Systems Design:

Process Costing

Chapter Four
Similarities Between Job-Order and Process
Costing

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

•• Process
Process costing
costing is
is used
used when
when aa single
single product
product is is produced
produced onon
aa continuing
continuing basis
basis or
or for
for aa long
long period
period of of time.
time. Job-order
Job-order
costing
costing is
is used
used when
when manymany different
different jobs
jobs are
are worked
worked on on each
each
period.
period.
•• Process
Process costing
costing systems
systems accumulate
accumulate costs costs byby department.
department.
Job-order
Job-order costing
costing systems
systems accumulated
accumulated costs costs by
by individual
individual
jobs.
jobs.
•• Process
Process costing
costing systems
systems use use department
department production
production reports
reports to
to
accumulate
accumulate costs.
costs. Job-order
Job-order costing
costing systems
systems useuse job
job cost
cost
sheets
sheets to
to accumulate
accumulate costs.
costs.
•• Process
Process costing
costing systems
systems compute
compute unitunit costs
costs by
by department.
department.
Job-order
Job-order costing
costing systems
systems compute
compute unit
unit costs
costs by
by job.
job.
 Quick Check 

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.
 Quick Check 

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.
What is a Processing Department?

Any location 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.
 Sequential vs. Parallel Processing

Sequential
Sequential processing
processing means
means that
that units
units
flow
flow in
in aa sequence
sequence from
from one
one
department
department to to another.
another.

Parallel
Parallel processing
processing is is used
used when
when
after
after aa point,
point, some
some units
units go
go through
through
different
different processing
processing departments
departments
than
than others.
others. For
For example,
example, aa
petroleum
petroleum refinery
refinery separates
separates crude
crude
oil
oil into
into products
products like
like gasoline,
gasoline, jet
jet
fuel,
fuel, and
and heating
heating oil.
oil.
 Comparing Job-Order
and Process Costing

Direct
Direct
Materials
Materials

Direct Work in Finished

Finished
Direct Labor
Labor Goods
Process Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
 Comparing Job-Order
and Process Costing

Costs
Costs are
are traced
traced and
and
applied
applied to
to individual
individual
Direct
Direct jobs
jobs in
in aa job-order
job-order
Materials
Materials cost
cost system.
system.

Direct Finished
Finished
Direct Labor
Labor Jobs
Jobs Goods
Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
 Comparing Job-Order
and Process Costing

Costs
Costs areare traced
traced and
and
applied
applied toto departments
departments
Direct
Direct in
in aa process
process cost
cost
Materials
Materials system.
system.

Direct Processing
Processing Finished
Finished
Direct Labor
Labor Goods
Department
Department Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
T-Account and Journal Entry Views of Cost Flows

For purposes of this example,

assume there are two
processing departments –
Departments A and B.
We will use T-accounts and
journal entries.
 Process Cost Flows
(in T-account form)

Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B
•Direct
Materials
 Process Cost Flows
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
 Process Cost Flows
(in T-account form)

Work in Process
Department A
Wages Payable
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor
 Process Costing
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
 Process Cost Flows
(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
 Process Costing
(In journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
 Process Cost Flows
(in 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
 Process Costing
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
 Process Cost Flows
(in 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
 Process Costing
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
 Process Cost Flows
(in journal entry 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
 Process Costing
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX
To record cost of goods sold.
 Equivalent Units of Production

Equivalent units are the product of the number of

partially completed units and the percentage
completion of those units.

We need to calculate equivalent units because a

department usually has some partially completed units
in its beginning and ending inventory.
Equivalent Units – The Basic Idea

Two half completed products are

equivalent to one completed product.

+ = 1

So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
 Quick Check 

For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in process 30 percent complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Jones
Jones have
have for
for the
the period?
period?
a.
a. 10,000
10,000
b.
b. 11,500
11,500
c.
c. 13,500
13,500
d.
d. 15,000
15,000
 Quick Check 

For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in process 30 percent complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Jones
Jones have
have for
for the
the period?
period?
a.
a. 10,000
10,000
10,000 units + (5,000 units × 0.30)
b.
b. 11,500
11,500 = 11,500 equivalent units
c.
c. 13,500
13,500
d.
d. 15,000
15,000
 Calculating Equivalent Units

Equivalent
Equivalent units
units can
can be
be calculated
calculated two
two
ways:
ways:
The
 The First-In,
First-In, First-Out
First-Out Method
Method –– FIFO
FIFO is
is
covered
covered in
in the
the appendix
appendix to
to this
this chapter.
chapter.

The
 The Weighted-Average
Weighted-Average Method
Method –– This
This
method
method will
will be
be covered
covered in
in the
the main
main portion
portion of
of the
the
chapter.
chapter.
 Equivalent Units of Production
Weighted-Average Method

The weighted-average method . . .

•Makes no distinction between work done in prior or
current periods.
•Blends together units and costs from prior and
current periods.

Cost per Costs for the period

equivalent = Equivalent units of production
for the period
unit
 Process Costing and Direct Labor

Direct
Materials Direct
Direct labor
labor costs
costs
may
may bebe small
small
in
in comparison
comparison to
Dollar Amount

to
Conversion other
other product
product
costs
costs in
in process
process
Direct cost
Labor cost systems.
systems.

Type of Product Cost

 Process Costing and Direct Labor

Direct
Materials Direct
Direct labor
labor costs
costs
Conversion
may
may bebe small
small
in
in comparison
comparison to
Dollar Amount

to
other
other product
product
costs
costs in
in process
process
cost
cost systems.
systems.

Type of Product Cost

Direct
Direct labor
labor and
and manufacturing
manufacturing overhead
overhead may
may be
be
combined
combined into
into one
one product
product cost
cost called
called conversion
conversion..
 Weighted-Average Example

Smith Company reported the following activity in

Department A 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%

 Weighted-Average Example

The first step in calculating the equivalent units is

to identify the units completed and transferred
out of Department A in June (5,400 units)

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
 Weighted-Average Example

The second step is to identify the equivalent units of

production in ending work in process with respect to
materials for the month (540 units) and add this to the
5,400 units from step one.
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540

Equivalent units of Production in

Department A during June 5,940
 Weighted-Average Example

The third step is to identify the equivalent units of

production in ending work in process with respect to
conversion for the month (270 units) and add this to the
5,400 units from step one.
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
 Weighted-Average Example

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

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

Materials 6,000 Units Started

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
 Weighted-Average Example

Conversion
Conversion 6,000 Units Started

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
Production Report – Weighted-Average

Production Report

AA quantity
quantity schedule
schedule
showing
showing the
the flow
flow of
of units
units
Section 1 and
and the
the computation
computation ofof
equivalent
equivalent units.
units.


AA computation
computation of
of
Section 2 cost
cost per
per equivalent
equivalent unit.
unit.

Section 3
 Production Report

Production Report

Section 1

Section 2

 Cost
Cost Reconciliation
Reconciliation
section
section shows
shows the
the
reconciliation
reconciliation of
of all
all cost
cost
Section 3 flows
flows into
into and
and out
out ofof the
the
department
department during
during the
the
period.
period.
 Production Report Example

Assume
Assume that
that Double
Double Diamond
Diamond Skis Skis uses
uses the
the
weighted-average
weighted-average method
method of of process
process costing
costing to
to
determine
determine unit
unit costs
costs in
in itit Shaping
Shaping and
and Milling
Milling
Department.
Department.
 Production Report Example

Work
Work in
in process,
process, May
May 1:
1: 200
200 units
units

Materials:
Materials: 55%
55% complete
complete $$ 9,600
9,600
Conversion:
Conversion: 30%
30% complete
complete 5,575
5,575

Production
Production started
started during
during May
May 5,000
5,000 units
units
Production
Production completed
completed during
during May
May 4,800
4,800 units
units

Costs
Costs added
added to
to production
production in
in May
May
Materials
Materials cost
cost $$ 368,600
368,600
Conversion
Conversion cost
cost 350,900
350,900

Work
Work in
in process,
process, May
May 31
31 400
400 units
units
Materials:
Materials: 40%
40% complete
complete
Conversion:
Conversion: 25%
25% complete
complete
 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160

5,200 4,960
 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900
Step 2: Calculating the Costs Per Equivalent
Unit

To calculate the cost per equivalent

unit for the period:

Cost per Costs for the period

equivalent = Equivalent units of production
for the period
unit
 Production Report Example

Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit
 Production Report Example

Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25

$378,200 ÷ 4,960 units = $76.25

 Production Report Example

Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25 $ 72.75
Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 ÷ 4,900 units = $72.75

 Production Report Example

Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
 Production Report Example

Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

4,800 units @ $149.00
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
 Production Report Example

Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

160 units @ $76.25
Cost Materials
100 units @ Conversion
$72.75
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 12,200 160
Conversion 7,275 100
Total work in process, May 31 19,475 All costs
Total cost accounted for $ 734,675 accounted for
 Operation Costing

Operation
Operation costing
costing is
is aa hybrid
hybrid of
of job-order
job-order
and
and process
process costing
costing because
because itit
possesses
possesses attributes
attributes of
of both
both approaches.
approaches.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Material
MaterialCosts
Costscharged
charged Conversion
Conversioncosts
costs
to
tobatches
batchesas
asin
in assigned
assignedtotobatches
batches
job-order
job-ordercosting.
costing. as
asin
inprocess
processcosting.
costing.