2. The work-in-process units in department 1 will reflect the
percent completion in that department. The work-in-process units in department
2 will reflect the completed part costs transferred from department 1 plus the
cost proportional to the percent completed in department 2.
11.(LO-2)
In such settings, a batch of each product is a job. The costs of all
processes required to produce the product can be accumulated in a job cost
sheet. But a process costing system is required to accumulate the costs for the
batch at each individual station or process because a part of the batch may still
be in process at each station, and a part may be completed and transferred to
the next station. Therefore cost systems in such settings do share some
characteristics with both job-costing and process-costing.
12.(LO-2)
There are several reasons for the preference. First, the weighted
average method is computationally easier. This complexity is particularly salient
in processes that involve many departments. Second, the volume of inventory is
usually small relative to the volume of work done during a period, meaning that
refinements such as FIFO have little gain in accuracy relative to the weighted
average method. Thus, firms usually use the weighted average method.
13.(LO-2)
The difference in the value of the ending inventory (completed items)
is a function of the difference in costs between periods and the relative amounts
in opening inventory and throughput. The greater these differences, the more
the numbers under FIFO will differ from the numbers computed with the
weighted average method. In practice, costs rarely fluctuate dramatically across
months and the throughput volume dwarfs inventory values. Thus, the error from
using the weighted average method is small.
14.(LO-3)
As illustrated in the text, we can compare the standard costs of the
work done this period with actual costs to determine variances. Such variance
analysis is likely to be more informative in a process-costing setting relative to a
job-costing setting. The reason is that the firm is doing the same process over
and over, allowing it to establish meaningful standards. Such standards then
become the basis for judging actual performance (i.e., variances assume
meaning).

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15.(LO-3)
Essentially, we will have to compute a process costing report (or at
least establish rates) for each of the processes. This part of the system looks like
process costing. Then, for each batch of items, we will track the processes that it
consumes. We will add up all of the costs of the processes to determine the cost
of the batch. This part of the system looks like job costing. Most real world
systems have features of both process and job costing systems, and are termed
operations costing systems.

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Balakrishnan/Managerial Accounting, 2e
Exercises
1. Kang Industries provides the following partially complete process-cost report.
Item
Equivalent Units of Material
Equivalent Units of Conversion
Value
Ending WIP inventory
10,000
7,000
?
Cost of goods completed &
transferred out
90,000
90,000
$270,000
The cost of goods completed and transferred out contains $162,000 toward the
cost of
materials and $108,000 toward conversion cost.
Required: Determine the value of Kangs ending WIP inventory.

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Exercise Solutions
1. (LO1) Let us begin by using the data for finished items to calculate the cost
per equivalent unit.

$162,000
$1.80
Cost per equivalent unit of direct materials = 90,000 EUs
.
$108,000
$1.20
Cost per equivalent unit of conversion costs = 90,000 EUs
.
The cost data are given and we know that finished items are 100%
complete for all cost categories.
Thus, the value of ending work in progress
= ($1.80 x 10,000 equivalent units) + ($1.20 x 7,000 equivalent units)
= $26,400.

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