Managerial Accounting - Process Costing and Hybrid Product Costing System

Process Costing
and Hybrid Product-

Costing Systems
I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 1

Comparison of Job-Order Costing
and Process Costing
Process Job-Order
Job-order
Costing Costing
Used for production of small,

identical, low cost items.
Mass produced in automated
continuous production process.
Costs cannot be directly traced to
each unit of product.
and Process Costing
Process Job-Order
Job-order
Costing Costing
Typical process cost applications:

Petrochemical refinery
Paint manufacturer
Paper mill

and Process Costing
Job-order costing Process costing
z Costs accumulated by z Costs accumulated by
the job. department or process.
z Work in process has a z Work in process has a
job-cost sheet for each production report for
job. each batch of products.
z Many unique, high cost z A few identical, low cost
jobs. products.
z Jobs built to customer z Units continuously
order. produced for inventory
in automated process.
Process Cost Flows
Let’s examine the cost flows

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

Process Cost Flows
Work in Process
Raw Materials Department A
•Purchases
Factory Overhead
•Other
Overhead

Process Cost Flows
Work in Process
•Purchases •Direct •Direct
Material Material
Factory Overhead
•Other
Overhead

Process Cost Flows
Work in Process
•Purchases •Direct •Direct
Material Material
•Indirect
Material
Factory Overhead
•Other
Overhead
•Indirect
Material

Process Cost Flows
Next let’s add labor and

manufacturing overhead
to the process cost
flows. Are you with me?

Process Cost Flows
Salaries and Work in Process
Department A
Wages Payable
•Direct
Material
Factory Overhead
•Other
Overhead
•Indirect
Material

Process Cost Flows
Department A
Wages Payable
•Direct
•Direct
Material
Labor
•Direct
Labor
Factory Overhead
•Other
Overhead
•Indirect
Material

Process Cost Flows
Department A
Wages Payable
•Direct
•Direct
Material
Labor
•Direct
•Indirect
Labor
Labor
Factory Overhead
•Other
Overhead
•Indirect
Material
•Indirect
Labor
Process Cost Flows
Department A
Wages Payable
•Direct
•Direct
Material
Labor
•Direct
•Indirect
Labor
Labor
•Overhead
Factory Overhead
•Other •Overhead
Overhead Applied to
•Indirect Work in
Material Process
•Indirect
Labor
Process Cost Flows
Next let’s transfer work

from Department A to
Department B. Are you
ready?

Process Cost Flows
Work in Process
Department A
•Direct
Material
•Direct
Labor
•Overhead
Work in Process
Department B

Process Cost Flows
Work in Process
Department A
•Direct •Transferred
Material to Dept. B
•Direct
Labor
•Overhead
Work in Process
Department B
•Transferred
from Dept. A

Process Cost Flows
Next let’s add material,

labor, and manufacturing
overhead to Department B.
Are you with me?

Process Cost Flows
Work in Process
•Purchases •Direct •Transferred
Material to Dept. B
•Direct
Labor
•Overhead
Work in Process
Department B
Salaries and •Transferred
from Dept. A
Wages Payable

Process Cost Flows
Work in Process
•Purchases •Direct •Direct •Transferred
Material Material to Dept. B
•Direct
Labor
•Overhead
Work in Process
Department B
Salaries and •Transferred
from Dept. A
Wages Payable
•Direct
•Direct Material
Labor •Direct
Labor

Process Cost Flows
Work in Process
Department A
Material to Dept. B
•Direct
Labor
Factory Overhead •Overhead
•Other Work in Process

Overhead Department B
•Indirect •Transferred
Material from Dept. A
•Indirect •Direct
Labor Material
•Direct
Labor

Process Cost Flows
Work in Process
Department A
Material to Dept. B
•Direct
Labor
Factory Overhead •Overhead
•Other •Overhead Work in Process

Overhead Applied to Department B
•Indirect Work in
•Transferred
Material Process from Dept. A
•Indirect •Direct
Labor Material
•Direct
Labor
•Overhead
Process Cost Flows
Now let’s complete the

goods in Department B and
sell them. Still with me?

Process Cost Flows
Work in Process
Department B Finished Goods
•Transferred
from Dept. A
•Direct
Material
•Direct
Labor
•Overhead
Cost of Goods Sold

Process Cost Flows
Work in Process
•Transferred •Cost of •Cost of
from Dept. A Goods Goods
•Direct Mfd. Mfd.
Material
•Direct
Labor
•Overhead
Cost of Goods Sold

Process Cost Flows
Work in Process
•Transferred •Cost of •Cost of •Cost of
from Dept. A Goods Goods Goods
•Direct Mfd. Mfd. Sold
Material
•Direct
Labor
•Overhead
Cost of Goods Sold
•Cost of
Goods
Sold

Process Costing
Direct Direct-labor costs
Material are usually small
in comparison to
Dollar Amount
Manufacturing other product

Overhead costs in process
cost systems.
Direct (high level of
Labor automation)
Type of Product Cost

Process Costing
Direct Direct-labor costs
Material are usually small
in comparison to
Conversion
Dollar Amount
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.
Differences Between Job-Order
and Process Costing
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.
Finished
Direct Labor Jobs
Goods
Manufacturing Cost of
Overhead Goods
Sold
Differences Between Job-Order
and Process Costing
The work-in-process
account consists of
individual products in a
Direct Material
process cost system.
Direct Labor Finished

Products
& Overhead Goods
(Conversion)
When direct labor is a relatively small amount Cost of

compared to material and overhead, it is Goods
often combined with overhead. Sold
Equivalent Units: A Key Concept
Costs are accumulated for a period of time

for products in work-in-process inventory.
Products in work-in-process inventory at
the beginning and end of the period are
only partially complete.
Equivalent units is a concept expressing
these partially completed products as a
smaller number of fully completed
products.
Equivalent Units Example
Two one-half completed products are

equivalent to one completed product.
+ =

Equivalent Units Example
Two one-half completed products are

equivalent to one completed product.
+ =
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.

Equivalent Units Question 1
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
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
10,000units
units++(5,000
(5,000units
units××.30)
.30)
b. 11,500 ==11,500
11,500equivalent
equivalentunits
units
c. 13,500
d. 15,000
Calculating and Using Equivalent
Units of Production
To calculate the cost per

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

If Jones incurred $27,600 in
production costs for the 11,500
equivalent units. What was Jones’s
cost per equivalent unit for the
period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
If Jones incurred $27,600 in
production costs for the 11,500
equivalent units. What was Jones’s
cost per equivalent unit for the
period?
a. $1.84
$27,600
$27,600÷÷11,500
11,500equivalent
equivalent
b. $2.40 units
units
c. $2.76 ==$2.40
$2.40per
perequivalent
equivalentunit
unit
d. $2.90
Departmental Production Report
c Analysis of d Calculation
physical flow of equivalent
of units. units.
Production
Report
e Computation f Analysis of
of unit costs. total costs.

Equivalent Units of Production –
Weighted-Average Method
The weighted-average method . . .
z Makes no distinction between work done in the
prior period and work done in the current period.
z Blends together units and costs from the prior
period and the current period.
The FIFO method is a more

complex method and is
rarely used in practice.

Production Report Example
At this point, we need

to look at an example
to illustrate the
departmental
production report.
MVP Sports Equipment Company makes baseball

gloves in two departments, Cutting and Stitching.
MVP uses the weighted-average cost procedure.
Material is added at the beginning of the Cutting
Department, and conversion is incurred uniformly
throughout the process.
Using the following information for the month of
March, let’s prepare a production report for the
Cutting Department.
Exh.
4-4

Work in process, March 1: 20,000 units Cost
Materials: 100% complete. $ 50,000
Conversion: 10% complete. 7,200
Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units

Exh.
4-4

Work in process, March 1: 20,000 units Cost
Materials: 100% complete. $ 50,000
Conversion: 10% complete. 7,200
Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units
Work in process, March 31: 10,000 units

Materials 100% complete.
Conversion 50% complete.
Costs incurred during March

Materials cost $ 90,000
Conversion cost 193,500
Exh.
4-5

c Analysis of Physical Flow of Units
Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000
Units completed and transferred out during March 40,000

Total units accounted for 50,000

Exh.
4-6

d Calculation of Equivalent Units
Conversion Equivalent Units
Physical Percentage Direct
Units Complete Material Conversion
Work in process, March 1 20,000 10%

50% of 10,000 units
Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total equivalent units 50,000 45,000
Beginning inventory % is not used in weighted-average method.

Exh.
4-6

Conversion Equivalent Units
Physical Percentage Direct
Units Complete Material Conversion
Work in process, March 1 20,000 10%

100% of 10,000 units, all
material added at beginning
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total equivalent units 50,000 45,000

Exh.
4-7

e Computation of unit costs
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Exh.
4-7

² Computation of unit costs
Direct
Material Conversion Total
Work in Process, March1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26
$140,000 ÷ 50,000 equivalent units

$2.80 + $4.46
$200,700 ÷ 45,000 equivalent units
Exh.
4-8

f Analysis of total costs
Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400

Exh.
4-8

f Analysis of total costs
Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
All costs
Total costs accounted for $ 340,700
accounted for

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.

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 accounts.
Process Costing
GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.

Process Costing

Post.
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.
W ork in Process - Department A XXXXX

W ork in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.

Process Costing

Post.
Salaries and W ages Payable XXXXX
To record direct-labor costs.

Process Costing

Post.
Manufacturing Overhead XXXXX
To apply overhead to departments.

Process Costing

Post.
To record the transfer of goods from
Department A to Department B.

Process Costing

Post.
Finished Goods XXXXX
To record the completion of goods
and their transfer from Department B
to finished-goods inventory.

Process Costing

Post.
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX

Finished Goods XXXXX
To record cost of goods sold.

FIFO

Exh.
4-5

c Analysis of Physical Flow of Units
Physical
Units
Units completed and transferred out during March 40,000


Exh.

4-6

Physical Units Percentage of Direct Conversion
completion with material
respect to
conversion
Work in process, march 1 20,000 10%
Total units 50,000
Units completed & transferred during March 40,000 100% 40,000 40,000
WIP, March 31 10,000 50% 10,000 5,000
Total Equivalent Units 50,000 50,000 45,000
Less: Equivalent units in March WIP 20,000 2,000
New equivalent units in March only 30,000 43,000

Exh.

4-6
p Computation of Unit Costs
Direct Conversion Total

material
Costs incurred during March $90,000 $193,500 283,500
Equivalent units for March only 30,000 43,000
Cost per equivalent unit $3 $4.5 $7.5

Exh.

4-6
p Total Costs
Total
Cost of March 1 WIP $ 57,200
Cost incured to finish the March 1 WIP 20,000 x 0.9 x $4.5 81,000
Cost incurred to produce units that were 20,000 x $7.5 150,000

started and completed during March
Total cost of goods completed and $ 288,200
transferred out
Cost remaining in March 31 WIP

Direct Material 10,000 x $3 $30,000
Conversions 5,000 x $4.5 22,500
Total costs of March 31 WIP $ 52,500
TOTAL COSTS $ 340,700

End of Chapter 4
I’m ready to process
some leisure time.

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Process Costing

and Hybrid Product-

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 1

 Used for production of small,

Typical process cost applications:

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 3

Let’s examine the cost flows

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 5

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 6

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 7

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 8

Next let’s add labor and

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 9

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 10

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 11

Next let’s transfer work

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 14

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 15

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 16

Next let’s add material,

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 17

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 18

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 19

•Other Work in Process

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 20

•Other •Overhead Work in Process

Now let’s complete the

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 22

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 23

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 24

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 25

Manufacturing other product

Type of Product Cost

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 26

Type of Product Cost

So, direct labor and manufacturing overhead are often

Direct Labor Finished

When direct labor is a relatively small amount Cost of

Costs are accumulated for a period of time

Two one-half completed products are

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 31

Two one-half completed products are

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 32

To calculate the cost per

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 35

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 38

The FIFO method is a more

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 39

At this point, we need

 MVP Sports Equipment Company makes baseball

Production Report Example

Units started into production in March: 30,000 units

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 42

Production Report Example

Units started into production in March: 30,000 units

Work in process, March 31: 10,000 units

Costs incurred during March

Production Report Example

Units completed and transferred out during March 40,000

I.K. Gunarta – Program Pasca Sarjana Manajemen Industri ITS 44

Production Report Example

Work in process, March 1 20,000 10%

Units completed and transferred 40,000 100% 40,000 40,000

Used for production of small,

Costs are accumulated for a period of time

MVP Sports Equipment Company makes baseball