CHAPTER

CHAPTER 33

Process Costing

Difference
Difference Between
Between Job-Order
Job-Order
and
and Process
Process Costing
Costing Systems
Systems
Job-Order Costing
Each unique product or batch is
considered a job for which cost
information is needed
Necessary to trace manufacturing costs to
specific jobs
When completed, cost of job is removed
from Work in Process and included in
Finished Goods
Slide 3-3

Difference
Difference Between
Between Job-Order
Job-Order
and
and Process
Process Costing
Costing Systems
Systems
Process Costing
Large quantities produced of
homogenous products
Average cost = total costs divided by total
number of items produced
When completed, number of units
completed times average cost determines
cost to be moved from WIP to Finished
Goods
Slide 3-4

Which of the following characteristics are

associated with a process costing system?
a. Heterogeneous products
b. Homogeneous products
Answer: b

Slide 3-5

Which of the following characteristics are

associated with a process costing system?
a. Continuous production
b. Discontinuous production
Answer: a

Slide 3-6

Which of the following characteristics

are associated with a process costing
system?
a. Costs are traced to jobs
b. Costs are traced to processing
departments
Answer: b

Slide 3-7

Type
Type of
of Costing
Costing Used
Used

Slide 3-8

An example of a business requiring a

process costing system would be a(n):
a.
b.
c.
d.

Custom cabinet shop

Antique furniture restorer
Soap manufacturer
Automobile repair shop

Answer: c
A soap manufacturer produces many identical
units
Slide 3-9

Job-Order
Job-Order Costing
Costing System
System

Slide 3-10

Process
Process Costing
Costing System
System

Slide 3-11

Cost
Cost Flows
Flows through
through Departments
Departments
Manufacturing operations typically pass
through two or more departments
Costs are accumulated in each department
Easy to identify when materials are added
Harder to identify when labor and overhead are
added
-Often grouped together as conversion costs
-Assumed to be added evenly

Slide 3-12

Learning objective 1: Describe how products flow through departments

and how costs flow through accounts

The costs in a process costing system are

traced to:
a. Specific jobs
b. Specific customers
c. Specific company administrators
d. Specific production departments
Answer: d
Specific production departments
Slide 3-13

Learning objective 1: Describe how products flow through departments

and how costs flow through accounts

Cost
Cost Flows
Flows through
through Accounts
Accounts
Direct Material
Suppose that $142,000 of direct materials are
used
Journal entry:

Slide 3-14

Learning objective 1: Describe how products flow through departments

and how costs flow through accounts

Cost
Cost Flows
Flows through
through Accounts
Accounts
Direct Labor
Suppose that $62,200 of direct labor costs are
incurred
Journal entry:

Slide 3-15

Learning objective 1: Describe how products flow through departments

and how costs flow through accounts

Cost
Cost Flows
Flows through
through Accounts
Accounts
Manufacturing Overhead
Suppose manufacturing overhead is applied at a
rate of $3 per direct labor dollar
Journal entry:

Slide 3-16

Learning objective 1: Describe how products flow through departments

and how costs flow through accounts

Cost
Cost Flows
Flows through
through Accounts
Accounts
Transferred-in Cost
When a department completes its work, the items
are transferred to the next department
Related costs are transferred as well
Suppose the Mixing Department completed units
with a cost of $360,000

Slide 3-17

Learning objective 1: Describe how products flow through departments

and how costs flow through accounts

Flow
Flow of
of Costs
Costs Between
Between
Processing
Processing Departments
Departments

Slide 3-18

Learning objective 1: Describe how products flow through departments

and how costs flow through accounts

Calculating
Calculating Unit
Unit Cost
Cost
Equivalent Units
Partially completed units are converted to a
comparable number of completed units, called
equivalent units
e.g. 100 units that are 50% complete are
equivalent to 50 complete units (100 x 50%)
Equivalent units may be different for material
and conversion costs if materials and conversion
costs enter production at different times.

Slide 3-19

Learning objective 2: Discuss the concept of an equivalent unit

Equivalent
Equivalent Units
Units
Material
Material and
and
Conversion
Conversion Costs
Costs

Slide 3-20

Learning objective 2: Discuss the concept of an equivalent unit

 Beginning Work in Process 500 units

% complete = 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete = 85% materials, 50% conversion
1. Calculate equivalent units for materials

Slide 3-21

Learning objective 2: Discuss the concept of an equivalent unit

Beginning Work in Process 500 units

% complete: 65% materials, 45% conversion

Units started: 2,300

Units finished: 2,500
Ending Work in Process 300 units

% complete: 85% materials, 50% conversion

2. Calculate equivalent units conversion

Slide 3-22

Learning objective 2: Discuss the concept of an equivalent unit

Calculating
Calculating Unit
Unit Cost
Cost
Cost Per Equivalent Unit
The average unit cost is referred to as cost per
equivalent unit

Slide 3-23

Learning objective 3: Calculate the cost per equivalent unit

Calculating
Calculating Cost
Cost per
per
Equivalent
Equivalent Unit
Unit
Mixing Department
Beginning Work in Process: 10,000 gallons that are
80% complete
-Direct material costs = $18,000
-Direct labor =$7,80
-Overhead = $23,400
70,000 gallons started, 60,000 gallons completed
-Direct material costs = $142,000
-Direct labor cost = $62,200
- Overhead cost = $186,600

Slide 3-24

Learning objective 3: Calculate the cost per equivalent unit

Cost
Cost per
per EU
EU
Mixing
Mixing Department
Department

Slide 3-25

Learning objective 3: Calculate the cost per equivalent unit

Equivalent units(EU):
Materials =2,650EU, conversion=2,755EU

Costs in beginning Work in Process

Materials = $3,180, conversion = $3,306

Costs incurred:
Materials = $18,020, conversion = $13,224

1.

Slide 3-26

Calculate materials cost/equivalent unit

Learning objective 3: Calculate the cost per equivalent unit

Equivalent units (EU):

Materials = 2,650EU, conversion = 2,755EU

Costs in beginning Work in Process

Materials = $3,180, conversion = $3,306

Costs incurred:
Materials = $18,020, conversion = $13,224

2.

Slide 3-27

Calculate conversion cost/equivalent unit

Learning objective 3: Calculate the cost per equivalent unit

Costs
Costs Transferred
Transferred Out
Out
60,000 gallons completed by the Mixing
Department
Unit cost is $6 per gallon
$360,000 (60,000 X $6) of cost transferred to
the Packaging Department

Slide 3-28

Learning objective 4: Calculate the cost of goods completed and the ending
Work in Process balance in a processing department

Ending
Ending Work
Work in
in Process
Process

Slide 3-29

Learning objective 4: Calculate the cost of goods completed and the ending
Work in Process balance in a processing department

Summary
Summary of
of Cost
Cost Activity
Activity

Mixing
Mixing Department
Department

Slide 3-30

Learning objective 4: Calculate the cost of goods completed and the ending
Work in Process balance in a processing department

Production
Production Cost
Report
Cost Report
Reconciliation of Units

Slide 3-31

Learning objective 5: Describe a production cost report

Production
Production Cost
Report
Cost Report
Reconciliation of Costs

Slide 3-32

Learning objective 5: Describe a production cost report

Basic
Basic Steps
Steps in
in Process
Process Costing
Costing
Step 1: Account for the number of physical
units
Step 2: Calculate the cost per equivalent
unit for materials, labor, and
overhead
Step 3: Assign cost to items completed and
items in ending Work in Process
Step 4: Account for the amount of product
cost

Slide 3-33

Learning objective 5: Describe a production cost report

Dealing
Dealing with
with Transferred-In
Transferred-In Cost
Cost
Packaging Department summary:
Beginning Work in Process 15,000 gallons 50%
through packaging operation
Costs in WIP: materials $10,500, labor $4,500,
$9,000 overhead, $92,250 transferred in
Units transferred in 60,000 gallons with $360,000
transferred in cost
Costs added: Materials $49,500, labor $27,900,
$55,800 overhead
Ending Work in Process 5,000 gallons 40% through
packaging operation
Slide 3-34

Learning objective 5: Describe a production cost report

Production
Production Cost
Cost Report
Report

Packaging
Packaging Department
Department

Slide 3-35

Learning objective 5: Describe a production cost report

Production
Production Cost
Cost Report
Report

Packaging
Packaging Department
Department

Slide 3-36

Learning objective 5: Describe a production cost report

Production
Production Cost
Cost Report
Report

Packaging
Packaging Department
Department

Slide 3-37

Learning objective 5: Describe a production cost report

Process
Process Costing
Costing and
and Incremental
Incremental
Analysis
Analysis
A company has no beginning or ending Work in
Process
Assume materials and labor variable,
manufacturing overhead fixed
Cost summary:

Slide 3-38

Learning objective 5: Describe a production cost report

Process
Process Costing
Costing and
and Incremental
Incremental
Analysis
Analysis
Decreasing price to $2.90 will increase
demand to 275,000 units
$2.90 is less than equivalent cost per unit
Incremental analysis: profit will increase

Slide 3-39

Learning objective 5: Describe a production cost report

You
You Get
Get What
What You
You Measure
Measure

Slide 3-40

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