CHAPTER 4

Process Costing
 4-2

Similarities Between
Job-Order and Process Costing

Both systems assign material, labor, and overhead costs to

products and they provide a mechanism for computing unit
product costs.
Both systems use the same manufacturing accounts, including
Manufacturing Overhead, Raw Materials, Work in Process, and
Finished Goods.
The flow of costs through the manufacturing accounts is
basically the same in both systems.

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 4-3

Differences Between
Job-Order and Process Costing

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 4-4

Quick Check 1
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.

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 4-5

Quick Check 1a
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.

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 4-6

Processing Departments
Any unit in an organization where materials, labor,
or overhead are added to the product.

The activities performed in a processing

department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment typically
flow in a sequence from one department to another.

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 4-7

Learning Objective 1

Record the flow of materials,

labor, and overhead through a
process costing system.

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 4-8

The Flow of Materials, Labor, and

Overhead Costs – Part 1

Direct
Materials

Direct Labor Work in Finished

Process Goods

Manufacturing Cost of
Overhead Goods
Sold

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 4-9

The Flow of Materials, Labor, and

Overhead Costs – Part 2
Job-order costing systems
trace and apply
Direct manufacturing costs to jobs
Materials

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold

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 4-10

The Flow of Costs in a Process Costing System

Costs are traced and applied to
departments in a process cost
Direct system.
Materials

Direct Labor Processing Finished

Department Goods

Manufacturing Cost of
Overhead Goods
Sold

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 4-11

Job-Order Costing (Recap)

Yacht Custom Patio:

Job order costing Job order costing

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 4-12

Process Costing (Recap)

Dried pasta: Printer toner/ink:

Process costing Process costing

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 4-13

How Pastas are Processed

Processes:
• Mixing
• Shaping and Cutting
• Drying
• Packaging

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 4-14

Flow of Raw Material Costs

The next few slides provide an example of the flow of costs through the
accounting records. They demonstrate using a dried pasta producer
that has identified two departments: Mixing & forming and drying and
packaging.

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 4-15

Flow of Raw Material Costs: T-Account Form

For example:
Mixing and
Work in Process
Raw Materials forming Department A
•Direct •Direct
Materials Materials

For example:
Drying and
Packaging

Work in Process
Department B
•Direct
Materials

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 4-16

Flow of Raw Material Costs: Journal Entry Form

As in job-order costing, materials are drawn from the
storeroom using a materials requisition form.
Materials can be added in any processing department.
Here is the journal entry to issue raw materials to
Processing Department A and Department B.

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 4-17

The Flow of Labor Costs: T-Account Form

Salaries and For example: Work in Process
Wages Payable
Mixing and
forming
Department A
•Direct
•Direct Materials
Labor •Direct
Labor For example:
Drying and
Packaging

Work in Process
Department B
•Direct
Materials
•Direct
Labor

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 4-18

The Flow of Labor Costs: Journal Entry Form

In process costing, labor costs are traced to
departments—not to individual jobs. The following
journal entry records the labor costs recorded to
Department A and Department B.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX

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 4-19

The Flow of Manufacturing Overhead

Costs: T-Account Form
Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
Examples of manufacturing overhead: •Direct
• Indirect materials Materials
• Indirect labor
• Depreciation of production equipment •Direct
• Rent for production facilities Labor
• Manager salaries for those involved in the
production process. •Applied
Overhead
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 4-20

The Flow of Manufacturing Overhead

Costs: Journal Entry Form
In process costing, as in job-order costing, predetermined
overhead rates are usually used. Manufacturing overhead
cost is applied according to the amount of the allocation
base that is incurred in the department. The following
journal entry records the overhead cost applied to
Department A and Department B.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX

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 4-21

Transfers from Work In Process-Dept. A to Work In

Process-Dept. B: T-Account Form
Work in Process Work in Process
Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labor Labor
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A

The transferred-in costs from Department A are added to

the manufacturing costs incurred in Department B.

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 4-22

Transfers from Work In Process-Dept. A to Work In

Process-Dept. B: Journal Entry Form
Once processing has been completed in a
department, the units are transferred to the next
department for further processing.

Work in Process - Department B XXXXX

Work in Process - Department A XXXXX

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 4-23

Transfers from Work In Process–Dept. B to

Finished Goods: T-Account Form

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A

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 4-24

Transfers from Work In Process–Dept. B to

Finished Goods: Journal Entry Form

After processing has been finished in Department

B, the costs of the completed units are transferred
to the Finished Goods inventory account:

Finished Goods XXXXX

Work in Process - Department B XXXXX

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 4-25

Transfers from Finished Goods Inventory to

Cost of Goods Sold: T-Account Form
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

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 4-26

Transfers from Finished Goods to Cost of

Goods Sold: Journal Entry Form

Finally, when a customer’s order is filled and units

are sold, the cost of the units is transferred to Cost
of Goods Sold:

Cost of Goods Sold XXXXX

Finished Goods XXXXX

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 4-27

Complication: Partially Completed Units

A department usually has some partially completed units in its

beginning and ending inventory.

Complicates the determination of:

• a department’s output for a given period, and
• the unit cost that should be assigned to that department’s output.

Solution: Use Equivalent Units

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 4-28

Calculating Equivalent Units

Equivalent units is the product of the number of partially completed units and the percentage
completion of those units with respect to the processing in the department. The equivalent
units is the number of complete units that could have been obtained from the materials and
effort that went into the partially complete units.
Using equivalent units makes it easier to measure the production of partially completed units,
which is important for calculating the cost of production in a process costing system. By using
equivalent units, the cost of each stage of production can be allocated to the partially
completed units based on their level of completion. This allows for a more accurate calculation
of the cost of production and helps companies to make informed decisions about pricing and
profitability.

Example: 10,000 units, which are 70% complete, are equivalent to 7,000 completed units. (If 10,000 units are
in process but you have only expended 70% of the processing costs on them, then you are considered to
have 7,000 equivalent units of production)

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 4-29

Quick Check 2
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 percent complete. How
many equivalent units of production did Jones
have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000

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 4-30

Quick Check 2a
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 percent complete. How
many equivalent units of production did Jones
have for the period?
a. 10,000
10,000 units + (5,000 units × 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000

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 4-31

Learning Objective 2

Compute the equivalent units

of production using the
weighted-average method.

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 4-32

Weighted-Average Method
We are assuming use of the weighted-average method, which…
1. Makes no distinction between work done in prior or current
periods.
2. Blends together units and costs from prior and current period.
3. Determines equivalent units of production for a department by
adding together the number of units transferred out plus the
equivalent units in ending WIP inventory.
(Equivalent units of production = # of units transferred out +
equivalent units in ending WIP inventory)

Alternative methods: FIFO, LIFO

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 4-33

Equivalent units of production

Equivalent units of Equivalent units in

Units transferred to
production = next department
+ ending work in
process inventory

For the current period, Jones started 15,000 units and completed 10,000
units, leaving 5,000 units in process 40 percent complete. How many
equivalent units of production did Jones have for the period?

A: 10,000
B: 12,000
C: 13,000
D: 15,000

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 4-34

Example

Equivalent units in
Equivalent units of Units transferred to
production = next department + ending work in
process inventory

For the current period, Jones started 15,000 units and completed 10,000
units, leaving 5,000 units in process 40 percent complete. How many
equivalent units of production did Jones have for the period?

A: 10,000 Equiv. units of prod. = # units completed +

B: 12,000 Equiv. units in ending WIP
C: 13,000 Equiv. units of prod. = 10,000 + (5,000 * 40%)
D: 15,000 Equiv. units of prod. = 10,000 + (2,000)
Equiv. units of prod. = 12,000

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 4-35

Step 1: Compute the Equivalent Units of

Production – Part 1
Smith Company reported the following activity in the
Assembly Department for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

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 4-36

Step 1: Compute the Equivalent Units of

Production – Part 2
Begin by calculating the equivalent units completed and transferred
out of the Assembly Department in June (5,400 units).

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400

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 4-37

Step 1: Compute the Equivalent Units of

Production – Part 3
Next, identify the equivalent units of production in ending work in
process with respect to materials for the month (540 units) and adding
this to the 5,400 units from step one.
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540

Equivalent units of Production in

the Department during June 5,940

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 4-38

Step 1: Compute the Equivalent Units of

Production – Part 4
Finally, identify the equivalent units of production in ending work
in process with respect to conversion for the month (270
units) and adding this to the 5,400 units.

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670

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 Step 1: Compute the Equivalent
4-39

Units of Production – Part 5

Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670

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 4-40

Learning Objective 3

Compute the cost per

equivalent unit using the
weighted-average method.

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 4-41

Compute and Apply Costs Using the Weighted-

Average Method

Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit
Equivalent units of production

Cost of goods transferred out =

unit cost X units completed

Cost of ending work in process =

unit cost X equivalent units in ending work in process

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Step 2: Compute the Cost per
4-42

Equivalent Unit
Beginning Work in Process Inventory: 300 units

Materials: 40% complete $ 6,119

Conversion: 20% complete $ 3,920

Production started during June 6,000 units

Production completed during June 5,400 units

Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130

Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete
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 4-43

Costs with Partially Completed Units:

Example Showing T-Accounts

Raw Materials WIP – Assembly Dept.

Beg. Bal. $XXX $118, 621 Direct Beg. Bal. $10,039
Materials Used
Materials Add. $118,621
Conversion Add. $81,130

Wages Payable
$60,000 Direct Beg. Bal. $XXX
Labor MOH

$21,130 MOH
Applied

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 Step 2: Compute the Cost per
4-44

Equivalent Unit
Here is a schedule with the cost and equivalent
unit information.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

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 Step 2: Compute the Cost per
4-45

Equivalent Unit
Here is a schedule with the cost and equivalent
unit information.
$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

Cost per equivalent unit $ 21.00 $ 15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00

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 4-46

Learning Objective 4

Assign costs to units using the

weighted-average method.

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 4-47

Step 3: Assign Costs to Units – Part 1

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270

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 4-48

Step 3: Assign Costs to Units – Part 2

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00

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 4-49

Step 3: Assign Costs to Units – Part 3

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390

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 4-50

Step 3: Compute Cost of Units Transferred

Out
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400

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 4-51

Step 3: Assign Costs to Units – Part 4

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit $ 21.00 $ 15.00

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 4-52

Step 3: Assign Costs to Units – Part 5

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit $ 21.00 $ 15.00
Cost of units transferred out $ 113,400 $ 81,000 $ 194,400

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 4-53

Costs with Partially Completed Units:

Example Showing T-Accounts

WIP – Assembly Dept.

Beg. Bal. $10,039

$194,400 Completed and Transferred Out
Materials Add. $118,621
Conversion Add. $81,130

End Bal. $15,390 To next processing department (WIP)

or Finished Goods

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 4-54

Learning Objective 5

Prepare a cost reconciliation

report using the weighted-
average method.

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 4-55

Reconcile Costs
Check to see if they reconcile:
• Cost of beginning Work In Process inventory + Costs added to
production during the period
• Costs of units transferred out + Cost of ending Work In Process
inventory

• Ending WIP = Beg WIP + Cost added to production – Costs of units

transferred out
• Ending WIP + Costs of units transferred out = Beg WIP + Costs
added to production

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 4-56

Step 4: Prepare a Cost Reconciliation

Report – Part 1
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

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 4-57

Step 4: Prepare a Cost Reconciliation Report –

Part 2
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 15,390
Cost of units transferred out 194,400
Total cost accounted for $ 209,790

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 4-58

Let’s Practice! Schrute Beets, Inc.

Shrute Beets, Inc. uses the weighted-average method in its process costing system. It produces prefabricated
flooring from beets in a series of steps carried out in production departments. All of the material that is used in the
first production department is added at the beginning of processing in that department. Data for May for the first
production department follow:

1. Calculate the first production department’s equivalent units of production.

2. Compute the first production department's cost per equivalent unit.

3. Compute the first production department’s cost of ending WIP inventory.

4. Compute the first production department’s cost of the units transferred to the second production
department.
 4-59

Schrute Beets, Inc.

1. Calculate the first production department’s equivalent units of production.

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

= 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑡𝑡𝑡𝑡 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 + 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑖𝑖𝑖𝑖 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑊𝑊𝑊𝑊𝑊𝑊

Materials Conversion Materials:

10,000 units * 100% = 10,000
Units transferred to next 175,000 175,000 units
department
Conversion:
Equivalent units in ending WIP 10,000 3,000 10,000 units * 30% =
3,000 units
Equivalent units of production 185,000 178,000
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Schrute Beets, Inc.

2. Compute the first production department's cost per equivalent unit.

Materials Conversion
Cost of beginning WIP $1,500 $4,000
Cost added during period $54,000 $352,000
Total cost $55,500 $356,000
Equivalent units of production 185,000 178,000

Cost per equivalent unit $0.30 $2.00

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Schrute Beets, Inc.

1. Calculate the first production department’s equivalent units

3. Compute the first production department’s cost of ending WIP inventory.

Materials Conversion Total

Ending WIP inventory
Equivalent units 10,000 3,000
Cost per equivalent unit $0.30 $2.00
Cost of ending WIP $3,000 $6,000 $9,000
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Schrute Beets, Inc.

1. Calculate the first production department’s equivalent units

2. Compute the first production department's cost per equ
4. Compute the first production department’s cost of the units transferred to the
second production department.
Materials Conversion Total
Units Completed and Transferred Out
Equivalent units 175,000 175,000
Cost per equivalent unit $0.30 $2.00
Cost of units transferred $52,500 $350,000 $402,500
out
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Schrute Beets, Inc.

Bonus: Cost Reconciliation Report

Costs to be accounted for

Cost of beginning WIP $5,500

Costs added during the period $406,000
Total $411,500

Costs accounted for:

Cost of ending WIP $9,000

Costs transferred out during the period $402,500
Total $411,500