UNIVERSITI MALAYA

SEMINAR WEEK6

Process Costing and Hybrid

Product-Costing Systems

Copyright ©Copyright © 2020 McGraw-Hill

2020 McGraw-Hill Education.
Education. All All rights
rights reserved. Noreserved. No reproduction
reproduction or without
or distribution distribution
priorwithout
writtenprior written
consent of consent of 4-1
McGraw-Hill/Irwin
McGraw-Hill Education. Education.
McGraw-Hill
 Process costing
What is Process Costing – production moves/flows
from one process (or dept) to the next until completion
occurs.
The output of one process will be the input for further
processing. The completed production of the last dept
is transferred to the FG.
The charge of the direct cost is treated the same as
done using JOC; DM and DL is charge to the
appropriate process; but much easier than the JOC as
the allocation of cost to many individual cost unit is
unnecessary. Similar treatment also goes for indirect
cost. The cost are attributable to the cost object (i.e.
process)
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
 Comparison of Job-Order Costing and
Process Costing (1 of 2)
Process
Process Job-Order
Costing
Costing Costing

 Used for production of large,

identical, low-cost items.
 Mass produced in automated
continuous production
processes.
 Costs cannot be directly traced to
each unit of product.
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-3
McGraw-Hill Education.
 Comparison of Job-Order Costing and
Process Costing (2 of 2)
Process
Process Job-Order
Costing
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-4
McGraw-Hill Education.
 Job-Order Costing vs. Process Costing

Job-order costing Process costing

Costs accumulated by Costs accumulated by
the job. department or process.
Work in process has a Work in process has a
job-cost sheet for each production report for each
job. batch of products.
Many unique, high-cost A few identical, low-cost
jobs. products.
Jobs built to customer Units continuously
order. produced for inventory in
automated process.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-5
McGraw-Hill Education.
 Differences Between Process and Job-
Order Costing (1 of 2)
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.

Finished
Direct Labor Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-6
McGraw-Hill Education.
 Differences Between Process and Job-
Order Costing (2 of 2)
The work-in-process
account consists of
individual products in a
Direct Material
process-cost system.

Direct Labor Finished

& Overhead Products Goods
(Conversion)

When direct labor is a relatively small amount Cost of

compared to material and overhead, it is often Goods
combined with overhead. Sold
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-7
McGraw-Hill Education.
 Process Cost Flows – Single
Department

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-8
McGraw-Hill Education.
 Journal Entry
Direct Material, Direct Labor, and
Overhead Applied

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-9
McGraw-Hill Education.
 Process Cost Flows –Two Departments

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-10
McGraw-Hill Education.
 Journal Entry
Dept. B – Transferred In Costs

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-11
McGraw-Hill Education.
 Journal Entry
Dept. B – Direct Material, Direct
Labor, and Manufacturing Overhead

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-12
McGraw-Hill Education.
 Journal Entry
Goods Completed

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-13
McGraw-Hill Education.
 Journal Entry
Cost of Goods Sold

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-14
McGraw-Hill Education.
 Equivalent Units: A Key Concept
By definition, units in work-in-process inventory at
both the beginning and end of the period are only
partially complete (finished units are transferred
out).
Equivalent units is a concept expressing these
partially completed units.
Equivalent units refers to the amount of
manufacturing activity that has been applied to a
batch of physical units.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-15
McGraw-Hill Education.
 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.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-16
McGraw-Hill Education.
 Equivalent Units Question 1

For the current period, Jones started 15,000

units and completed 10,000 units, leaving
5,000 units in process 30% complete. How
many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-17
McGraw-Hill Education.
 Equivalent Units Question 1 (Solved)

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 10,000 units + (5,000 units × .30)
= 11,500 equivalent units
c. 13,500
d. 15,000

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-18
McGraw-Hill Education.
 Equivalent Units Question 2

Jones incurred $27,600 in production costs

for the 11,500 equivalent units. What was
Jones’s cost per equivalent unit for the
period?
a. $1.84
b. $2.76
c. $2.40
d. $2.90

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-19
McGraw-Hill Education.
 Equivalent Units Question 2
(Solved)

Jones incurred $27,600 in production costs

for the 11,500 equivalent units. What was
Jones’s cost per equivalent unit for the
period?
a. $1.84
b. $2.76
$27,600 ÷ 11,500 equivalent units
c. $2.40
= $2.40 per equivalent unit
d. $2.90

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-20
McGraw-Hill Education.
 Calculating and Using Equivalent
Units of Production
To calculate the direct materials and conversion costs
per equivalent unit for the period:

Materials Materials cost for the period

cost per
=
equivalent Materials equivalent units for
unit
the period
Conversion
cost per Conversion cost for the period
equivalent =
unit Conversion equivalent units for
the period
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
4-21
McGraw-Hill Education.
 Departmental Production Report

Analysis of Calculation
physical flow of equivalent
of units units

Production
Report

Computation Analysis of
of unit costs total costs

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-22
McGraw-Hill Education.
 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.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-23
McGraw-Hill Education.
 Production Report Example (1 of 2)

 MVP Sports Equipment Company makes baseball gloves in

two departments, Cutting and Stitching.
 MVP uses the weighted-average process costing.

 Material is added at the beginning of the Cutting

Department, while conversion is incurred uniformly
throughout the process.
 Using the following information for the month of March, let’s
prepare a production report for the Cutting Department.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-24
McGraw-Hill Education.
 Production Report Example (2 of 2)
Work in process, March 1: 20,000 units Cost
Materials: 100% complete $
50,000
Conversion: 10% complete
7,200

Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units
Work in process, March 31: 10,000 units
Materials 100% complete
Conversion 50% complete

Costs incurred during March

Materials cost 90,000
Conversion costs:
Direct labor $ 86,000
Applied manufacturing overhead 107,500
Total conversion costs
193,500
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-25
Total costs to account for McGraw-Hill Education. $ 340,700
 Production Report Example – Units
Accounted For
① Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-26
McGraw-Hill Education.
 Production Report Example –
Equivalent Units (1 of 2)
② Calculation of Equivalent Units
Conversion Equivalent Units
Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000 50% of 10,000 units

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

Beginning inventory % is not used in weighted-average method.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-27
McGraw-Hill Education.
 Production Report Example -
Equivalent Units (2 of 2)
② Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
100% of 10,000 units, all
Total units to account for 50,000
material added at beginning
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

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-28
McGraw-Hill Education.
 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
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-29
McGraw-Hill Education.
 Production Report Example – Total
Costs (1 of 2)
Analysis of total costs

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-30
McGraw-Hill Education.
 Production Report Example – Total
Costs (2 of 2)
Analysis of total costs

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-31
McGraw-Hill Education.
 Production Report Example – Costs
Accounted For
Analysis of total costs

All costs
accounted for

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-32
McGraw-Hill Education.
 MVP Sports Equipment Report Example
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

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-33
McGraw-Hill Education.
 Departmental Production Report
Analysis of
physical flow
of units
Calculation
of equivalent
units
Computation
of unit costs

Analysis of
total costs

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-34
McGraw-Hill Education.
 Operation Costing (1 of 2)
Operation costing employs some aspects
of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-35
McGraw-Hill Education.
 Operation Costing (2 of 2)
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.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of 4-36
McGraw-Hill Education.
 Loss (Normal and abnormal)
Certain losses are inherent in the production process
and cannot be eliminated.
E.g, liquid may evaporated, part of cloth cut to make
suit may be lost, losses occur in cutting wood to make
furniture.
The loss occur under efficient operating conditions is
referred to normal loss.
In addition to losses cannot be avoided, there are some
losses that are not expected to occur under efficient
operating conditions, e.g. improper mixing of
ingredients, incorrect cutting of cloth, leaking of liquid
container etc.
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
 McGraw-Hill Education.
 Loss (Normal and abnormal)
Normal loss and abnormal loss requires different
accounting treatment.
Normal loss – the cost is absorbed by the completed
production
Abnormal loss - the losses will not be included in the
process cost and reported separately as a period cost in
profit and loss account at the end of the period.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
 Normal loss treatment
Example (1);
Input: 1200 litres @$1.00
Completed productions transferred to next process or
finished goods store : 900 litres @ $1.20
Normal loss: 200 litres
How to record these losses in Process account?
Units CPU Total($) Units CPU Total($)
Input 1200 1.00 1200 Complete and 900 1.20 1080
cost transferred out
Normal loss 200 - -
Abnormal loss 100 1.20 120
1200 1200

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
 Accounting for sale of scrap
CPU =
Example (2)
1200 units were introduced into a process at a cost of
$1200. the output from the process was 900 units. The
normal loss is one-sixth of the input, and any lost units
have a scrap value of $0.50 per unit.
CPU = = $1.10

Units CPU Total($) Units CPU Total($)

Input 1200 1.00 1200 Complete and 900 1.10 990
cost transferred out
Normal loss 200 0.50 100
Abnormal loss 100 1.10 110
1200 1200 1200
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
1200
McGraw-Hill Education.
 Elements of costs with different
degrees of completion
Not all of the element of costs may have reached the
same degree of completion.
There are 2 circumstances can be occurred to influence
the degree of completion:
1. Materials added at the start of the process; the
material may be fully completed, but the conversion
cost may be partially completed (example 3).
2. Materials added at the end of the process (example
4);

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
  Example (3):
The following information refers to Process A:
OWIP nil
Unit introduced into the process 14000
Units completed and transferred out to Process B 10000
CWIP 4000
Materials added during the period $70000
Conversion cost added during the period $48000

Materials introduced at the start of the process, and conversion cost

are applied uniformly throughout the process. The CWIP is
estimated to be 50% complete.

Required:
To compute the cost of completed production transferred to Process
B and the CWIP?
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
  Cost of completed production:
i. Show the CPU table
Element Total cost Completed CWIP EU CPU ($)
units
Material 70000 10000 4000 14000 $5.00
Conversion 48000 10000 2000 (50%) 12000 $4.00
118000 $9.00

ii. Show the CWIP value

CWIP
Materials (4000 x $5) $20000
Conversion (2000x$4) 8000
Completed units (10000x$9) 90000
118000

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
  Cost of completed production:
iii. Process A account
Total Completed CWIP
units
Material 70000 Completed 90 000
and
transferred
to B
Conversion 48000 CWIP 28000
118000 118000
OWIP 28000

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
  Example (4): previous process
The following information refers to Process B:
OWIP nil
Unit transferred from Process A 10000
CWIP 1000
Complete and transferred to FG 9000
Cost for the period:
Cost transferred from Process A $90000
Conversion cost $57000
Materials $36000

Materials introduced at the end of the process, and conversion cost are applied
uniformly throughout the process. The CWIP is estimated to be 50% complete.

Required:
To compute the cost of completed production transferred to FG and the cost of
CWIP?

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
  Cost of completed production:
i. Show the CPU table
Element Total cost Completed CWIP EU CPU ($)
units
Previous 90000 9000 1000 10000 9
process
Material 36000 9000 - 9000 4
Conversion 57000 9000 500 (50%) 9500 6
183000 19

ii. Show the CWIP value

CWIP $
Previous process ($9x1000) 9000
Materials (-x $4) -
Conversion (500x$6) 3000
Completed units ($19x9000) 171000
Total 183000
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
 iii. Process B account

Total Completed units CWIP

Previous process 90000 Completed and 171000
transferred to FG
Material 36000 CWIP 12000
Conversion 57000
183000 183000

Let’s try other comprehensive example for WA method…

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
 FIFO Method
It assumes that the OWIP is the first group of units to be
processed and completed during the current period.
The OWIP is charged separately to completed production, and
the CPU is based only on the current period cost and
production for the current period.
The CWIP is assumed to come from the new units started
during the period

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
 EU using FIFO method
Example (5):
OWIP; cost $39300
DM (500 units;60% completed)
Conversion (500 units; 40% completed)
Units started and completed (1000 units)
Current period cost:
DM $35190
Conversion $74880
CWIP:
DM (600units; 30% completed)
Conversion (600 units; 50% completed)
Required: Calculate the CPU
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
 EU & CPU (FIFO)
Material Conversion
OWIP: Units
DM 500x.4 200
Conversion 500x.6 300
Units completed 1000 1000
and transferred
out
CWIP:
DM 600x.3 180
Conversion 600x.5 300
EU 1380 1600
Current cost $35190 $74880
CPU($) 25.50 46.80

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.
 Cost Sheet
Cost of completed production:
OWIP 39300
DM 25.50x1200
30600
Conversion 46.8x1300
60840
130740
CWIP:
DM 180x$25.5
4590
Conversion 300x$46.8
14040
18630

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of
McGraw-Hill Education.