Process Costing

Chapter 17

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 Introduction

 In many industries, products are mass

produced, that is, relatively homogeneous
products are processed in a very similar
manner.
 Companies in these industries use process
costing.
 This chapter presents process costing.

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 Learning Objectives

1 Determine when process-costing systems

are appropriate
2 Describe five key steps in process costing
3 Calculate and use equivalent units
4 Prepare journal entries for process-costing
systems

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 Learning Objectives

5 Demonstrate the weighted-average method of

process costing
6 Demonstrate the first-in, first-out (FIFO) method
of process costing
7 Incorporate standard costs into a process-costing
system
8 Apply process-costing methods to cases with
transferred-in costs

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 Learning Objective 1

Determine when process-

costing systems are appropriate

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 Process Costing

 In a process-costing system, the unit cost of

a product or service is obtained by assigning
total costs to many identical or similar units.
 In a manufacturing setting, each unit is
assumed to receive the same amount of
direct material costs, direct manufacturing
labor costs, and indirect manufacturing costs.

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 Process Costing

 The principal difference between process

costing and job costing is the extent of
averaging used to compute unit costs of
products or services.
 In a job-costing system, individual jobs use
different quantities of production resources.
 Thus, it would be incorrect to cost each job at
the same average production cost.
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 Process Costing

 In contrast, when similar or identical units

of products or services are mass produced,
and not processed as individual jobs, process
costing averages production costs over all
units produced.

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 Process Costing

Direct Materials Direct

Labor Department Department
Indirect Mfg. A B
Costs

Finished Goods Cost of Goods Sold

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 Learning Objective 2

Describe five key steps

in process costing

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 Five Steps in Process Costing

 Step 1: Summarize the flow of physical units

of output.
 Step 2: Compute output in terms of equivalent
units.
 Step 3: Compute equivalent unit costs.

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 Five Steps in Process Costing

 Step 4: Summarize total costs to account for.

 Step 5: Assign total costs to units completed
and to units in ending work-in-process
inventory.

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 Learning Objective 3

Calculate and use equivalent units

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 Equivalent Units

 Equivalent units is a derived amount of output

units that takes the quantity of each input in units
completed or in work in process and converts it
into the amount of completed output units that
could be made with that quantity of input.
 Equivalent unit calculations are necessary when
all physical units of output are not uniformly
completed during the period.

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 Equivalent Units

 The following information relates to Aspen

Inc., a manufacturer of skiing accessories.
 Ending work-in-process inventory is 100%
complete for materials and 20% complete
for conversion.

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 Physical Units (Step 1)

Physical
Flow of Production units
Work-in-process, beginning 0
Started during current period 35,000
To account for 35,000
Completed and transferred out
during current period 30,000
Work-in-process, ending (100%/20%) 5,000
Accounted for 35,000
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 Compute Equivalent
Units (Step 2)
Equivalent units
Direct Conversion
Flow of Production Materials Costs
Completed and
transferred out 30,000 30,000
Work-in-process,
ending 5,000 (100%) 1,000 (20%)
Current period work 35,000 31,000
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 Compute Equivalent
Unit Costs (Step 3)
 Total production costs are $146,050.
Direct Conversion
Materials Costs
$84,050 $62,000
Equivalent units 35,000 31,000
Cost per equivalent unit $2.4014
$2.00

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 Summarize and Assign Total
Costs (Steps 4 and 5)
 Step 4: Total costs to account for: $146,050
 Step 5: Assign total costs:
Completed and transferred out
30,000 x $4.4014 = $132,043
Work-in-process ending (5,000 units)
Direct materials 5,000 x $2.4014 = 12,007
Conversion costs 1,000 x $2.00 = 2,000
Total $146,050

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 Learning Objective 4

Prepare journal entries for

process-costing systems

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 Journal Entries

 Journal entries in process-costing systems

are basically like those made in job-costing
systems with respect to direct materials and
conversions costs.
 The main difference is that in a process-
costing system, there is a separate work-in-
process account for each department rather
than for each job.
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 Journal Entries

 Assume that Aspen Inc. has two processing

departments – Assembly and Finishing.
 Aspen Inc. purchases direct materials as needed.
 What is the journal entry for materials?
 Work-in-Process, Assembly 84,050
Accounts Payable Control 84,050 To
record direct materials purchased and used

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 Journal Entries

 What is the journal entry for conversion costs?

 Work-in-Process, Assembly 62,000
Various accounts 62,000
To record Assembly Department conversion
costs
 What is the journal entry to transfer completed
goods from Assembly to Finishing?

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 Journal Entries

Work-in-Process, Finishing 132,043

Work-in-Process, Assembly
132,043 To record cost of goods completed
and transferred from Assembly to Finishing
during the period

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 Flow of Costs

Accounts Payable WIP Assembly

84,050 84,050 132,043
62,000
Various Accounts 14,007
62,000
WIP Finishing
132,043

Finished Goods Cost of Goods Sold

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 Learning Objective 5

Demonstrate the weighted-

average method of process
costing

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 Weighted-Average Method

 The weighted-average process-costing method

calculates the average equivalent unit cost of
the work done to date (regardless of the period
in which it was done).
 It assigns this cost to equivalent units
completed and transferred out and to
equivalent units in ending work-in-process
inventory.
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 Weighted-Average Method

 The weighted-average cost is the total of all

costs entering the Work-in-Process account
(regardless of whether it is from beginning
work in process or from work started during
the period) divided by total equivalent units
of work done to date.

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 Weighted-Average Method

 Assume that Aspen Inc. had 1,000 units in the

Assembly Department beginning work-in- process
inventory.
 These units were 100% complete for materials
($2,350) and 60% complete for conversion ($5,200).
 Ending work-in-process inventory consisted of
5,000 units (100% materials) and (20% conversion).

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 Physical Units (Step 1)

 Work-in-process, beginning:
100% material
60% conversion costs 1,000
Units started in process 35,000 36,000
 Units transferred out: 31,000
Units in ending inventory:
100% material
20% conversion costs 5,000 36,000
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 Compute Equivalent
Units (Step 2)
 Partially completed units are converted into
equivalent units.
 Ending inventory is only 20% complete for
conversion which equals 1,000 equivalent
units (5,000 x 20%).

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 Compute Equivalent
Units (Step 2)

Materials Conversion
Completed and
transferred 31,000
31,000 Ending
inventory 5,000 1,000 Equivalent units
36,000 32,000

100% 20%

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 Compute Equivalent
Unit Costs (Step 3)
 Materials Conversion
Beginning
inventory $ 2,350 $ 5,200
 Current costs 84,050 62,000
 Total $86,400 $67,200
 Equivalent units 36,000 32,000
 Cost per unit $2.40 $2.10

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 Summarize and Assign Total
Costs (Steps 4 and 5)
 Work-in-process beginning inventory:
Materials $ 2,350
Conversion 5,200
Total beginning inventory $ 7,550
+ Current costs in Assembly Department:
Materials $ 84,050 Conversion
62,000
= Costs to account for $153,600

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 Summarize and Assign Total
Costs (Steps 4 and 5)
 This step distributes the department’s costs
to units transferred out:
31,000 units × $4.50 = $139,500
 And to units in ending work-in-process
inventory: $12,000 + $2,100 = $14,100

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 Summarize and Assign Total
Costs (Steps 4 and 5)
 Costs transferred out:
31,000 × ($2.40 + $2.10) $139,500
 Costs in ending inventory:
Materials 5,000 × $2.40 12,000
Conversion 1,000 × $2.10
2,100
 Total costs accounted for: $153,600

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Journalizing: Weighted-Average

 What are the journal entries in the Assembly

Department?
 Work-in-Process, Assembly 84,050
Accounts Payable Control 84,050 To
record direct materials purchased and used
 Work-in-Process, Assembly 62,000
Various accounts 62,000 To record
Assembly Department conversion costs

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Journalizing: Weighted-Average

Work-in-Process, Finishing 139,500

Work-in-Process, Assembly
139,500 To record cost of goods completed
and transferred from Assembly to Finishing
during the period

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 Key T-Account:
Weighted-Average

Work-in-Process Inventory, Assembly

Beg. Inv. 7,550 Transferred to
Materials 84,050 Finishing
Conversion 62,000 139,500
Balance 14,100

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 Learning Objective 6

Demonstrate the first-in,

first-out (FIFO) method
of process costing

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 First-In, First-Out Method

 FIFO process-costing method assigns the cost

of the prior accounting period’s equivalent
units in beginning work-in-process inventory
to the first units completed and transferred out.

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 First-In, First-Out Method

 FIFO assigns the cost of equivalent units

worked on during the current period first to
complete beginning inventory, then to start
and complete new units, and finally to units
in ending work-in-process inventory.
 This method assumes that the earliest
equivalent units in the Work-in-Process,
Assembly account are completed first.
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 First-In, First-Out Method

 A distinctive feature of the FIFO process-

costing method is that work done on beginning
inventory before the current period is kept
separate from work done in the current period.

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 First-In, First-Out Method

 Assume that Aspen Inc. uses FIFO.

 How many units will be in the quantity
schedule (Step 1)?
 36,000 (same as weighted-average method)
 What are the equivalent units (Step 2)?

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 Compute Equivalent
Units (Step 2)
Materials Conversion
Completed
and transferred:
From beginning
inventory 0 400
Started and completed 30,000
30,000 Ending inventory
5,000 1,000 35,000
31,400

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 Compute Equivalent
Units (Step 2)
Materials Conversion
Completed and
transferred 31,000
31,000 Ending inventory
5,000 (100%) 1,000 (20%)
36,000 32,000 Beginning
inventory 1,000 (100%) 600
(60%) Equivalent units 35,000 31,400

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Compute Equivalent
Unit Costs (Step 3)

Materials Conversion
Current costs $84,050 $62,000
Equivalent units 35,000 31,400
Cost per unit $2.40
$1.975

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 Summarize and Assign Total
Costs (Steps 4 and 5)
 Work-in-process beg. inventory $ 7,550
 Current costs:
Material 84,050
Conversion
62,000 Total
$153,600
 Same as using weighted-average

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 Summarize and Assign Total
Costs (Steps 4 and 5)
 Costs transferred out:
 From beginning inventory: $7,550
Conversion costs added:
1,000 x 40% x $1.975 790 $ 8,340
 From current production:
30,000 x $4.375 131,250
 Total $139,590

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 Summarize and Assign Total
Costs (Steps 4 and 5)
 Work-in-process ending inventory:
 Materials: 5,000 × $2.40 $12,000
 Conversion:
5,000 × 20% × $1.975 1,975
Total $13,975

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 Summarize and Assign Total
Costs (Steps 4 and 5)
 Costs transferred out $139,590
+ Costs in ending inventory $13,975
= $153,565 ($35 rounding error)
 An alternative approach:
 Costs to account for $153,600
– Cost in ending inventory $13,975
= Costs transferred out $139,625
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 Key T-Account: FIFO

Work-in-Process Inventory, Assembly

Beg. Inv. 7,550 Transferred to
Materials 84,050 Finishing
Conversion 62,000 139,625
Balance 13,975

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 Comparison of Weighted-
Average and FIFO Methods

Weighted
Average FIFO Difference Costs
of units completed and
transferred out $139,500
$139,625 +$125 Work-in-process,
ending 14,100 13,975 -$125
Total costs accounted
for $153,600 $153,600 0

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 Comparison of Weighted-
Average and FIFO Methods
 The weighted-average ending inventory is
higher than the FIFO ending inventory by
$125.
 This results in a lower cost of goods sold and
hence higher operating income and higher
income taxes than does the FIFO method.

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 Comparison of Weighted-
Average and FIFO Methods
 Differences in equivalent unit costs of
beginning inventory and work done during
the current period account for the differences
in weighted-average and FIFO costs.
W-A
FIFO

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 Learning Objective 7

Incorporate standard costs

into a process-costing system

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 Standard-Costing Method
of Process Costing
 Setting standards for quantities of inputs
needed to produce output in companies that
use process-costing is often relatively
straightforward.
 Standard costs per input unit may then be
assigned to these physical standards to develop
standard costs per output unit.

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 Standard-Costing Method
of Process Costing
 Assume that Aspen Inc. uses the standard-
costing method of process costing.
 Steps 1 and 2 are identical to the steps
described for the FIFO method.
 Step 3 is easier than under weighted-average
and FIFO methods.
 Why?

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 Standard-Costing Method
of Process Costing
 Because the cost per equivalent unit does not
have to be computed, as was done for the
weighted-average and FIFO methods.
 The cost per equivalent unit are the standard
costs.
 The entries to the Work-in-Process account
are at standard costs rather than actual.

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 Standard-Costing Method
of Process Costing
 Process-costing systems using standard costs
usually accumulate actual costs incurred
separately from the inventory accounts.
 Assume that actual materials cost is $84,050
and standard materials cost is $84,250
 What are the journal entries in the Assembly
Department?

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Standard-Costing Method
of Process Costing

Direct Materials Control 84,050

Accounts Payable Control 84,050 Work-
in-Process 84,250 Direct material
variances 200 Direct
Materials Control 84,050 To record
direct materials purchased and used in production
during the period and variances

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 Learning Objective 8

Apply process-costing methods to

cases with transferred-in costs

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 Transferred-In Costs
Weighted Average
 Assume that the Finishing Department of
Aspen Inc. had 4,000 units in beginning
work-in-process inventory and 2,000 in
ending work-in-process inventory.
 31,000 units were transferred from the
Assembly Department to the Finishing
Department during this period.

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 Transferred-In Costs
Weighted Average
 The beginning work-in-process inventory
was 60% complete for materials and 25%
for conversion.
 The ending work-in-process inventory was
100% complete for materials and 40% for
conversion.

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 Transferred-In Costs
Weighted Average
 There are three equivalent unit computations
for the Finishing Department.
1 Transferred-in
2 Direct materials
3 Conversion

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 Physical Units (Step 1)

 Beginning inventory 4,000

Units started in process 31,000 35,000
 Units completed and
transferred to
finished goods 33,000
Ending inventory 2,000 35,000

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 Compute Equivalent
Units (Step 2)
 Equivalent units for transferred-in costs:
 Transferred to finished goods 33,000
Ending inventory 2,000

35,000
 Inventory is 100% complete for the work
performed in the Assembly Department.

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 Compute Equivalent
Units (Step 2)

Equivalent units for direct materials costs:

Transferred to finished goods 33,000
Ending inventory (100%) 2,000

35,000

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 Compute Equivalent
Units (Step 2)
 Equivalent units for conversion costs
(ending inventory 2,000):
 Transferred to finished goods 33,000
Ending inventory (40%) 800

33,800

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 Compute Equivalent
Unit Costs (Step 3)
 Assume the following costs in the Finishing
Department:
 Work-in-process beginning inventory from:
Assembly Department $30,200
Direct materials
9,400 Conversion
costs 8,000
Total cost in beginning inventory $47,600
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Compute Equivalent
Unit Costs (Step 3)

Current costs in Finishing Department are as

follows:
Costs received from the
Assembly Department $139,500
Direct materials 9,780
Conversion 42,640
Total $191,920

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 Compute Equivalent
Unit Costs (Step 3)
 (Transferred-in costs $30,200 + Costs
transferred-in from the Assembly Department
$139,500) ÷ 35,000 units = $4.85
 (Direct materials $9,400 + $9,780) ÷ 35,000 =
$0.55
 (Conversion costs $8,000 + $42,640) ÷ 33,800 =
$1.50
 Total unit cost = $6.90

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 Summarize and AssignTotal
Costs (Steps 4 and 5)
 Total costs in beginning
inventory $ 47,600
Current costs in
Finishing Department 191,920
$239,520
 Costs to account for:
$47,600 + $ 191,920 = $239,520

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 Summarize and AssignTotal
Costs (Steps 4 and 5)
 Costs in work-in-process ending inventory:
 Transferred-in costs:
2,000 × $4.85 $
9,700
 Direct materials: 2,000 × $0.55 1,100
 Conversion: 2,000 × 40% × $1.50 1,200
 Total cost in ending inventory $12,000

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 Summarize and AssignTotal
Costs (Steps 4 and 5)
 Costs to account for: $239,520
 Costs transferred to
finished goods inventory:
33,000 × $6.90 $227,700
 Costs in ending work-in- process
inventory: $12,000 – $180
rounding error 11,820
 Total $239,520

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T-Account Finishing Department

Work-in-Process Inventory, Finishing

Beg. Inv. 47,600 Transferred to
Transferred-in 139,500 Finished Goods
Materials 9,780 227,700
Conversion 42,640
Balance 11,820

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 Transferred-In Costs
FIFO Method
 The physical units (Step 1) is the same as in
weighted-average.
 Beginning inventory 4,000
Units started in process 31,000 35,000
 Units transferred to
finished goods 33,000
Ending inventory 2,000 35,000

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 Compute Equivalent Units
FIFO (Step 2)
 Equivalent units for transferred-in costs:
From beginning work-in-process 0
Started and completed 29,000
Work-in-process, ending (100%) 2,000
Total equivalent units 31,000

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 Compute Equivalent Units
FIFO (Step 2)
 Equivalent units for transferred-in costs:
 Transferred to finished goods 33,000 Ending
work-in-process inventory 2,000 Total
35,000
 Beg. work-in-process inventory 4,000
 Equivalent units 31,000
 Inventories are 100% complete for the work
performed in the Assembly Department.

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Compute Equivalent Units
FIFO (Step 2)

Equivalent units for materials costs:

From beginning work-in-process 1,600
Started and completed 29,000
Work-in-process, ending (100%) 2,000
Total equivalent units 32,600

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 Compute Equivalent Units
FIFO (Step 2)
 Equivalent units for material costs
(beginning inventory 4,000):
 Transferred to finished goods 33,000
 Ending inventory (100%) 2,000
Total 35,000
 Beginning inventory (60%) 2,400
 Equivalent units 32,600

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Compute Equivalent Units
FIFO (Step 2)

Equivalent units for conversion costs:

From beginning work-in-process 3,000
Started and completed 29,000
Work-in-process, ending (40%) 800
Total equivalent units 32,800

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 Compute Equivalent Units
FIFO (Step 2)
 Equivalent units for conversion costs (beginning
inventory 4,000, ending inventory
2,000):
 Transferred to finished goods 33,000
 Ending inventory (40%) 800
 Total 33,800
 Beginning inventory (25%) 1,000
 Equivalent units 32,800

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 Compute Equivalent Unit Costs
FIFO (Step 3)
 Cost per equivalent unit:
 Transferred-in: $139,590 ÷ 31,000 $4.50
 Direct materials: $9,780 ÷ 32,600 0.30
 Conversion: $42,640 ÷ 32,800 1.30
 Total unit cost $6.10

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 Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
 Current costs in Finishing Department $192,010
 Work-in-process beginning inventory 47,600
Costs to account for $239,610
 Same as weighted-average

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 Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
 Work-in-process ending inventory:
 Transferred-in: 2,000 × $4.50 $ 9,000
 Direct materials: 2,000 × $0.30 600
 Conversion: 800 × $1.30 1,040
 Total $10,640

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 Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
 Costs transferred out:
 From beginning inventory: $47,600
 Direct materials added:
4,000 × 40% × $0.30 480
 Conversion costs added:
4,000 × 75% × $1.30 3,900
 Total $51,980

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 Summarize and Assign Total
Costs FIFO (Steps 4 and 5)

Total costs transferred out:

From beginning inventory $ 51,980
From current production:
29,000 × $6.10 176,900
Total $228,880

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 Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
 Total costs accounted for:
 Transferred to finished goods:
$176,900 + $51,980
$228,880
 Work-in-process ending inventory 10,640
 Rounding 90
 Total $239,610

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 Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
 Costs to account for $239,610
 Work-in-process ending inventory -10,640
 Transferred to finished goods $228,970

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End of Chapter 17

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