CH 21

Accounting Principles
Thirteenth Edition
Weygandt ● Kimmel ● Kieso
Chapter 21
Process Costing
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Chapter Outline
Learning Objectives
LO 1 Discuss the uses of a process cost system and how it
compares to a job order system.
LO 2 Explain the flow of costs in a process cost system
and the journal entries to assign manufacturing
costs.
LO 3 Compute equivalent units.
LO 4 Complete the four steps to prepare a production
cost report.
Copyright ©2018 John Wiley & Sons, Inc. 2

Overview of Process Cost System
LEARNING OBJECTIVE 1
Discuss the uses of a process cost system and how it
compares to a job order system.
Uses of Process Cost Systems
• To apply costs to similar products that are mass-
produced in a continuous fashion
• Examples include the production of cereal, paint,
manufacturing steel, oil refining and soft drinks
LO 1 Copyright ©2018 John Wiley & Sons, Inc. 3

Uses of Process Cost Systems (1 of 3)

Which of the following items is not a characteristic of a process
cost system:
a. Once production begins, it continues until the finished
product emerges.
b. The focus is on continually producing homogenous products.
c. When the finished product emerges, all units have precisely
the same amount of materials, labor, and overhead.
d. The products produced are heterogeneous in nature.

Which of the following items is not a characteristic of a process
cost system:
a. Once production begins, it continues until the finished
product emerges.
b. The focus is on continually producing homogenous products.
c. When the finished product emerges, all units have precisely
the same amount of materials, labor, and overhead.
d. Answer: The products produced are heterogeneous in
nature.

Process Cost for Service Companies
Service companies that provide individualized,
nonroutine services will probably benefit from using a
job order cost system.
Those that perform routine, repetitive services will
probably be better off with a process cost system.

Similarities and Differences Between Job
Order Cost and Process Cost Systems
Job Order Cost Process Cost
• Costs assigned to each • Costs tracked through a
job series of manufacturing
• Products have unique processes or
characteristics departments
• Products are uniform or
relatively homogeneous
and produced in a large
volume

Job Order Cost and Process Cost Flow (1 of 3)

Similarities Differences
1. Manufacturing cost 1. Number of work in
elements. process accounts used.
2. Accumulation of the 2. Documents used to
costs of materials, track costs.
labor, and overhead. 3. Point at which costs are
3. Flow of costs. totaled.
4. Unit cost computations.

Feature Job Order Cost System Process Cost System
Work in process One work in process Multiple work in process
accounts account accounts
Documents used Job cost sheets Production cost reports
Determination of total
manufacturing costs Each job Each period
Unit-cost Cost of each job ÷ Units Total manufacturing costs ÷

computations produced for the job Equivalent units produced
during the period

Do It! 1: Job Order and Process Cost
Indicate whether the following are true or false.

1. A law firm is likely to use process costing for major False
lawsuits.
2. A manufacturer of paintballs is likely to use process True
costing.
3. Both job order and process costing determine False
product costs at the end of a period of time, rather
than when a product is completed.
4. Process costing does not keep track of manufacturing False
overhead.
Process Cost Flow and Assigning Costs
Process Cost Flow
Tyler Company manufactures roller blade and skateboard
wheels that it sells to manufacturers and retail outlets.
Manufacturing consists of two processes: machining and
assembly. The Machining Department shapes, hones, and
drills the raw materials. The Assembly Department
assembles and packages the wheels.

Process Cost Flow
Explain the flow of costs in a process cost system and the
journal entries to assign manufacturing costs.

Assigning Manufacturing Costs (1 of 10)
• Accumulation of cost of materials, labor, and overhead
is same as in job order costing.
o Debit Raw Materials Inventory for purchases of raw
materials
o Debit Factory Labor for factory labor incurred
o Debit Manufacturing Overhead for overhead cost
incurred
• Assignment of manufacturing costs to WIP in process
cost is different than job order cost.

Material Costs
• A process cost system requires fewer material requisition
slips than a job order cost system.
• Materials are used for processes and not specific jobs.
• Requisitions are for larger quantities of materials.

Material Costs
Illustration: Tyler Company adds materials at the beginning of
each process. Suppose Tyler adds $50,000 of direct materials
to the machining process and $20,000 of direct materials to
the assembly process. Tyler makes the following entry to
record the materials used.
Work in Process—Machining 50,000
Work in Process—Assembly 20,000
Raw Materials Inventory 70,000

Factory Labor Costs
• Time tickets may be used in both systems.
• All labor costs incurred within a production department are
a cost of processing.

Factory Labor Costs
Illustration: Suppose that Tyler Company incurs factory labor
charges of $20,000 in the machining process and $13,000 in
the assembly process. The entry to assign labor costs to
machining and assembly for Tyler is:

Factory Labor 33,000

Manufacturing Overhead Costs
• Objective of assigning overhead is to allocate overhead to
production departments on objective and equitable basis
• Use activity that “drives” or causes costs
• Machine time used - primary driver

Manufacturing Overhead Costs
Illustration: Assume that based on machine hours that Tyler
Company allocates overhead of $45,000 to the machining
process and $17,000 to the assembly process. Tyler’s entry to
allocate overhead to the two processes is:

Manufacturing Overhead 62,000

Transfers to Next Department
Suppose Tyler transferred goods with a recorded cost of
$87,000 from machining to assembly. Tyler makes the
following entry.


Transfers to Next Department
Assembly Department completes unit with a recorded cost of
$114,000 and then transfers them to the finished goods
warehouse. The entry for this transfer is as follows.
Finished Goods Inventory 114,000
Tyler Company sells finished good with a recorded cost of $27,000.

It records the cost of goods sold as follows.
Cost of Goods Sold 27,000

In making journal entries to assign raw materials costs, a
company using process costing:
a. debits Finished Goods Inventory.
b. often debits two or more work in process accounts.
c. generally credits two or more work in process accounts.
d. credits Finished Goods Inventory.

In making journal entries to assign raw materials costs, a
company using process costing:
a. debits Finished Goods Inventory.
b. Answer: often debits two or more work in process
accounts.
c. generally credits two or more work in process accounts.
d. credits Finished Goods Inventory.

Do It! 2: Process Costing (1 of 4)
Ruth Company manufactures ZEBO through two processes:
blending and bottling. In June, raw materials used were
Blending $18,000 and Bottling $4,000. Factory labor costs
were Blending $12,000 and Bottling $5,000. Manufacturing
overhead costs assigned were Blending $6,000 and Bottling
$2,500. The company transfers units completed at a cost of
$19,000 in the Blending Department to the Bottling
Department. The Bottling Department transfers units
completed at a cost of $11,000 to Finished Goods.
Journalize the assignment of these costs to the two processes
and the transfer of units as appropriate.

Journalize the assignment of these costs to the two processes
and the transfer of units as appropriate.
To Record Material Used:
Work in Process—Blending 18,000

Work in Process—Bottling 4,000
Raw Materials Inventory 22,000

To Assign Factory Labor to Production:
Factory Labor 17,000
To Assign Overhead to Production:
Manufacturing Overhead 8,500

To Record Transfer of Units to Bottling Department:
To Record Transfer of Units to Finished Goods:


Equivalent Units
Compute equivalent units.
Illustration: Suppose you work in the office of your college’s

president, and she asks you to compute the cost of instruction per
full-time equivalent student at your college. The college’s vice
president for finance provides the following information.
Costs:
Total cost of instruction $9,000,000
Student population:
Full-time students 900
Part-time students 1,000

Equivalent Units (1 of 3)
Illustration: Part-time students take 60% of the classes of a
full-time student during the year. Compute the number of full-
time equivalent students per year.
Full - Time Equivalent Units Full - Time
students + of part - time student = Equivalent Students
900 + 1,000  60%  = 1,500
Cost of instruction per full-time equivalent student =

Total cost of instruction $9,000,000
Number of full-time equivalent students ÷ 1,500
$ 6,000

Weighted-Average Method (1 of 2)
• Considers degree of completion (weighting) of units
completed and transferred out and units in ending work
in process
• Most widely used method
• Beginning work in process not part of computation of
equivalent units
Units Completed Equivalent Units Equivalent
and Transferred + of Ending Work = Units of
out in Process Production

Weighted-Average Method (2 of 2)
Illustration: The entire output of Sullivan Company’s Blending
Department consists of ending work in process of 4,000 units
which are 60% complete as to materials, labor, and overhead.
Calculate the equivalent units of production.
Completed units 0
Work in process equivalent units (4,000 × 60%) + 2,400
Equivalent units 2,400

Refinement on the Weighted-Average Method
Illustration: Kellogg Company has produced Eggo®

Waffles since 1970. Three departments produce these
waffles: Mixing, Baking, and Freezing/Packaging. The
Mixing Department combines dry ingredients, including
flour, salt, and baking powder, with liquid ingredients,
including eggs and vegetable oil, to make waffle batter.
Illustration 21.9 provides information related to the
Mixing Department at the end of June.

Refinement Weighted-Average Method (1 of 3)
Illustration: Information related to Mixing Department at

the end of June.
Percentage Complete
Physical Conversion
Units Materials Costs
Work in process, June 1 100,000 100% 70%
Started into production 800,000
Total units to be accounted for 900,000
900,000 Double underline
Units transferred out 700,000

Work in process, June 30 200,000 100% 60%
Total units accounted for 900,000 Double
900,000
underline

Refinement Weighted-Average Method (2 of 3)
Mixing Department Equivalent Units

Conversion
Materials Costs
Units transferred out 700,000 700,000
Work in process, June 30
200,000 × 100% 200,000
200,000 × 60% 120,000
Total equivalent units 900,000 double underline 820,000 Double underline
900,000 820,000
• Conversion costs are labor costs plus overhead costs.

• Beginning work in process is not part of the equivalent-units-of-
production formula.
Refinement Weighted-Average Method (3
of 3)
Units Completed Equivalent Units Equivalent Units

and Transferred + of Ending Work = of Production-
Out-Materials in Process-Materials Materials
Units Completed Equivalent Units of Equivalent Units
and Transferred Ending Work in of Production-
Out-Conversion + Process-Conversion = Conversion
Cost Costs Costs

The Mixing Department’s output during the period consists of
20,000 units completed and transferred out, and 5,000 units
in ending work in process 60% complete as to materials and
conversions costs. Beginning inventory is 1,000 units, 40%
complete as to materials and conversion costs. The equivalent
units of production are:
a. 22,600.
b. 23,000.
c. 24,000.
d. 25,000.

The Mixing Department’s output during the period consists of
20,000 units completed and transferred out, and 5,000 units
in ending work in process 60% complete as to materials and
conversions costs. Beginning inventory is 1,000 units, 40%
complete as to materials and conversion costs. The equivalent
units of production are:
a. 22,600.
b. Answer: 23,000 (20,000 x (5,000 x .6)).
c. 24,000.
d. 25,000.

Do It! 3: Equivalent Units (1 of 3)
The fabricating department Outdoor Essentials has the
following production and cost data for the current month.
Beginning Work in Ending Work in
Process Units Transferred Out Process
–0– 15,000 10,000
Materials are entered at the beginning of the process. The

ending work in process units are 30% complete as to
conversion costs. Compute the equivalent units of production
for (a) materials and (b) conversion costs.

–0– 15,000 10,000
Compute the equivalent units of production for (a) materials and

(b) conversion costs.
Ending work in process units 10,000
25,000

–0– 15,000 10,000
Compute the equivalent units of production for (a) materials and

(b) conversion costs.
Equivalent unit in ending WIP (10,000 × 30%) 3,000
18,000

Production Cost Report
Complete the four steps to prepare a production cost
report.
A production cost report is the
• Key document used to understand activities
• Prepared for each department and shows Production
Quantity and Cost data
• Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
Production Cost Report (1 of 5)
Flow of costs to make an Eggo® Waffle and the related
production cost reports for each department.


Compute the Physical Unit Flow (Step 1)
• Physical units - actual units to be accounted for during
a period, regardless of work performed
• Total units to be accounted for - units started (or
transferred) into production during period + units in
production at beginning of period
• Total units accounted for - units transferred out during
period + units in process at end of period

Compute Physical Unit Flow (Step 1) (1 of 2)
Mixing Department
Physical Units
Units to be accounted for
Work in process, June 1 100,000
Started (transferred) into production 800,000
Total units 900,000 Double Border
900,000
Units accounted for
Completed and transferred out 700,000
Total units 900,000 Double Border
900,000

Equivalent Units of Production (Step 2) (1 of 2)
Mixing Department
• Department adds materials at beginning of process
• Incurs conversion costs uniformly during the process
Equivalent Units
Materials Conversion Costs
Units transferred out 700,000 700,000
200,000 × 100% 200,000
200,000 × 60% 120,000
Total equivalent units 900,000 Double underline 820,000 Double underline
900,000 820,000
Equivalent Units of Production (Step 2) (2 of 2)
• Costs expressed in terms of equivalent units of

production
• When equivalent units of production are different for
materials and for conversion costs, three unit costs are
computed:
1. Materials
2. Conversion
3. Total Manufacturing

Compute Unit Production Costs (Step 3) (1 of 3)
Compute total materials cost related to Eggo® Waffles:

Direct materials costs $ 50,000
Cost added to production during June
Direct material cost 400,000
Total material costs $ 450,000
Total Material Equivalent Units Unit Material

÷ =
Cost of Materials Cost
$450,000 ÷ 900,000 = $0.50
Compute total materials cost related to Eggo® Waffles:

Conversion costs $ 35,000
Cost added to production during June
Conversion costs 170,000
Total material costs $ 205,000
Total Conversion Equivalent Units of Unit Conversion

÷ =
Cost Conversion Costs Cost
$205,000 ÷ 820,000 = $0.25

÷ =
Costs Conversion Costs Cost
$205,000 ÷ 820,000 = $0.25
Compute total manufacturing costs per unit:

Unit Materials Unit Conversion Total Manufacturing
+ =
Cost Cost Cost per Unit
$0.50 + $0.25 = $0.75

Prepare a Cost Reconciliation Schedule (Step 4)
Kellogg charged total costs of $655,000 to the Mixing Department

in June, calculated as follows.
Costs to be accounted for

Work in process, June 1 $ 85,000
Direct material cost 570,000
Total costs $ 655,000

Cost Reconciliation Schedule (Step 4) (1 of
2)

Cost Reconciliation Schedule (Step 4) (2 of
2)

Largo Company has unit costs of $10 for materials and $30 for
conversion costs. If there are 2,500 units in ending work in
process, 40% complete as to conversion costs and fully
complete as to materials cost, the total cost assignable to the
ending work in process inventory is:
a. $45,000.
b. $55,000.
c. $75,000.
d. $100,000.

Largo Company has unit costs of $10 for materials and $30 for
conversion costs. If there are 2,500 units in ending work in
process, 40% complete as to conversion costs and fully
complete as to materials cost, the total cost assignable to the
ending work in process inventory is:
a. $45,000.
b. Answer: $55,000 (($10 x 2,500) + ($30 x 2,500 x .40)).
c. $75,000.
d. $100,000.

Costing Systems – Final Comments
• Companies often use a combination of a process cost
and a job order cost system.
• Called operations costing, this hybrid system is similar
to process costing in its assumption that standardized
methods are used to manufacture the product.
• Product may have some customized, individual features
that require use of a job order cost system.

Do It! 4: Cost Reconciliation Schedule
In March, Rodayo Manufacturing had the following unit production
costs: materials $6 and conversion costs $9. On March 1, it had
zero work in process. During March, Rodayo transferred out 12,000
units. As of March 31, 800 units that were 25% complete as to
conversion costs and 100% complete as to materials were in ending
work in process. Assign the costs to the units transferred out and in
process.
Costs transferred out $ 180,000
Work in process, March 31
Materials (800 × $6) $4,800
Conversion costs (200 × $9) 1,800 6,600
Total costs $186,600

Appendix 21A: FIFO Method for Equivalent
Units
Equivalent Units Under FIFO
Equivalent units are the sum of the work performed to:
1. Finish units of beginning work in process inventory.
2. Complete units started into production during the
period (referred to as units started and completed).
3. Start, but only partially complete, units in ending work
in process inventory.

Equivalent Units Under FIFO (1 of 2)
Mixing Department
Physical Units
Work in process, June 1 (40% complete) 500
Total units 85,00 Double underline
8,500
Units to be accounted
Work in process, June 30 (75% complete) 400
8,500

Equivalent Units Under FIFO (2 of 2)
Mixing Department
Work Added Equivalent

Production Data Physical Units This Period Units
Work in process, June 1 500 60% 300
Started and completed 7,600 100% 7,600
Work in process, June 30 400 75% 300
Total 8,500 8,200

Comprehensive Example FIFO

Compute Physical Unit Flow (Step 1) (2 of 2)
Mixing Department
Physical Units
900,000
900,000

Compute Physical Unit Flow (1)
Mixing Department
Physical Units
Total units 900,000900,000
Double Border
Completed and transferred out
Started and completed 600,000
700,000
Total units 900,000
900,000 Double Border

Equivalent Units of Production (2) (1 of 2)
Equivalent Units for Materials
Kellogg adds materials at beginning of the process. 100% of
materials costs has been incurred on ending W IP.
Mixing Department—Materials
Materials
Physical Added Equivalent
Production Data Units This Period Units
Work in process, June 1 100,000 0% 0
Work in process, June 30 200,000 100% 200,000
Total 900,000 800,000

Equivalent Units of Production (2) (2 of 2)
Equivalent Units for Conversion Costs
The Mixing Department required 30,000 equivalent units (100,000 units
× 30%) of conversion costs to complete the beginning inventory. In
addition, 200,000 units of ending work in process were 60 percent
complete in terms of conversion costs.
Mixing Department—Conversion Costs
Physical Word Added Equivalent
Production Data Units This Period Units
Total 900,000 750,000

Compute Unit Production Costs (3) (1 of 2)
Under the FIFO method, the unit costs of production are

based entirely on the production costs incurred during
the month.
Direct materials $400,000
Conversion costs 170,000
Total $570,000

Compute Unit Production Costs (3) (2 of 2)
Compute unit cost for the following:
Total Materials Equivalent Units of Unit Materials
÷ =
Cost Materials Cost
$400,000 ÷ 800,000 = $0.50

÷ =
Cost Conversion Cos ts Cost
$170,000 ÷ 750,000 = $0.227
Total Materials Unit Conversion Manufacturing

+ =
Cost Cost Cost per Unit
$0.50 + $0.227 = $0.727
Prepare Cost Reconciliation Schedule (4) (1 of 2)
Kellogg is now ready to determine the cost of goods

transferred out of the Mixing Department to the Baking
Department and the costs in ending work in process. The
total costs charged to the Mixing Department in June are
as follows.
Costs to be accounted for
Work in process, June 1 $ 85,000
Started into production 570,000
Total costs $ 655,000

Prepare Cost Reconciliation Schedule (4) (2 of 2)

Preparing the Production Cost Report (1 of 2)
• Internal document for management that shows

production quantity and cost data for a production
department
• Provides a basis for evaluating productivity of a
department
• Managers can use cost data to assess whether unit
costs and total costs are reasonable
• Top management can also judge whether current
performance is meeting planned objectives

Preparing the Production Cost Report (2 of 2)

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from the use of the information contained herein.
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Accounting Principles

Copyright ©2018 John Wiley & Sons, Inc. 2

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 3

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 4

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 5

LO 1 Copyright ©2018 John Wiley & Sons, Inc. 6

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Unit-cost Cost of each job ÷ Units Total manufacturing costs ÷

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Indicate whether the following are true or false.

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Work in Process—Machining 20,000

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Work in Process—Machining 45,000

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Work in Process—Assembly 87,000

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Tyler Company sells finished good with a recorded cost of $27,000.

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Work in Process—Blending 18,000

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To Record Transfer of Units to Finished Goods:

Finished Goods Inventory 11,000

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Illustration: Suppose you work in the office of your college’s

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Cost of instruction per full-time equivalent student =

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Illustration: Kellogg Company has produced Eggo®

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Illustration: Information related to Mixing Department at

Units transferred out 700,000

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Mixing Department Equivalent Units

• Conversion costs are labor costs plus overhead costs.

Units Completed Equivalent Units Equivalent Units

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Materials are entered at the beginning of the process. The

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Compute the equivalent units of production for (a) materials and

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Compute the equivalent units of production for (a) materials and

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