Chapter 4 - Costing Method - Process Costing

COST AND MANAGEMENT
ACCOUNTING I
Chapter 4
The Process & Operation or

Service Costing Methods
©2003 Prentice Hall

Saturday, Business Publishing,
December 24, 2022CostCost
Accounting
& Mgt.11/e,Acct-
Horngren/Datar/Foster
I Instructor: Kassaye Tuji
2
Saturday, December 24, 2022 Cost & Mgt. Acct- I Instructor: Kassaye Tuji
Differences between Job-Order & Process Costing
Job-Order Costing Process Costing
1. Many different jobs are 1. A single product is produced on
worked on during each period, a continuous basis for long periods
with each job having different of time. All units of product are
production requirements. identical.
2. Costs are accumulated by 2. Costs are accumulated by
identical job. department.
3. Job Cost Sheet is the key 3. Department Production Report
document controlling the is the key document showing the
accumulation of costs by a accumulation & disposition of
job. costs by a department.
4. Unit Costs are computed 4. Unit Costs are computed
by job on the job cost by department on the
sheet. department production report.
©2003 Prentice Hall Business Publishing, 1-3
Saturday, December 24, 2022CostCost
Accounting
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Similarities between Job-Order and Process Costing
1. The same basic purposes exist in both systems, which
are
 To assign material, labor, and overhead cost to
products &
 To provide a mechanism for computing unit costs.
2. Both systems maintain and use the same basic Mfg.
Accounts, including:
 MOH,
 Raw Materials,
 Work In Process, &
 Finished Goods.
3. The flow of costs through the manufacturing accounts is
 basically the same in both systems.
Accounting
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The Flow of Costs in Process-Costing System
with Sequential Production Departments
1. As D.M and D.L are used in Production Department ‘A’:
These costs are added to the WIP Inventory Account for

Department ‘A’.
Overhead is applied using Predetermined OH Rate.
The Predetermined OH Rate is determined in the same way
in job order and process costing.
WIP: Production Department ‘A’ xxx
Raw Materials xxx
Wage Payable xxx
MOH Applied xxx
Accounting
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The Flow of Costs in Process-Costing System with
Sequential Production Departments…
2. When production department ‘A’ completes:
These units of product are transferred to production

department ‘B’.
The costs assigned to these goods are transferred
from the WIP Inventory account for department ‘A’
to WIP Inventory account in department ‘B’,
The costs assigned to those partially completed
products are called Transferred-In Costs.
WIP: Production Department ‘B’ xxx
WIP: Production Department ‘A’ xxx
Accounting
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3. DM and DL are used in production department ‘B’, &

MOH is applied using Predetermined OH Rate:
WIP: Production Department ‘B’ xxx

Raw Materials xxx
Wages Payable xxx
MOH Applied xxx

Accounting
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4. Goods are completed in production department ‘B’ &

Transferred to the Finished Goods warehouse.
Finished-Goods xxx
WIP: Production Dep’t ‘B’ xxx
5. Goods are Sold
Cost of Goods Sold xxx

Finished-Goods xxx
Accounting
& Mgt.11/e,Acct-
9
Illustrating Process Costing
Assumptions:
ABC Manufacturing Company manufactures thousands of

Products ‘A’.
These components are assembled in the Assembly
Department; upon completion the units are completely
transferred to the Testing Department.
The process-costing system for “Product A” has a single
direct cost category (Direct Materials) and a single indirect-
cost category (Conversion Costs).
DM are added at the beginning of the process in Assembly.
Conversion costs are added evenly during Assembly.
©2003 Prentice Hall Business Publishing, 1 - 10
Accounting
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Illustrating Process Costing…
 Case 1: Process Costing with Zero Beginning &Zero Ending WIP
Inventory that is all units are started and fully completed
by the end of the current accounting period.
 Data for the Assembly Department for January, 2020

Physical Units for January 2020
WIP, beginning inventory (January 1) 0 units
Started during January 400 units
Completed and transferred out during Jan. 400 units
WIP, ending inventory (January 31) 0 units
Total Costs for January 2020
Direct materials costs added during January Br.32,000
Conversion costs added during January 24,000
Total Assembly Dep’t costs added during Jan. 56,000
Per Unit Cost:
Direct Material costs per unit (32,000/400) Br. 80
Conversion costs per unit (24,000/400) 60
Assembly Department costs per unit 140
Accounting
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Case 2: Process Costing with Zero Beginning but
Some Ending WIP Inventory
 Data for the Assembly Department for February, 2020
Physical Units for February 2020

WIP, beginning inventory (February 1) 0 units
Started during February 400 units
Completed and transferred out during February 175 units
Work in process, ending inventory (February 28) 225 units
Total Costs for February 2020
Direct materials costs added during February Br.32,000
Conversion costs added during February 18,600
Total Assembly Dep’t costs added during Feb. 50,600
 In addition, the Assembly Department estimates that the partially
assembled units are on averages 60% complete as to Conversion Costs.
Accounting
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 Case 2: Process Costing with Zero Beginning but
Some Ending WIP Inventory…
 How should the company calculate the cost of:
 Fully Assembled Units in February 2020 &
 Partially Assembled Units still in process at the end of Feb. 2020?
Steps:
1. Summarize the flow of Physical Units of output.
2. Compute output in terms of Equivalent Units.
3. Compute Equivalent Unit Costs.
4. Summarize total Costs to Account For.
5. Assign Total Costs to unit’s completed & to units in ending WIP.
 DM usually placed in production at one or more discreet points in

the process.
 In contrast, DL and MOH (called CC), and usually are incurred
continuously throughout the process.
Accounting
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Suppose there are 1000 Physical Units in process at the end of an
accounting period.
o Each of the physical units is 75% Complete with respect to
Conversion.
 How much conversion activity has been applied to these partially

completed units?
 Conversion activity occurs uniformly throughout the production
process.
 Therefore, the amount of conversion activity required to do 75%
of the conversion on 1000 units is equivalent to the amount of the
conversion on 750 units.
Hence, the 1000 Physical Units in process represent 750 Equivalent
Units of conversion activity.
Since DMs are incorporated at the beg. of the production process,
the 1000 Physical Units represent 1000 Equivalent Units of DMs.
Accounting
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Physical Units & Equivalent Units (Step 1&2)
Flow of Physical Equivalent
Production Units Units
DM CC
WIP, beginning 0
Started during current period 400
To account for 400
Completed & transferred out
during current period 175 175 175
WIP Ending
(225*100%; 225*60%) 225 225 135
Accounted for 400
Work done in current period 400 310
Accounting
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Physical Units & Equivalent Units (Step 3, 4 & 5)
T. Prod. DM CC
Costs
(Step 3) Costs added during Feb. Br. 50,600 32,000 18,600
Divided by equivalent units of -
work done in current period 400 310
Cost per equivalent unit 80 60
. .
(Step 4) Total costs to account for Br. 50,600
.
(Step 5) Assignment of costs:
Completed & transferred out (175 units) Br. 24,500 (175*80) (175*60)
Work in process, ending (225 units)
Direct Materials 18,000 225*80
Conversion Costs 8,100 135*60
Total WIP 26,100
Total costs accounted for Br. 50,600 . .
Accounting
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Physical Units & Equivalent Units …
Journal Entries
Work in Process- Assembly 32,000
Account Payable Control 32,000
(To record DM purchased and used in production)
Various Accounts 18,600
(To record Assembly department CC)
Work in Process- Testing 24,500
(To record cost of goods completed and transferred
from Assembly to Testing Department)
Accounting
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 Case 3: Process Costing With Some Beginning and Some Ending
Work in Process Inventory.
 Data for the Assembly Department for March 2020
Physical Units for March 2020
Work in Process, beginning inventory (March 1)225 units
Direct Materials (100% complete)
Conversion costs (60% complete)
Started during March 275 units
Completed and transferred out during March 400 units
Work in Process, ending inventory (March 31) 100 units
Conversion Costs (50% complete)
Total Costs for March 2020
Work In Process, Beginning Inventory:
DM (225 E.U * Br. 80/unit) 18,000
CC (135 E.U * Br.60/unit) 8,100 26,100
DM costs added during March 19,800
CC added during March 16,380
Total Costs to account for Br.62, 280
Accounting
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Case 3: Process Costing With Some Beg. & Some End. WIP Inv…
 Common Assumption Methods applied for the purpose:
A) Weighted Average - Process Costing Method
 This method calculates the EU cost of the work done to

date (regardless of the period in which it was done)
 And assigns this cost to EUs completed and transferred

out of the process and to EUs in ending WIP inventory.
 The Weighted Average Cost is the total of all costs

entering in the WIP account (regardless of whether it is
from the Beg. WIP or from work started during the
period) divided by total EUs of work done to date.
Accounting
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Case 3: Process Costing With Some Beg. & Some End. WIP Inv…
A) Weighted Average - Process Costing Method…
 Physical Units and Equivalent Units (Step 1&2)
Step 1 Step 2
Flow of Physical Equivalent Units
Production Units (PU) DM CC
Work in process, beginning 225
To account for 500
Completed & transferred out during the
current period……… 400 400 400
WIP, ending
(100*100%; 100*50%) 100 100 50
Accounted for 500
Accounting
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Calculation of Product Costs (Steps 3, 4, and 5)
T. Prod. DM CC
Costs
(Step 3)WIP, Beginning 26,100 18,000 8,100
Costs added during the current period 36,180 19,800 16,380
Costs incurred to date (costs to account for) 37,800/ Br. 24,480/
Divided by E.U of work done to date……… 500 450
Cost per EU of work done Br. 75.60 Br. 54.40
(Step 4) Total costs to account for 62,280
(Step 5) Assignment of Costs:

Completed and transferred out (400 units)… 52,000 (400*75.60) (400*54.40)
WIP, Ending (100 units)
Direct Materials 7,560 100*75.60
Conversion Costs 2,720 50*54.40
Total cost of WIP Ending 10,280
Total costs accounted for 62,280
Accounting
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 Calculation of Product Costs (Steps 3, 4, and 5)…
 Journal Entries
Account Payable Control 19,800
(To record DM Purchased and Used in Production)
Various Accounts 16,380
(To record Assembly Department CC)
(To record Cost of Goods Completed and Transferred from
Assembly to Testing Department)
Accounting
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B) First-In, First-Out - Process Costing Method
 Assign the cost of the Previous Period’s Equivalent Units
in beginning work-in process inventory:
 To the first units completed & transferred out of the process.
 Assigns the cost of EU worked on during the current period:

 First to complete beginning inventory,
 Then to start & complete new units in End WIP Inventory.
Work done on Beg. Inventory before the current period is

kept separate from work done in the current period.
Costs incurred in the current period and units produced in

the current period are used to calculate costs per equivalent
unit of work done in the current period.
Accounting
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B) First-In, First-Out - Process Costing Method …
Physical Units and Equivalent Units
Step 1 Step 2
Flow of Physical Equivalent
Units (PU) Units
Production DM CC
To account for 500
Completed & transferred out during current period:
 From Beginning WIP:
225*(100%-100%); 225*(100%-60%) 225 0 90
 Started and Completed
175*100%, 175*100% 175 175 175
Work In Process, Ending
100*100%; 100*50% 100 100 50
Accounted for 500

Accounting
& Mgt.11/e,Acct-
1-25
B) First-In, First-Out - Process Costing Method…
 Calculation of Product Costs (Steps 3, 4, and 5)
T. Prod. Costs DM CC
(Step 3) WIP, Beginning 26,100
Costs Added Current Period 36,180 19,800/ 16,380/
Divided by equivalent units of work done in current period 275 315
Costs per equivalent unit of work done in the current period Br. 72 Br. 52
(Step 4) Total Costs to account for 62,280
(Step 5) Assignment of Costs: .

Completed & transferred out (400 units):
WIP, Beginning (225 units)…………. 26,100
D.M added in current period 0 0*72
C.C added in current period 4,680 90*52
Total from beginning inventory…….. 30,780
Started and completed (175 units) 21,700 175*72 175*52
T. C of units completed & transferred 52,480
Work In Process, Ending (100 units):
Direct Materials 7,200 100*72
Total WIP, Ending 9,800
Total costs accounted for 62,280
1-26
B) First-In, First-Out - Process Costing Method…
 Journal Entries

(To record cost of goods completed and transferred from
Assembly to Testing Department)
27
1-28
Transferred-In Costs in Process Costing
 Transferred-In Costs also called Previous

Department Costs are the costs incurred in a
preceding department.
 As the units move from one department to the
next, their costs are transferred with them.
 Transferred in costs are treated as if they are a
separate type of DM added at the beginning of
the process.
1-29
Transferred-In Costs in Process Costing…
Flow:
In our example as the Assembly Process is
completed, the department transfers the units to
its Testing Department.
 Here, the units receive additional DMs, such
as packing materials for shipment, at the end
of the process.
 Conversion costs are added evenly during the
Testing Department’s Process.
As units are completed in Testing, they are
immediately transferred to FG
Data for the Testing Dep’t for the month of March 2020
1-30
Physical Units for March 2020

E.g. WIP, Beginning Inventory (March 1) 240 units
Transferred-In Costs (100% complete)
Conversion Costs (62.5% complete)
Transferred In During March 400 units
Completed During March 440 units
WIP, Ending Inventory (March 31) 200 units
Transferred-In Costs (100% complete)
Conversion Costs (80% complete)
Costs of Testing Department for March 2020
Work In Process, Beginning Inventory
Transferred-In Costs (240 E.U* Br.140) 33,600
Direct Materials 0
CC (150 E.U * Br.120/unit) 18,000 51,600
Transferred-In Costs during March
Weighted-Average 52,000
FIFO 52,480
DM Costs Added During March 13,200
CC Added During March 48,600
 240 x 62.5% = 150 EU, then 150 x 120 = 18,000
1-31
Transferred-In Costs in Weighted Average Method
A. Transferred-In Costs & Equivalent
The Weighted Average Method Units
Flow of Physical Tran. In DM CC
Production Units Costs

Transferred in during current period 400
To account for 640
Completed and transferred out

during current period………………. 440 440 440 440
Work In Process, Ending:
200*100%; 200*0%; 200*80% 200 200 0 160
Accounted for 640
Work done to date 640 440 600
1-32
Transferred-in Costs in Weighted Average Method…
T. Prod. Tran. DMs CCs
Costs In costs
(Step 3) WIP, Beginning 51,600 33,600 00.00 18,000
Costs added in the current period 113,800 52,000 13,200 48,600
Costs incurred to date 85,600/ 13,200/ 66,600/
Divided by E.U of work done to date 640 440 600
Cost per equivalent unit of work done 133.75 30 111
(Step 4) Total costs to account for 165,400
(Step 5) Assignment of Costs:

Completed & transferred out (440 units) 120,890 (440*133.75) (440*30) (440*111)
Work in process, ending (200 units)

Transferred-In Costs 26,750 200*133.75
Direct Materials 0 0*30
Total Work In Process 44,510
Total Costs Accounted For 165,400
Finished Goods Control 120,890

Entry: Work-in Process: Testing 120,890
 (To record cost of goods completed and transferred from Testing to finished goods)
1-33
Transferred-in Costs in FIFO Costing Method
Flow of Physical Equivalent Units

Units Tran In DM CC
Production (PU) Costs
Work In Process, Beginning 240
Transferred-In Current Period 400
To Account For 640
Completed & Transferred out during current period
From Beginning Work In Process
240*0%; 240*(100%-0%); 240*(100%-62.5%) 240 0 240 90
Started & Completed:
200*100%; for the three 200 200 200 200
Work In Process, Ending
200*100%; 200*0%;200*80% 200 200 0 160
Accounted for 640
Work done in current period 400 440 450
1-34
T. Prod. Tran. DM CC
Costs In Cost
(Step 3)Work In Process, Beginning 51,600
Costs Added Current Period 114,280 52,480/ 13,200/ 48,600/
Divided By E.U of Work Done in Current Period 400 440 450
Costs Per E.U of Work Done in the Current Period 131.20 30 108
(Step 4) Total Costs To Account For 165,880
(Step 5) Assignment of Costs
Completed & Transferred Out (440 units)
Work In Process, Beginning (240 units) 51,600
Transferred-In Costs Added In Current Period 0 0*131.20
DM Added In Current Period (100% of 240= 240) 7,200 240*30
CC Added In Current Period (37.5% of 240 = 90) 9,720 90*108
Total From Beginning Inventory 68,520
Started and Completed (200 units) 53,840 200*131.20 200*30 200*108
Total Costs of Units Completed & Transferred 122,360
Work In Process, Ending (200 Units)
Transferred-In Costs (100% of 200= 200) 26,240 200*131.20
Direct Materials (0% of 200= 0) 0 0*30
Conversion Costs (80% of 200 = 160) 17,280 160*108
Total Work In Process, Ending 43,520
Total Costs Accounted For 165,880
1-35
 Journal Entries
Finished Goods Control 122,360
Work-In Process: Testing 122,360
(To record cost of goods completed and transferred from
Testing to finished goods)
36
1-37
Operation Costing System
Operation Costing is a hybrid costing (of job order
and process) applied to batches of similar products.
An operation costing system uses work orders that
specify the needed D.M and Step-By-Step
Operations.
Work orders for each batch differ as to the
combinations of D.M and Operations to be
undergone.
Product costs are compiled for each distinct work
order which will be made up of two or more units
of a product.
1-38
Operation Costing System …
 For example,
 Think of a furniture maker that makes;
 a batch of non-reclining (unrolling) armchairs
followed by,
 a batch of recliners (adjustable seat).
 The recliners will require more materials (for the
reclining mechanism) and more assembly time, but
 all of the non-reclining chairs will be alike, &
 all of the recliners will be alike.
▓ Garment and shoe industries use a variety of styles
and qualities of fabric and leather, but
 virtually (nearly) the same labor and overhead for
various products.
1-39
Other Costing Systems
 Contract costing- when a job is big and work is to be done at
site, it is known as contract.
▓ Contract costing is applicable in industries like:
 Building Construction,
 Bridge Construction,
 Ship Building, etc.
 Batch costing- In batch costing:
 Productions of identical products are arranged in groups
or batches &
 Costs are ascertained for each batch separately.
 It shares some features of operation costing.
▓ This system is used in:
 Toys,
 Ready Made Garments,
 Tyres & Tubes, etc.
End of Chapter 4

Accounting
& Mgt.11/e,Acct-

Chapter 4 - Costing Method - Process Costing

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COST AND MANAGEMENT

The Process & Operation or

©2003 Prentice Hall

These costs are added to the WIP Inventory Account for

These units of product are transferred to production

3. DM and DL are used in production department ‘B’, &

WIP: Production Department ‘B’ xxx

©2003 Prentice Hall Business Publishing, 1-7

4. Goods are completed in production department ‘B’ &

5. Goods are Sold

Cost of Goods Sold xxx

ABC Manufacturing Company manufactures thousands of

 Data for the Assembly Department for January, 2020

 Data for the Assembly Department for February, 2020

Physical Units for February 2020

 DM usually placed in production at one or more discreet points in

 How much conversion activity has been applied to these partially

 This method calculates the EU cost of the work done to

 And assigns this cost to EUs completed and transferred

 The Weighted Average Cost is the total of all costs

(Step 4) Total costs to account for 62,280

(Step 5) Assignment of Costs:

 Assigns the cost of EU worked on during the current period:

Work done on Beg. Inventory before the current period is

Costs incurred in the current period and units produced in

©2003 Prentice Hall Business Publishing, 1 - 24

(Step 4) Total Costs to account for 62,280

(Step 5) Assignment of Costs: .

Work in Process- Testing 52,480

 Transferred-In Costs also called Previous

Physical Units for March 2020

 240 x 62.5% = 150 EU, then 150 x 120 = 18,000

Work in process, beginning 240

Completed and transferred out

Work done to date 640 440 600

(Step 4) Total costs to account for 165,400

(Step 5) Assignment of Costs:

Work in process, ending (200 units)

Finished Goods Control 120,890

Flow of Physical Equivalent Units

©2003 Prentice Hall Business Publishing, 1 - 40

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