Cost 6 Process-Costing

4-1
Chapter 4
Systems Design:
Process Costing
Types of Costing Systems Used

to Determine Product Costs
Process Job-order
Costing Costing
F Many units of a single, homogeneous product

flow evenly through a continuous production
process.
F One unit of product is indistinguishable from any
other unit of product.
F Each unit of product is assigned the same
average cost.
I Made R. Natawidnyana, Ak., CPMA
4-2
Types of Costing Systems Used

to Determine Product Costs
Process Job-order
Costing Costing
Typical process cost applications:

v Petrochemical refinery
v Paint manufacturer
v Paper mill
Differences Between Job-

Order and Process Costing
Job order costing Process costing
l Many jobs are worked l A single product is
during the period. produced for a long
period of time.
l Costs are accumulated
by individual jobs. l Costs are accumulated
by departments.
l Job cost sheet is the
key document. l Department production
report is key document.
l Unit cost computed by
job. l Unit costs are computed
by department.

4-3
Process Costing
Direct
Materials Direct labor costs
may be small
in comparison to
Dollar Amount
other product
Conversion
costs in process
cost systems.
Direct
Labor
Type of Product Cost
Process Costing
Direct
Materials Direct labor costs
may be small
Conversion in comparison to
Dollar Amount
other product
costs in process
cost systems.
Type of Product Cost

So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.
4-4
Comparing Job-Order
and Process Costing
Direct
Materials
Work in Finished
Direct Labor
Process Goods
Manufacturing Cost of
Overhead Goods
Sold
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 Goods
Overhead Goods
Sold
4-5
Comparing Job-Order
and Process Costing
Costs are traced and
applied to departments
Direct in a process cost
Materials system.
Processing Finished
Direct Labor
Department Goods
Overhead Goods
Sold
Process Cost Flows
Let’s look at cost flows in a

process cost system with
Departments A and B.
We will use
T-accounts and
start with materials.

4-6
Process Cost Flows

Work in Process
Raw Materials Department A
•Purchases •Direct •Direct
Materials Materials
•Indirect •Direct
Materials Labor
Manufacturing Work in Process

Overhead Department B
Actual Applied
•Other •Direct
Overhead Materials
•Indirect
Materials
Process Cost Flows

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

Actual Applied
•Other •Direct
Overhead Materials
•Indirect •Direct
Materials Labor
•Indirect
Labor
4-7
Process Cost Flows

Work in Process
Department A
•Direct
Materials
•Direct
Labor
•Applied
Overhead

Actual Applied
•Other •Overhead •Direct
Overhead Applied to Materials
•Indirect Work in •Direct
Materials Process Labor
•Indirect •Applied
Labor Overhead
Process Cost Flows
Next, transfer work

from Department A
to Department B.

4-8
Process Cost Flows

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 Cost Flows
Now let’s complete

the goods in
Department B
and sell them.

4-9
Process Cost Flows
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
Equivalent Units of Production
Equivalent units are partially complete

and are part of work in process
inventory. Partially completed
products are expressed in terms of a
smaller number of fully completed
units.

4-10
Two half completed products are

equivalent to one completed product.
+ = 1
So, 10,000 units 70 percent complete

are equivalent to 7,000 complete units.
Calculating and Using

To calculate the cost per

equivalent unit for the period:
Cost per
Costs for the period
equivalent = Equivalent units of production
unit
for the period

4-11
Equivalent Units of Production –

Weighted Average Method
The weighted average method . . .
l Makes no distinction between work done in prior
and current period.
l Blends together units and costs from prior
period and current period.
Let’s see how this works!
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%

4-12
Equivalent units are calculated as follows:
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
4-13
900 units × 60% 540
900 units × 30% 270
Department A during June 5,940 5,670

Equivalent units of production always equals:
+ Equivalent units remaining in work in process
900 units × 60% 540
900 units × 30% 270
Department A during June 5,940 5,670
4-14
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
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

270 Equivalent Units 900 × 30%
5,670 Equivalent units
of production
4-15
Production Report
Shows the flow Provides cost

of units and costs information for
through work in financial
process statements
Production
Report
Becomes the
job cost sheet Helps managers
in process control their
costing departments
Production Report
Production Report
ŒA quantity schedule
showing the flow of units
Section 1 and the computation of
equivalent units.
•A computation of
Section 2 cost per equivalent unit.
Section 3

4-16
Production Report
Production Report
Ž A reconciliation of cost
flows for the period,
Section 1 including:
vTotal cost for units
completed and
Section 2 transferred from the
processing department.
vTotal cost for partially
completed units
Section 3 remaining in work in
process.
Production Report Example
Double Diamond Skis uses process costing to

determine unit costs in its Shaping and Milling
Department.
Double Diamond uses the weighted average
cost procedure.
Using the following information for the month of
May, let’s prepare a production report for
Shaping and Milling.

4-17
Work in process, May 1: 200 units

Materials: 55% complete. $ 9,600
Conversion: 30% complete. 5,575
Production started during May: 5,000 units

Production completed during May: 4,800 units
Costs added to production in May

Materials cost $ 368,600
Conversion cost 350,900
Work in process, May 31: 400 units

Materials 40% complete.
Conversion 25% complete.
Section 1: 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
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800

4-18

Total units 5,200
Equivalent units
Materials 40% complete 160
5,200 4,960

Total units 5,200
Equivalent units
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900

4-19
Section 2: Compute 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

Total
Total cost $ 734,675 $ 378,200 $ 356,475

Cost per equivalent unit $ 76.25
$378,200 ÷ 4,960 units = $76.25

4-20

Total
Total cost $ 734,675 $ 378,200 $ 356,475

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


Section 3: Cost Reconciliation
Total Equivalent Units

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

4-21


4,800 units @ $149.00 Cost Materials Conversion
Transferred out during May $ 715,200 4,800 4,800
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for


160 units @ $76.25 Cost Materials Conversion
100 units @ $72.75
Transferred out during May $ 715,200 4,800 4,800
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

4-22
Operation Costing
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 Charged Conversion costs

to batches as in assigned to batches
job-order costing. as in process costing.
Do You Want to See

Journal Entries?
I’m going to end this chapter and
process some leisure time, unless
you want to see some journal
entries.

4-23
Process Costing
Typical Accounting Entries
Let’s look at the accounting

journal entries for a process
cost system. We’ll omit the
numbers so that we can focus
on concepts.
Process Costing
GENERAL JOURNAL Page 4

Post.
Da te Description Re f. Debit Credit
Raw Ma te ria ls XXXXX
Accounts Pa yable XXXXX
To record the purchase of material.

4-24
Process Costing

Post.
Raw Ma te ria ls XXXXX
Accounts Pa yable XXXXX
To record the purchase of material.
W ork in Process - De partment A XXXXX

W ork in Process - De partment B XXXXX
Ra w Mate rials XXXXX
To record the use of direct material.
Process Costing

Post.
Sa la rie s a nd Wa ges Pa yable XXXXX
To record direct labor costs.

4-25
Process Costing

Post.
Ma nufa cturing Overhe a d XXXXX
To apply overhead to departments.
Process Costing

Post.
W ork in Proce ss - De pa rtme nt A XXXXX
To record the transfer of goods from
Department A to Department B.

4-26
Process Costing

Post.
Finished Goods XXXXX
W ork in Proce ss - De pa rtme nt B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
Process Costing

Post.
Accounts Re ceivable XXXXX
Sa le s XXXXX
To record sales on account.
Cost of Goods Sold XXXXX

Finishe d Goods XXXXX
To record cost of goods sold.

4-27
End of Chapter 4

Cost 6 Process-Costing

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4-1

Types of Costing Systems Used

F Many units of a single, homogeneous product

Types of Costing Systems Used

Typical process cost applications:

I Made R. Natawidnyana, Ak., CPMA

Differences Between Job-

I Made R. Natawidnyana, Ak., CPMA

Type of Product Cost

I Made R. Natawidnyana, Ak., CPMA

Type of Product Cost

Process Cost Flows

Let’s look at cost flows in a

I Made R. Natawidnyana, Ak., CPMA

Process Cost Flows

Manufacturing Work in Process

I Made R. Natawidnyana, Ak., CPMA

Process Cost Flows

Manufacturing Work in Process

Process Cost Flows

Manufacturing Work in Process

Process Cost Flows

Next, transfer work

I Made R. Natawidnyana, Ak., CPMA

Process Cost Flows

I Made R. Natawidnyana, Ak., CPMA

Process Cost Flows

Now let’s complete

I Made R. Natawidnyana, Ak., CPMA

Process Cost Flows

I Made R. Natawidnyana, Ak., CPMA

Equivalent Units of Production

Equivalent units are partially complete

I Made R. Natawidnyana, Ak., CPMA

Equivalent Units of Production

Two half completed products are

So, 10,000 units 70 percent complete

I Made R. Natawidnyana, Ak., CPMA

Calculating and Using

To calculate the cost per

I Made R. Natawidnyana, Ak., CPMA

Equivalent Units of Production –

Let’s see how this works!

I Made R. Natawidnyana, Ak., CPMA

Weighted Average Example

Smith Company reported the following activity

Units started into production in June 6,000

Units completed and transferred out 5,400

Work in process, June 30 900 60% 30%

I Made R. Natawidnyana, Ak., CPMA

Weighted Average Example

Equivalent units are calculated as follows:

I Made R. Natawidnyana, Ak., CPMA

Weighted Average Example

Equivalent units are calculated as follows:

Equivalent units of Production in

Weighted Average Example

Equivalent units are calculated as follows:

Weighted Average Example

Weighted Average Example

Materials 6,000 Units Started

5,400 Units Completed