PRODUCT

COSTING

1-1
 JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
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• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.

• CONTACT:
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• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
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Comparison of Job-Order Costing
and Process Costing
Process
Process Job-order
Costing
Costing Costing

 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.
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Comparison of Job-Order Costing
and Process Costing
Process
Process Job-order
Costing
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill

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Comparison of Job-Order Costing
and Process Costing
Job-order costing Process costing
– Costs accumulated by – Costs accumulated by
the job. department or process.
– Work in process has a – Work in process has a
job-cost sheet for each production report for
job. each batch of products.
– Many unique, high cost – A few identical, low cost
jobs. products.
– Jobs built to customer – Units continuously
order. produced for inventory in
automated process.
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Differences Between Job-Order
and Process Costing
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
1-9
 Differences Between Job-Order
and Process Costing
The work-in-process
account consists of
individual products in a
Direct Material
process cost system.

Direct Labor Finished

& Overhead Products Goods
(Conversion)

When direct labor is a relatively small amount Cost of

compared to material and overhead, it is often Goods
combined with overhead. Sold
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 Process Cost Flows
One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material
Cost of goods completed Cost of goods sold
Direct labor
Applied manufacturing and transferred to during current
overhead finished goods period

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 Process Cost Flows
Two Sequential Production Departments
Work-in-Process Inventory Work-in-Process Inventory
Production Department A Production Department B
Direct material Cost of goods completed
Direct labor in department A and Cost of goods completed
Applied manufacturing transferred to and transferred to
overhead department B finished goods

Direct material
Direct labor
Applied manufacturing
overhead

Finished Goods Inventory Cost of Goods Sold

Cost of goods sold
during current period

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Equivalent Units: A Key Concept

•• Costs
Costs are
are accumulated
accumulated for for aa period
period of
of time
time for
for
products
products inin work-in-process
work-in-process inventory.
inventory.
•• Products
Products inin work-in-process
work-in-process inventory
inventory at at the
the
beginning
beginning and
and end
end of of the
the period
period areare only
only
partially
partially complete.
complete.
•• Equivalent
Equivalent units
units is
is aa concept
concept expressing
expressing
these
these partially
partially completed
completed products
products as as aa
smaller
smaller number
number of of fully
fully completed
completed products.
products.

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Equivalent Units of Production

Equivalent units are partially complete

and are part of work in process
inventory. Partially completed
products are expressed in terms of a
smaller number of fully completed
units.

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 Process Cost Flows
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

1-15
Equivalent Units of Production
Two half completed products are
equivalent to one completed product.

+ = 1

So,
So, 10,000
10,000 units
units 70
70 percent
percent complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.

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 Quick Check 
For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in process 30 percent complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Jones
Jones have
have for
for the
the period?
period?
a.
a. 10,000
10,000
b.
b. 11,500
11,500
c.
c. 13,500
13,500
d.
d. 15,000
15,000
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 Quick Check 
For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in process 30 percent complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Jones
Jones have
have for
for the
the period?
period?
a.
a. 10,000
10,000
10,000 units + (5,000 units × 0.30)
b.
b. 11,500
11,500 = 11,500 equivalent units
c.
c. 13,500
13,500
d.
d. 15,000
15,000
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Calculating and Using Equivalent
Units of Production

To calculate the cost per

equivalent unit for the period:

Cost per
Costs for the period
equivalent = Equivalent units of production
unit for the period

1-19
 Quick Check 
Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent
unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
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 Quick Check 
Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent
unit for the period?
a. $1.84
$27,600
$27,600 ÷÷ 11,500
11,500 equivalent
equivalent units
units
b. $2.40 == $2.40
$2.40 per
per equivalent
equivalent unit
unit
c. $2.76
d. $2.90
1-21
 Equivalent Units of Production –
Weighted Average Method
The weighted average method . . .
– Makes no distinction between work done in prior
and current period.
– Blends together units and costs from prior
period and current period.

Let’s see how this works!

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EXP 1: Production Report Example
• MVP Sports Equipment Company makes baseball gloves
in two departments, Cutting and Stitching.
• MVP uses the weighted-average cost procedure.
• Material is added at the beginning of the Cutting
Department, and conversion is incurred uniformly
throughout the process.
• Using the following information for the month of March,
let’s prepare a production report for the Cutting
Department.

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 Production Report Example
Work in process, March 1: 20,000 units Cost
Materials: 100% complete. $ 50,000
Conversion: 10% complete. 7,200

Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 units

Materials 100% complete.
Conversion 50% complete.

Costs incurred during March

Materials cost 90,000
Conversion costs:
Direct labor $ 86,000
Applied manufacturing overhead 107,500
Total conversion costs 193,500
Total costs to account for $ 340,700

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 Production Report Example
 Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

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 Production Report Example
 Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000

Units started during March 30,000
50% of 10,000 units
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

ginning inventory % is not used in weighted-average method.

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 Production Report Example
 Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
100% of 10,000 units, all
Total units to account for 50,000
material added at beginning
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

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 Production Report Example
 Computation of unit costs
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units

$2.80 + $4.46
$200,700 ÷ 45,000 equivalent units
1-28
 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

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 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

1-30
 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

All costs
Total costs accounted for accounted for $ 340,700

1-31
 MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Direct
Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000

Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

1-32
EXP 2: Production Report Example

Double
Double Diamond
Diamond Skis
Skis uses
uses process
process costing
costing to
to
determine
determine unit
unit costs
costs in
in its
its Shaping
Shaping and
and Milling
Milling
Department.
Department.
Double
Double Diamond
Diamond uses
uses the
the weighted
weighted average
average
cost
cost procedure.
procedure.
Using
Using the
the following
following information
information for
for the
the month
month of
of
May,
May, let’s
let’s prepare
prepare aa production
production report
report for
for
Shaping
Shaping and
and Milling.
Milling.

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 Production Report Example

Work
Work in
in process,
process, May
May 1:
1: 200
200 units
units
Materials:
Materials: 55%
55% complete.
complete. $$ 9,600
9,600
Conversion:
Conversion: 30%
30% complete.
complete. 5,575
5,575

Production
Production started
started during
during May:
May: 5,000
5,000 units
units
Production
Production completed
completed during
during May:
May: 4,800
4,800 units
units

Costs
Costs added
added to
to production
production in
in May
May
Materials
Materials cost
cost $$ 368,600
368,600
Conversion
Conversion cost
cost 350,900
350,900

Work
Work in
in process,
process, May
May 31:
31: 400
400 units
units
Materials
Materials 40%
40% complete.
complete.
Conversion
Conversion 25%
25% complete.
complete.
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 Production Report Example

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400

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 Production Report Example

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160

5,200 4,960

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 Production Report Example

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900

1-37
 Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit

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 Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25

$378,200 ÷ 4,960 units = $76.25

1-39
 Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25 $ 72.75
Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 ÷ 4,900 units = $72.75

1-40
 Production Report Example
Section 3: Cost Reconciliation

Total Equivalent Units

Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for

1-41
 Production Report Example
Section 3: Cost Reconciliation

Total Equivalent Units

4,800 units @ $149.00 Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for

1-42
 Production Report Example
Section 3: Cost Reconciliation

Total Equivalent Units

160 units @ $76.25 Cost Materials Conversion
100 units @ $72.75
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 12,200 160
Conversion 7,275 100
Total work in process, May 31 19,475
All costs
Total cost accounted for $ 734,675 accounted for

1-43
 JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.

• CONTACT:
• 0322-3385752
• 0312-2302870
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.