Process-Costing Systems: The Mcgraw Hill Companies, Inc. 2006 Mcgraw Hill/Irwin

8
Process-Costing
Systems
McGrawHill/Irwin
TheMcGrawHillCompanies,Inc.2006
8-2
Process Costing
Production environment
Homogenous units
Mass produced
Automated
Continuous flow
McGrawHill/Irwin
8-3
Process Costing
Production environment
Homogenous units
Mass produced
Automated
Continuous flow
McGrawHill/Irwin
Costing procedure
Costs are recorded
for a department.
Department costs are
assigned equally to
units produced.
8-4
Process Costing
To help
set prices
To evaluate
products
How are unit

costs used?
To evaluate
production
efficiency
McGrawHill/Irwin
To determine
balance sheet
inventory
8-5
Process Costing
Dollar Amount
Direct
Materials
McGrawHill/Irwin
Direct labor costs

are usually small
Manufacturing in comparison to
Overhead
other product
costs in process
Direct
cost systems.
Labor
(high level of
automation)
Type of Product Cost
8-6
Process Costing
Dollar Amount
Direct
Materials
Conversion
Direct labor costs

are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)
Type of Product Cost

So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.
McGrawHill/Irwin
8-7
Comparing Job Costing

and Process Costing
Job costing
Process costing
Costs accumulated by the

job.
Costs accumulated by
department or process.
Work in process has a job

cost record for each job.
Many unique, high cost

jobs.
Work in process has a

production report for each
batch of products.
A few identical, low cost

products.
Units continuously
produced for inventory in
automated process.
Jobs built to customer

order.
McGrawHill/Irwin
8-8

and Process Costing
Work in process
contains individual
jobs in a
job cost system.
Direct
Materials
Direct Labor
Manufacturing
Overhead
McGrawHill/Irwin
Jobs
Finished
Goods
Cost of
Goods
Sold
8-9

and Process Costing
Direct
Materials
Direct Labor
& Overhead
(Conversion)
Work in process
contains homogenous
products in a process
cost system.
Products
Finished
Goods
Cost of
Goods
Sold
McGrawHill/Irwin
810

and Process Costing
Sameobjective:
objective: determine
determine
Same
thecost
costof
ofproducts
products
the
Same
Same Inventory
Inventory accounts:
accounts: raw
raw materials,
materials,
work
work in
in process,
process, and
and finished
finished goods
goods
Same
Same overhead
overhead assignment
assignment method:
method:
predetermined
predetermined rate
rate times
times actual
actual activity
activity
McGrawHill/Irwin
811
Department With No Beginning or

Ending WIP Inventory
Same
objective:ordetermine
No beginning
ending
the
of products
Work
incost
Process
Inventory
a company
is
Same Common
Inventorywhen
accounts:
raw materials,
successful
at just-in-time
production
work in process,
and finished
goods
assignment
method:
Manufacturing
costs
for a period
CostSame
per overhead
=
predetermined
rate
times actual
activity
unit
Units
produced
for the
period
McGrawHill/Irwin
812
Department With No Beginning or

Spirit Beverages produces a sport drink. During October, the
Blending Department had the following manufacturing costs:
Direct materials
Conversion costs
Total costs to be assigned
$16,000
5,600
$21,600
Spirit started and completed 8,000 four-bottle packages during

October. Spirit had no beginning work in process inventory.
Compute the manufacturing unit costs for October.
Direct materials
Conversion costs
Mfg. cost per completed unit
McGrawHill/Irwin
$16,000 8,000 units = $ 2.00

5,600 8,000 units = $ 0.70
$21,600 8,000 units = $ 2.70
813
Department With Ending WIP

Inventory
Same objective: determine
No beginning
in products
Process Inventory
theWork
cost of
Same Inventory
accounts:
raw materials,
Ending
Work in Process
Inventory
consists
of incomplete
units atand
the finished
end of the
period.
work in process,
goods
Same
overhead
assignment
method:
We must
now deal
with the concept
predetermined
rate times
actual activity
of equivalent
units.
McGrawHill/Irwin
814

Inventory
Samenow
objective:
determine
We must
deal with
the concept
theequivalent
cost of products
of
units.
Equivalent
unitsaccounts:
is a concept
expressing
Same
Inventory
raw
materials,
partially
units
asfinished
a smaller
number
workcomplete
in process,
and
goods
of fully complete units.
CostSame
per overhead
assignment
method:
Manufacturing
costs
for a period
=
equivalent
predetermined
rate times
actual
activity
Equivalent
units
for the
period
unit
McGrawHill/Irwin
815
Equivalent Units Example

Two one-half filled cups are
equivalent to one full cup.
So, 10,000 units 70 percent complete

are equivalent to 7,000 complete units.
McGrawHill/Irwin
816
Assigning Costs to Products
Lets look at the five-step

process for assigning costs
to units produced, followed
by an example using the five
steps.
McGrawHill/Irwin
817
Assigning Costs to Products

The Five-step Process
Summarize
Summarizethe
theflow
flow of
ofphysical
physicalunits
units(number
(number of
of
units
units completed
completed and
and number
number of
of units
unitsremaining
remaining in
in
process).
process).
Compute
Computethe
thenumber
number of
ofequivalent
equivalentunits
unitsproduced.
produced.
Summarize
Summarizethe
thetotal
totalcosts
coststo
to be
be accounted
accounted for
for
(costs
(costsin
inbeginning
beginning work
work in
inprocess
processinventory
inventoryand
and
the
thecosts
costsincurred
incurred in
inthe
the current
current period).
period).
Compute
Computecosts
costsper
per equivalent
equivalentunit.
unit.
Assign
Assignunit
unit costs
costsfrom
from
to
tounits
unitscompleted
completedand
andto
to
units
units in
inending
endingwork-in-process
work-in-processinventory.
inventory.
McGrawHill/Irwin
818

Inventory
Spirit incurred the following manufacturing costs in October
(same data as before):
Direct materials
Conversion costs
Total costs to be assigned
$16,000
5,600
$21,600
Spirit started 8,000 units and completed 6,000 units in October.

Spirit had no beginning work in process inventory. All direct
materials had been added to each unit still in process, but only
20 percent of conversion costs had been incurred for the 2,000
units still in process.
Complete the five-step process to assign
costs to units produced in October.
McGrawHill/Irwin
819

Inventory Equivalent Units
Flow of Units in October

Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Ending work in process inventory
Total units accounted for
McGrawHill/Irwin
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
0
8,000
8,000
6,000
2,000
8,000
?
?
?
?
?
?
820


Units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
0
8,000
8,000
6,000
2,000
8,000
6,000
?
?
6,000
?
?
Units completed and transferred are 100%

complete for both material and conversion.
McGrawHill/Irwin
821


Units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
0
8,000
8,000
6,000
2,000
8,000
6,000
2,000
8,000
6,000
?
?
All material had been added to

units remaining in process.
McGrawHill/Irwin
822


Units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
0
8,000
8,000
6,000
2,000
8,000
6,000
2,000
8,000
6,000
400
6,400
20% of 2,000 units
McGrawHill/Irwin
823

Inventory Assigning Costs
Flow of Costs in October

Costs to account for (Step 3)
Costs in beginning work in process inventory
Current period costs
Total costs to account for
Material Conversion
$
0
16,000
$ 16,000
$
$
Total
0 $
0
5,600
21,600
5,600 $ 21,600
Equivalent Units
Costs per equivalent unit (Step 4)
8,000
?
6,400
?
Costs accounted for (Step 5)

Costs transferred
Cost of ending work in process inventory
Total costs accounted for
?
?
?
?
?
?
?
?
?
McGrawHill/Irwin
824


Equivalent Units
Costs transferred
Material Conversion
$
0
16,000
$ 16,000
$
8,000
2.00
Total
0 $
0
5,600
21,600
5,600 $ 21,600
6,400
0.875
?
?
?
?
?
?
$ 2.875
?
?
?
$16,000 8,000 equivalent units

McGrawHill/Irwin
825


Material Conversion
$
0
16,000
$ 16,000
Equivalent Units
8,000
2.00

Costs transferred
$ 12,000
?
?
Total
0 $
0
5,600
21,600
5,600 $ 21,600
6,400
0.875
$ 2.875
5,250 $ 17,250
?
?
?
?
6,000 equivalent units @ $2.00

McGrawHill/Irwin
826


Material Conversion
$
0
16,000
$ 16,000
Equivalent Units
8,000
2.00

Costs transferred
$ 12,000
4,000
$ 16,000
Total
0 $
0
5,600
21,600
5,600 $ 21,600
6,400
0.875
$ 2.875
5,250 $ 17,250
350
4,350
5,600 $ 21,600

400 equivalent units @ $0.875
McGrawHill/Irwin
827
Department with Beginning &

When
When there
there is
is Beginning
Beginning WIP,
WIP,the
the
determination
determination of
of equivalent
equivalent units
units
becomes
becomes somewhat
somewhat more
more complicated.
complicated.
Primary
Primaryquestion
questionto
tobe
beanswered:
answered:
Which
Whichunits
unitswere
werecompleted
completedfirst
first
during
duringthe
the period?
period?
(How
(Howyou
youanswer
answer this
thisquestion
questionwill
will
affect
affect the
the Total
TotalEU
EUfor
for the
theperiod.)
period.)
McGrawHill/Irwin
828

Weighted
Weighted Average
Average vs.
vs. FIFO
FIFO
WeightedWeightedAverage
Average
All
Allunits
unitsand
andcosts
costs
are
areconsidered
considered
together
togetherto
todetermine
determine
average
averagecost
costper
perEU,
EU,
regardless
regardlessof
of
whether
whetherthe
thecosts
costs
were
wereincurred
incurredlast
last
period
periodor
orcurrently.
currently.
McGrawHill/Irwin
FIFO
FIFO
Costs
Costsare
areaccounted
accounted
for
forby
bylayer.
layer.Cost
Costper
per
EU
EUfor
forthis
thisperiod
periodis
is
computed
computedseparately
separately
from
fromthe
theCost
Costper
perEU
EU
for
forlast
lastperiod.
period.
829

Weighted
Weighted Average
Average vs.
vs. FIFO
FIFO
Average
All
Allunits
unitsand
andcosts
costs
are
areconsidered
considered
together
togetherto
todetermine
determine
average
averagecost
costper
perEU,
EU,
regardless
regardlessof
of
whether
whetherthe
thecosts
costs
were
wereincurred
incurredlast
last
period
periodor
orcurrently.
currently.
McGrawHill/Irwin
Average is
is
the
the most
most
commonly
commonly
used
used
method.
method.
830
Assigning Costs Using

Weighted-Average Costing
The
The weighted
weighted average
average method
method .. .. ..
Makes
Makesno
nodistinction
distinctionbetween
betweenwork
workdone
donein
inthe
theprior
priorperiod
period
and
andwork
workdone
donein
inthe
thecurrent
currentperiod.
period.
Blends
Blendstogether
togetherunits
unitsand
andcosts
costsin
inbeginning
beginninginventory
inventorywith
with
units
unitsand
andcosts
costsin
inthe
thecurrent
currentperiod.
period.
The
The FIFO
FIFO method
method isis covered
covered in
inAppendix
AppendixA.
A.
Lets revisit Spirit in December

where we have a beginning
inventory from the previous month.
McGrawHill/Irwin
831
Beginning and Ending Inventory

Spirit had the following cost and
unit data for December:
Beginning WIP inventory

Costs incurred in Dec.
Units Started in Dec.
Units completed
Ending WIP inventory
Percentage Complete
Total Costs
Units Materials Conversion Materials Conversion
2,000
40%
80% $
2,000 $
1,000
20,000
7,000
12,000
10,000
100%
100%
4,000
25%
60%
Complete the five-step process to assign costs to units

completed and to units left in process for December.
McGrawHill/Irwin
832

First lets look at a flow chart

showing the blending of units
in beginning work in process
inventory with units started
during the month.
McGrawHill/Irwin
833

Beginning
Inventory
2,000 units
14,000 units
10,000 units
completed
12,000 units
started
Ending
Inventory
4,000 units
Now lets examine the five-step process.
McGrawHill/Irwin
834

Flow of Units in December

Units accounted for
McGrawHill/Irwin
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
4,000
14,000
?
?
?
?
?
?
835


Units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
4,000
14,000
10,000
?
?
10,000
?
?

McGrawHill/Irwin
836


Units accounted for
25% of 4,000 units
McGrawHill/Irwin
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
4,000
14,000
10,000
1,000
11,000
10,000
2,400
12,400
60% of 4,000 units
837

Flow of Costs in December

Material Conversion Total
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs assigned to units transferred
McGrawHill/Irwin
11,000
?
?
?
?
12,400
?
?
?
?
?
?
?
?
838


1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
11,000
$
2.00 $
?
?
?
12,400
0.6452 $ 2.6452
?
?
?
?
?
?

McGrawHill/Irwin
839


1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
11,000
$
2.00 $
12,400
0.6452 $ 2.6452

$ 20,000 $
?
?
6,452 $ 26,452
?
?
?
?

McGrawHill/Irwin
840


1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
11,000
$
2.00 $
12,400
0.6452 $ 2.6452

$ 20,000 $
2,000
$ 22,000 $
6,452 $ 26,452
1,548
3,548
8,000 $ 30,000

McGrawHill/Irwin
841
Costs Transferred in
from Prior Departments
Multiple
Multipledepartments
departments in
in aaprocess
process result
result in
in units
units and
and
costs
coststhat
thatare
aretransferred
transferredfrom
from aaprior
prior department
department to
to
the
thecurrent
currentdepartment.
department.
These
Thesetransferred-in
transferred-incosts
costsare
aretreated
treatedexactly
exactlylike
likeaa
direct
direct material
materialthat
that isis added
added at
at the
thebeginning
beginningof
ofaa
production
productionprocess.
process.
Lets
Letsrevisit
revisitSpirit.
Spirit.with
withthe
theaddition
additionof
oftransferred-in
transferred-in
units
unitsand
andcosts.
costs. We
Wewill
willuse
usethe
theDecember
December
information
informationand
andthe
theweighted-average
weighted-average method.
method.
McGrawHill/Irwin
842
Complete the five-step process for Spirit to assign costs to
units completed and to units left in process for December.
Flow of units in December

Transferred-in during Dec.
Units completed
Percentage Complete
Units Materials Conversion Trans-in
2,000
40%
80%
100%
12,000
10,000
100%
100%
100%
4,000
25%
60%
100%
Flow of costs in December

Transferred-in during Dec.
Units completed
Total Costs
Units Materials Conversion Trans-in
$ 20,000 $
7,000 $ 52,000
2,000
2,000
1,000
5,000
12,000
10,000
4,000
McGrawHill/Irwin
843

Units transferred in during Dec.
Units accounted for
McGrawHill/Irwin
Step 1
Step 2
Physical
Equivalent Units
Units Material Conversion Trans-in
2,000
12,000
14,000
10,000
4,000
14,000
?
?
?
?
?
?
?
?
?
844

Units accounted for
Step 1
Step 2
Physical
Equivalent Units
2,000
12,000
14,000
10,000
4,000
14,000
10,000
?
?
10,000
?
?
10,000
?
?
100% complete for material,

conversion, and transferred-in units.
McGrawHill/Irwin
845

Units accounted for
25% of 4,000 units
Step 1
Step 2
Physical
Equivalent Units
2,000
12,000
14,000
10,000
4,000
14,000
10,000
1,000
11,000
10,000
2,400
12,400
10,000
4,000
14,000
60% of 4,000 units

Transferred-in units are 100% complete
McGrawHill/Irwin
846

Costs in beginning WIP inventory
Equivalent units
Cost of ending WIP inventory
McGrawHill/Irwin
Material Conversion Trans-in

$ 2,000 $
20,000
$ 22,000 $
11,000
?
?
?
?
1,000
7,000
8,000
12,400
?
?
?
?
Total
5,000 $ 8,000
52,000
79,000
$ 57,000 $ 87,000
14,000
?
?
?
?
?
?
?
?
847

Equivalent units
11,000
$ 2.00 $

$ 2,000 $
20,000
$ 22,000 $
?
?
?
1,000
7,000
8,000
Total
5,000 $ 8,000
52,000
79,000
$ 57,000 $ 87,000
12,400
14,000
0.6452 $ 4.0714 $ 6.7166
?
?
?
?
?
?
?
?
?

McGrawHill/Irwin
848

Equivalent units
11,000
$ 2.00 $
$ 2,000 $
20,000
$ 22,000 $

Costs assigned to units transferred $ 20,000 $
?
?
1,000
7,000
8,000
Total
5,000 $ 8,000
52,000
79,000
$ 57,000 $ 87,000
12,400
14,000
0.6452 $ 4.0714 $ 6.7166
6,452
?
?
$ 40,714 $ 67,166
?
?
?
?

McGrawHill/Irwin
849

Equivalent units
11,000
$ 2.00 $
$ 2,000 $
20,000
$ 22,000 $

Costs assigned to units transferred $ 20,000 $
2,000
$ 22,000 $
1,000
7,000
8,000
Total
5,000 $ 8,000
52,000
79,000
$ 57,000 $ 87,000
12,400
14,000
0.6452 $ 4.0714 $ 6.7166
6,452
1,548
8,000
$ 40,714 $ 67,166
16,286
19,834
$ 57,000 $ 87,000

McGrawHill/Irwin
850
Accounting for Spoilage Costs
Spoilage
Spoilagerepresents
representsthe
theamount
amount of
of resources
resourcesthat
thatgo
go
into
intothe
theprocess,
process,but
but DO
DONOT
NOTresult
result in
infinished
finished product.
product.
Managers
Managers face
face key
keyproblems
problemsrelated
related to
to spoilage:
spoilage:
1.
1.Identifying
Identifyingwhether
whetherititexists.
exists.
2.
2.Determining
Determiningwhether
whetheritit can
canbe
beeliminated.
eliminated.
3.
3.Deciding
Decidingwhether
whether eliminating
eliminatingitit is
isworthwhile.
worthwhile.
4.
4.Determining
Determiningthe
thecost
costof
of spoilage.
spoilage.
The
The5-step
5-stepapproach
approachdiscussed
discussedearlier
earliercan
can
be
bemodified
modifiedby
byincluding
including spoilage
spoilage
McGrawHill/Irwin
851

Normal
Normal spoilage
spoilage occurs
occurs as
as aa part
part of
of the
the regular
regular operations
operations
of
of an
an efficient
efficient process.
process.
Abnormal
Abnormal spoilage
spoilage is
is the
the result
result of
of unusual
unusual operating
operating problems.
problems.
Abnormal
Abnormal spoilage
spoilage is
is in
in addition
addition to
to normal
normal spoilage,
spoilage,
and
and is
is recorded
recorded as
as aa loss
loss of
of the
the period.
period.
We
We will
will illustrate
illustrate the
the spoilage
spoilage using
using the
the December
December data
data for
for
Spirit
Spirit Beverages,
Beverages, but
but without
without the
the transferred-in
transferred-in costs.
costs.
McGrawHill/Irwin
852

Units Started in Dec.
Units completed
Spoiled units
Percentage Complete
Total Costs
Units Materials Conversion Materials Conversion
2,000
40%
80% $
2,000 $
1,000
20,000
7,000
12,000
10,000
100%
100%
500
20%
50%
3,500
25%
60%
Spoilage is found at an inspection when 20% of the material

has been added and the conversion is 50% complete.
McGrawHill/Irwin
853

Beginning
Inventory
2,000 units
14,000 units
10,000 units
completed
12,000 units
started
Spoilage
500 units
Ending
Inventory
3,500 units
Complete the five-step process to assign costs to units

completed and to units left in process for December.
McGrawHill/Irwin
854

Units accounted for
Spoiled units
McGrawHill/Irwin
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
500
3,500
14,000
?
?
?
?
?
?
?
?
855

Units accounted for
Spoiled units
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
500
3,500
14,000
10,000
?
?
?
10,000
?
?
?

McGrawHill/Irwin
856

Units accounted for
Spoiled units
20% of 500 units

McGrawHill/Irwin
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
500
3,500
14,000
10,000
100
?
?
10,000
250
?
?
50% of 500 units

857

Units accounted for
Spoiled units
25% of 3,500 units

McGrawHill/Irwin
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
500
3,500
14,000
10,000
100
875
10,975
10,000
250
2,100
12,350
60% of 3,500 units

858

1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
Spoiled units
McGrawHill/Irwin
10,975
?
?
?
?
?
12,350
?
?
?
?
?
?
?
?
?
?
859

1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
10,975
$ 2.0046 $

Spoiled units

McGrawHill/Irwin
?
?
?
?
12,350
0.6478 $ 2.6523
?
?
?
?
?
?
?
?

860

1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
10,975
$ 2.0046 $
12,350
0.6478 $ 2.6523

Spoiled units
$ 20,046 $
?
?
?
6,478 $ 26,524
?
?
?
?
?
?

McGrawHill/Irwin

861

1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
10,975
$ 2.0046 $
12,350
0.6478 $ 2.6523

Spoiled units
$ 20,046 $
200
?
?
6,478 $ 26,524
162
362
?
?
?
?

McGrawHill/Irwin

862

1,000 $ 3,000
20,000
7,000
27,000
$ 22,000 $
8,000 $ 30,000
Equivalent units
10,975
$ 2.0046 $
12,350
0.6478 $ 2.6523

Spoiled units
$ 20,046 $
200
1,754
$ 22,000 $
6,478 $ 26,524
162
362
1,360
3,114
8,000 $ 30,000

McGrawHill/Irwin
863
Process Cost Flows
Lets conclude our discussion

of process costing by examining
the cost flows in a twodepartment process, A and B.
We will use T-accounts and start
with materials.
McGrawHill/Irwin
864
Process Cost Flows

Materials Inventory
Purchases
Direct
Materials
Factory Overhead
Other
Overhead
McGrawHill/Irwin
WIP Dept. A
Direct
Materials
WIP Dept. B
Direct
Materials
865
Process Cost Flows

Materials Inventory
Purchases
Direct
Materials
Indirect
Materials
Factory Overhead
Other
Overhead
Indirect
Materials
McGrawHill/Irwin
WIP Dept. A
Direct
Materials
WIP Dept. B
Direct
Materials
866
Process Cost Flows
Next lets add labor and

manufacturing overhead
to the process cost flows.
Are you with me?
McGrawHill/Irwin
867
Process Cost Flows

Wages Payable
Indirect
Labor
Factory Overhead
Other
Overhead
Indirect
Materials
Indirect
Labor
McGrawHill/Irwin
WIP Dept. A
Direct
Materials
WIP Dept. B
Direct
Materials
868
Process Cost Flows

Wages Payable
Indirect
Labor
Direct
Labor
Factory Overhead
Overhead
Other
Overhead Applied to
Work in
Indirect
Materials Process
Indirect
Labor
McGrawHill/Irwin
WIP Dept. A
Direct
Materials
Conversion
WIP Dept. B
Direct
Materials
Conversion
869
Process Cost Flows
Next lets transfer work

from Department A to
Department B. Are you
ready?
McGrawHill/Irwin
870
Process Cost Flows

WIP Dept. A
Direct
Materials
Transferred
to Dept. B
Conversion
WIP Dept. B
Direct
Materials
Conversion
Transferred
from Dept. A
McGrawHill/Irwin
871
Process Cost Flows
Now lets complete the

goods in Department B and
sell them. Still with me?
McGrawHill/Irwin
872
Process Cost Flows

WIP Dept. B
Finished Goods
Direct
Cost of
Materials
Goods
Conversion
Mfd.
Transferred
from Dept. A
Cost of
Goods
Mfd.
Cost of Goods Sold
McGrawHill/Irwin
873
Process Cost Flows

WIP Dept. B
Finished Goods
Direct
Cost of
Materials
Goods
Conversion
Mfd.
Transferred
from Dept. A
Cost of
Goods
Mfd.
Cost of
Goods
Sold
Cost of Goods Sold

Cost of
Goods
Sold
McGrawHill/Irwin
874
End of Chapter 8
McGrawHill/Irwin

Process-Costing Systems: The Mcgraw Hill Companies, Inc. 2006 Mcgraw Hill/Irwin

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8

How are unit

Direct labor costs

Direct labor costs

Type of Product Cost

Comparing Job Costing

Costs accumulated by the

Work in process has a job

Many unique, high cost

Work in process has a

A few identical, low cost

Jobs built to customer

Comparing Job Costing

Comparing Job Costing

Comparing Job Costing

Department With No Beginning or

Department With No Beginning or

Spirit started and completed 8,000 four-bottle packages during

$16,000 8,000 units = $ 2.00

Department With Ending WIP

Department With Ending WIP

Equivalent Units Example

So, 10,000 units 70 percent complete

Assigning Costs to Products

Lets look at the five-step

Assigning Costs to Products

Department With Ending WIP

Spirit started 8,000 units and completed 6,000 units in October.

Department With Ending WIP

Flow of Units in October

Department With Ending WIP

Flow of Units in October

Units completed and transferred are 100%

Department With Ending WIP

Flow of Units in October

All material had been added to

Department With Ending WIP

Flow of Units in October

20% of 2,000 units

Department With Ending WIP

Flow of Costs in October

Costs accounted for (Step 5)

Department With Ending WIP

Flow of Costs in October

$16,000 8,000 equivalent units

Department With Ending WIP

Flow of Costs in October

Costs accounted for (Step 5)

6,000 equivalent units @ $2.00

Department With Ending WIP

Flow of Costs in October

Costs accounted for (Step 5)

2,000 equivalent units @ $2.00

Department with Beginning &

Department with Beginning &

Department with Beginning &

Assigning Costs Using

Lets revisit Spirit in December

Beginning and Ending Inventory

Beginning WIP inventory

Complete the five-step process to assign costs to units

Beginning and Ending Inventory

First lets look at a flow chart