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Chapter 4

Process Costing and

Hybrid Product-Costing
Systems

Twelfth Edition

© 2020 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objective 4-1 – List and explain the similarities
and important differences between job-order and
process costing.

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 Comparison of Job-Order Costing and Process Costing 1

Process Job-Order
Costing Costing

Used for production of small,

identical, low-cost items.
Mass produced in automated
continuous production processes.
Costs cannot be directly traced to
each unit of product.

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 Comparison of Job-Order Costing and Process Costing 2

Process Job-Order
Costing Costing

Typical process cost applications:

• Petrochemical refinery
• Paint manufacturer
• Paper mill

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 Job-Order Costing vs. Process Costing

Job-order costing Process costing

• Costs accumulated by the • Costs accumulated by
job. department or process.
• Work in process has a • Work in process has a
job-cost sheet for each production report for each
job. batch of products.
• Many unique, high-cost • A few identical, low-cost
jobs. products.
• Jobs built to customer • Units continuously
order. produced for inventory in
automated process.

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 Differences Between Process and Job-Order Costing 1

The work-in-process
account consists of
individual jobs in a
job-order cost system.
Direct Material

Finished
Direct Labor Jobs
Goods

Manufacturing Cost of
Overhead Goods
Sold
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 Differences Between Process and Job-Order Costing 2

The work-in-process
account consists of
individual products in a
process-cost system.
Direct Material

Direct Labor
& Overhead Finished
Products
(Conversion) Goods

When direct labor is a relatively small amount Cost of

compared to material and overhead, it is often Goods
combined with overhead. Sold

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 Learning Objective 4-2 – Prepare journal entries to
record the flow of costs in a process-costing system
with sequential production departments.

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 Process Cost Flows – Single Department

Access the text alternative for slide images.

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 Journal Entry Direct Material, Direct Labor, and
Overhead Applied

Work-in-Process Inventory: Production Department A ............................. 100,000

Raw-Material Inventory .................................................................... 50,000
Wages Payable ............................................................................... 20,000
Manufacturing Overhead ................................................................. 30,000

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 Process Cost Flows –Two Departments

Access the text alternative for slide images.

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 Journal Entry Dept. B – Transferred In Costs

Work-in-Process Inventory: Production Department B ............................ 80,000

Work-in-Process Inventory: Production Department A …………… 80,000

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 Journal Entry Dept. B – Direct Material, Direct Labor, and
Manufacturing Overhead

Work-in-Process Inventory: Production Department B ............................ 75,000

Raw-Material Inventory .................................................................... 40,000
Wages Payable ............................................................................... 15,000
Manufacturing Overhead ................................................................. 20,000

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 Journal Entry Goods Completed

Finished-Goods Inventory ....................................................................... 130,000

Work-in-Process Inventory: Production Department B .................... 130,000

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 Journal Entry Cost of Goods Sold

Cost of Goods Sold ................................................................................. 125,000

Finished-Goods Inventory ............................................................... 125,000

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 Learning Objective 4-3 – Prepare a table of equivalent
units under weighted-average process costing.

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 Equivalent Units: A Key Concept

By definition, units in work-in-process inventory at both the

beginning and end of the period are only partially complete
(finished units are transferred out).
Equivalent units is a concept expressing these partially
completed units.
Equivalent units refers to the amount of manufacturing
activity that has been applied to a batch of physical units.

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 Equivalent Units Example

Two half completed products are

equivalent to one completed product.

So, 10,000 units that are 70% complete

are equivalent to 7,000 complete units.

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 Equivalent Units Question 1

For the current period, Jones started 15,000 units and

completed 10,000 units, leaving 5,000 units in process
30% 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

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 Equivalent Units Question 1 (Solved)

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
10,000 units + (5,000 units × .30)
b. 11,500
c. 13,500 = 11,500 equivalent units
d. 15,000

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 Equivalent Units Question 2

Jones incurred $27,600 in production costs for the

11,500 equivalent units. What was Jones’s cost per
equivalent unit for the period?
a. $1.84
b. $2.76
c. $2.40
d. $2.90

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 Equivalent Units Question 2 (Solved)

Jones incurred $27,600 in production costs for the

11,500 equivalent units. What was Jones’s cost per
equivalent unit for the period?
a. $1.84
b. $2.76
$27,600 ÷ 11,500 equivalent units
c. $2.40
= $2.40 per equivalent unit
d. $2.90

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 Calculating and Using Equivalent Units of Production

To calculate the direct materials and conversion costs per

equivalent unit for the period:

Materials
Materials cost for the period
cost per 
equivalent unit Materials equivalent units for the period

Conversion
Conversion cost for the period
cost per 
equivalent unit Conversion equivalent units for the period

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 Departmental Production Report 1

Analysis of Calculation
physical flow of equivalent
of units units

Production
Report

Computation Analysis of
of unit costs total costs

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 Equivalent Units of Production – Weighted-Average
Method

The weighted-average method . . .

• Makes no distinction between work done in the prior
period and work done in the current period.
• Blends together units and costs from the prior period and
the current period.
• The FIFO method is a more complex method and is rarely
used in practice.

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 Production Report Example 1

MVP Sports Equipment Company makes baseball gloves in

two departments, Cutting and Stitching.

MVP uses the weighted-average process costing.

Material is added at the beginning of the Cutting Department,

while conversion is incurred uniformly throughout the
process.

Using the following information for the month of March, let’s

prepare a production report for the Cutting Department.

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 Production Report Example 2
Work in process, March 1: 20,000 Units Cost
Materials: 100% complete $ 50,000
Conversion: 10% complete 7,200

Units started into production in March: 30,000 Units

Units completed and transferred out in March: 40,000 Units
Work in process, March 31: 10,000 Units
Materials 100% complete
Conversion 50% complete

Costs incurred during March

Materials cost 90,000
Conversion costs:
Direct labor $ 86,000
Applied manufacturing overhead 107,500
Total conversion costs 193,500
Total costs to account for $ 340,700

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 Production Report Example – Units Accounted For

1) Analysis of Physical Flow of Units

Physical Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

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 Production Report Example – Equivalent Units 1

2) Calculation of Equivalent Units

Equivalent Equivalent
Units Units
Percentage of
Completion
Physical with Respect to Direct
Units Conversion Material Conversion
Work in process, March 1 20,000 10%
Units started during March 30,000
Total units to account for 50,000 50% of 10,000 units

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Beginning inventory % is not used in weighted-average method.

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 Production Report Example - Equivalent Units 2

Equivalent Equivalent
Units Units
Percentage of
Completion
Physical with Respect to Direct
Units Conversion Material Conversion
Work in process, March 1 20,000 10%
Units started during March 30,000
100% of 10,000 units, all
Total units to account for 50,000
material added at beginning
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

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 Learning Objective 4-4 – Compute the cost per
equivalent unit under the weighted-average method of
process costing.

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 Computation of Unit Costs

Direct Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500

Total costs to account for $140,000 $200,700 $340,700

Equivalent units 50,000 45,000

Costs per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units

$2.80 + $4.46
$200,700 ÷ 45,000 equivalent units

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 Learning Objective 4-5 – Analyze the total production
costs for a department under the weighted-average
method of process costing.

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 Production Report Example – Total Costs 1

Analysis of total costs

Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit
$290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

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 Production Report Example – Total Costs 2

Analysis of total costs

Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit
$290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

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 Production Report Example – Costs Accounted For

Analysis of total costs

Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit
$290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process All costs 50,300
Total costs accounted for accounted for $ 340,700

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 Learning Objective 4-6 – Prepare a departmental
production report under weighted-average process
costing.

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 MVP Sports Equipment Report Example
MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Equivalent Units Equivalent Units
Physical Percentage of Completion
Units with Respect to Conversion Direct Material Material
Work in process, March 1 20,000 10%
Units started during March 30,000
Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000
Direct Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26
Cost of goods completed and transferred during
March 40,000 units x $7.26 per equivalent unit $290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $340,700

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 Actual versus Normal Costing

Manufacturing overhead is
Actual costs of applied
manufacturing overhead
are entered in Work-in- to Work-in-Process Inventory
Process Inventory using a predetermined
overhead rate

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 Departmental Production Report 2

Analysis of
physical flow
of units
Calculation
of equivalent
units
Computation
of unit costs
Analysis of
total costs

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 Learning Objective 4-7 – Describe how an operation
costing system accumulates and assigns the costs of
direct-material and conversion activity in a batch
manufacturing process.

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 Operation Costing 1

Operation costing employs some aspects

of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

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 Operation Costing 2

Operation costing employs some aspects

of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Material costs are charged Conversion costs

to batches as in are assigned to batches
job-order costing. as in process costing.

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 End of Main Content

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© 2020 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.