IPE 4439
Principles of Economics
and Cost Accounting
Course Teacher: Sharmin Akter Urmee
Lecturer, Department of MPE
Room No: 111, Old Academic Building
CHAPTER 6
SYSTEMS DESIGN
PROCESS COSTING
Comparison of job-order and process costing
The similarities that exist between job-order and process costing can be
summarized as follows:
1. Both systems have the same basic purposes—to assign materials,
labour, and overhead costs to products and to provide a mechanism
for computing unit costs.
2. Both systems use the same basic manufacturing accounts, including
Manufacturing Overhead, Raw Materials, Work in Process, and
Finished Goods.
3. The flow of costs through the manufacturing accounts is basically
the same in both systems.
Comparison of job-order and process costing
Processing Departments
Any location in an organization where work is
performed on a product and where materials,
labour, or overhead costs are added to the
product.
Processing Departments
For example, a potato chip factory operated by Frito-
Lay might have three processing departments—one
for preparing potatoes, one for cooking, and one for
inspecting and packaging. A brick factory might have
two processing departments—one for mixing and
moulding clay into brick form and one for firing the
moulded brick
Processing Departments
The Flow of Materials, Labour, and Overhead
Costs
Materials, Labour, and Overhead Cost Entries
To complete our discussion of cost flows in a process costing
system, in this section we show journal entries relating to
materials, labour, and overhead costs at Standard Products Co.,
a producer of Green Clean, a multi-purpose household cleaner.
The company has two processing departments—Mixing and
Filling. In the Mixing Department, the various ingredients are
checked for quality and then mixed to create bulk liquid
cleaner. In the Filling Department, bottles are checked for
defects, filled with cleaner, capped, and labelled, and then the
bottles are packed for shipping.
Materials Costs
Labour Costs and Overhead Costs
Completing the Cost Flows
Equivalent units of production
We now turn our attention to Tropic Breeze, a company that
manufactures two models of an efficient and reliable industrial fan for
use in large factory spaces. Tropic Breeze uses process costing to
determine its unit product cost. The company’s production process
includes three processing departments, the Housings Department, the
Electrics and Testing Department, and the Inspection and Packing
Department. The basic idea in process costing is to add together all of the
costs incurred in a department during a period and then spread these
costs uniformly across the units processed in that department during that
period. As we will see, applying this simple idea involves a few
complications.
Equivalent units of production
For example, suppose the Housings Department at Tropic
Breeze has 500 units in its ending work in process inventory
that are 60% complete. These 500 partially complete units
are equivalent to 300 fully complete units (500 × 60% = 300).
Therefore, the ending work in process inventory contains
300 equivalent units.
Equivalent units of production
FIFO method
A method of accounting for cost flows in a process
costing system in which equivalent units and unit
costs relate only to work done during the current
period.
Weighted-average method
A method of process costing that blends together
units and costs from both the current and prior
periods.
Weighted-Average Method
Weighted-Average Method
Consider the Electrics and Testing Department at Tropic Breeze. This department uses
computerized machines to ensure the electrical integrity of the industrial fans
produced.
Weighted-Average Method
Weighted-Average Method
Cost per Equivalent Unit—Weighted-Average
Method
Cost per Equivalent Unit—Weighted-Average
Method
Cost per Equivalent Unit—Weighted-Average
Method
Applying costs—weighted-average method
Applying costs—weighted-average method
Applying costs—weighted-average method
Applying costs—weighted-average method
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