Revised Summer 2010

CHAPTER 4
SYSTEMS DESIGN: PROCESS COSTING
Key Terms and Concepts to Know
Differences between Job-Order Costing and Processing Costing:
Processing costing accumulates manufacturing costs (raw material, direct labor
and manufacturing overhead) by processing department.
Job-order costing accumulates manufacturing costs by job.
Process costing uses a work-in-process account for each department whereas joborder costing uses one work-in-process account for all jobs.
In process costing, the flow of costs through the work-in-process accounts follows
the flow of units being produced through the manufacturing departments. When
the units are completed in one department and transferred to the next
department, the costs incurred to date for those units are transferred to the next
departments work-in-process inventory account.
Production Report:
The Production Report replaces the Job Cost Sheet as the key document in
process costing.
A production report is prepared for each work-in-process account to assign the
total costs incurred to the units completed and transferred to the next department
(or finished goods inventory if they are ready for sale) and to the units remaining
in work-in-process in three major steps:
o first by analyzing the flow of units through the work-in-process account
o second by accumulating the costs added to work-in-process during the
period and the costs already present in the beginning balance in work-inprocess
o third by assigned the total costs in work-in-process to the units transferred
out and the units still in process.
Equivalent Units of Production Weighted Average Method:
At the end of most accounting periods, the balance in work-in-process inventory is
not zero. This means incomplete units are still in process and must be assigned
costs in proportion to how complete they are with respect to each of direct
materials, direct labor and manufacturing overhead.
To simplify the calculations, partially completed units are converted into equivalent
whole units for each type of cost. For example, if there are six units in process at
the end of the period and one-third of the direct materials needed for a complete
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unit has been added to each unit, then the six incomplete units are the equivalent
of two complete units of direct materials.
Units completed and transferred out are always 100% complete for all types of
costs.

Key Topics to Know

Production Report
The production report is completed in four steps:
Physical
Units

STEP 1: Work in Process Units

Beginning balance
+ Started into production
= Units to be Accounted For

STEP 2: Equivalent Units

Materials

Labor

Overhead

Completed and Transferred Out

+ Ending balance
= Units Accounted For

STEP 3A: Work in Process Dollars

Total

Beginning balance
+ Costs added during the period
= Costs to be Accounted For

STEP 3B: Cost per Equivalent Unit

STEP 4: Costs Assigned

Completed and Transferred Out

+ Ending balance
= Costs Accounted For

Step 1: Analyze the flow of physical units through the work-in-process inventory
account. Units to be Accounted For (inflows) must equal Units Accounted For
(outflows).
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Step 2: Calculate equivalent units only for Units Completed and Transferred Out

and Ending Balance in work-in-process. Multiply physical units by percent

complete for each cost column (materials, labor and overhead). Total equivalent
units for each cost column.
Step 3A: Total costs in beginning inventory and added during the period for each
cost column (materials, labor and overhead) and in total.
Step 3B: For each cost column (materials, labor and overhead), divide total costs
from Step 3A by total equivalent units from Step 2.
Step 4: For Completed and Transferred Out, multiply equivalent units from Step 2
by cost per equivalent unit from Step 3B for each cost column (materials, labor
and overhead). For Ending Balance, multiply equivalent units from Step 2 by cost
per equivalent unit from Step 3B for each cost column (materials, labor and
overhead). Total costs assigned in each cost column and the total column. Total
costs to be assigned in Step 3A must equal total costs assigned in Step 4.
Note that labor and overhead may be combined as conversion cost only if the
percent complete is the same.

Journal Entries
The journal entries for process costing are the same as those for job-order costing
with one exception.
The entry to transfer cost from one work-in-process account to another is:
Work-in-process inventory second department debit
Work-in-process first department

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Example #1:
Micro Labs Company produces house paint in two processing departments: the Mixing
Department which mixes the paint colors and the Finishing Department which puts the
paint in containers and labels them. The following information related to the companys
operation for October follows:
a) Raw materials were issued for use in production: Mixing department, $551,000,
and the Finishing department, $629,000.
b) Direct labor costs incurred: Mixing department $230,000, and Finishing
department $270,000.
c) Manufacturing overhead cost applied: Mixing department $665,000, and Finishing
department, $405,000.
d) The cost of the mixed paint transferred from the Mixing department to the
Finishing department was $1,850,000.
e) Paint that had been prepared for shipping was transferred from the Finishing
department to Finished Goods. Cost of the transferred paint was $3,200,000.
Required: Prepare journal entries to record items a) through e) above.
Solution #1:
a) Work in Process Mixing
Work in Process Finishing
Raw Materials

551,000
629,000
1,180,000

b) Work in Process Mixing

Work in Process Finishing
Wages and Salaries Payable

230,000
270,000

c) Work in Process Mixing

Work in Process Finishing
Manufacturing Overhead

665,000
405,000

d) Work in Process Finishing

Work in Process Mixing

1,850,000

e) Finished Goods
Work in Process Finishing

3,200,000

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500,000

1,070,000
1,850,000
3,200,000

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Example #2:
Micro Labs uses a processing costing system. The following data are available for the
mixing department for October. The department started 175,000 gallons into
production during the month.
Percent Complete
Conversion
Gallons
Materials
Costs
Work-in-process, October 1
30,000
65%
30%
Work-in-process, October 31
15,000
80%
40%
Required: Determine the equivalent units of production for the month.
Solution #2:

Work-in-process, October 1
Started into production
Units to be Accounted For

Gallons
30,000
175,000
205,000

Completed and Transferred

Work-in-process, October 31
Units Accounted For

190,000
15,000
205,000

Equivalent Units
Conversion
Materials
Cost

190,000
12,000
202,000

190,000
6,000
196,000

Example #3:
Micro Labs September 30th general ledger showed a balance of $634,500 in work-inprocess inventory. $206,500 of the balance was direct materials.
Required: Using the data and solutions from Examples #1 and #2, compute the cost
per equivalent unit for materials and conversion costs.

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Solution #3:
Beginning balance
Costs added during the period
Costs to be Accounted For

Total
$634,500

Materials
$206,500

1,446,000
$2,080,500

551,000
$757,500
$757,500
202,000
= $3.75

Cost per Equivalent Unit

Conversion
Cost
$428,000
230,000
665,000
$1,323,000
$1,323,000
196,000
= $6.75

Example #4:
Micro Labs must assign the manufacturing costs in work-in-process inventory at the end
of October to the gallons finished and ready for sale and the gallons still in process at
October 31.
Required: Using the data and solutions from Examples #1, #2 and #3, compute the
balance in work-in-process inventory for the Mixing department and the cost
of gallons transferred to the Finishing department during October.
Solution #4:
Total
Completed and Transferred

$1,995,000

Work-in-process, October 31
Costs Accounted For

$85,500
$2,080,500

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Materials
190,000 x
$3.75 =
$712,500
12,000 x
$3.75 =
$45,000
$757,000

Conversion
Cost
190,000 x
$6.75 =
$1,282,500
6,000 x
$6.75 =
$40,500
$1,323,000

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Practice Problems
Practice Problem #1
Steel Manufacturing Company uses a process cost system. The Molding Department
adds materials at the beginning of the process and conversion costs are incurred
uniformly throughout the process. Work in process on May 1 was 75% complete and
work in process on May 31 was 40% complete.
Required: Complete the Production Cost Report for the Molding Department for May.
STEEL MANUFACTURING COMPANY
Molding Department
Production Cost Report
For the Month Ended May 31, 2008
Physical
Units

STEP 1: Work in Process Units

Beginning balance
+ Started into production
= Units to be Accounted For

16,000
50,000
66,000

STEP 2: Equivalent Units

Completed and Transferred Out
+ Ending balance
= Units Accounted For

Materials

Conversion
Costs

$41,000

$42,000

46,000

STEP 3A: Work in Process Dollars

Beginning balance
+ Costs added during the period
= Costs to be Accounted For

Total
250,000
198,000

STEP 3B: Cost per Equivalent Unit

STEP 4: Costs Assigned

Completed and Transferred Out

+ Ending balance
= Costs Accounted For
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Practice Problem #2:

The Pasta Factory manufactures spaghetti sauce through two production departments:
Cooking and Packaging. For the month of February, the work-in-process accounts show
the following postings:
Cooking
Packaging
Beginning work-in-process
$0
$6,000
Materials
40,000
21,000
Labor
21,000
9,000
Overhead
25,000
14,000
Costs transferred in
50,000
Required:
a) Journalize the February transactions for work in process inventory.
b) Determine the February 28th balances in the work-in-process accounts.

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Sample True / False Questions

1. Process cost accounting focuses on the process involved in mass-producing
products that are very similar in nature.
True False
2. Process cost systems are used to apply costs to a specific job, such as the
manufacturing of a specialized machine.
True False
3. In a process cost system, materials, labor and overhead are only added in the first
production department.
True False
4. Equivalent units of production are used to determine the cost per unit of
completed products.
True False
5. Equivalent units of production is the sum of units completed and transferred
out plus equivalent units of beginning work in process.
True False
6. The physical units in a department are another name for the equivalent units of
production.
True False
7. A production report is an internal document for management that shows
production quantity and cost data for a particular job.
True False
8. Equivalent units of production measure the work done during a period, expressed
in fully completed units.
True False
9. The total manufacturing cost per unit is used in costing the units completed and
transferred during the period.
True False
10. One similarity of process cost accounting with job order cost accounting is that
both determine total manufacturing costs after each job.
True False

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Sample Multiple Choice Questions

1. Jacobs Company's Assembly Department has materials cost at $4 per unit and
conversion cost at $8 per unit. There are 9,000 units in ending work in process,
all of which are 70% complete as to conversion costs. What are the total costs
assigned to inventory?
a) $50,400
b) $86,400
c) $75,600
d) $108,000
2. If beginning work in process is 2,000 units, ending work in process is 1,000 units,
and the units accounted for equals 5,000 units, what are the units started into
production?
a) 7,000
b) 6,000
c) 3,000
d) 4,000
3. Stone Company had the following department information about physical units
and percentage of completion:
Physical Units
Work in process, May 1 (60%)
36,000
Completed and transferred out
90,000
Work in process, May 31 (40%)
30,000
If materials are added at the beginning of the production process, what is the
total number of equivalent units for materials during May?
a) 126,000
b) 120,000
c) 116,400
d) 102,000
4. Which of the following would not appear as a debit in the Work in Process
account of a second department in a two stage production process?
a) Materials used
b) Overhead applied
c) Labor assigned
d) Cost of products transferred out

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5. One characteristic of products that are mass-produced in a continuous production

process is that
a) The products are identical or very similar in nature.
b) They are grouped in batches.
c) They are produced at the time an order is received.
d) Their costs are accumulated on job cost sheets
6. Which of the following would not appear as a debit in the Work in Process
account of a second department in a two stage production process?
a) Materials used
b) Overhead applied
c) Labor assigned
d) cost of products transferred out
Use the following information for questions 79.
In the month of June, department X had 10,000 units in beginning work in process
that were 70% complete. During June, 40,000 units were transferred into production
from another department. At the end of June, there were 5,000 units in ending work
in process that were 40% complete. Materials are added at the beginning of the
process, while conversion costs are incurred uniformly throughout the process
7. How many units were transferred out of the process in June?
a) 40,000 units
b) 35,000 units
c) 45,000 units
d) 50,000 units
8. The equivalent units of production for materials for June were
a) 45,000 equivalent units.
b) 50,000 equivalent units.
c) 52,000 equivalent units.
d) 40,000 equivalent units
9. The equivalent units of production for conversion costs for June were
a) 40,000 equivalent units.
b) 47,000 equivalent units.
c) 45,000 equivalent units.
d) 50,000 equivalent units.

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10. A process cost accounting system is most appropriate when

a) A variety of different products are produced, each one requiring different
types of materials, labor, and overhead.
b) The focus of attention is on a particular job or order.
c) Similar products are mass-produced.
d) Individual products are custom made to the specification of customers
11. Which of the following cost elements occurs in a process costing system?
a) Direct materials
b) Direct labor
c) Manufacturing overhead
d) All of these
12. If equivalent units are 6,000 for conversion costs and units transferred out equals
4,000, what stage of completion should the ending work in process be for the
8,000 units remaining?
a) 75%
b) 25%
c) 10%
d) 20%
13. In
a)
b)
c)
d)

a process cost system:

A Work in Process account is maintained for each product.
A materials requisition identifies the job on which the materials will be used.
A Work in Process account is maintained for each process.
One Work in Process account is maintained for all manufacturing processes.

14. In
a)
b)
c)
d)

process cost accounting, manufacturing costs are summarized on a

Job order cost sheet.
Process order cost sheet.
Production cost report.
Manufacturing cost sheet.

15. Binder Company has the following production information available for June:
Total materials costs
$ 80,000
Equivalent units of materials
10,000
Total conversion costs
$120,000
Equivalent units of conversion costs
20,000
What is the total manufacturing cost per unit?
a) $14.00
b) $6.67
c) $6.00
d) $8.00
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Solutions to Practice Problems

Practice Problem #1:
STEEL MANUFACTURING COMPANY
Molding Department
Production Cost Report
For the Month Ended May 31, 2008
Physical
Units

STEP 1: Work in Process Units

Beginning balance
+ Started into production
= Units to be Accounted For

16,000
50,000
66,000

STEP 2: Equivalent Units

Materials

Completed and Transferred Out

+ Ending balance
= Units Accounted For

46,000
20,000
66,000

STEP 3A: Work in Process Dollars

Beginning balance
+ Costs added during the period
= Costs to be Accounted For

Completed and Transferred Out

+ Ending balance
= Costs Accounted For

$41,000
157,000
$198,000

$42,000
93,000
$135,000

$3.00

$2.50

$138,000
60,000
$198,000

$115,000
20,000
$135,000

Total
$83,000
250,000
$333,000

STEP 3B: Cost per Equivalent Unit

STEP 4: Costs Assigned

46,000
20,000
66,000

Conversion
Costs
46,000
8,000
54,000

$253,000
80,000
$333,000

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Practice Problem #2:

a)

Work in ProcessCooking
Work in ProcessPackaging
Raw Materials Inventory

40,000
21,000

Work in ProcessCooking
Work in ProcessPackaging
Salaries and Wages Payable

21,000
9,000

Work in ProcessCooking
Work in ProcessPackaging
Manufacturing Overhead

25,000
14,000

Work in ProcessPackaging
Work in ProcessCooking

50,000

b)

Cooking
$0
40,000
21,000
25,000

61,000

30,000

39,000
50,000

50,000

$36,000

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Packaging
$6,000
21,000
9,000
14,000
50,000
$100,000

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Solutions to True / False Problems

1.
2.
3.
4.
5.
6.

7.
8.
9.
10.

True
False because process costing focuses on accumulating quantities and costs by
production department, not production jobs.
False because materials, labor and/or overhead may be added at any point
during the production process.
True
False because equivalent units is the sum of units completed and transferred
out plus equivalent units of ending work in process.
False because physical units are the actual units being produced whereas
equivalent units are an accounting convenience to eliminate partially completed
units when preparing the production report.
False because the production report shows quantity and cost data for a
particular production department.
True
True
False because the production report shows total manufacturing costs for a
particular production department.

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Solutions to Multiple Choice Questions

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

B
C
B
D
A
D
C
B
B
C
D
B
C
C
A

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