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PROCESS COSTING
Chapter
18
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Learning Objective
LO1
To distinguish production
procedures that match
with process costing from
those that correspond
with job order costing.
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Job Order Costing

Custom orders
Unique products
Low production volume
High product flexibility
Low to medium
standardization of labor
and material
Process Costing

Repetitive operations
Identical products
High production volume
Low product flexibility
High standardization of
labor and material
Production of Goods and Services
and Costing Systems
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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.
Process Costing
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill
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Learning Objective
LO2
To account for the physical
flows and related cost
flows when using
process costing.
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Direct
Materials
Finished
Goods
Cost per
unit for
each job
Direct
Labor
Factory
Overhead
Jobs
The Work in Process
account consists of
individual jobs in
job costing.
Tracking the Physical Flow and
Related Production Costs
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Direct
Materials
Finished
Goods
Direct Labor
and Factory
Overhead
(Conversion)
Processes
The Work in Process
account consists of
specific processes in
process costing.
Cost per
unit
processed
Tracking the Physical Flow and
Related Production Costs
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Same objective: to determine
the cost of products
Same inventory accounts: raw materials,
work in process, and finished goods
Same overhead assignment method:
predetermined rate times actual activity
Tracking the Physical Flow and
Related Production Costs
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Work in
Process
Assembly
Labor
Materials
Indirect
Finished
Goods
Conversion
Costs
Direct
Delivered
to
Customers
Work in
Process
Packaging
Understanding Cost Flows
Factory
Overhead
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Costs are accumulated for a period of time
by process or department.
Unit cost is computed by dividing the
accumulated costs by the number of
units produced in the period.
Understanding Cost Flows
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Unit cost is computed by dividing the
accumulated costs by the number of
units produced in the period.
If partially complete units remain in
process, we must use equivalent units
as the divisor to obtain unit costs.
Understanding Cost Flows
Costs are accumulated for a period of time
by process or department.
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Learning Objective
LO3
To demonstrate how to
calculate equivalent units.
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Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
Two one-half full pitchers are
equivalent to one full pitcher.
+
=
1
Process Costing and
Equivalent Units
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For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
Process Costing and
Equivalent Units
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For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
10,000 units + (5,000 units .30)
= 11,500 equivalent units
Process Costing and
Equivalent Units
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Learning Objective
LO4
To use the costs of resources
consumed to calculate the
cost per equivalent unit
of production.
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Cost per
equivalent
unit
=
Product costs for the period
Equivalent units for the period
Cost per Equivalent Unit
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Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCos cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Cost per Equivalent Unit
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Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCos cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 11,500 equivalent units
= $2.40 per equivalent unit
Cost per Equivalent Unit
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Equivalent units may be
different for material and
conversion at different stages
of a process.
At completion of Stage 1 of the process,
material is 40% complete, but conversion
is only 25% complete.
Stage 1
40% of
Material
25% of
Conversion
Process Costing and
Equivalent Units
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Stage 2
25% of
Conversion
60% of
Material
Stage 1
40% of
Material
25% of
Conversion
+
+
=
=
100%
50%
Process Costing and
Equivalent Units
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Stage 3
50% of
Conversion
The process is now complete.
Stage 2
25% of
Conversion
60% of
Material
Stage 1
40% of
Material
25% of
Conversion
Process Costing and
Equivalent Units
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Owl Inc. uses
FIFO process
costing in its
Fabrication
Department where
a product called
Strata is made.
Process Costing
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Process Costing
Owl Inc Fabrication Department Data For April
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 25%
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Owl Inc Fabrication Department Data For April
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 25%
Material is added at the
beginning of the process so
it is always 100% complete.
Process Costing
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April Fabrication Department Physical Flow
Units to account for:
Beginning inventory
30,000
Units started during April
90,000
Total number of units
120,000
Units accounted for as:
Units transferred from Fabrication to Mixing
100,000
Ending inventory
20,000
Total number of units
120,000
Physical Flow of Units
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Fabrication Department
Direct Material Equivalent Units of Production - April
Units of Percent Added Equivalent
Product This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000
Computing Equivalent
Units of Production
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Fabrication Department
Direct Material Equivalent Units of Production - April
Units of Percent Added Equivalent
Product This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000
Since materials are added at the
beginning of the process, no additional
materials are necessary to complete the
beginning inventory.
Computing Equivalent
Units of Production
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Fabrication Department
Direct Material Equivalent Units of Production - April
Units of Percent Added Equivalent
Product This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000
}
100,000
100,000 units completed
and transferred.
Computing Equivalent
Units of Production
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Fabrication Department
Conversion Equivalent Units of Production - April
Units of Percent Added Equivalent
Product This Period Units
Beginning goods in process 30,000 60% 18,000
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 25% 5,000
Total units 120,000 93,000
Computing Equivalent
Units of Production
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Fabrication Department
Conversion Equivalent Units of Production - April
Units of Percent Added Equivalent
Product This Period Units
Beginning goods in process 30,000 60% 18,000
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 25% 5,000
Total units 120,000 93,000
Since conversion is 40 percent
complete in the beginning inventory,
60 percent of the work must be
completed in April.
Computing Equivalent
Units of Production
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Fabrication Department
Conversion Equivalent Units of Production - April
Units of Percent Added Equivalent
Product This Period Units
Beginning goods in process 30,000 60% 18,000
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 25% 5,000
Total units 120,000 93,000
}
100,000
Transferred
Computing Equivalent
Units of Production
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Summary of Fabrication Department
Equivalent Units of Production - April
Direct
Activities during April Material Conversion
Units from beginning inventory
processed in current period 0 18,000
Units started and completed
in current period 70,000 70,000
Units in ending inventory at
end of current period
20,000 5,000
Equivalent units of production
for period
90,000 93,000
Computing Equivalent
Units of Production
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Fabrication Department
April Work in Process Costs
Beginning work in process 22,380 $
Costs added in April:
Direct material 45,000
Conversion 55,800
Total costs to account for 123,180 $
Process Costing and
Equivalent Units
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Fabrication Department
Cost Per Equivalent Unit - April
Materials Conversion
Total cost of resource for
April 45,000 $ 55,800 $
Equivalent units of production
in April 90,000 93,000
Cost per equivalent unit for
April = 0.50 $ = 0.60 $
Direct
Cost per Equivalent Unit
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Learning Objective
LO5
To use the cost per
equivalent unit to
assign costs to the
work completed
during the period.
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Fabrication Department Work in Process
Cost Summary for April
Cost of completed units
From beginning work in process
April 1 balance 22,380 $
Costs to complete April 1 inventory
Direct material
Conversion
Started and completed
Total completed and transferred
Cost of Completed Units
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Cost of Completed Units
Fabrication Department Work in Process
Cost Summary for April
Cost of completed units
From beginning work in process
April 1 balance 22,380 $
Costs to complete April 1 inventory
Direct material 0 $
Conversion (18,000 $0.60) 10,800 10,800
Started and completed
Total completed and transferred
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Fabrication Department Work in Process
Cost Summary for April
Cost of completed units
From beginning work in process
April 1 balance 22,380 $
Costs to complete April 1 inventory
Direct material 0 $
Conversion (18,000 $0.60) 10,800 10,800
Started and completed (70,000 $1.10) 77,000
Total completed and transferred (100,000 units)
110,180 $
$0.50 + $0.60 = $1.10
Cost of Completed Units
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Learning Objective
LO6
To create a process costing
production report and
use the report for
decision making.
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We will account for all costs incurred
by assigning unit costs to the:
A. 100,000 units completed and
transferred.
B. 20,000 units remaining in ending
work in process inventory.
Tracking Costs Using a Process
Costing Production Report
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Fabrication Department Work in Process
Cost Summary for April
Cost of completed units
From beginning work in process
April 1 balance 22,380 $
Costs to complete April 1 inventory
Direct material 0 $
Conversion (18,000 $0.60) 10,800 10,800
Started and completed (70,000 $1.10) 77,000
Total completed and transferred (100,000 units) 110,180 $
Cost of ending work in process
Direct material (20,000 $0.50) 10,000 $
Conversion
Total cost accounted for
Tracking Costs Using a Process
Costing Production Report
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Fabrication Department Work in Process
Cost Summary for April
Cost of completed units
From beginning work in process
April 1 balance 22,380 $
Costs to complete April 1 inventory
Direct material 0 $
Conversion (18,000 $0.60) 10,800 10,800
Started and completed (70,000 $1.10) 77,000
Total completed and transferred (100,000 units) 110,180 $
Cost of ending work in process
Direct material (20,000 $0.50) 10,000 $
Conversion (5,000 $0.60) 3,000 13,000
Total cost accounted for 123,180 $
Tracking Costs Using a Process
Costing Production Report
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Fabrication Department Work in Process
Cost Summary for April
Cost of completed units
From beginning work in process
April 1 balance 22,380 $
Costs to complete April 1 inventory
Direct material 0 $
Conversion (18,000 $0.60) 10,800 10,800
Started and completed (70,000 $1.10) 77,000
Total completed and transferred (100,000 units) 110,180 $
Cost of ending work in process
Direct material (20,000 $0.50) 10,000 $
Conversion (5,000 $0.60) 3,000 13,000
Total cost accounted for 123,180 $
All costs accounted for
Tracking Costs Using a Process
Costing Production Report
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Ethics, Fraud, and
Corporate Governance
Overstating equivalent units of
resources in ending inventory will
understate cost of goods sold, and
thereby overstate income.
Equivalent units of production can be
overstated by inflating the application
of direct labor and overhead
(conversion costs) to work in process.
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End of Chapter 18