Chapter 04: Process
Costing
Cost Accounting
What is Process Costing?
Process costing is used most commonly in
industries that convert raw materials into
homogeneous (i.e., uniform) products, such as
bricks, soda, or paper, on a continuous
basis.
Similarities between Job-Order and
Process Costing:
Much of what you learned in the previous chapter
about costing and cost flows applies equally well to
process costing in this chapter. We are not throwing
out all that we have learned about costing and
starting from “scratch” with a whole new system. The
similarities between job-order and process costing
can be summarized as follows:
1. Both systems have the same basic purposes—to
assign material, labor, and manufacturing overhead
costs to products and to provide a mechanism for
computing unit product costs.
2. Both systems use the same basic manufacturing
accounts, including Manufacturing Overhead, Raw
Materials, Work in Process, and Finished Goods.
Differences between Job-Order and
Process Costing:
Cost Flows in Process Costing -
Processing Departments
Cost Flows in Process Costing Before going
through - The Flow of Materials, Labor, and
Overhead Costs
Materials, Labor, and Overhead Cost
Entries
Materials Costs: As in job-order costing, materials are
drawn from the storeroom using a materials requisition
form. Materials can be added in any processing
department, although it is not unusual for materials to
be added only in the first processing department, with
subsequent departments adding only labor and overhead
costs.
At Megan’s Classic Cream Soda, some materials (i.e.,
water, flavors, sugar, and carbon dioxide) are added in
the Formulating Department and some materials (i.e.,
bottles, caps, and packing materials) are added in the
Bottling Department. The journal entry to record the
materials used in the first processing department, the
Formulating Department, is as follows:
• Work in Process—Formulating . . . . . . . . . . . . .
. . . . . . . . . Dr XXX
• Raw Materials . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .Cr XXX
The journal entry to record the materials used in the
Materials, Labor, and Overhead Cost
Entries
Labor Costs: In process costing, labor costs are traced to
departments—not to individual jobs. The following journal
entry records the labor costs in the Formulating
Department at Megan’s Classic Cream Soda:
• Work in Process—Formulating . . . . . . . . . . . . . . .
. . . . . . . . . . . Dr XXX
• Salaries and Wages Payable . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .Cr XXX
A similar entry would be made to record labor costs in the
Bottling Department. Overhead Costs In process costing, as
in job-order costing, predetermined overhead rates are
usually used. Manufacturing overhead cost is applied
according to the amount of the allocation base that is
incurred in the department. The following journal entry
records the overhead cost applied in the Formulating
Department:
• Work in Process—Formulating . . . . . . . . . . . . . . .
Materials, Labor, and Overhead Cost
Entries
Completing the Cost Flows Once processing has been completed in a
department, the units are transferred to the next department for
further processing, as illustrated in the T-accounts in Exhibit 4–
3. The following journal entry transfers the cost of partially
completed units from the Formulating Department to the Bottling
Department:
• Work in Process—Bottling . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . Dr XXX
• Work in Process—Formulating . . . . . . . . . . . . . . . . . . .
. . . . . . . .Cr XXX
After processing has been completed in the Bottling Department,
the costs of the completed units are transferred to the Finished
Goods inventory account:
• Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . Dr XXX
• Work in Process—Bottling . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .Cr XXX
Finally, when a customer’s order is filled and units are sold, the
cost of the units is transferred to Cost of Goods Sold:
• Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . Dr XXX
Equivalent Units of Production
Equivalent Units of Production:
Weighted-Average Method
Suppose the Molding Department at Double Diamond has
500 units in its ending work in process inventory
that are 60% complete with respect to processing in
the department. 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
Consider the Shaping and Milling Department at
Double Diamond. This department uses computerized
milling machines to precisely shape the wooden core
and metal sheets that will be used to form the
backbone of the ski. The activity shown at the top
of the next page took place in the department in
May.
The first thing to note about the activity in the
Shaping and Milling Department is the flow of units
through the department. The department started with
200 units in beginning work in process inventory.
During May, 5,000 units were started into
production. This made a total of 5,200 units. Of
this total, 4,800 units were completed and
Equivalent Units of Production
Equivalent Units of Production
Equivalent Units of Production
Compute and Apply Costs - Shaping and
Milling Department (Data for May
Operations)
Cost per Equivalent Unit—Weighted-Average
Method
Applying Costs—Weighted-Average
Method
For example, each unit transferred out of Double
Diamond’s Shaping and Milling Department to the
Graphics Application Department, as depicted in
Exhibit 4–4, will carry with it a cost of $149.00
($76.25 for materials cost and $72.75 for conversion
cost). Because 4,800 units were transferred out in May
to the next department, the total cost assigned to
those units would be $715,200 (5 4,800 units * $149.00
per unit).
Applying Costs—Weighted-Average
Method
Cost Reconciliation Report