Chapter 16 – Process Costing
Objective 1: Discuss the uses of a process cost system and how it compares to a
job order system.
Use to apply costs to ___________products that are
_________________ in a continuous fashion.
Examples include the production of:______________________________
__________________________________________________________
Question:
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 unique in nature.
Similarities Differences
Practice: Indicate whether the following statements are true or false.
1. A law firm is likely to use process costing for major lawsuits.
2. A manufacturer of paintballs is likely to use process costing.
3. Both job order and process costing determine 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 overhead.
Objective 2: Explain the flow of costs in a process cost system and the journal
entries to assign manufacturing costs.
Tyler Company manufactures roller blade and skateboard wheels that it sells to
manufactures 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.
Assigning Manufacturing Costs
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.
Journal entry to record materials used Example:
Factory Labor Costs:
Time tickets may be used in both systems.
All labor costs incurred within a production department are a cost of processing.
The journal entry to record factory labor costs:
Manufacturing Overhead Costs:
Objective of assigning overhead is to allocate overhead to production
departments on objective and equitable basis.
Use the activity that “drives” or causes the costs.
Machine time used - primary driver.
Journal entry to allocate overhead:
TRANS FERS
Mo nthly Entry to trans fe r g o ods to ne xt de partme nt:
Work in P roce ss —Ass e mbly XXXXX
Work in P roce ss —Machining XXXXX
Entry to trans fe r co mple te d g o ods to Finis he d Go ods :
Finis he d Goods Inve ntory XXXXX
Work in P roce ss —Ass e mbly XXXXX
Entry to re cord Co s t o f Go ods s o ld a t the time o f s a le :
Cos t of Goods S old XXXXX
Finis he d Goods Inve ntory XXXXX
Question: In making the journal entry to assign raw materials costs:
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.
Practice: 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.
Objective 3: Compute equivalent units.
Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
Two one-half full pitchers are
equivalent to one full pitcher.
+ =
Illustration: Suppose you have a work-study job 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
Part-time students take 60% of the classes of a full-time student during the year. To
compute the number of full-time equivalent students per year, you would make the
following computation:
Cost of instruction per full-time equivalent student =
To calculate EUP (Equivalent Units of Production):
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.
Question: 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:
Equivalent Units
Units Completed Equivalent Units
of Ending Work
and Transferred + = of Production ̶
in Process ̶
Out ̶Materials Materials
Materials
Units Completed Equivalent Units of
Equivalent Units
and Transferred Ending Work in
+ = of Production ̶
Out ̶Conversion Process ̶Conversion
Conversion Costs
Cost Costs
Practice: The fabricating department Outdoor Essentials has the following production
and cost data for the current month.
Be ginning Units Ending
Work in P roce ss Tra nsfe rre d Out Work in P roce s s
–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.
Objective 4: 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:
1)
2)
3)
4)
Flow of costs to make an Eggo® Waffle and the related production cost reports for each
department.
Production Cost Report
Equivalent Units
Physical Units Materials Conversion Costs
Quantities
Units to be accounted for
Work in process, _____________
Started into production
Total Units
Units accounted for
Transferred out
Work in process, _____________
Total units
Costs
Unit Costs Materials Conversion Costs Total
Total Cost
Equivalent Units
Unit costs (Total/EUP)
Costs to be accounted for
Work in process, ____________
Started into production
Total Costs
Cost Reconciliation Schedule
Costs accounted for
Transferred out
Work in process, ______________
Materials
Conversion Costs
Total Costs
Question: 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.
Practice: 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.
Production Cost Report
Equivalent Units
Physical Units Materials Conversion Costs
Quantities
Units to be accounted for
Work in process, _____________
Started into production
Total Units
Units accounted for
Transferred out
Work in process, _____________
Total units
Costs
Unit Costs Materials Conversion Costs Total
Total Cost
Equivalent Units
Unit costs (Total/EUP)
Costs to be accounted for
Work in process, ____________
Started into production
Total Costs
Cost Reconciliation Schedule
Costs accounted for
Transferred out
Work in process, ______________
Materials
Conversion Costs
Total Costs