Cost Accounting

Chapter 6
Process Costing
Learning Objectives
1. Cite examples of businesses in which process costing
is used.
2. Determine if a process cost system can be used,
based on an examination of the production
environment.
3. Calculate equivalent production and departmental
unit costs.
4. Prepare a departmental cost of production report
based on fifo costing.

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Learning Objectives
5. Prepare general journal entries to record production
costs in a process cost system.
6. (Appendix) Prepare a departmental cost of production
report based on average costing.

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6-1 Process Cost Accumulation
• When all units of product manufactured within a cost
center are essentially alike (homogeneous), keeping
track of the cost of separate batches of product is not
necessary, and may not be practical. Instead of job
order costing, process costing can be used.
• In a process cost system, materials, labor, and factory
overhead are charged to cost, materials, labor, and
factory overhead are charged to cost centers.

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6-1 Process Cost Accumulation
• The primary requirement is that all the products
manufactured within the cost center during the period
must be the same in terms of resources consumed;
otherwise, process costing will distort products’ costs.

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6-1 Process Cost Accumulation
• Costing by Departments
– materials, labor, and factory overhead are generally
charged to the producing departments
– each assembly line can be treated as a separate cost center.
– requires less record keeping, and less record keeping means
that it costs less to operate
– under conditions of continuous processing or under mass
production methods

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6-1 Process Cost Accumulation
• Accounting for Materials, Labor, and Factory
Overhead Costs
– Materials Costs. materials requisition forms
– Labor Costs. daily time tickets or clock cards
– Factory Overhead Costs. predetermined factory overhead
rate

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6-2 The Cost of Production Report
• The cost of production report is a worksheet
presenting the amount of costs accumulated and
assigned to production during a month or other
period.
– (1) total and unit costs of work received from one or more
other departments
– (2) total and unit costs of materials, labor, and factory
overhead added by the department
– (3) the cost of the beginning and ending work in process
inventories
– (4) the cost transferred to a succeeding department or to
finished goods

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6-2 The Cost of Production Report
• Average costing and fifo costing
• An equivalent unit is the amount of a resource that is
required to complete one unit of the product

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6-2 The Cost of Production Report
• Ending work in process inventory is 60 percent
complete with respect to materials in the Cutting
Department.
• 100 percent complete in the Assembly Department.
• 20 percent complete with respect to labor in the
Cutting Department and 70 percent complete in the
Assembly Department.
• Ending inventory is 40 percent complete in the
Cutting Department and 70 percent complete in the
Assembly Department.

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whole or in part. 10
6-2 The Cost of Production Report

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in
whole or in part. 11
6-2 The Cost of Production Report

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in
whole or in part. 12
6-2 The Cost of Production Report

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in
whole or in part. 13
6-2 The Cost of Production Report

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whole or in part. 14
EXHIBIT 6-1

15
6-2 The Cost of Production Report
• The current period equivalent units in the Assembly
Department are determined as follows:

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whole or in part. 16
6-2 The Cost of Production Report

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whole or in part. 17
EXHIBIT 6-2

18
6-2 The Cost of Production Report
• Increase in Quantity of Production When
Materials Are Added

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whole or in part. 19
6-2 The Cost of Production Report
• Ending work in process inventory is complete as to
materials and 50 percent complete as to conversion
cost.

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6-2 The Cost of Production Report
• Of the 5,800 gallons transferred from 800 gallons
were in process at the beginning of the period.
• 80 percent complete as to materials and 25 percent
complete as to conversion costs.
• Ending inventory is complete as to materials but only
50 percent complete as to conversion cost.

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whole or in part. 21
EXHIBIT 6-3

22
6-2 The Cost of Production Report

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whole or in part. 23
Appendix: Process Costing with an Average Cost
Flow Assumption

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whole or in part. 24
Appendix: Process Costing with an Average
Cost Flow Assumption
• Ending work in process inventory is 60 percent
complete with respect to materials in the Cutting
Department and 100 percent complete with respect to
materials in the Assembly Department
• Ending inventory is 20 percent complete with respect
to labor in the Cutting Department and 70 percent
complete in the Assembly Department.
• With respect to factory overhead, ending inventory is
40 percent complete in the Cutting Department and
70 percent complete in the Assembly Department.

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whole or in part. 25
Appendix: Process Costing with an Average
Cost Flow Assumption

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whole or in part. 26
Appendix: Process Costing with an Average
Cost Flow Assumption

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whole or in part. 27
EXHIBIT 6-4

28
Appendix: Process Costing with an Average Cost
Flow Assumption
• Ending inventory in the Assembly Department is also
complete as to materials, but it is only 70 percent
complete as to conversion cost.
• Each cost element in the Assembly Department are
computed by adding the number of equivalent units
transferred out of the department to those in ending
inventory, as follows:

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whole or in part. 29
Appendix: Process Costing with an Average Cost
Flow Assumption

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whole or in part. 30
EXHIBIT 6-5

31