2-1

Welcome to Week 4 : )

u Today’s agenda: CHAPTER 4

u Quiz on Chapter 3 Process Costing
u Blackboard and Housekeeping
u Assignment submission for week 5
u Lecture on Chapter 4: Process Costing
u Homework etc.

© 2017 McGraw-Hill Education 1 © 2017 McGraw-Hill Education

Types of Costing Systems Used to

Learning Objectives Determine Product Costs (LO1)
1. Understand the distinction between job-order and process Process Job-order
costing systems.
2. Describe the cost concepts relevant to process costing and the Costing Costing
flow of costs through the costing system.
3. Understand the concept of equivalent units of production and
its computation.
q Many units of a single, homogeneous product
4. Apply the weighted average cost method (WACM) to account
for the flow of production and cost and prepare a production flow evenly through a continuous production
report. process.
5. Apply the first-in-first-out (FIFO) method to determine the
equivalent units of production.
q One unit of product is indistinguishable from any
other unit of product..
6. Prepare a production cost report using the FIFO method to
account for the flow of production and the production cost. q Each unit of product is assigned the same
7. Compare the WACM and FIFO approaches. average cost.

© 2017 McGraw-Hill Education 3 © 2017 McGraw-Hill Education 4

Types of Costing Systems Used Differences Between Job-

to Determine Product Costs Order and Process Costing
Process Job-order
Costing Costing

Typical process cost applications:

v Petrochemical refinery
v Paint manufacturer
v Paper mill

© 2017 McGraw-Hill Education 5 © 2017 McGraw-Hill Education 6

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Sequential Processing
Flow of Materials, Labour Departments
and Overhead Costs (LO2) Start
Basic raw Processing Processing
Direct Material materials Department 1 costs
Partially completed goods
Processing Finished Processing Processing
Direct Labour
Department Goods Department 2 costs
Partially completed goods
Manufacturing Cost of Processing Processing
Overhead Goods Department 3 costs
Sold Completed goods
Finished Goods
© 2017 McGraw-Hill Education 7 © 2017 McGraw-Hill Education 8

Flow of Costs – Part 2

Flow of Costs – Part 1
Work in Process Work in Process
Mixing Department Mixing Department
Raw Materials Wages Payable
Direct Direct
Purchases Direct Material Material
Direct
Material Direct
Labour
Indirect Labour
Indirect
Labour
Material
Work in Process Work in Process
Manufacturing Finishing Department Manufacturing
Finishing Department
Overhead Overhead
Actual Applied Direct Actual Applied Direct
Other Material Other Material
Overhead Overhead
Direct
Indirect Indirect
Labour
Material
Material Indirect
Labour
© 2017 McGraw-Hill Education 9 © 2017 McGraw-Hill Education 10

Flow of Costs – Part 3 Flow of Materials, Labour, and

Work in Process Overhead Costs
Wages Payable Mixing Department
Direct
Direct Material
Direct
Labour
Indirect Labour
Now, let’s transfer the partially
Labour Applied completed goods from the
Overhead
Manufacturing Work in Process Mixing Department
Overhead Finishing Department to the
Actual Applied
Other Overhead
Direct
Material
Finishing Department.
Overhead Applied to
Direct
Indirect Work in
Labour
Material Process
Indirect Applied
Labour Overhead

© 2017 McGraw-Hill Education 11 © 2017 McGraw-Hill Education 12

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Flow of Materials, Labour, Flow of Materials, Labour,

and Overhead Costs and Overhead Costs

Work in Process Work in Process

Mixing Department Finishing Department The goods have been completed
Direct Transferred Direct in the Finishing Department and
Material to Finishing
Direct
Material will be transferred to Finished
Direct
Labour Labour Goods Inventory when they are
Applied Applied ready to be sold.
Overhead Overhead
Transferred
from Mixing

© 2017 McGraw-Hill Education 13 © 2017 McGraw-Hill Education 14

Flow of Materials, Labour,

Transferred in Costs
and Overhead Costs
Work in Process
•Materials, labour, and overhead costs can be
Finishing Department Finished Goods added in any processing department – not just
Direct Cost of Cost of Cost of the first department
Material Goods Goods Goods
Direct Manufactured Manufactured Sold •Costs in the second or third (etc.) department
Labour
Applied
would consist of the materials, labour, and
Overhead overhead costs incurred in that department as
Transferred well as the costs attached to partially
from Dept. A Cost of Goods Sold completed units transferred in from the prior
Cost of department.
Goods •These costs are called Transferred in Costs
Sold

© 2017 McGraw-Hill Education 15 © 2017 McGraw-Hill Education 16

Materials, Labour, and Overhead Flow of Materials, Labour, and

Cost Entries Part 1/6 Overhead Costs Entries Part 2

GENERAL JOURNAL Page 4 GENERAL JOURNAL Page 4

Date Description Debit Credit Date Description Debit Credit

Raw Materials XXXXX Work in Process - Mixing Deparment XXXXX
Accounts Payable XXXXX Work in Process - Finishing Department XXXXX
To record the purchase of material. Salaries and Wages Payable XXXXX
To record direct labour costs.
Work in Process - Mixing Department XXXXX
Work in Process - Finishing Department XXXXX
Raw Materials XXXXX
To record the use of direct material.

© 2017 McGraw-Hill Education 17 © 2017 McGraw-Hill Education 18

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Flow of Materials, Labour, and Flow of Materials, Labour, and

Overhead Costs Entries Part 3 Overhead Costs Entries Part 4

GENERAL JOURNAL Page 4 GENERAL JOURNAL Page 4

Date Description Debit Credit Date Description Debit Credit

Work in Process - Mixing Department XXXXX Work in Process - Finishing Department XXXXX

Work in Process - Finishing Department XXXXX Work in Process - Mixing Department XXXXX

Manufacturing Overhead XXXXX To record the transfer of goods from

To apply overhead to departments. Mixing to Finishing.

© 2017 McGraw-Hill Education 19 © 2017 McGraw-Hill Education 20

Flow of Materials, Labour, and Flow of Materials, Labour, and

Overhead Costs Entries Part 5 Overhead Costs Entries Part 6

GENERAL JOURNAL Page 4

GENERAL JOURNAL Page 4
Date Description Debit Credit
Finished Goods XXXXX Date Description Debit Credit
Work in Process - Finishing Department XXXXX Accounts Receivable XXXXX
To record the completion of goods and their Sales XXXXX
transfer from the Finishing Department
To record sales on account.
to finished goods inventory.

Cost of Goods Sold XXXXX

Finished Goods XXXXX
To record cost of goods sold.

© 2017 McGraw-Hill Education 21 © 2017 McGraw-Hill Education 22

Equivalent Units of
Product Cost Categories Production (LO 3)
q Companies that typically use a process costing Equivalent units are partially complete and are part
system for determining product costs are of work in process inventory. It is the concept of
normally very automated. expressing partially completed products as a
q Labour will usually be a very small
smaller number of fully completed units.
proportion of total manufacturing costs
q Labour and manufacturing overhead costs + =
are commonly combined together and
called conversion costs.
Two one-half completed products are equivalent to
q In a process costing system there are
conversion costs and material costs one completed product. So, 10,000 units 70%
complete are equivalent to 7,000 complete units.

© 2017 McGraw-Hill Education 23 © 2017 McGraw-Hill Education 24

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Quick Checkü Quick Check Solutionü

For the current period, Matrix started 15,000 For the current period, Matrix started 15,000 units
units and completed 10,000 units, leaving and completed 10,000 units, leaving 5,000 units in
5,000 units in process 30 percent complete. process 30 percent complete. How many equivalent
How many equivalent units of production did units of production did Matrix have for the period?
Matrix have for the period?
a. 10,000 10,000 units + (5,000 units × .30)
b. 11,500
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000

© 2017 McGraw-Hill Education 25 © 2017 McGraw-Hill Education 26

Equivalent Units of Quick Checkü

Production
To calculate the cost per Now assume that Matrix incurred $27,600 in
equivalent unit for the period: production costs for the 11,500 equivalent
units of production. What was Matrix’s cost
Cost per Costs for the period
per equivalent unit for the period?
equivalent = Equivalent units of production a. $1.84
unit for the period b. $2.40
c. $2.76
d. $2.90

© 2017 McGraw-Hill Education 27 © 2017 McGraw-Hill Education 28

Quick Check Solutionü Equivalent Units of

Production
d. $2.90
Now assume that Matrix incurred $27,600 in u There are two alternate approaches for
production costs for the 11,500 equivalent calculating equivalent units of production for each
units of production. What was Matrix’s cost cost category:
per equivalent unit for the period? u weighted average cost method
a. $1.84 u the first-in-first-out (FIFO) method
$27,600 ÷ 11,500 equivalent units
b. $2.40
c. $2.76 = $2.40 per equivalent unit

© 2017 McGraw-Hill Education 29 © 2017 McGraw-Hill Education 30

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Weighted-Average Method
Weighted-Average Cost
Example Part 1/6
Method (WACM) (LO 4)
Under the weighted-average method Matrix, Inc. reported the following activity in
equivalent units will always be calculated as Mixing Department for the month of June:
follows: Percent Completed
Units Materials Conversion
Units transferred to the next department Work in process, June 1 300 40% 20%
or to finished goods 10,000
Equivalent units in ending work in process Units started into production in June 6,000

inventory + 4,200 Units completed and transferred out 5,400 100% 100%
Equivalent units of production = 14,200 of the Mixing Department during June

Work in process, June 30 900 60% 30%

© 2017 McGraw-Hill Education 31 © 2017 McGraw-Hill Education 32

Weighted-Average Method Weighted-Average Method

Example Part 2 Example Part 3
Equivalent units are calculated as follows:
Equivalent units are calculated as follows:

Materials Conversion
Materials Conversion
Units completed and transferred
Units completed and transferred
out of Mixing in June 5,400 5,400 out of Mixing in June 5,400 5,400
Work in process June 30
(900 units x 60% complete) 540

© 2017 McGraw-Hill Education 33 © 2017 McGraw-Hill Education 34

Weighted-Average Method Weighted-Average Method

Example Part 4 Example Part 5
EquivalentEquivalent
units of production always equals:
units are calculated as follows: 6,000 Units Started
Units completed and transferred Materials
+ Equivalent units remaining in work in process

Materials Conversion Beginning Ending

Units completed and transferred Work in Process 5,100 Units Started Work in Process
out of Mixing in June 5,400 5,400 300 Units and Completed 900 Units
40% Complete 60% Complete
Work in process June 30
(900 units x 60% complete) 540
(900 units x 30% complete) 270
Equivalent units of production 5,400 Units Completed
900 × 60%
in the Mixing Deparment 5,940 5,670 540 Equivalent Units
5,940 Equivalent units
of production
© 2017 McGraw-Hill Education 35 © 2017 McGraw-Hill Education 36
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Weighted-Average Method
Example Part 6 Production Report
Conversion 6,000 Units Started Production
Report
ΠQuantity schedule with
Beginning Ending Section 1 computation of equivalent
Work in Process 5,100 Units Started Work in Process
units.
300 Units and Completed 900 Units
40% Complete 30% Complete
 A computation of cost per
Section 2 equivalent unit.

5,400 Units Completed

270 Equivalent Units
900 × 30% Ž A reconciliation of cost
Section 3 flows for the period.
5,670 Equivalent units
of production
© 2017 McGraw-Hill Education 37 © 2017 McGraw-Hill Education 38

Production Report Example – Production Report Example –

Information Part 1 Information Part 2
Work in process, May 1: 200 units Cost
q Double Diamond Skis uses process costing to Materials: 50% complete. $ 3,000
determine unit costs in its Shaping and Milling Conversion: 30% complete. 1,000
Department. Units started into production in May: 5,000
Units completed and transferred out in May: 4,800
q Double Diamond uses the weighted average
cost procedure. Costs added to production in May
Materials cost $ 74,000
q Using the following information for the month Conversion cost 70,000
of May, let’s prepare a production report for Work in process, May 31: 400 units
Shaping and Milling. Materials 40% complete.
Conversion 25% complete.

© 2017 McGraw-Hill Education 39 © 2017 McGraw-Hill Education 40

Production Report Production Report Example

Example – Step 1 – Step 1 continued
StepŒ: Quantity Schedule with Equivalent Units Step Œ: Quantity Schedule with Equivalent Units
Units to be accounted for: Units to be accounted for:
Work in process, May 1 200 Work in process, May 1 200
Started into production 5,000 Started into production 5,000
Total units 5,200 Total units 5,200

Equivalent units Equivalent units

Materials Conversion Materials Conversion
Units accounted for as follows: Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800 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

© 2017 McGraw-Hill Education 41 © 2017 McGraw-Hill Education 42

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Production Report Example Production Report Example

– Step 2 Part I – Step 2 Part II
Step : Compute cost per equivalent unit Step : Compute cost per equivalent unit
Total
Total
Cost Materials Conversion
Cost Materials Conversion
Cost to be accounted for:
Cost to be accounted for:
Work in process, May 1 $ 4,000 $ 3,000 $ 1,000
Work in process, May 1 $ 4,000 $ 3,000 $ 1,000 Costs added in the Shipping
Costs added in the Shipping and Milling Department 144,000 74,000 70,000
and Milling Department 144,000 74,000 70,000
Total cost $ 148,000 $ 77,000 $ 71,000
Total cost $ 148,000 $ 77,000 $ 71,000
Equivalent units 4,960 4,900
Equivalent units 4,960 4,900 Cost per equivalent unit $ 15.524

$77,000 ÷ 4,960 units = $15.524 (rounded)

© 2017 McGraw-Hill Education 43 © 2017 McGraw-Hill Education 44

Production Report Example – Production Report Example

Step 2 Part 3 – Step 3 Part 1
Step : Compute cost per equivalent unit
Step Ž: Cost Reconciliation
Total
Cost Materials Conversion
Total Equivalent Units
Cost to be accounted for: Cost Materials Conversion
Work in process, May 1 $ 4,000 $ 3,000 $ 1,000
Cost accounted for as follows:
Costs added in the Shipping
Transferred out during May 4,800 4,800
and Milling Department 144,000 74,000 70,000
Work in process, May 31:
Total cost $ 148,000 $ 77,000 $ 71,000 Materials 160
Conversion 100
Equivalent units 4,960 4,900
Total work in process, May 31
Cost per equivalent unit $ 15.524 $ 14.490
Total cost accounted for
Total cost per equivalent unit = $15.524 + $14.490 = $30.014

$71,000 ÷ 4,900 units = $14.490 (rounded)

© 2017 McGraw-Hill Education 45 © 2017 McGraw-Hill Education 46

Production Report Example-

Step 3 Part 2 First-In-First-Out (FIFO)
Method (LO 5)
Step Ž: Cost Reconciliation
u The FIFO method of process costing is a
Total Equivalent Units
4,800 units @ $30.014 method in which equivalent units and
Cost Materials Conversion
units costs relate only to work done
Cost accounted for as follows: during the current period.
Transferred out during May $144,067 4,800 4,800
Work in process, May 31: u Under the FIFO method, both beginning
Materials 160 and ending work in process inventories
Conversion 100 are converted to an equivalent unit
Total work in process, May 31 basis.
Total cost accounted for

Refer to Exhibit 4-10 for an example of the fully completed WACM production report

© 2017 McGraw-Hill Education 47 © 2017 McGraw-Hill Education 48

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FIFO Method Example –

FIFO Method Example - Data Solution Part 1
Cost
Work in process, May 1: 200 units
• Double Diamond Skis uses process costing to Materials: 50% complete. $ 3,000
determine unit costs in its Shaping and Conversion: 30% complete. 1,000
Milling Department. Units started into production in May: 5,000
Units completed and transferred out in May: 4,800
• Double Diamond uses the FIFO costing
method. Costs added to production in May
• Using the following information for the Materials cost $ 74,000
Conversion cost 70,000
month of May, let’s prepare a production
report for Shaping and Milling. Work in process, May 31: 400 units
Materials 40% complete.
Conversion 25% complete.

© 2017 McGraw-Hill Education 49 © 2017 McGraw-Hill Education 50

FIFO Method Example – FIFO Method Example –

Solution Part 2 Solution Part 3
Materials 5,000 Units Started
Conversion
5,000 Units Started

Beginning Ending Beginning Ending

Work in Process Work in Process Work in Process Work in Process
4,600 Units Started 200 Units 4,600 Units Started
200 Units and Completed 400 Units and Completed 400 Units
50% Complete 40% Complete 30% Complete 25% Complete

200 × 50% 200 × 70%

4,600 Units Started and Completed 4,600 Units Started and Completed
100 Equivalent Units 140 Equivalent Units
160 Equivalent Units 100 Equivalent Units
400 × 40% 400 × 25%
4,860 Equivalent units 4,840 Equivalent units
of production of production
© 2017 McGraw-Hill Education 51 © 2017 McGraw-Hill Education 52

Production Report: FIFO Production Report: FIFO

Method Example (LO 6) Method Example Part 2
Section 1: Quantity Schedule with Equivalent Units Section 2: Cost per equivalent unit
Units to be accounted for:
Total
Work in process, May 1 200
Cost Materials Conversion
Started into production 5,000
Total units 5,200 Cost to be accounted for:
Equivalent units Work in process, May 1 $ 4,000
Materials Conversion Costs added in the Shipping
Units accounted for as follows: and Milling Department 144,000 $74,000 $70,000
Transferred to next dept. Total cost $ 148,000
From work in process, May 1 200 100 140
Started and completed in May 4,600 4,600 4,600 Equivalent units 4,860 4,840
Work in process, May 31 400 160 100 Cost per equivalent unit $15.226 $14.463
5,200 4,860 4,840 Total cost per equivalent unit = $15.226 + $14.463 = $29.689

© 2017 McGraw-Hill Education 53 © 2017 McGraw-Hill Education 54

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Production Report: FIFO Production Report: FIFO

Method Example Part 3 Method Example Part 4
Section 3: Cost Reconciliation Section 3: Cost Reconciliation

140 units @ $14.463

100 units @ $15.226 Total Equivalent Units Total Equivalent Units
Cost Materials Conversion Cost Materials Conversion
Cost accounted for as follows: Cost accounted for as follows:
Transferred out during May Transferred out during May
From work in process, May 1: From work in process, May 1:
Cost in beginning inventory $4,000 Cost in beginning inventory $4,000
Cost to complete these units: Cost to complete these units:
Materials 1,523 100 Materials 1,523 100
Conversion Conversion 2,025 140
Total Cost Total Cost $7,548

© 2017 McGraw-Hill Education 55 © 2017 McGraw-Hill Education 56

Production Report: FIFO Production Report: FIFO

Method Example Part 5 Method Example Part 6
Section 3: Cost Reconciliation Section 3: Cost Reconciliation

4,600 units @ Total Equivalent Units Total Equivalent Units

$29.689 Cost Materials Conversion Cost Materials Conversion
Cost accounted for as follows: Cost accounted for as follows:
Transferred out during May Transferred out during May
From work in process, May 1 $7,548 From work in process, May 1 $7,548
Units started and completed, May 136,570 4,600 4,600 Units started and completed, May 136,570
Total cost transferred $144,118 Total cost transferred $144,118
Materials Work inMaterials
process, May 31:
Materials 2,436 160
160 units @ $15.226

© 2017 McGraw-Hill Education 57 © 2017 McGraw-Hill Education 58

Production Report: FIFO

Production Report: FIFO
Method Example Part 7
Method Example Part 8
Section 3: Cost Reconciliation
Section 3: Cost Reconciliation
Total Equivalent Units
Total Equivalent Units Cost Materials Conversion
Cost Materials Conversion
Cost accounted for as follows:
Cost accounted for as follows:
Transferred out during May
Transferred out during May
From work in process, May 1 $7,548
From work in process, May 1 $7,548
Units started and completed, May 136,570
Units started and completed, May 136,570
Total cost transferred $144,118
Total cost transferred $144,118
Work inMaterials
process, May 31 3,882
Work inMaterials
process, May 31:
Materials 2,436 160 Total cost $148,000
Conversion 1,446 100
100 units @ $14.463 $3,882
Refer to Exhibit 4-10 for an example of the fully completed FIFO production report

© 2017 McGraw-Hill Education 59 © 2017 McGraw-Hill Education 60

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Comparison of Costing Chapter Summary

Methods (LO 7)
q Job-order and process costing are similar in that they
both assign costs to products. They are different in that
job costing tracks cost for each unique job whereas
process costing has a production report for each
processing department.
q Direct materials and direct labor are traced and
overhead is assigned to each processing department.
These costs flow from the WIP Inventory account to the
Finished Goods inventory.
q Partially completed units in WIP are expressed in terms
of equivalent units fully completed.
q Companies can choose between the weighted average
cost method or the FIFO method to calculate equivalent
units (EU), cost per EU, and a production report.

© 2017 McGraw-Hill Education 61 © 2017 McGraw-Hill Education 62