Managerial Accounting

Eighth Edition

Weygandt Kimmel Kieso

Chapter 3

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.

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Uses of Process Cost Systems
Process Cost System Job Order Cost System
Company Product Company Product
Jones Soda, Soft drinks Young & Rubicam, Advertising
PepsiCo J. Walter Thompson

ExxonMobil, Oil Disney, Movies

Royal Dutch Shell Warner Brothers

Intel, Computer chips Center Ice Ice rinks

Advanced Micro Consultants,
Devices Ice Pro
Dow Chemical, Chemicals Kaiser, Patient health
DuPont Mayo Clinic care

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Uses of Process Cost Systems
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 heterogeneous in nature.

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Uses of Process Cost Systems
Answer
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.

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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.

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Similarities and Differences
Job Order Cost and Process Cost Systems

Job Order Cost Process Cost

• Costs assigned to • Costs tracked through a
each job. series of manufacturing
processes or departments.
• Products have unique
characteristics. • Products are uniform or
relatively homogeneous and
produced in a large volume.

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Job Order Cost and Process Cost Flow

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

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Job Order Cost and Process Cost Flow
Summary of major differences

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 Each job Each period
manufacturing costs
Unit-cost Cost of each job ÷ Total manufacturing costs ÷
computations Units produced for the job Equivalent units produced
during the period

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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 True
process 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 False
manufacturing overhead.

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Process Cost Flow and Assigning Costs

LEARNING OBJECTIVE 2
Explain the flow of costs in a process cost system and the
journal entries to assign manufacturing costs.

Process Cost Flow

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.

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Process Cost Flow

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Assigning Manufacturing Costs
• 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 a process
cost system is different than in a job order cost system.

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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

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Assigning Manufacturing Costs
Material Costs Journal Entry
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

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

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Assigning Manufacturing Costs
Factory Labor Costs Journal Entry
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:

Work in Process—Machining 20,000

Work in Process—Assembly 13,000
Factory Labor 33,000

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Assigning Manufacturing Costs
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

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Assigning Manufacturing Costs
Manufacturing Overhead Costs Journal Entry
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:

Work in Process—Machining 45,000

Work in Process—Assembly 17,000
Manufacturing Overhead 62,000

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Assigning Manufacturing Costs
Journal Entry to Transfer to Next Department
Suppose Tyler transferred goods with a recorded cost of
$87,000 from machining to assembly. Tyler makes the
following entry.

Work in Process—Assembly 87,000

Work in Process—Machining 87,000

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Transfers to Finished Goods and CGS
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
Work in Process—Assembly 114,000
Tyler Company sells finished goods with a recorded cost of
$27,000. It records the cost of goods sold as follows.
Cost of Goods Sold 27,000
Finished Goods Inventory 27,000

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Assigning Manufacturing Costs
Question
In making entries to assign raw materials costs, a
company using process costing:
a. increases Finished Goods Inventory.
b. often increases two or more work in process accounts.
c. generally decreases two or more work in process
accounts.
d. decreases Finished Goods Inventory.

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Do It! 2: Process Costing
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.

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Equivalent Units

LEARNING OBJECTIVE 3

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

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Equivalent Units
Full-time equivalent unit computation
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.
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

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Weighted-Average Method
• 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

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Weighted-Average Method
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

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Refinements on Weighted-Aver. Method
Kellogg Company has produced Eggo® Waffles since 19
70. 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 3.9 provides information related to the Mixing
Department at the end of June.

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Refinements on Weighted-Aver. Method
Information for Mixing Department at end of June

Percentage
Percentage Complete in
Physical Complete in 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

Units transferred out 700,000

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

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Refinements on Weighted-Aver. Method
Computation of equivalent units
Mixing Department Equivalent Units
Materials Conversion 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 900,000 820,000

• Conversion costs are labor costs plus overhead costs

• Beginning work in process is not part of the equivalent-units-of-
production formula
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Refinements on Weighted-Aver. Method
Refined equivalent units of production formula
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

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Equivalent Units
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:
a. 22,600
b. 23,000
c. 24,000
d. 25,000
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Do It! 3: Equivalent Units
The Fabricating Department Outdoor Essentials has the
following production and cost data for the current month.

Beginning Units Ending

Work in Process Transferred Out Work in 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.
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Production Cost Report

LEARNING 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:
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
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Production Cost Report
Flow of costs to make an Eggo® Waffle and the related
production cost reports for each department.

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Production Cost Report
Unit and cost data-Mixing Department

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Production Cost Report
Compute the physical unit flow
• 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

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Physical Unit Flow-Mixing Department

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Production Cost Report
Compute equivalent units of production
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
Work in process, June 30
200,000 × 100% 200,000
200,000 × 60% 120,000
Total equivalent units 900,000 820,000

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Equivalent Units of Production
• 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

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Production Cost Report
Total and Unit Material Costs
Compute total materials cost related to Eggo® Waffles:
Work in process, June 1
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

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Production Cost Report
Total and Unit Conversion Costs
Compute total conversion costs related to Eggo® Waffles:
Work in process, June 1
Conversion costs $ 35,000
Cost added to production during June
Conversion costs 170,000
Total conversion costs $205,000

Total Conversion Equivalent Units of Unit Conversion

 
Cost Conversion Costs Cost

$205,000  820,000  $0.25

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Total Manufacturing Cost per Unit

Total Conversion Equivalent Units of Unit Conversion

 
Costs Conversion Costs Cost
$205,000  820,000  $0.25

Compute total manufacturing cost per unit:

Unit Materials Unit Conversion Total Manufacturing
 
Cost Cost Cost per Unit

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Prepare a Cost Reconciliation Schedule
Costs charged to Mixing Department
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 cost $655,000

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Cost Reconciliation Schedule
Mixing Department

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Cost Reconciliation Schedule
Production Cost Report

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Production Cost Report
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
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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

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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.

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App. 3A 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.

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Equivalent Units Under FIFO
Physical unit flow-Assembly Department

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Equivalent Units Under FIFO
Computation of equivalent units-FIFO

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Comprehensive Example FIFO

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Compute Physical Unit Flow
Physical unit flow-Mixing Department

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Compute Physical Unit Flow
Physical unit flow (FIFO)-Mixing Department

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Equivalent Units of Production
Computation of equivalent units-materials
Kellogg adds materials at beginning of the process. 100% of
materials costs has been incurred on ending WIP.

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Equivalent Units of Production
Computation of equivalent units-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.

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Compute Unit Production Costs
Costs incurred during production in June
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 $570,600

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Compute Unit Production Costs
Unit cost formulas and computations-Mixing Dept.
Compute unit cost for the following:
Total Materials Equivalent Units of Unit Materials
 
Cost Materials Cost
$400,000  800,000  $0.50

Total Conversion Equivalent Units of Unit Conversion

 
Cost Conversion Costs Cost
$170,000  750,000  $0.227

Total Materials Unit Conversion Manufacturing

 
Cost Cost Cost per Unit
$0,50  $0, 227  $0.727

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Prepare a Cost Reconciliation Schedule
Costs charged to Mixing Department
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 $655,000

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Prepare a Cost Reconciliation Schedule
Cost reconciliation report

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Preparing the Production Cost Report
• 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

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Preparing the Production Cost Report
Production cost report-FIFO method

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Copyright
Copyright © 2018 John Wiley & Sons, Inc.
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Copyright ©2018 John Wiley & Sons, Inc. 66