4-1

Process Costing

Chapter 5
 4-2

Similarities Between Job-Order and Process

Costing
• Both systems assign material, labor, and
overhead costs to products and they provide a
mechanism for computing unit product costs.
• Both systems use the same manufacturing
accounts, including Manufacturing Overhead,
Raw Materials, Work in Process, and Finished
Goods.
• The flow of costs through the manufacturing
accounts is basically the same in both systems.
 4-3

Differences Between Job-Order and

Process Costing
Process costing: Job-Order costing:
1. A single product is 1. Many different jobs are
produced either on a worked on during each
continuous basis or for period, with each job
having unique features.
long periods of time
2. Costs are accumulated
2. Costs are accumulated by individual job.
by department.
3. Unit costs are
3. Unit costs are computed computed by job on
by department. the job cost sheet.
 4-4

Processing Departments
Any unit in an organization where materials, labor,
or overhead are added to the product.

The activities performed in a processing department

are performed uniformly on all units of production.

Furthermore, the output of a processing department

must be homogeneous.

Products in a process costing environment typically

flow in a sequence from one department to another.
 4-5

Concept Check 1

Process costing is used for products

that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
 4-6

Learning Objective 1

Record the flow of materials,

labor, and overhead through a
process costing system.
 4-7

The Flow of Costs in Job-Order and Process

Costing - Similarities

Direct
Materials

Direct Labor Work in Finished

Process Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-8

The Flow of Costs in a Job-Order Costing

System
Job-order costing
systems trace and apply
manufacturing costs to
Direct jobs.
Materials

Finished
Direct Labor Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-9

The Flow of Costs in a Processing Costing

System
Work in process – separate
account for each department
Transferred-in costs –
Direct
process account to another
Materials department

Direct Labor
Processing Finished
Department Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-10

Flow of Raw Material Costs

For purposes of this example, assume there

are two processing departments –
Departments A and B.
We will use T-accounts and journal entries.
 4-11

Flow of Raw Material Costs:

T-Account Form
Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B
•Direct
Materials
 4-12

Flow of Raw Material Costs:

Journal Entry Form
As in job-order costing, materials are drawn
from the storeroom using a materials
requisition form. Materials can be added in
any processing department. Here is the
journal entry to issue raw materials to
Processing Department A and Department B.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Raw Materials XXXXX
 4-13

The Flow of Labor Costs:

T-Account Form
Salaries and Work in Process
Wages Payable Department A
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor
 4-14

The Flow of Labor Costs: Journal Entry Form

In process costing, labor costs are traced to

departments – not to individual jobs. The
following journal entry records the labor
costs recorded to Department A and
Department B.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
 4-15

The Flow of Manufacturing Overhead

Costs: in T-Account Form
Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
 4-16

The Flow of Manufacturing Overhead

Costs: Journal Entry Form
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 to
Department A and Department B.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
 4-17

Transfers from Work In Process –

Dept. A to Work in Process – Dept. B:
T-Account Form

Work in Process Work in Process

Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labor Labor
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A
 4-18

Transfers from Work In Process – Dept. A to

Work in Process – Dept. B: Journal Entry
Form

Once processing has been completed in a

department, the units are transferred to the next
department for further processing.

Work in Process - Department B XXXXX

Work in Process - Department A XXXXX
 4-19

Transfers from Work In Process – Dept.

B to Finished Goods: T-Account Form

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
 4-20

Transfers from Work In Process –

Dept. B to Finished Goods:
Journal Entry Form

After processing has been finished in

Department B, the costs of the completed units
are transferred to the Finished Goods inventory
account:

Finished Goods XXXXX

Work in Process - Department B XXXXX
 4-21

Transfers from Finished Goods Inventory to

Cost of Goods Sold:
T-Account Form
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labor
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold

•Cost of
Goods
Sold
 4-22

Transfers from Finished Goods to Cost

of Goods Sold: Journal Entry Form

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 XXXXX

Finished Goods XXXXX
 4-23

Process Costing Flows(T-Account)

Transferred-out/in
 4-24

Process Costing Computations: Three

Key Concepts – Overview

In process costing, each department needs to

calculate two numbers for financial reporting
purposes—the cost of its ending work in
process inventory and the cost of its
completed units that were transferred to the
next stage of the production process. The key
to deriving these two numbers is calculating
unit costs within each department.
 4-25

Process Costing Computations: Three

Key Concepts – Part 1
Key Concept #1: There are two methods for performing
the computations, the weighted-average method and the
FIFO method.

The weighted-average The FIFO method of

method of process costing process costing, which
calculates unit costs by appears in Chapter 5
combining costs and outputs Supplement, calculates unit
from the current and prior costs based solely on the
periods. costs and outputs from the
current period.
 4-26

Process Costing Computations: Three

Key Concepts – Part 2
Characteristics of the weighted-average method:
a) This method makes no distinction between work
done in the prior and current periods. It blends
together units and costs from the prior and
current periods.
a) Whereas, FIFO calculates unit costs using only the
costs and outputs from the current period.
b) The equivalent units of production for a
department are the number of units transferred
to the next department (or finished goods) plus
the equivalent units in the department’s ending
work in process inventory.
 4-27

Process Costing Computations: Three

Key Concepts – Part 3
Key Concept #2: Conversion Costs

• Direct labor costs are often small in comparison to the

other product costs in process cost systems.

 Therefore, direct labor and

manufacturing overhead
are often combined into
one classification of
product cost called
conversion costs.
 4-28

Process Costing Computations: Three

Key Concepts – Part 4
Key Concept #3: Equivalent Units

Equivalent Units =
# of partially completed units
×Percentage completion

These partially completed units complicate the

determination of a department’s output for a given
period and the unit cost that should be assigned to
that output.
 4-29

Process Costing Computations: Three

Key Concepts – Part 5
Key Concept #3: Equivalent Units
Two half-completed products are
equivalent to one complete product.

+ = 1

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.
 4-30

Calculating Equivalent Units: Examples

Assume Department A 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).

Department A’s ending work in process inventory would

contain 300 equivalent units for the period.
 4-31

Concept Check 2
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
c. 13,500
d. 15,000
 4-32

Learning Objective 2

Compute the equivalent units

of production using the
weighted-average and FIFO
methods.
 4-33

Equivalent Units of Production

Weighted-Average Method

The weighted-average method . . .

1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.
 4-34

Step 1: Compute the Equivalent Units of Production

– Part 1

Smith Company reported the following activity in

the Assembly Department for the month of June:

Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 4-35

Step 1: Compute the Equivalent Units of Production

– Part 2
Begin by calculating the equivalent units completed and
transferred out of the Assembly Department in June (5,400
units).

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
 4-36

Step 1: Compute the Equivalent Units of Production

– Part 3
Next, identify the equivalent units of production in ending work in
process with respect to materials for the month (540 units) and
adding this to the 5,400 units from step one.

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540

Equivalent units of Production in

the Department during June 5,940
 4-37

Step 1: Compute the Equivalent Units of Production

– Part 4
Finally, identify the equivalent units of production in ending work
in process with respect to conversion for the month (270 units)
and adding this to the 5,400 units.

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
 4-38

Step 1: Compute the Equivalent Units of Production

- Part 5
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
 4-39

Step 1: Compute the Equivalent Units of Production

- Part 6
6,000 Units Started
Materials

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

5,400 Units Completed

540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production
 4-40

Step 1: Compute the Equivalent Units of Production

- Part 7
6,000 Units Started
Conversion

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

5,400 Units Completed

900 × 30%
270 Equivalent Units
5,670 Equivalent units
of production
 4-41

How about FIFO Method?

Step 1: Compute the Equivalent Units of
Production – FIFO Method
Materials Conversion
Equivalent units needs to complete
beginning WIP inventory
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
 4-42

Step 1: Compute the Equivalent Units of

Production – FIFO Method
Materials Conversion
Equivalent units needed to complete
beginning WIP inventory
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
Equivalent units in ending WIP
inventory
Materials: 900 units × 60% complete 540
Conversion: 900 units × 30% complete 270
Equivalent units in ending WIP
inventory 5,820 5,610
 4-43

Step 1: Compute the Equivalent Units of

Production – FIFO Method
6,000 Units Started
Materials

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

300 ×
60%
180 Equivalent Units
5,100 Units Completed
900 ×
540 Equivalent Units 60%
5,820 Equivalent units
of production
 4-44

Step 1: Compute the Equivalent Units of

Production – FIFO Method
6,000 Units Started
Conversion

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

300 ×
80%
240 Equivalent Units
5,100 Units Completed
900 ×
270 Equivalent Units 30%
5,610 Equivalent units
of production
 4-45

Comparing Equivalent Units:

Weighted-Average and FIFO Methods

• The FIFO method removes the equivalent units that were

already in beginning inventory from the equivalent units as
defined using the weighted-average method.
• Thus, the FIFO method isolates the equivalent units due to
work performed during the current period.
• This can be illustrated using the Smith Company example as
follows:
 4-46

Comparing Equivalent Units:

Weighted-Average and FIFO Methods

Materials Conversion
Equivalent units - weighted-average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units × 40% 120
300 units × 20% 60
Equivalent units - FIFO method 5,820 5,610
 4-47

Learning Objective 3

Compute the cost per

equivalent unit using the
weighted-average and FIFO
methods.
 4-48

Cost per equivalent unit

Weighted-Average Method

Cost of beginning WIP

+ Cost added during the period

Cost per Total Costs

=
unit
# of units produced

Units transferred out

+ Equivalent units in ending WIP

Equivalent Unit of Production

 4-49

Step 2: Compute the Cost per Equivalent Unit (WA)

- Part 1: Beginning Work in Process

Beginning Work in Process Inventory: 300 units

Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400
units

Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130

Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete
 4-50

Step 2: Compute the Cost per Equivalent Unit (WA)

- Part 2

The formula for computing the cost per equivalent

unit is:

Weighted-Average Method (a separate calculation

is made for each cost category in each processing
department)

Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit
Equivalent units of production
 4-51

Step 2: Compute the Cost per Equivalent Unit (WA)

- Part 3

Here is a schedule with the cost and equivalent

unit information.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

 4-52

Step 2: Compute the Cost per Equivalent Unit (WA)

- Part 4: Basic Information
Here is a schedule with the cost and equivalent unit
information.
$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

Cost per equivalent unit $ 21.00 $ 15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00

 4-53

Quick Check 3
• Harker Corporation uses the weighted-average method in its process costing
system. The first processing department, the Welding Department, started
the month with 16,000 units in its beginning work in process inventory that
were 40% complete with respect to conversion costs. The conversion cost in
this beginning work in process inventory was $29,440. An additional 59,000
units were started into production during the month and 61,000 units were
completed in the Welding Department and transferred to the next
processing department. There were 14,000 units in the ending work in
process inventory of the Welding Department that were 10% complete with
respect to conversion costs. A total of $246,400 in conversion costs were
incurred in the department during the month. What would be the cost per
equivalent unit for conversion costs for the month?
a. $4.38
b. $4.42
c. $4.52
 4-54

How about FIFO?

Step 2: Compute the Cost per
Equivalent Unit (FIFO)
FIFO Method
(a separate calculation is made for each cost category in each
processing department)

Equivalent units of production = Equivalent units to complete beginning

work in process inventory* + Units started and
completed during the period + Equivalent units in ending work
in process inventory

*Equivalent units to complete beginning work in process inventory = Units in beginning

work in process inventory × (100% − Percentage completion of beginning work in process
inventory)
 4-55

Step 2: Compute the Cost per Equivalent

Unit (FIFO)

Total
Cost Materials Conversion

Cost added in June $ 199,751 $ 118,621 $ 81,130

Equivalent units 5,820 5,610
Cost per equivalent unit $ 20.3816 $ 14.4617

$118,621 ÷ 5,820 $81,130 ÷ 5,610

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

 4-56

Learning Objective 4

Assign costs to units using the

weighted-average and FIFO
methods.
 4-57

Step 3: Assign Costs to Units (WA)

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
 4-58

Step 3: Assign Costs to Units (WA)

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
 4-59

Step 3: Assign Costs to Units (WA)

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit $ 21.00 $ 15.00
Cost of units transferred out $ 113,400 $ 81,000 $ 194,400
 4-60

Quick Check 4 & 5

• Sunspot Beverages uses the weighted-average method in its process
costing system. It makes blended tropical fruit drinks in two stages.
Fruit juices are extracted from fresh fruits and then blended in the
Blending Department. Then it moves to the Bottling Department. The
Blending Department's cost per equivalent unit for materials and
conversion in June are $0.87 and $0.67, respectively. The following
information pertains to the operations of the Blending Department for
June.

Percent Completed
Units Materials Conversion
Work in process, beginning 98,000 70% 40%
Started into production 469,000
Completed and transferred out 459,000
Work in process, ending 108,000 75% 25%
 4-61

Quick Check 4
• What are the Blending Department's cost of ending work in process
inventory for materials, conversion, and in total for June

Materials Conversion Total

a. $93,960 $72,360 $166,320
b. $70,470 $18,090 $88,560
c. $399,330 $307,530 $706,860
d. $299.498 $76,883 $376,370
 4-62

Quick Check 5
• What are the Blending Department's cost of units transferred out to
the Bottling Department for materials, conversion, and in total for
June.

Materials Conversion Total

a. $93,960 $72,360 $166,320
b. $70,470 $18,090 $88,560
c. $399,330 $307,530 $706,860
d. $299.498 $76,883 $376,370
 4-63

Step 3: How about FIFO?

Compute the cost of ending Work in Process Inventory.

Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of Ending WIP inventory $ 11,006 $ 3,905 $ 14,911

540 × $20.3816 270 × 14.4617

 4-64

Computing the Cost of Units

Transferred Out (FIFO)
Compute the total cost of units transferred out.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,669 $ 3,471 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of units started and completed $ 103,946 $ 73,755 177,701
Cost of Units Transferred Out $ 194,880
 4-65

Learning Objective 5

Prepare a cost reconciliation

report using the weighted
average and FIFO methods.
 4-66

Step 4: Prepare a Cost Reconciliation Report

(WA)

Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790
 4-67

Step 4: Prepare a Cost Reconciliation Report

(WA)

Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 15,390
Cost of units transferred out 194,400
Total cost accounted for $ 209,790
 4-68

Step 4: How about FIFO?

Assembly Department
Cost Reconciliation for June
Costs to be accounted for:
Cost of beginning Work in Process inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process inventory $ 14,911
Cost of units transferred out 194,880
Total cost accounted for* $ 209,791

* $1 rounding error.
 4-69

Reconciling Costs

• Units in Beg. WIP + Units Started

= Units Transferred Out + Units in End. WIP

Equivalent units of production

• Cost in Beg. WIP + Cost Added

Total cost
= Cost Transferred Out + Cost in End. WIP
Need to compute using EU
 4-70

End of Chapter 4