Process Costing

Chapter 4

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2012byTheMcGrawHillCompanies,Inc.Allrightsreserved.
 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:
1.Is used when a single product is produced on a
continuing basis or for a long period of time. Job-order
costing is used when many different jobs having different
production requirements are worked on each period.
2.Systems accumulate costs by department. Job-order
costing systems accumulated costs by individual jobs.
3.Systems compute unit costs by department. Job-order
costing systems compute unit costs by job on the job cost
sheet.
 4-4

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.
 4-5

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.
 4-6

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.
 4-7

Learning Objective 1

Record the flow of

materials, labor, and
overhead through a
process costing system.
 4-8

Comparing Job-Order and Process

Costing
Direct
Materials

Work in Finished
Direct Labor
Process Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-9

Comparing Job-Order and Process

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

Finished
Direct Labor Jobs
Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-10

Comparing Job-Order and Process

Costing
Costs are traced and
applied to departments
Direct in a process cost
Materials system.

Direct Labor
Processing Finished
Department Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-11

T-Account and Journal Entry Views of

Process 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.
 4-12

Process Cost Flows: The Flow of Raw

Materials (in T-account form)
Work in Process
Raw Materials Department A
Direct Direct
Materials Materials

Work in Process
Department B
Direct
Materials
 4-13

Process Cost Flows: The Flow of Raw

Materials (in journal entry form)
 4-14

Process Cost Flows: The Flow of Labor

Costs (in 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
 4-15

Process Costing: The Flow of Labor

Costs (in journal entry form)
 4-16

Process Cost Flows: The Flow of Manufacturing

Overhead Costs (in T-account form)
Work in Process
Department A
Direct
Manufacturing Materials
Overhead Direct
Actual Overhead Labor
Overhead Applied to Applied
Work in Overhead
Process
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead
 4-17

Process Cost Flows: The Flow of Manufacturing

Overhead Costs (in journal entry form)
 4-18

Process Cost Flows: Transfers from WIP-

Dept. A to WIP-Dept. B (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

Department
Department Department
Department
A
A B
B
 4-19

Process Cost Flows: Transfers from WIP-Dept. A

to WIP-Dept. B (in journal entry form)
 4-20

Process Cost Flows: Transfers from WIP-Dept.

B to Finished Goods (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
 4-21

Process Cost Flows: Transfers from WIP-Dept.

B to Finished Goods (in journal entry form)
 4-22

Process Cost Flows: Transfers from Finished

Goods to COGS (in 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
 4-23

Process Cost Flows: Transfers from Finished

Goods to COGS (in journal entry form)
 4-24

Equivalent Units of Production

Equivalent units are the
product of the number
of partially completed
units and the
percentage completion
of those units.

These partially completed units complicate the

determination of a departments output for a given
period and the unit cost that should be assigned to
that output.
 4-25

Equivalent Units The Basic Idea

Two half completed products are
equivalent to one complete 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.
 4-26

Quick Check
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
 4-27

Quick Check
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 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
 4-28

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.
 4-29

Learning Objective 2

Compute the equivalent

units of production using
the weighted-average
method.
 4-30

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.
 4-31

Treatment of Direct Labor

Direct
Materials Direct labor costs
may be small
Dollar Amount

Manufacturing in comparison to
Overhead
other product
Direct costs in process
Labor cost systems.

Type of Product Cost

 4-32

Treatment of Direct Labor

Direct
Materials
Direct labor and
Conversion manufacturing
Dollar Amount

Direct overhead may be

Labor
combined into
Direct Manufacturing
one classification
Labor Overhead of product
cost called
conversion costs.
Type of Product Cost
 4-33

Weighted-Average An Example
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%

 4-34

Weighted-Average An Example
The first step in calculating the equivalent units is to
identify the units completed and transferred out of
Assembly Department in June (5,400 units)
 4-35

Weighted-Average An 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 adding this to the 5,400 units from step one.
 4-36

Weighted-Average An 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 adding this to the 5,400 units from step one.
 4-37

Weighted-Average An Example
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
 4-38

Weighted-Average An Example
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
 4-39

Weighted-Average An Example
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
 4-40

Learning Objective 3

Compute the cost per

equivalent unit using the
weighted-average
method.
 4-41

Compute and Apply Costs

Beginning Work in Process Inventory: 400 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
 4-42

Compute and Apply Costs

The formula for computing the cost per
equivalent unit is:
Cost of beginning
Cost per Work in Process + Cost added during
equivalent =
Inventory the period
unit Equivalent units of production
 4-43

Compute and Apply Costs

Here is a schedule with the cost and equivalent
unit information.
 4-44

Compute and Apply Costs

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

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

 4-45

Learning Objective 4

Assign costs to units

using the weighted-
average method.
 4-46

Applying Costs
 4-47

Applying Costs
 4-48

Applying Costs
 4-49

Computing the Cost of Units

Transferred Out
 4-50

Computing the Cost of Units

Transferred Out
 4-51

Computing the Cost of Units

Transferred Out
 4-52

Learning Objective 5

Prepare a cost
reconciliation report.
 4-53

Reconciling Costs
 4-54

Reconciling Costs
 4-55

Operation Costing
Operation cost is a hybrid of job-order and
process costing because it possesses
attributes of both approaches.

Operation
Operation costing
costing is
is
commonly
commonly used
used when
when
batches
batches of
of many
many
different
different products
products pass
pass
through
through the
the same
same
processing
processing department.
department.