Chapter 4: Process Costing

- Job - order and process costing are similar in that they:

o Both deal with assigning materials, labor, and overhead to products as a way to calculate the unit product
cost.
o Both systems use Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory.
o The flow of costs is similar, but not exactly the same, in the two systems.
- Processing Costing is best suited for the production of a single product that is continuously produced for a long
period of time.
o Process costing accumulates costs by department, while job - order costing accumulates costs by
individual jobs.
o Process costing uses a fundamental document called a department production report, while job - order
costing uses the job cost sheet.
o In process costing unit cost is computed by department, while in job - order systems unit cost is computed
by job.
- Processing department: is any unit in an organization where materials, labor, or overhead are added to the
product. The output from a processing department is homogeneous, that is, they all appear the same.
Products in a process costing environment typically flow in a sequence from one department to another.

Flow of Costs
- There is a key fundamental difference between process and job - order costing systems. Job - order costing
systems trace and apply manufacturing costs to individual jobs. One Work in Process account is often used to
accumulate costs for all jobs.
- Each Department has its own Work in Process accountand direct materials, direct labor, and applied
overhead are added to each respective departmental WIP account.
o Entry to add such a cost would be debit Work in Process- department A xx and debit Work in Process-
department xxx. Credit Manufacturing overhead the sum of xx and xxx.
o The cost of units complete as to processing in Department A are transferred into Department B for
additional work. Department B has incurred additional costs to work on units that were in process at the
beginning of the period. The transferred - in costs from Department A are added to the manufacturing
costs incurred in Department B.
To transfer the costs, we debit the Work in Process Inventory in Department B, and credit, or reduce,
the Work in Process Inventory in Department A.
When Department B is done, we credit the WIP for Department B and credit Finished Goods. This
amount represents COGM.
o Once we sell, we credit Finished Goods inventory and debit COGS.

- Equivalent Units of Production
o Equivalent units = (number of partially completed units in ending WIP inventory) * the percentage
completion of those units) + already completed units (those units completed and transferred to
Finished goods).
o Equivalent units need to be calculated because a department usually has some partially completed units
in its beginning and ending inventory. These partially completed units complicate the determination of a
department's output for a given period and the unit cost that should be assigned to that output.
o Can use weighted - average method to calculate
o Equivalent Cost per unit= Total Costs for the period (DM or CC) / Equivalent units of production for the
period
- Weighted - average method
o Make no distinction between work done in the prior period and work done in the current periodunits
made are the same, so labor costs dont change and basically, all units bear same unit cost
o We blend together the units and costs from both the prior and current period.
- Direct Labor and MOH are combined into one classification of product cost called Conversion Cost (costs
incurred to convert direct materials into a finished good)
- Steps in Calculating Equivalent Unitsweighted-average method
o The first step is to identity the units completed and transferred out (these units are 100% complete as to
materials and conversion)
o The second step is to calculate the equivalent units as to materials in ending inventory.
o The third step is to calculate the equivalent units in ending inventory as to conversion.
o When using the weighted - average method, equivalent units of production will always be equal to the
units completed and transferred out plus the equivalent units remaining in work in process inventory.

Compute cost per equivalent unit using weighted average method
- Cost per equivalent unit = (Cost of beginning WIP inventory + Cost added during the period) / Equivalent
units of production
- Cost per equivalent unit for materials and for conversion. Combine these to get total cost per equivalent unit.

Assign costs to units using the weighted - average method.
- To compute cost of Ending WIP inventory, first record the equivalent units of production in ending Work in
Process Inventory for materials and conversion. The second step is to record the cost per equivalent unit. The
third step is to compute the cost of ending Work in Process Inventory (multiply EU by cost per EU).
- To compute the cost of units transferred, the first step is to record the units transferred out to the next
department. The second step is to record the cost per equivalent unit. The third step is to compute the cost of
units transferred out (multiply units transferred out by cost per EU)

Prepare a Cost Reconciliation Report
- Computing the Costs to be Accounted for-- The first step is to record the cost of beginning Work in Process
Inventory. The second step is to record the costs added to production during the period. The third step is to
sum these two costs for a total to be accounted for.
- Computing the costs accounted for-- The first step is to record the previously computed cost of ending Work in
Process Inventory. The second step is to record the previously computed cost of units transferred out. The
third step is to sum these two costs
- Notice the two totals agree indicating that all costs have been accounted for.
-
- Production Report
o Section 1- Prepare A quantity schedule showing the flow of units and the computation of equivalent
units.

o Section 2- A computation of cost per equivalent unit.

o Section 3- Cost Reconciliation section shows the reconciliation of all cost flows into and out of the
department during the period.