Process Costing

Chapter 17

ACCT 3270
Fall 2016
Jay K.
Baker,
MSFS, MBA,
CPA, CFP

J. Keith Baker 2015

Job Costing Versus Process Costing

LO 17 - 1 Identify the situations in which process-costing
systems are appropriate.
Job-Costing Systems

Process-Costing
Systems

Distinct, identifiable
units of a product
or service

Masses of identical
or similar units of a
product or service

Examples:
Custom-made
machines,
houses

Examples:
Food,
chemical processing

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17-2

Process Costing
Process costing is a system where the unit
cost of a product or service is obtained by
assigning total costs to many identical or
similar units.
Each unit receives the same or similar
amounts of direct materials costs, direct
labor costs, and manufacturing overhead.
Unit costs are computed by dividing total
costs incurred by the number of units of
output from the production process.

J. Keith Baker 2016

More on job-vs-process-costing

In a job-costing system, individual jobs use

different quantities of resources, so it would
be incorrect to cost each job at the same
average production cost.
In contrast, when identical or similar units of
products or services are mass-produced,
process costing is used to calculate an
average production cost for all units produced.

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17-4

Comparing Job Order

and Process Operations

A1

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17-5

Process-Costing Assumptions
Process-costing systems separate costs into
cost categories according to when costs are
introduced into the process.
Direct materials are added at the beginning of
the production process, or at the start of work
in a subsequent department down the assembly
line.
Conversion costs are added equally along the
production process.

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17-6

Process-costing: three cases

Lets look at the process-costing process three
ways:
1.No beginning or ending work-in-process
inventories.
2.No beginning work-in-process inventory and
some ending work-in-process inventory.
3.Both beginning and ending work-in-process
inventories are present.

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17-7

Process costing case 1

When using process costing without any
beginning or ending work-in-process inventory,
all costs that were introduced to the process
during the period will be assigned to the
finished units leaving work-in-process inventory
at the end of the period. Go to Page 666 - 668
of your text.

J. Keith Baker 2016

17-8

Quick Check
Serile Pharma places 900 units in production during the month
of January. All 900 units are completed during the month. It had
no opening inventory. Direct material costs added during
January was $81,000 and conversion costs added during
January was $9,000.What is the total cost per unit of the
product produced during January?
A) $100
B) $90
C) $80
D) $10
Total cost per unit = [($81,000 + $9,000) / 900] = $100

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17-9

Five-Step Process-Costing Allocation

LO 17 - 3 Describe the five steps in process costing
and calculate equivalent units.
1.
2.
3.
4.
5.

Summarize the flow of physical units

of output.
Compute output in terms of equivalent
units.
Summarize total costs to account for .
Compute cost per equivalent unit.
Assign total costs to units completed
and to units in ending work-in-process.
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1710

Equivalent Units

A derived amount of output units that:

1.

2.

Takes the quantity of each input in units

completed and in unfinished units of work in
process and
Converts the quantity of input into the amount
of completed output units that could be
produced with that quantity of input

Are calculated separately for each input

(direct materials and conversion cost)
When calculating equivalent units in step 2,
focus on quantities and disregard dollar
amounts until after the equivalent units are
computed
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1711

Steps 1 and 2 Illustrated

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1712

Steps 3, 4, and 5, Illustrated

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1713

General Ledger Cost Flows Illustrated

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1714

Quick Check
In a process-costing system, the calculation of equivalent units
is used for calculating ________.
A) the dollar amount of sales affected during the period
B) the dollar amount of the cost of goods sold for the
accounting period
C) the dollar price earned for a particular job
D) the dollar amount of revenue for the period including the
revenue estimated to be received from the sale of equivalent
units

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1715

Quick Check
Charlie Chairs Inc., manufactures plastic moldings for car seats. Its costing system utilizes two cost categories, direct materials and
conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of
production. Conversion costs are allocated evenly throughout production.
Data for Department A for February 2015 are:
Work in process, beginning inventory, 40% converted

200 units

Units started during February 800 units

Work in process, ending inventory

100 units

Costs for Department A for February 2015 are:

Work in process, beginning inventory:
Direct materials

$150,000

Conversion costs

$200,000

Direct materials costs added during February

$600,000

Conversion costs added during February

$425,000

What is the unit cost per equivalent unit of beginning inventory in Department A?
A) $750
B) $1,750
C) $2,800
D) $3,250

Direct materials per unit ($150,000 / 200 units)

750
Conversion costs per unit ($200,000 / (200 0.40) units)
Total costs per unit

J. Keith Baker 2016

$
2,500
$3,250
1716

Quick Check
When a Bakery transfers goods from the Mixing Department to the
Baking Department, the accounting entry is ________.
A) Work in Process Mixing Department
Work in Process Baking Department
B) Work in Process Baking Department
Accounts Payable
C) Work in Process Baking Department
Work in Process Mixing Department
D) Work in Process Mixing Department
Accounts Payable

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1717

Quick Check
The purpose of the equivalent-unit computation is to ________.
A) convert completed units into the amount of partially
completed output units that could be made with that quantity
of input
B) assist the business in determining the cost assigned to
ending inventory and work-in-process inventory
C) predict the future production capabilities of the organization
D) satisfy the GAAP requirements which requires all partially
completed goods to be reported as equivalent-units

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1718

Weighted-Average
Process-Costing Method
LO 17 4 Use the weighted average method and first-in,
first-out (FIFO) method of process costing.

Calculates cost per equivalent unit of all

work done to date (regardless of the
accounting period in which it was done)
Assigns this cost to equivalent units
completed and transferred out of the
process, and to incomplete units in still-inprocess

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1719

Weighted-Average
Process-Costing Method

Weighted-average costs is the total of all costs

in the work-in-process account divided by the
total equivalent units of work done to date.
The beginning balance of the work-in-process
account (work done in a prior period) is
blended in with current period costs.

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1720

Steps 1 and 2 Illustrated

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1721

Steps 3, 4, and 5 Illustrated

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1722

Result of the Process

Two critical figures arise out of step 5 of the

cost allocation process:
1.

2.

The amount of the journal entry transferring the

allocated cost of units completed and sent from
work-in-process inventory to finished goods
inventory
The ending balance of the work-in-process
inventory account that will appear on the
balance sheet

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1723

Quick Check
A production department's output for the most recent month consisted of 10,000
units completed and transferred to the next stage of production and 10,000 units in
ending Work in Process inventory. The units in ending Work in Process inventory
were 50% complete with respect to both direct materials and conversion costs.
There were 1,000 units in beginning Work in Process inventory, and they were 70%
complete with respect to both direct materials and conversion costs. Calculate the
equivalent units of production for the month, assuming the company uses the
weighted average method.
A. 10,000 units.
B. 10,300 units.
C. 15,000 units.
D. 15,300 units.
E. 10,700 units.
Feedback:
Units completed and transferred to next stage
Units in ending Work in Process inventory (10,000 * 50% complete)
10,000 units
5,000 units
15,000 units

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1724

Quick Check
Luker Corporation uses a process costing system. The company had
$160,500 of beginning Finished Goods Inventory on October 1. It
transferred in $837,000 of goods completed during the period. The
ending Finished Goods Inventory balance on October 31 was
$158,200. The entry to account for the cost of goods sold in October
is:
A. Debit Cost of Goods Sold $837,000; credit Finished Goods Inventory $837,000.
B. Debit Cost of Goods Sold $839,300; credit Work in Process Inventory $839,300.
C. Debit Finished Goods Inventory $837,000; credit Work in Process Inventory $837,000.
D. Debit Finished Goods Inventory $158,200; credit Cost of Goods Sold $158,200.
E. Debit Cost of Goods Sold $839,300; credit Finished Goods Inventory $839,300.
Feedback: Cost of Goods Sold = Beginning FG + cost of goods manufactured Ending FG
160,500 + 837,000 158,200 = $839,300

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1725

Using Product Costing

in a Process Industry
Torrance Tape, Inc. (2T), manufactures adhesives and tapes.
Production at 2Ts Valley Plant takes place in three steps.

1.
Compounding
Department

2.
Coating
Department

3.
Cutting and
Packaging
Department

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Warehouse

1726

Measure the Physical

Flow of Resources (Step 1)
Gallons of
Compound

a
b

Work in process, March 1

+ Gallons of adhesive started
Total gallons to account for

20,000a
92,000
112,000

=Transferred out to Coating Department

+ Work-in-process, March 31
Total units accounted for

96,000
16,000b
112,000

25% complete with respect to conversion costs

30% complete with respect to conversion costs

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1727

Compute the Equivalent Units

of Production (Step 2)
Compounding Department, March: Equivalent Units

Transferred out
Work-in-process, March 31
Total work
a

Physical
units

Equivalent units
Materials
Conversion

96,000
16,000a

96,000
16,000
112,000

96,000
4,800
100,800

30% complete with respect to conversion costs

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1728

Identify the Product Costs for

Which to Account (Step 3)
Costs:

Work-in-process costs

Current period costs

Work (EU)

Work-in-process EU*

Current period EU

Weighted
average:

FIFO:

Weighted-Average Unit Costs

(Work-in-process costs + Current period costs)
(Work-in-process EU + Current period EU
Work-in Process Unit Costs

Current Period Unit Costs

Work-in-process costs
Work-in-process EU

Current period costs

Current period EU

*Note: EU is equivalent unit.

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1729

First-in, First-Out
Process-Costing Method

Assigns the cost of the previous accounting

periods equivalent units in beginning workin-process inventory to the first units
completed and transferred out of the
process
Assigns the cost of equivalent units worked
on during the current period first to
complete beginning inventory, next to
started and completed new units, and lastly
to units in ending work-in-process inventory

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1730

First-in, First-Out
Process-Costing Method

A distinctive feature of FIFO process-costing

method is that work done on beginning
inventory is kept separate from work done in
the current period.
There is no blending of costs as we saw with
the weighted-average method.

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1731

Steps 1 and 2, Illustrated example, case

3, with beg & ending wip (FIFO)

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1732

Steps 3, 4, and 5, Illustrated

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1733

Result of the Process (As Before)

Two critical figures arise out of step 5 of the

cost-allocation process:
1.

2.

The amount of the journal entry transferring the

allocated cost of units completed and sent from
work-in-process inventory to finished goods
inventory
The ending balance of the work-in-process
inventory account that will appear on the
balance sheet

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1734

Quick Check
A company uses the FIFO method for inventory costing. At the beginning
of a period, the production department had 20,000 units in beginning
Work in Process inventory which were 40% complete; the department
completed and transferred 165,000 units. At the end of the period, 22,000
units were in the ending Work in Process inventory and are 75% complete.
Compute the number of equivalent units produced by the department.
A. 181,500.
B. 165,000.
C. 173,500.
D. 145,000.
E. 187,000.
Equivalent Units
Units to complete BGIP
Started and completed
Units in EGIP
Equivalent units

20,000 * 60%
145,000 * 100%
22,000 *75%

J. Keith Baker 2016

12,000
145,000
16,500
173,500

1735

Comparing weighted-average and

FIFO methods

FIFO assumes that all the higher-cost units

(from our example) from the previous period
in beginning wip are the first to be completed
and transferred out and that ending wip
consists of only the lower-cost current-period
units.
The weighted-average method smooths out
the cost per equivalent unit by assuming that
more lower-cost units are transferred out and
some higher-cost remain in ending wip.

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1736

Comparing weighted-average and

FIFO methods, concluded

Managers use information from processcosting systems to make pricing and productmix decisions and understand how well a
firms processes are performing.
FIFO provides managers with information
about changes in the costs per unit from one
period to the next.
In a period of rising prices, the weightedaverage method will decrease taxes because
cost of goods sold will be higher and operating
income lower.
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1737

Determining Which is Better:

FIFO or Weighted-Average?
Does not separate prior period and current
period activities and costs.

Separates prior period and current period

activities and traces the prior period and
current period costs to the respective units.

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1738

Dealing With Transfer Costs

LO 17 5 Apply process-costing methods to situation
with transferred-in costs.

Dealing with the norm that most processcosting systems have two or more
departments or processes in the production
cycle.
How to assigns these costs as units move
from department to department and their
related costs are also transferred by journal
entries.

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1739

How Do We Account For Movement of

Transferred Costs?

Lets diagram it out:

Now lets look at the Data for the Testing Department as follows:

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1740

Transferred-In Costs
Are costs incurred in previous departments
that are carried forward as the products cost
when it moves to a subsequent process in
the production cycle.
Also called previous department costs.
Journal entries are made to mirror the
progress in production from department to
department.
Transferred-in costs are treated as if they are
a separate type of direct material added at
the beginning of the process.

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1741

Steps 1 and 2, Illustrated example for

beginning and ending wip and
transferred-in costs, weighted average

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1742

Steps 3, 4, and 5, Illustrated

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1743

Steps 1 and 2, Illustrated example for beg &

ending wip and transferred-in costs, FIFO

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1744

Steps 3, 4, and 5, Illustrated

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1745

Points to remember about

transferred-in costs
1.

2.

3.

Be sure to include the transferred-in costs

from previous departments in your
calculations.
When calculating the costs to be transferred
using the FIFO method, do not overlook
costs that were in beginning wip which may
now be part of the units transferred.
Unit costs may fluctuate between periods so
transferred units may contain batches
accumulated at different costs (using FIFO).

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1746

Points to remember about transferredin costs, concluded

4.

5.

Those unit costs discussed in item #3

on the prior slide will be transferred to
the next department at ONE AVERAGE
UNIT cost.
Units may be measured in different
denominations in different
departments (feet in one department
and yards in another or kilos vs. liters).
In this case, measurements must be
converted to the correct measure.
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1747

Measure the Physical

Flow of Resources (Step 1)
Gallons of
Compound

Work in process, March 1

+ Gallons of adhesive started
Total gallons to account for

20,000a
92,000
112,000

=Transferred out to Coating Department

+ Work-in-process, March 31
Total units accounted for

96,000
16,000b
112,000

25% complete with respect to conversion costs

b
30% complete with respect to conversion costs
a

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1748

Compute the Equivalent Units

of Production (Step 2)
Compounding Department, March: Equivalent Units

Transferred out
Work-in-process, March 31
Total work

Physical
units

Equivalent units
Materials Conversion

96,000
16,000

96,000
16,000a
112,000

96,000
4,800b
100,800

16,000 units 100% (all materials added in beginning)

b
16,000 units 30%
a

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1749

Identify the Product Costs for

Which to Account (Step 3)
Total
costs

Work in process, March 1

Current costs, March
Total

Materials
costs

Conversion
costs

$ 24,286 $ 16,160 $ 8,126

298,274
84,640 213,634
$322,560 $100,800 $221,760

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1750

Compute the Cost per

Equivalent Unit (Step 4)
Total
costs

Total costs (Step 3)

Materials
costs

Conversion
costs

$322,560 $100,800 $221,760

Total equivalent units (Step 2)

Cost per equivalent unit

J. Keith Baker 2016

112,000 100,800
$ 0.90 $
2.20

1751

Assign Product Costs to

Batches of Work (Step 5)
Total

Transferred out:
Equivalent units
Cost per equivalent unit
Cost assigned
Work-in-process, March 31
Equivalent units
Cost per equivalent unit
Cost assigned
Total cost assigned

Materials
costs

Conversion
costs

96,000
96,000
$
0.90 $
2.20
$297,600 $ 86,400 $211,200
16,000
4,800
$
0.90 $
2.20
24,960
14,400
10,560
$322,560 $100,800 $221,760

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1752

Quick Check
The Swivel Chair Company manufacturers a standard recliner. During February, the firm's
Assembly Department started production of 145,000 chairs. During the month, the firm
completed 175,000 chairs and transferred them to the Finishing Department. The firm
ended the month with 18,000 chairs in ending inventory. All direct materials costs are added
at the beginning of the production cycle. Weighted-average costing is used by Swivel.
How many chairs were in inventory at the beginning of the month? Conversion costs are
incurred uniformly over the production cycle.
A) 8,000 chairs
B) 18,000 chairs
C) 38,000 chairs
D) 48,000 chairs

Beginning inventory = 18,000 chairs (ending inventory) + 175,000 chairs (finished

and transferred during the month) 145,000 chairs (started production during the
month) = 48,000 chairs

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1753

Quick Check
The Swivel Chair Company manufacturers a standard recliner. During February,
the firm's Assembly Department started production of 145,000 chairs. During the
month, the firm completed 175,000 chairs and transferred them to the Finishing
Department. The firm ended the month with 18,000 chairs in ending inventory. All
direct materials costs are added at the beginning of the production cycle.
Weighted-average costing is used by Swivel.
What were the equivalent units for materials for February?
A) 193,000 chairs
B) 173,000 chairs
C) 163,000 chairs
D) 153,000 chairs
Equivalent units for materials = 18,000 units (ending units) + 175,000 units
(completed and transferred) = 193,000 units.

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1754

Quick Check
The Swivel Chair Company manufacturers a standard recliner. During February, the firm's
Assembly Department started production of 145,000 chairs. During the month, the firm
completed 175,000 chairs and transferred them to the Finishing Department. The firm
ended the month with 18,000 chairs in ending inventory. All direct materials costs are added
at the beginning of the production cycle. Weighted-average costing is used by Swivel.
What were the equivalent units for conversion costs for February if the beginning inventory
was 70% complete as to conversion costs and the ending inventory was 40% complete as to
conversion costs?
A) 182,200
B) 152,200
C) 172,200
D) 162,200

Equivalent units for conversion costs for February = 175,000 units + 7,200
equivalent units = 182,200 units

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1755

Quick Check
A major advantage of using the FIFO process-costing method is
that ________.
A) FIFO makes the unit cost calculations simpler
B) in contrast with the weighted-average method, FIFO is
considered GAAP
C) FIFO provides managers with information about changes in
the costs per unit from one period to the next
D) in the period of rising prices, it leads to lower operating
income and lower tax payments, saving the company cash and
increasing the company's value

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1756

Quick Check
Transferred-in costs are treated as if they are ________.
A) conversion costs added at the beginning of the process
B) costs of beginning inventory added at the beginning of the
process
C) direct labor costs added at the beginning of the process
D) a separate direct material added at the beginning of the
process

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1757

Hybrid Costing Systems

LO 17 - 6 Understand the need for hybrid-costing
systems such as operation costing.
Product-costing systems do not always fall neatly into
either job-costing or process-costing categories.
A Hybrid-costing system blends characteristics from
both job-costing and process-costing systems.
Many actual production systems are in fact hybrids.
Examples include manufacturers of televisions,
dishwashers, and washing machines, as well as
Adidas who tend to use hybrid-costing systems.
.
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1758

Hybrid-costing systems, concluded

The hybrid-costing systems use process

costing to account for the conversion costs
and job costing for the material and
customizable components.
One specific type of hybrid-costing system is
known as the Operation-Costing System

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1759

Operation-costing system

An operation is a standardized method or

technique that is performed repetitively
resulting in different finished goods.
An operation-costing system is a hybridcosting system applied to batches of similar,
but not identical, products.
Within each operation, all product units are
treated exactly alike, using identical amounts
of the operations resources.
Managers find operation costing useful in cost
management because operation costing
focuses on control of physical processes or
operations of a given production system.
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1760

Quick Check
Weighted-average method, equivalent units. Consider
the following data for the assembly division of Fenton
Watches, Inc.: The assembly division uses the weightedaverage method of process costing.

Compute equivalent units for direct materials and conversion

costs. Show physical units in the first column of your schedule.

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1761

Under the weighted-average method, equivalent units are

calculated as the equivalent units of work done to date. The
equivalent units of work effort performed for the Assembly
Division for direct materials and conversion costs are:
STEP 1:
Summarize Output
in Physical Units

STEP 2: Compute
Output in
Equivalent Units

J. Keith Baker 2016

Quick Check

Weighted-average
method,
assigning
costs
For the data in used previously, summarize total costs to
account for, calculate cost per equivalent unit for direct
materials and conversion costs, and assign total costs to
units completed (and transferred out) and to units in ending
work in process.
STEP 3:
Summarize
Total Costs to
Account For

STEP 4:
Compute Cost
per Equivalent
Unit

STEP 5: Assign
Total Costs to
Units Completed
and to Units in
Ending Work in
Process

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1763

Quick Check
FIFO method, equivalent units. Suppose the assembly division
at Fenton Watches, Inc., uses the FIFO method of process
costing instead of the weighted-average method. Compute
equivalent units for direct materials and conversion costs.
Show physical units in the first column of your schedule.

STEP 1:
Summarize
Output in
Physical
Units

Calculation not in the

weighted average
method

STEP 2:
Compute
Equivalent
Units done
in current
period
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1764

Quick Check
Managers find operation costing useful in cost management
because it ________.
A) often results in profit maximization
B) results in cost minimization
C) focuses on control of physical processes of a given
production system
D) uses job costing to account for the conversion costs and
process costing for the material and customizable components

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1765

Quick Check
Which of the following companies is likely to use a hybridcosting system?
A) Best Fit Corp., which manufactures pharmaceuticals
B) Rida Corp., which processes and sells, after import, a single
variant of Turkish marble to real estate companies
C) Fast run, which sells a limited range of televisions, which go
through similar manufacturing process
D) Karoline Corp., which manufactures and sells a single
model of cap

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1766

Quick Check
Pitt Enterprises manufactures jeans. All materials are introduced at the beginning of the manufacturing process in the Cutting
Department. Conversion costs are incurred uniformly throughout the manufacturing process. As the cutting of material is completed, the
pieces are immediately transferred to the Sewing Department. Information for the Cutting Department for the month of May follows.
Work in Process, May 1 (50,000 units, 100% complete for direct materials, 40% complete with respect to direct labor and overhead;
includes $70,500 of direct material cost; $34,050 of conversion costs).
Units started in May

225,000

Units completed in May

200,000

Work in Process, May 31 (75,000 units, 100% complete for direct materials; 20% complete for conversion costs).
Costs incurred in May
Direct materials

$342,000

Conversion costs

$352,950

If Pitt Enterprises uses the FIFO method of process costing, compute the equivalent units for materials and conversion costs respectively
for May.
A. 225,000; 225,000.
B. 200,000; 195,000
C. 275,000; 200,000
D. 225,000; 195,000
E. 200,000; 200,000

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1767

Quick Check
Pitt Enterprises manufactures jeans. All materials are introduced at the beginning of the manufacturing
process in the Cutting Department. Conversion costs are incurred uniformly throughout the manufacturing
process. As the cutting of material is completed, the pieces are immediately transferred to the Sewing
Department. Information for the Cutting Department for the month of May follows.
Work in Process, May 1 (50,000 units, 100% complete for direct materials, 40% complete with respect to
direct labor and overhead; includes $70,500 of direct material cost; $34,050 of conversion costs).
Units started in May

225,000

Units completed in May

200,000

Work in Process, May 31 (75,000 units, 100% complete for direct materials; 20% complete for conversion
costs).
Costs incurred in May
Direct materials

$342,000

Conversion costs

$352,950

If Pitt Enterprises uses the FIFO method of process costing, compute the equivalent units for materials and
conversion costs respectively for May.
All 50,000 units in beginning Work in Process were already 100% complete with respect to direct materials. The
information indicates 225,000 units were begun during May. Since direct materials are added at the beginning of the
process, those units were 100% complete with respect to direct materials by the end of May. Therefore, the equivalent
units of production for direct materials for May was 225,000. The 50,000 units in beginning Work in Process were only
40% complete with respect to conversion costs. Therefore, the remaining 60% or 30,000 units were completed in May as
far as conversion costs are concerned. The information also indicates that 200,000 units were completed during May.
That means that another 150,000 units were started and completed during May and were 100% complete with respect to
conversion costs (200,000 50,000). Finally, there were 75,000 units in ending Work in Process inventory and those
units were 20% complete with respect to conversion costs. 75,000 units * 20% = 15,000 units. Therefore, the total
equivalent units of production for conversion costs during May were 30,000 + 150,000 + 15,000 = 195,000.

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End of Chapter 17

J. Keith Baker 2016

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