Chapter 04

Systems Design:
Process Costing
Chapter Four
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
4-2
Similarities Between Job-Order and Process

Costing
Both
Both systems
systems assign
assign material,
material, labor
labor and
overhead
overhead costs
costs to
to products
products and
and they
they provide
provide aa
mechanism
mechanism for
for computing
computing unit
unit product
product cost.
cost.
Both
Both systems
systems use
use the
the same
same manufacturing
manufacturing
accounts,
accounts, including
including Manufacturing
Manufacturing Overhead,
Raw
Raw Materials,
Materials, Work
Work in
in Process,
Process, and
and Finished
Finished
Goods.
Goods.
The
The flow
flow of
of costs
costs through the manufacturing
accounts
accounts is
is basically
basically the same in both
both systems.
systems.
McGrawHill/Irwin
4-3
Differences Between Job-Order and Process

Costing
Process
Process costing
costing is
is used
used when
when aa single
single product
product is
is
produced
produced on
on aa continuing
continuing basis
basis or
or for
for aa long
long period
period of
of
time.
time. Job-order
Job-order costing
costing is
is used
used when
when many
many different
different
jobs
jobs are
are worked
worked on
on each
each period.
period.
Process
Process costing
costing systems
systems accumulate
accumulate costs
costs by
by
department.
department. Job-order
Job-order costing
costing systems
systems accumulated
accumulated
costs
costs by
by individual
individual jobs.
jobs.
Process
Process costing
costing systems
systems compute
compute unit
unit costs
costs by
by
department.
department. Job-order
Job-order costing
costing systems
systems compute
compute unit
unit
costs
costs by
by job
job on
on the
the job
job cost
cost sheet.
sheet.
McGrawHill/Irwin
4-4
Quick Check
Process costing is used for products that are:

a. Different and produced continuously.
b.
c.
Similar and produced continuously.

Individual units produced to customer
specifications.
d. Purchased from vendors.
McGrawHill/Irwin
4-5
Quick Check
Process costing is used for products that are:

a. Different and produced continuously.
b.
c.
Similar and produced continuously.

Individual units produced to customer
specifications.
d. Purchased from vendors.
McGrawHill/Irwin
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.
McGrawHill/Irwin
4-7
Learning Objective 1
Record the flow of

materials, labor, and
overhead through a
process cost system.
McGrawHill/Irwin
Comparing Job-Order
and Process Costing
4-8
Direct
Direct
Materials
Materials
Direct
Direct Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Work in
Process
Finished
Finished
Goods
Goods
Cost
Cost of
of
Goods
Goods
Sold
Sold
Comparing Job-Order
and Process Costing
4-9
Costs
Costs are
are traced
traced and
and
applied
applied to
to individual
individual
jobs
jobs in
in aa job-order
job-order
cost
cost system.
system.
Direct
Direct
Materials
Materials
Direct
Direct Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Jobs
Jobs
Finished
Finished
Goods
Goods
Cost
Cost of
of
Goods
Goods
Sold
Sold
Comparing Job-Order
and Process Costing
4-10
Direct
Direct
Materials
Materials
Direct
Direct Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Costs
Costs are
are traced
traced and
and
applied
applied to
to departments
departments
in
in aa process
process cost
cost
system.
system.
Processing
Processing
Department
Department
Finished
Finished
Goods
Goods
Cost
Cost of
of
Goods
Goods
Sold
Sold
4-11
T-Account and Journal Entry Views of Cost Flows

For purposes of this example,
assume there are two
processing departments
Departments A and B.
We will use T-accounts and
journal entries.
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
4-12
Raw Materials
Direct
Materials
Work in Process
Department A
Direct
Materials
Work in Process
Department B
Direct
Materials
McGrawHill/Irwin
4-13
Process Cost Flows

(in journal entry form)
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
4-14
Wages Payable
Direct
Labor
Work in Process
Department A
Direct
Materials
Direct
Labor
Work in Process
Department B
Direct
Materials
Direct
Labor
McGrawHill/Irwin
Process Costing
4-15
GENERAL JOURNAL
Date
Description
Page 4
Post.
Ref.
Debit
Work in Process - Department A
XXXXX
Work in Process - Department B
XXXXX
Salaries and Wages Payable
Credit
XXXXX
To record direct labor costs.
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
4-16
Work in Process
Department A
Manufacturing
Overhead
Actual
Overhead
Overhead
Applied to
Work in
Process
Direct
Materials
Direct
Labor
Applied
Overhead
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead
McGrawHill/Irwin
Process Costing
4-17
(In journal entry form)
GENERAL JOURNAL
Date
Description
Page 4
Post.
Ref.
Debit
XXXXX
XXXXX
Manufacturing Overhead
Credit
XXXXX
To apply overhead to departments.
McGrawHill/Irwin
4-18
Process Cost Flows

(in T-account form)
Work in Process
Department A
Direct
Transferred
Materials
to Dept. B
Direct
Labor
Applied
Overhead
McGrawHill/Irwin
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Process Costing
4-19
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Credit
XXXXX
XXXXX
To record the transfer of goods from

Department A to Department B.
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
4-20
Work in Process
Department B
Direct
Cost of
Materials
Goods
Direct
Manufactured
Labor
Applied
Overhead
Transferred
from Dept. A
McGrawHill/Irwin
Finished Goods
Cost of
Goods
Manufactured
Process Costing
4-21
GENERAL JOURNAL
Date
Description
Finished Goods
Post.
Ref.
Page 4
Debit
Credit
XXXXX
XXXXX
To record the completion of goods

and their transfer from Department B
to finished goods inventory.
McGrawHill/Irwin
Process Cost Flows

4-22
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
Cost of Goods Sold
from Dept. A
Cost of
Goods
Sold
McGrawHill/Irwin
Process Costing
4-23
GENERAL JOURNAL
Date
Description
Accounts Receivable
Post.
Ref.
Page 4
Debit
Credit
XXXXX
Sales
XXXXX
To record sales on account.

Cost of Goods Sold
Finished Goods
XXXXX
XXXXX
To record cost of goods sold.
McGrawHill/Irwin
4-24
Equivalent Units of Production

Equivalent units are the product of the number of
partially completed units and the percentage
completion of those units.
We need to calculate equivalent units because a

department usually has some partially completed units
in its beginning and ending inventory.
McGrawHill/Irwin
4-25
Equivalent Units The Basic Idea

Two half completed products are
equivalent to one completed product.
So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
McGrawHill/Irwin
4-26
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
McGrawHill/Irwin
4-27
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
McGrawHill/Irwin
4-28
Calculating Equivalent Units
Equivalent
Equivalent units
units can
can be
be calculated
calculated two
two
ways:
ways:
The
The First-In,
First-In, First-Out
First-Out Method
Method FIFO
FIFO is
is
covered
covered in
in the
the appendix
appendix to
to this
this chapter.
chapter.
The
The Weighted-Average
Weighted-Average Method
Method This
This
method
method will
will be
be covered
covered in
in the
the main
main portion
portion of
of the
the
chapter.
chapter.
McGrawHill/Irwin
4-29
Compute the equivalent

units of production using
the weighted-average
method.
McGrawHill/Irwin
4-30
Equivalent Units of Production

Weighted-Average Method
The weighted-average method . . .

Makes no distinction between work done in prior
or current periods.
Blends together units and costs from prior and
current periods.
Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending work in process inventory.
McGrawHill/Irwin
4-31
Treatment of Direct Labor
Dollar Amount
Direct
Materials
Direct
Labor
Direct
Direct labor
labor costs
costs
may
may be
be small
small
in
in comparison
comparison to
to
Conversion
other
other product
product
costs
costs in
in process
process
cost
cost systems.
systems.
Type of Product Cost
McGrawHill/Irwin
4-32
Treatment of Direct Labor
Dollar Amount
Direct
Materials
Direct
Direct labor
labor costs
costs
may
be
small
may
be
small
Conversion
in
in comparison
comparison to
to
other
other product
product
costs
costs in
in process
process
cost
cost systems.
systems.
Type of Product Cost
Direct
Direct labor
labor and
and manufacturing
manufacturing overhead
overhead may
may be
be
combined
combined into
into one
one product
product cost
cost called
called conversion
conversion..
McGrawHill/Irwin
4-33
Weighted-Average Example
Double Diamond Skis reported the following activity in
Shaping and Milling Department for the month of May:
McGrawHill/Irwin
4-34
The first step in calculating the equivalent units is

to identify the units completed and transferred
out of the Department in May (4,800 units)
McGrawHill/Irwin
4-35
The second step is to identify the equivalent units of
production in ending work in process with respect to
materials for the month (160 units) and add this to the
4,800 units from step one.
McGrawHill/Irwin
4-36
The third step is to identify the equivalent units of
production in ending work in process with respect to
conversion for the month (100 units) and add this to the
4,800 units from step one.
McGrawHill/Irwin
4-37
Equivalent
Equivalent units
units of
of production
production always
always equals:
equals:
Units
Units completed
completed and
and transferred
transferred
++ Equivalent
Equivalent units
units remaining
remaining in
in work
work in
in process
process
McGrawHill/Irwin
4-38
Materials
Materials
Beginning
Work in Process
200 Units
55% Complete
5,000 Units Started
4,800 Units Started

and Completed
4,800 Units Completed

160 Equivalent Units
4,960 Equivalent units
of production
McGrawHill/Irwin
Ending
Work in Process
400 Units
40% Complete
400 40%
4-39
Conversion
Conversion
Beginning
Work in Process
200 Units
30% Complete
5,000 Units Started
4,800 Units Started

and Completed

of production
McGrawHill/Irwin
Ending
Work in Process
400 Units
25% Complete
400 25%
4-40
Compute the cost per

equivalent unit using the
weighted-average method.
McGrawHill/Irwin
4-41
Compute and Apply Costs

Beginning
Beginning work
work in
in process:
process:
Materials:
Materials: 55%
55% complete
complete
Conversion:
Conversion: 30%
30% complete
complete
$$
9,600
9,600
5,575
5,575
Production
Production started
started during
during May
May
Production
Production completed
completed during
during May
May
5,000
5,000 units
units
4,800
4,800 units
units
Costs
Costs added
added to
to production
production in
in May
May
Materials
Materials cost
cost
Conversion
Conversion cost
cost
$$ 368,600
368,600
350,900
350,900
Ending
Ending work
work in
in process
process
Materials:
40%
Materials:
40% complete
complete
Conversion:
Conversion: 25%
25% complete
complete
McGrawHill/Irwin
200
200 units
units
400
400 units
units
4-42

The formula for computing the cost per equivalent
unit is :
Cost per
equivalent =
unit
McGrawHill/Irwin
Cost of beginning
work in process + Cost added during
inventory
the period
Equivalent units of production
4-43

Here is a schedule with the cost and equivalent
unit information.
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
15,175
Materials
Conversion
9,600
5,575
719,500
368,600
350,900
$ 734,675
$ 378,200
$ 356,475
4,960
4,900
Cost per equivalent unit
McGrawHill/Irwin
4-44

Here is a schedule with the cost and equivalent
unit information.
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
15,175
Materials
Conversion
9,600
5,575
719,500
368,600
350,900
$ 734,675
$ 378,200
$ 356,475
4,960
4,900
Cost per equivalent unit

$ 76.25
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
72.75
$356,475
4,900
unitsunits
= $72.75
$378,200
4,960
= $76.25
McGrawHill/Irwin
4-45
Assign costs to units using

the weighted-average
method.
McGrawHill/Irwin
4-46
McGrawHill/Irwin
Applying Costs
4-47
McGrawHill/Irwin
Applying Costs
4-48
McGrawHill/Irwin
Applying Costs
4-49
Computing the Cost of Units Transferred Out
McGrawHill/Irwin
4-50
McGrawHill/Irwin
4-51
McGrawHill/Irwin
4-52
Reconciling Costs
McGrawHill/Irwin
4-53
Reconciling Costs
McGrawHill/Irwin
4-54
Operation Costing
Operation cost is a hybrid of job-order and
process costing because it possesses
attributes of both approaches
Operation
Operation costing
costing is
is
commonly
commonly used
used when
when
batches
batches of
of many
many
different
different products
products pass
pass
through
through the
the same
same
processing
processing department.
department.
McGrawHill/Irwin
FIFO Method
Appendix 4A
McGrawHill/Irwin
4-56
FIFO vs. Weighted-Average Method

The FIFO method (generally considered more
accurate that the weighted-average method)
differs from the weighted-average method in
two ways:
1. The computation of equivalent units.
2. The way in which the costs of beginning
inventory are treated in the cost
reconciliation report.
McGrawHill/Irwin
4-57
Compute the equivalent

units of production using
the FIFO method.
McGrawHill/Irwin
4-58
Equivalent Units FIFO Method

Lets revisit the Double Diamond Skis example.
Assume the following activity is reported in
Shaping and Milling Department for May:
McGrawHill/Irwin
4-59
Step 1:
1 Determine equivalent units needed to complete
beginning inventory.
McGrawHill/Irwin
4-60
Step 2:
2 Determine units started and completed during
the period.
McGrawHill/Irwin
4-61
Step 3:
3 Add the equivalent units in ending working in
process inventory.
McGrawHill/Irwin
4-62
FIFO Example
Materials
Materials
Beginning
Work in Process
200 Units
55% Complete
200 45%
McGrawHill/Irwin
5,000 Units Started
4,600 Units Started

and Completed
90 Equivalent Units
of production
Ending
Work in Process
400 Units
40% Complete
400 40%
4-63
FIFO Example
Conversion
Conversion
Beginning
Work in Process
200 Units
30% Complete
200 70%
McGrawHill/Irwin
5,000 Units Started
4,600 Units Started

and Completed

of production
Ending
Work in Process
400 Units
25% Complete
400 25%
4-64
Equivalent Units: Weighted Average vs. FIFO

As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the weightedaverage method to obtain the equivalent units of production under
the FIFO method.
McGrawHill/Irwin
4-65
Compute the cost per

equivalent unit using the
FIFO method.
McGrawHill/Irwin
4-66
Cost per Equivalent Unit - FIFO
Lets revisit the Double Diamond Skis Shaping and Milling

Department for the Month of May to prepare our production report.
Beginning
Beginning work
work in
in process:
process:
Materials:
Materials: 55%
55% complete
complete
Conversion:
Conversion: 30%
30% complete
complete
Production
Production started
started during
during May
May
Production
Production completed
completed during
during May
May
Costs
Costs added
added to
to production
production in
in May
May
Materials
$$
Materials cost
cost
Conversion
Conversion cost
cost
Ending
Ending work
work in
in process:
process:
Materials:
40%
Materials:
40% complete
complete
Conversion:
Conversion: 25%
25% complete
complete
McGrawHill/Irwin
200
200 units
units
$$ 9,600
9,600
5,575
5,575
$15,
$15, 175
175
5,000
5,000 units
units
4,800
4,800 units
units
368,600
368,600
350,900
350,900
400
400 units
units
4-67
The formula for computing the cost per equivalent

unit under FIFO method is :
Cost per
equivalent =
Cost added during the period

Equivalent units of production
unit
McGrawHill/Irwin
4-68
McGrawHill/Irwin
4-69
Assign costs to units using

the FIFO method.
McGrawHill/Irwin
4-70
Applying Costs - FIFO
Step 1:
1 Record the equivalent units of production in ending work in
process inventory.
McGrawHill/Irwin
4-71

Step 2:
2 Record the cost per equivalent unit.
McGrawHill/Irwin
4-72
Step 3:
3 Compute the cost of ending work in process inventory.
McGrawHill/Irwin
4-73
Cost of Units Transferred Out
Step 1:
1 Record the cost in beginning work in process inventory.
McGrawHill/Irwin
4-74

Step 2:
2 Compute the cost to complete the units in beginning
work in process inventory.
McGrawHill/Irwin
4-75
Step 3:
3 Compute the cost of units started and completed this
period.
McGrawHill/Irwin
4-76

Step 4:
4 Compute the total cost of units transferred out.
McGrawHill/Irwin
4-77
McGrawHill/Irwin
Reconciling Costs
4-78
McGrawHill/Irwin
Reconciling Costs
4-79
A Comparison of Costing Methods

In a lean production environment, FIFO and
weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is superior
to weighted-average because it does not mix
costs of the current period with costs of the
prior period.
McGrawHill/Irwin
Service Department
Allocations
Appendix 4B
McGrawHill/Irwin
4-81
Operating Departments
An operating department carries out
the central purpose of the organization
The
Accounting
Department
at your
University.
McGrawHill/Irwin
An
Assembly
Department
at General
Motors.
4-82
Service Departments
A service department does not directly
engage in operating activities.
The
Accounting
Department
at Macys
McGrawHill/Irwin
The Human
Resources
Department
at Walgreens.
4-83
Interdepartmental Services
Service
Department
Operating
Department
Costs of the service

department become
overhead costs to
the operating
department
McGrawHill/Irwin
4-84
Allocation Approaches
Direct
Method
Step-Down
Method
Reciprocal
Method
McGrawHill/Irwin
4-85
Reciprocal Services
Service
Department 1
Service
Department 2
When service
departments provide
services to each
other we call them
reciprocal services.
McGrawHill/Irwin
4-86
Allocate service
department costs to
operating departments
using the direct method.
McGrawHill/Irwin
4-87
Interactions
between service
departments are
ignored and all
costs are
allocated directly
to operating
departments.
McGrawHill/Irwin
Direct Method
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
4-88
Departmental costs
before allocation
Number of employees
Square feet occupied
McGrawHill/Irwin
Direct Method
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
15
5,000
$ 90,000
10
2,000
$ 400,000
20
25,000
$ 700,000
30
50,000
4-89
Direct Method
Service Departments
Cafeteria
Custodial
Machining
Assembly
Departmental costs
before allocation
$ 360,000
$ 90,000
$ 400,000
$ 700,000
Cafeteria allocation
Custodial allocation
Total after allocation
How much of the Cafeteria and Custodial costs

should be allocated to each operating department
using the direct method of cost allocation?
McGrawHill/Irwin
4-90
Direct Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
(360,000)
144,000
20
$360,000
= $144,000
20 + 30
Allocation base: Number of employees
McGrawHill/Irwin
4-91
Direct Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
(360,000)
$360,000
30
= $216,000
20 + 30

McGrawHill/Irwin
4-92
Direct Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
(360,000)
(90,000)
$
25,000
$90,000
25,000 + 50,000
30,000
$ 574,000
= $30,000
Allocation base: Square feet occupied

McGrawHill/Irwin
4-93
Direct Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
30,000
60,000
$ 574,000
$ 976,000
(360,000)
(90,000)
$
50,000
$90,000
25,000 + 50,000
= $60,000

McGrawHill/Irwin
4-94
To allocate service
department costs to
operating departments
using the step-down
method.
McGrawHill/Irwin
4-95
Once a service
departments costs
are allocated,
other service
department costs
are not allocated
back to it.
McGrawHill/Irwin
Step Method
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
4-96
Step Method
There are three key points to understand
regarding the step method:
In both the direct and step methods, any amount of
the allocation base attributable to the service
department whose cost is being allocated is always
ignored.
Any amount of the allocation base that is
attributable to a service department whose cost has
already been allocated is ignored.
Each service department assigns its own costs to
operating departments plus the costs that have
been allocated to it from other service departments.
McGrawHill/Irwin
4-97
Step Method
We will use the same data used
in the direct method example.
Departmental costs
before allocation
Number of employees
Square feet occupied
McGrawHill/Irwin
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
15
5,000
$ 90,000
10
2,000
$ 400,000
20
25,000
$ 700,000
30
50,000
4-98
Step Method
Service Departments
Cafeteria
Custodial
Machining
Assembly
Departmental costs
before allocation
$ 360,000
$ 90,000
$ 400,000
$ 700,000
Allocate
Allocate Cafeteria
Cafeteria costs
costs first
first since
since
itit provides
provides more
more service
service than
than Custodial.
Custodial.
McGrawHill/Irwin
4-99
Step Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
(360,000)
60,000
10
$360,000
10 + 20 + 30
= $60,000

McGrawHill/Irwin
4-100
Step Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
(360,000)
20
$360,000
10 + 20 + 30
= $120,000

McGrawHill/Irwin
4-101
Step Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(360,000)
30
$360,000
10 + 20 + 30
= $180,000

McGrawHill/Irwin
4-102
Step Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(360,000)
(150,000)
$
New total = $90,000 original Custodial cost

plus $60,000 allocated from the Cafeteria.
McGrawHill/Irwin
4-103
Step Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(150,000)
50,000
$ 570,000
(360,000)
25,000
$150,000
25,000 + 50,000
= $50,000

McGrawHill/Irwin
4-104
Step Method
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(150,000)
50,000
100,000
$ 570,000
$ 980,000
(360,000)
50,000
$150,000
25,000 + 50,000
= $100,000

McGrawHill/Irwin
4-105
Reciprocal Method
Interdepartmental
services are given
full recognition
rather than partial
recognition as with
the step method.
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
Because of its mathematical complexity,

the reciprocal method is rarely used.
McGrawHill/Irwin
Quick Check Data

for Direct and Step Methods
4-106
Service Departments
Departmental costs
before allocation
Number of employees
Number of PCs
ADMIN
BACS
Accounting
Others
$ 180,000
15
12
$ 90,000
5
20
$ 190,000
20
18
$ 900,000
80
102
The direct method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business
Administration computer services

(BACS): Number of personal computers
McGrawHill/Irwin
4-107
Quick Check
How
How much
much cost
cost will
will be
be allocated
allocated from
from
Administration
Administration to
to Accounting?
Accounting?
a.
a. $$ 36,000
36,000
b.
b. $144,000
$144,000
c.
c. $180,000
$180,000
d.
d. $$ 27,000
27,000
McGrawHill/Irwin
4-108
Quick Check
How
How much
much cost
cost will
will be
be allocated
allocated from
from
Administration
Administration to
to Accounting?
Accounting?
a.
a. $$ 36,000
36,000
b.
b. $144,000
$144,000
Service Departments
c.
c. $180,000
$180,000
ADMIN
BACS
Accounting
Others
d.
$
27,000
d. $ 27,000
Departmental
costs
before allocation
ADMIN allocation
$ 180,000
(180,000)
$ 90,000
$ 190,000
36,000
$ 900,000
144,000
20
$180,000
= $36,000
20 + 80
McGrawHill/Irwin
4-109
Quick Check
How
How much
much total
total cost
cost will
will be
be allocated
allocated from
from
ADMIN
ADMIN and
and BACS
BACS combined
combined to
to the
the
Accounting
Accounting Department?
Department?
a.
a. $$ 52,500
52,500
b.
b. $135,000
$135,000
c.
c. $270,000
$270,000
d.
d. $$ 49,500
49,500
McGrawHill/Irwin
4-110
Service Departments
Quick
Check Operating Departments
ADMIN
BACS
Accounting
Others
Departmental costs
before allocation
$ 180,000 $ 90,000
$ 190,000 $ 900,000
ADMIN
allocation
(180,000)
36,000 from
How
much
cost
How
much total
total
cost will
will be
be allocated
allocated
from144,000
BACS allocation
(90,000)
13,500
76,500
ADMIN
ADMIN and
and BACS
BACS combined
combined to
to the
the
Total after allocation $
$
$ 239,500
Accounting
Department?
a.
a. $$ 52,500
52,500
b.
b. $135,000
$135,000
c.
c. $270,000
$270,000
d.
d. $$ 49,500
49,500
$90,000
McGrawHill/Irwin
$ 1,120,500
18
= $13,500
18 + 102
4-111
Quick Check Data

Service Departments
Departmental costs
before allocation
Number of employees
Number of PCs
ADMIN
BACS
Accounting
Others
$ 180,000
15
12
$ 90,000
5
20
$ 190,000
20
18
$ 900,000
80
102
The step method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business
administration computer services

(BACS): Number of personal computers
McGrawHill/Irwin
4-112
Quick Check
How
How much
much total
total cost
cost will
will be
be allocated
allocated from
from
ADMIN
ADMIN and
and BACS
BACS combined
combined to
to the
the
Accounting
Department?
a.
a. $35,250
$35,250
b.
b. $49,072
$49,072
c.
c. $18,000
$18,000
d.
d. $26,333
$26,333
McGrawHill/Irwin
4-113
Quick Check
How
How much
much total
total cost
cost will
will be
be allocated
allocated from
from
ADMIN
ADMIN and
and BACS
BACS combined
combined to
to the
the
Accounting
Department?
a.
a. $35,250
$35,250
b.
b. $49,072
$49,072
c.
c. $18,000
$18,000 Service Departments Operating Departments
BACS
Accounting
Others
d.
d. $26,333
$26,333 ADMIN
Departmental costs
before allocation
ADMIN allocation
BACS allocation

McGrawHill/Irwin
$ 180,000
(180,000)
-
$ 90,000
8,571
(98,571)
$ 190,000
34,286
14,786
$ 239,071
$ 1,120,929
900,000
137,143
83,786
4-114
McGrawHill/Irwin
End of Chapter 4

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Systems Design:

Similarities Between Job-Order and Process

Differences Between Job-Order and Process

Process costing is used for products that are:

Similar and produced continuously.

Process costing is used for products that are:

Similar and produced continuously.

Record the flow of

T-Account and Journal Entry Views of Cost Flows

Process Cost Flows

Process Cost Flows

Process Cost Flows

(in journal entry form)

Work in Process - Department A

Work in Process - Department B

Salaries and Wages Payable

To record direct labor costs.

Process Cost Flows

(In journal entry form)

Work in Process - Department A

Work in Process - Department B

To apply overhead to departments.

Process Cost Flows

(in journal entry form)

To record the transfer of goods from

Process Cost Flows

(in journal entry form)

To record the completion of goods

Process Cost Flows

(in journal entry form)

To record sales on account.

To record cost of goods sold.

Equivalent Units of Production

We need to calculate equivalent units because a

Equivalent Units The Basic Idea

Calculating Equivalent Units

Compute the equivalent

Equivalent Units of Production

The weighted-average method . . .

Treatment of Direct Labor

Type of Product Cost

Treatment of Direct Labor

Type of Product Cost

The first step in calculating the equivalent units is

5,000 Units Started

4,800 Units Started

4,800 Units Completed

5,000 Units Started

4,800 Units Started

4,800 Units Completed

Compute the cost per

Compute and Apply Costs

Compute and Apply Costs

Compute and Apply Costs

Cost per equivalent unit

Compute and Apply Costs

Cost per equivalent unit

Assign costs to units using

Computing the Cost of Units Transferred Out

Computing the Cost of Units Transferred Out

Computing the Cost of Units Transferred Out

FIFO vs. Weighted-Average Method

Compute the equivalent

Equivalent Units FIFO Method