4-1

Systems Design:
Process Costing

Chapter Four
4-2
Similarities Between Job-Order and
Process Costing

• Both systems assign material, labor and overhead costs

to products and they provide a mechanism for
computing unit product cost.
• Both systems use the same manufacturing accounts,
including Manufacturing Overhead, Raw Materials, Work
in Process, and Finished Goods.
• The flow of costs through the manufacturing accounts is
basically the same in both systems.
4-3
Differences Between Job-Order and
Process Costing

• Process costing is used when a single product is

produced on a continuing basis or for a long period of
time. Job-order costing is used when many different
jobs are worked on each period.
• Process costing systems accumulate costs by
department. Job-order costing systems accumulate
costs by individual jobs.
• Process costing systems compute unit costs by
department. Job-order costing systems compute unit
costs by job on the job cost sheet.
4-4

Quick Check 

Process costing is used for products that are:

a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
4-5

Quick Check 

Process costing is used for products that are:

a. Different and produced continuously.

b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
4-6

Processing Departments

Any unit in an organization where materials, labor or

overhead are added to the product.

The activities performed in a processing

department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be
homogeneous.
4-7

Learning Objective 1

Record the flow of

materials, labor, and
overhead through a
process cost system.
4-8
Comparing Job-Order
and Process Costing

Direct
Materials

Work in Finished
Direct Labor
Process Goods

Manufacturing Cost of
Overhead Goods
Sold
4-9
Comparing Job-Order
and Process Costing

Costs are traced and

applied to individual
Direct jobs in a job-order
Materials cost system.

Finished
Direct Labor Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
4-10
Comparing Job-Order
and Process Costing

Costs are traced and

applied to
Direct departments in a
Materials process cost system.

Processing Finished
Direct Labor
Department Goods

Manufacturing Cost of
Overhead Goods
Sold
T-Account and Journal Entry Views of Cost
4-11

Flows

For purposes of this example,

assume there are two processing
departments – Departments A
and B.
We will use T-accounts and
journal entries.
4-12
Process Cost Flows
(in T-account form)

Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B

•Direct
Materials
 Process Cost Flows
4-13

(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
4-14
Process Cost Flows
(in T-account form)

Work in Process
Department A
Wages Payable
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor
 Process Costing
4-15

(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
4-16
Process Cost Flows
(in T-account form)

Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
 Process Costing
4-17

(In journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
4-18
Process Cost Flows
(in T-account form)

Work in Process Work in Process

Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labor Labor
•Applied
•Applied
Overhead
Overhead
•Transferred
from Dept. A
 Process Costing
4-19

(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
4-20
Process Cost Flows
(in T-account form)

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
 Process Costing
4-21

(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
4-22
Process Cost Flows
(in journal entry form)

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labor
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold
•Cost of
Goods
Sold
 Process Costing
4-23

(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX
To record cost of goods sold.
4-24

Equivalent Units of Production

Equivalent units are the product of the number of partially

completed units and the percentage completion of those
units.

We need to calculate equivalent units because a

department usually has some partially completed units in
its beginning and ending inventory.
4-25

Equivalent Units – The Basic Idea

Two half completed products are equivalent

to one completed product.

+ =
1

So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
4-26

Quick Check 

For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000 units
units and
and
completed
completed 10,000
10,000 units,
units, leaving
leaving 5,000
5,000 units
units in
in
process
process 30
30 percent
percent complete.
complete. HowHow many
many equivalent
equivalent
units
units of
of production
production did
did Jones
Jones have
have for
for the
the period?
period?

a.
a. 10,000
10,000
b.
b. 11,500
11,500
c.
c. 13,500
13,500
d.
d. 15,000
15,000
4-27

Quick Check 

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
10,000 units + (5,000 units × 0.30)
d. 15,000 = 11,500 equivalent units
4-28

Calculating Equivalent Units

Equivalent units can be calculated two ways:

The First-In, First-Out Method – FIFO is covered in the
appendix to this chapter.
The Weighted-Average Method – This method will be
covered in the main portion of the chapter.
4-29

Learning Objective 2

Compute the equivalent

units of production using
the weighted-average
method.
 Equivalent Units of Production
4-30

Weighted-Average Method

The weighted-average method . . .

• Makes no distinction between work done in prior or
current periods.
• Blends together units and costs from prior and current
periods.
• Determines equivalent units of production for a
department by adding together the number of units
transferred out plus the equivalent units in ending
work in process inventory.
4-31

Treatment of Direct Labor

Direct
Materials Direct labor costs
may be small
in comparison to
Dollar Amount

other product
Conversion costs in process
cost systems.
Direct
Labor

Type of Product Cost

4-32

Treatment of Direct Labor

Direct
Direct labor costs
Materials
may be small
Conversion in comparison to
Dollar Amount

other product
costs in process
cost systems.

Type of Product Cost

Direct
Direct labor
labor and
and manufacturing
manufacturing overhead
overhead may
may be
be
combined
combined into
into one
one product
product cost
cost called
called conversion
conversion..
4-33

Weighted-Average Example

Double Diamond Skis reported the following activity in

Shaping and Milling Department for the month of May:

Percent Completed
Shaping and Milling Department Units Materials Conversion
Beginning work in process 200 55% 30%

Units started into production in May 5,000

Units completed during May and 4,800 100% 100%

transferred to the next department

Ending working process 400 40% 25%

4-34

Weighted-Average Example

The first step in calculating the equivalent units is to

identify the units completed and transferred out of the
Department in May (4,800 units)

Materials Conversion
Units completed and transferred
to the next department 4,800 4,800
4-35

Weighted-Average Example

The second step is to identify the equivalent units of

production in ending work in process with respect to
materials for the month (160 units) and add this to the
4,800 units from step one.

Materials Conversion
Units completed and transferred
to the next department 4,800 4,800
Work in process, June 30:
400 units × 40% 160

Equivalent units of Production in

during the month of May 4,960
4-36

Weighted-Average Example

The third step is to identify the equivalent units of

production in ending work in process with respect to
conversion for the month (100 units) and add this to the
4,800 units from step one.

Materials Conversion
Units completed and transferred
to the next department 4,800 4,800
Work in process, June 30:
400 units × 40% 160
400 units × 25% 100
Equivalent units of Production in
during the month of May 4,960 4,900
4-37

Weighted-Average Example

Equivalent
Equivalent units
units of
of production
production always
always equals:
equals:
Units
Units completed
completed and and transferred
transferred
++ Equivalent
Equivalent units
units remaining
remaining inin work
work in
in process
process

Materials Conversion
Units completed and transferred
to the next department 4,800 4,800
Work in process, June 30:
400 units × 40% 160
400 units × 25% 100
Equivalent units of Production
during the month of May 4,960 4,900
4-38

Learning Objective 3

Compute the cost per

equivalent unit using
the weighted-average
method.
4-39

Compute and Apply Costs

Beginning work in process: 200 units

Materials: 55% complete $ 9,600

Conversion: 30% complete 5,575

Production started during May 5,000 units

Production completed during May4,800 units

Costs added to production in May

Materials cost $ 368,600
Conversion cost 350,900

Ending work in process 400 units

Materials: 40% complete
Conversion: 25% complete
4-40

Compute and Apply Costs

The formula for computing the cost per equivalent

unit is :
4-41

Compute and Apply Costs

Here is a schedule with the cost and equivalent unit

information.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit
4-42

Compute and Apply Costs

Here is a schedule with the cost and equivalent unit

information.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25 $ 72.75
Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 ÷ 4,900
$378,200 unitsunits
÷ 4,960 = $72.75
= $76.25
4-43

Learning Objective 4

Assign costs to units

using the weighted-
average method.
 4-44

Applying Costs

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200
 4-45

Applying Costs

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200
4-46

Applying Costs

Shaping and Milling Department

Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
 4-47
Computing the Cost of Units
Transferred Out
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200
 4-48
Computing the Cost of Units
Transferred Out
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200
 4-49
Computing the Cost of Units
Transferred Out
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost per equivalent unit $ 76.25 $ 72.75
Cost of ending work in process inventory $ 12,200 $ 7,275 $ 19,475

Units completed and transferred out:

Units transferred to the next department 4,800 4,800
Cost per equivalent unit $ 76.25 $ 72.75
Cost of units transferred out $ 366,000 $ 349,200 $ 715,200
4-50

Reconciling Costs

Shaping and Milling Department

Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory $ 15,175
Costs added to production during the period 719,500
Total cost to be accounted for $ 734,675

Cost accounted for as follows:

Cost of ending work in process inventory $ 19,475
Cost of units transferred out 715,200
Total cost accounted for $ 734,675
4-51

Reconciling Costs

Shaping and Milling Department

Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory $ 15,175
Costs added to production during the period 719,500
Total cost to be accounted for $ 734,675

Cost accounted for as follows:

Cost of ending work in process inventory $ 19,475
Cost of units transferred out 715,200
Total cost accounted for $ 734,675
4-52

Operation Costing

Operation cost is a hybrid of job-order and process

costing because it possesses attributes of both
approaches

Operation
Operation costing
costing is
is
commonly
commonly used
used when
when
batches
batches of
of many
many different
different
products
products pass
pass through
through the
the
same
same processing
processing
department.
department.
4-53

End of Chapter 4