A WK5 Chp4

4-1
Process Costing
Chapter 4
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright 2016 by McGraw-Hill Education. All rights reserved.

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 4-1
Record the flow of

materials, labor, and
overhead through a
process costing system.
4-8
The Flow of Materials, Labor, and

Overhead Costs
Direct
Materials
Work in Finished
Direct Labor
Process Goods
Manufacturing Cost of
Overhead Goods
Sold
4-9
The Flow of Costs in a Job-Order

Costing System
Costs are traced and
applied to individual
Direct jobs in a job-order
Materials cost system.
Finished
Direct Labor Jobs Goods
Overhead Goods
Sold
4-10
The Flow of Costs in a Processing

Costing System
Costs are traced and
applied to departments
Direct in a process cost
Materials system.
Direct Labor
Processing Finished
Department Goods
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)
Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Raw Materials XXXXX
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)

Salaries and Wages Payable XXXXX
4-16
Process Cost Flows: The Flow of Manufacturing

Overhead Costs (in T-account form)
Work in Process
Department A
Manufacturing Direct
Overhead Materials
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)

Manufacturing Overhead XXXXX
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
A 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)
Finished Goods XXXXX

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)
Cost of Goods Sold XXXXX

Finished Goods XXXXX
4-24
4-1
4-25
a. To record issuing raw materials for use in production:

Work in ProcessMolding Department.
Work in ProcessFiring Department ....
Raw Materials.....................................
b. To record direct labor costs incurred:
Wages Payable .............................
c. To record applying manufacturing overhead:
Manufacturing Overhead ...............
d. To record transfer of unfired, molded bricks from the Molding
Department to the Firing Department:
Work in ProcessMolding Department
e. To record transfer of finished bricks from the Firing Department
to the finished bricks warehouse:
Finished Goods ...................................
Work in ProcessFiring Department
f. To record cost of goods sold:
Cost of Goods Sold .............................
Finished Goods
4-26
a. To record issuing raw materials for use in production:

Work in ProcessMolding Department ......... 23,000
Work in ProcessFiring Department ............. 8,000
Raw Materials ....................................... 31,000
b. To record direct labor costs incurred:
Wages Payable ..................................... 19,000
c. To record applying manufacturing overhead:
Manufacturing Overhead ....................... 62,000
d. To record transfer of unfired, molded bricks from the Molding Department to the Firing Department:
Work in ProcessMolding Department ... 57,000
e. To record transfer of finished bricks from the Firing Department to the finished bricks warehouse:
Finished Goods ............................................ 103,000
Work in ProcessFiring Department ...... 103,000
f. To record cost of goods sold:
Cost of Goods Sold ...................................... 101,000
Finished Goods ..................................... 101,000
4-27
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.
4-28
Equivalent Units The Basic Idea

Two half completed products are
equivalent to one complete product.
+ = 1
So, 10,000 units 70% complete

are equivalent to 7,000 complete units.
4-29
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
4-30
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
4-31
Calculating Equivalent Units

Equivalent units can be calculated
two ways:
The First-In, First-Out Method FIFO is
covered in the appendix to this chapter.
The Weighted-Average Method This method

will be covered in the main portion of the chapter.
4-32
Compute the equivalent

units of production using
the weighted-average
method.
4-33
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.
4-34
Treatment of Direct Labor

Direct
Materials Direct labor costs
may be small
Manufacturing
Dollar Amount
in comparison to
Overhead
other product
costs in process
Direct
Labor
cost systems.
Type of Product Cost

4-35
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
4-36
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%

4-37
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)
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
4-38
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.
Work in process, June 30:
900 units 60% 540
Equivalent units of Production in

the Department during June 5,940
4-39
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.
900 units 60% 540
900 units 30% 270
the Department during June 5,940 5,670
4-40
Equivalent units of production always equals:
+ Equivalent units remaining in work in process
900 units 60% 540
900 units 30% 270
the Department during June 5,940 5,670
4-41
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
4-42
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
4-43
4-2
Equivalent Units
Units transferred out
Work in process, ending:
Equivalent units of production

4-44
4-2
Equivalent Units
Units transferred out 190,000 190,000
Work in process, ending:
15,000 units 80% 12,000
15,000 units 40% 6,000
Equivalent units of production 202,000 196,000
4-45
Compute the cost per

equivalent unit using the
weighted-average
method.
4-46
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
4-47

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
4-48

Here is a schedule with the cost and equivalent
unit information.
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050
Equivalent units 5,940 5,670

4-49

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
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050
Equivalent units 5,940 5,670

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

4-50
4-3
Materials Labor Overhead
Cost of beginning work in

process inventory
Cost added during the period
Total cost (a)
Equivalent units of production (b)

Cost per equivalent unit (a) (b)
4-51
4-3
Materials Labor Overhead
Cost of beginning work in

process inventory $ 18,000 $ 5,500 $ 27,500
Cost added during the period 238,900 80,300 401,500
Total cost (a) $256,900 $85,800 $429,000

(b) 35,000 33,000 33,000
Cost per equivalent unit (a)
(b) $7.34 $2.60 $13.00
4-52
4-3(2)
Cost per equivalent unit for materials
Cost per equivalent unit for labor

Cost per equivalent unit for overhead
Total cost per equivalent unit

4-53
4-3(2)
Cost per equivalent unit for materials

$ 7.34
Cost per equivalent unit for labor 2.60
Cost per equivalent unit for overhead
13.00
Total cost per equivalent unit $22.94
4-54
Assign costs to units

using the weighted-
average method.
4-55
Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
4-56
Applying Costs
Assembly Department
4-57
Applying Costs
Assembly Department
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
4-58
Computing the Cost of Units

Transferred Out
Assembly Department
Units completed and transferred out:
Units transferred 5,400 5,400
4-59

Transferred Out
Assembly Department
4-60

Transferred Out
Assembly Department
Cost of units transferred out $ 113,400 $ 81,000 $ 194,400
4-4
4-61
Ending work in process inventory:
Cost per equivalent unit

Cost of ending work in process
inventory
Units transferred to the next

department
Cost per equivalent unit
Cost of units transferred out

4-4
4-62
Ending work in process inventory:

2,000 800
Cost per equivalent unit $13.86 $4.43
inventory $27,720 $3,544 $31,264
Units transferred to the next

department 20,100 20,100
Cost per equivalent unit $13.86 $4.43
Cost of units transferred out $278,586 $89,043 $367,629

4-63
Prepare a cost
reconciliation report.
4-64
Reconciling Costs
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790
4-65
Reconciling Costs
Assembly Department
Cost Reconciliation
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790
Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 15,390
Cost of units transferred out 194,400
Total cost accounted for $ 209,790
4-66
4-5
Cost of beginning work in process

inventory
Costs added to production during the

period
Total cost to be accounted for
Costs accounted for as follows:

inventory
Cost of units completed and
transferred out
Total cost accounted for
4-67
4-5
Cost of beginning work in process

inventory $ 3,570
Costs added to production during the

period 43,120
Total cost to be accounted for $46,690
Costs accounted for as follows:
inventory $ 2,860
Cost of units completed and

transferred out 43,830 *
Total cost accounted for $46,690
4-68
Tutorial
4-1
4-3
4-4
4-5
4-6
4-7
4-69
End of Chapter 4

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4-1

Copyright 2016 by McGraw-Hill Education. All rights reserved.

Similarities Between Job-Order and

Differences Between Job-Order and

The activities performed in a processing department

Furthermore, the output of a processing department

Products in a process costing environment typically

Learning Objective 4-1

Record the flow of

The Flow of Materials, Labor, and

The Flow of Costs in a Job-Order

The Flow of Costs in a Processing

T-Account and Journal Entry Views of

For purposes of this example, assume there

Process Cost Flows: The Flow of Raw

Process Cost Flows: The Flow of Raw

Work in Process - Department A XXXXX

Process Cost Flows: The Flow of Labor

Process Costing: The Flow of Labor

Work in Process - Department A XXXXX

Process Cost Flows: The Flow of Manufacturing

Process Cost Flows: The Flow of Manufacturing

Work in Process - Department A XXXXX

Process Cost Flows: Transfers from WIP-Dept. A

Work in Process Work in Process

Process Cost Flows: Transfers from WIP-Dept. A to

Work in Process - Department B XXXXX

Process Cost Flows: Transfers from WIP-Dept. B

Process Cost Flows: Transfers from WIP-Dept. B to

Finished Goods XXXXX

Process Cost Flows: Transfers from Finished

Process Cost Flows: Transfers from Finished

Cost of Goods Sold XXXXX

a. To record issuing raw materials for use in production:

a. To record issuing raw materials for use in production:

Equivalent Units of Production

These partially completed units complicate the

Equivalent Units The Basic Idea

So, 10,000 units 70% complete

Calculating Equivalent Units

The Weighted-Average Method This method

Learning Objective 4-2

Compute the equivalent

Equivalent Units of Production

The weighted-average method . . .

Treatment of Direct Labor

Type of Product Cost

Treatment of Direct Labor

Direct overhead may be

Units started into production in June 6,000

Units completed and transferred out 5,400

Work in process, June 30 900 60% 30%

Equivalent units of Production in

5,400 Units Completed

5,400 Units Completed

Equivalent units of production

Learning Objective 4-3

Compute the cost per

Compute and Apply Costs

Production started during June 6,000 units

Costs added to production in June

Ending Work in Process Inventory: 900 units

Compute and Apply Costs