Chapter 4

Process Costing and Hybrid

Product-Costing Systems

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Comparison of Job-Order Costing and
Process Costing
Job-order costing
Costs accumulated by the
job.
Work in process has a job-
cost sheet for each job.
Many unique, high cost
jobs.
Jobs built to customer
order.
Process costing
Costs accumulated by
department or process.
Work in process has a
production report for each
batch of products.
A few identical, low cost
products.
Units continuously produced
for inventory in automated
process.
4-2
Process Cost Flows
One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material
Cost of goods completed Cost of goods sold
Direct labor
Applied manufacturing and transferred to during current
overhead finished goods period

4-3
Process Cost Flows
Two Sequential Production Departments
Work-in-Process Inventory Work-in-Process Inventory
Production Department A Production Department B
Direct material Cost of goods completed
Direct labor in department A and Cost of goods completed
Applied manufacturing transferred to and transferred to
overhead department B finished goods

Direct material
Direct labor
Applied manufacturing
overhead

Finished Goods Inventory Cost of Goods Sold

Cost of goods sold
during current period

4-4
Equivalent Units: A Key Concept
Costs
 Costs are
are accumulated
accumulated for
for aa period
period of
of time
time for
for
products
products inin work-in-process
work-in-process inventory.
inventory.
Products
 Products inin work-in-process
work-in-process inventory
inventory at at the
the
beginning
beginning andand end
end of of the
the period
period areare only
only partially
partially
complete.
complete.
Equivalent
 Equivalent units
units isis aa concept
concept expressing
expressing these
these
partially
partially completed
completed products
products as as aa smaller
smaller number
number ofof
fully
fully completed
completed products.
products.

4-5
Equivalent Units Example
Two half completed products are
equivalent to one completed product.

+ = l

So, 10,000 units that are 70% complete

are equivalent to 7,000 complete units.

4-6
Calculating and Using Equivalent Units of
Production
To calculate the direct materials and conversion costs per
equivalent unit for the period:

Materials
cost per Materials cost for the period
= Materials equivalent units for
equivalent
the period
unit
Conversion
cost per Conversion cost for the period
equivalent =
Conversion equivalent units for
the period
unit
4-7
Departmental Production Report
Analysis of Calculation
physical flow of equivalent
of units. units.

Production
Report

Computation Analysis of
of unit costs. total costs.

4-8
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.

4-9
Production Report Example
 Computation of unit costs
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units

$2.80 + $4.46
$200,700 ÷ 45,000 equivalent units
4-10
 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

4-11
 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

4-12
 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

All costs
Total costs accounted for accounted for $ 340,700

4-13
 MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Direct
Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000

Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

4-14
Departmental Production Report
Analysis of
physical flow
of units.
Calculation
of equivalent
units.
Computation
of unit costs.

Analysis of
total costs.

4-15
 Operation Costing
Operation costing employs some aspects
of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

4-16
 Operation Costing
Operation costing employs some aspects
of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Material costs are charged Conversion costs

to batches as in are assigned to batches
job-order costing. as in process costing.

4-17