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PROCESS COSTING
Process
Process Costing
Costing
Used for production of small,
identical, low-cost items.
Mass produced in automated
continuous production process.
Costs cannot be directly traced to
each unit of product.
Comparing
Comparing Job
Job and
and Process
Process Costing
Costing
Job
Job and
and Process
Process Costing
Costing
The Work in Process
Direct account consists of
Materials individual jobs in
job costing.
Direct Finished
Jobs
Labor Goods
Job
Job and
and Process
Process Costing
Costing
The Work in Process
Direct account consists of
Materials specific processes in
process costing.
Direct Finished
Processes
Labor Goods
Costing
Costing Similarities
Similarities
The
The Key
Key to
to Process
Process Costing
Costing
Direct
Materials
Indirect
Work in
Process
Assembly
Work in
Factory Finished
Applied Process
Overhead Overhead Goods
Packaging
Indirect
Delivered
to
Direct
Labor Customers
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
18-8
Computing
Computing Unit
Unit Cost
Cost
Costs
Costs are
are accumulated
accumulated for
for aa period
period of
of time
time
by
by process
process or
or department.
department.
Unit
Unit cost
cost is
is computed
computed by by dividing
dividing the
the
accumulated
accumulated costscosts by
by the
the number
number of of
units
units produced
produced in in the
the period.
period.
Computing
Computing Unit
Unit Cost
Cost
Costs
Costs are
are accumulated
accumulated for
for aa period
period of
of time
time
by
by process
process or
or department.
department.
Unit
Unit cost
cost is
is computed
computed by by dividing
dividing the
the
accumulated
accumulated costscosts by
by the
the number
number of of
units
units produced
produced in in the
the period.
period.
IfIf partially
partially complete
complete units
units remain
remain in
in
process,
process, we we must
must use
use equivalent
equivalent units
units
as
as the
the divisor
divisor to
to obtain
obtain unit
unit costs.
costs.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
18-10
Process
Process Costing
Costing and
and Equivalent
Equivalent Units
Units
Equivalent
Equivalent units
units is
is aa concept
concept expressing
expressing aa
number
number ofof partially
partially completed
completed units
units as
as aa
smaller
smaller number
number of of fully
fully completed
completed units.
units.
+ = 1
Process
Process Costing
Costing and
and Equivalent
Equivalent Units
Units
For
For the
the current
current period,
period, PencilCo
PencilCo 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
in process
process 30
30 percent
percent
complete.
complete. How How many
many equivalent
equivalent units
units of
of
production
production did did PencilCo
PencilCo have
have for
for the
the period?
period?
a.
a. 10,000
10,000
b.
b. 11,500
11,500
c.
c. 1,500
1,500
d.
d. 15,000
15,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
18-12
Process
Process Costing
Costing and
and Equivalent
Equivalent Units
Units
For
For the
the current
current period,
period, PencilCo
PencilCo 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
in process
process 30
30 percent
percent
complete.
complete. How How many
many equivalent
equivalent units
units of
of
production
production did did PencilCo
PencilCo have
have for
for the
the period?
period?
a.
a. 10,000
10,000
10,000 units + (5,000 units × .30)
b.
b. 11,500
11,500 = 11,500 equivalent units
c.
c. 1,500
1,500
d.
d. 15,000
15,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
18-13
Cost
Cost Per
Per Equivalent
Equivalent Unit
Unit
Cost per
Product costs for the period
equivalent =
Equivalent units for the period
unit
Cost
Cost Per
Per Equivalent
Equivalent Unit
Unit
Now
Now assume
assume that
that PencilCo
PencilCo incurred
incurred
$27,600
$27,600 in
in production
production costs.
costs. What What was
was
PencilCo’s
PencilCo’s cost
cost per
per unit
unit for
for the
the period?
period?
a.
a. $1.84
$1.84
b.
b. $2.40
$2.40
c.
c. $2.76
$2.76
d.
d. $2.90
$2.90
Cost
Cost Per
Per Equivalent
Equivalent Unit
Unit
Now
Now assume
assume that
that PencilCo
PencilCo incurred
incurred
$27,600
$27,600 in
in production
production costs.
costs. What What was
was
PencilCo’s
PencilCo’s cost
cost per
per unit
unit for
for the
the period?
period?
a.
a. $1.84
$1.84
b.
b. $2.40
$2.40 $27,600 ÷ 11,500 equivalent units
c.
c. $2.76
$2.76 = $2.40 per equivalent unit
d.
d. $2.90
$2.90
Process
Process Costing
Costing and
and Equivalent
Equivalent Units
Units
40% of
Material
Equivalent
Equivalent units
unitsmay
maybe be
different
different for
formaterial
material and
andlabor
labor
Stage 1
and
and overhead
overhead at at different
different
stages
stages of
of aaprocess.
process.
25% of
Labor and
Overhead
At
At completion
completionof
ofStage
Stage11ofof the
theprocess,
process, material
material
is
is40%
40% complete,
complete, but
but labor
labor and
andoverhead
overheadare
areonly
only
25%
25% complete.
complete.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
18-17
Process
Process Costing
Costing and
and Equivalent
Equivalent Units
Units
40% of 60% of
Material + Material = 100%
Stage 1 Stage 2
25% of 25% of
Labor and + Labor and = 50%
Overhead Overhead
Process
Process Costing
Costing and
and Equivalent
Equivalent Units
Units
40% of 60% of
Material Material
The
Theprocess
process is
isnow
now complete.
complete.
Equivalent
Equivalent Units
Units
Equivalent
Equivalent Units
Units
Owl Inc Fabrication Department Data For April 2005
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - direct labor 40%
Percentage of completion - overhead 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct material 100%
Percentage of completion - direct labor 25%
Percentage of completion - overhead 25%
Equivalent
Equivalent Units
Units
Owl Inc Fabrication Department Data For April 2005
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - direct labor 40%
Percentage of completion - overhead 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Material
Ending Inventory: is added at the
beginning
Units of product of the process so 20,000
it is always
Percentage 100%
of completion complete.
- direct material 100%
Percentage of completion - direct labor 25%
Percentage of completion - overhead 25%
Equivalent
Equivalent Units
Units
Owl Inc Fabrication Department Data For April 2005
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - direct labor 40%
Percentage of completion - overhead 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Overhead
Ending Inventory: is applied on the basis
of labor,
Units of productso both are at the 20,000
same percentage
Percentage of- completion.
of completion direct material 100%
Percentage of completion - direct labor 25%
Percentage of completion - overhead 25%
Physical
Physical Flow
Flow of
of Units
Units
Units
Units of
of Production
Production
Fabrication Department
Direct Material Equivalent Units of Production - April 2005
Units
Units of
of Production
Production
Since materials are added at the
beginning of the process, no additional
materials are necessary to complete the
beginning
Fabrication inventory.
Department
Direct Material Equivalent Units of Production - April 2005
Units
Units of
of Production
Production
100,000 units completed
and transferred.
Fabrication Department
Direct Material Equivalent Units of Production - April 2005
} 100,000
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000
Units
Units of
of Production
Production
Units
Units of
of Production
Production
Since labor and overhead were 40
percent complete in the beginning
inventory, 60 percent of the work must
be completed
Fabrication Department Direct in April.
Labor and Factory
Overhead Equivalent Units of Production - April 2005
Units
Units of
of Production
Production
Units
Units of
of Production
Production
Summary of Fabrication Department
Equivalent Units of Production - April 2005
Equivalent
Equivalent Units
Units
Fabrication Department
April Work in Process Costs
Beginning work in process $ 22,380
Costs added in April:
Direct material 45,000
Direct labor 11,160
Overhead 44,640
Total costs to account for $ 123,180
Cost
Cost per
per Equivalent
Equivalent Unit
Unit
Fabrication Department
Cost Per Equivalent Unit - April 2005
Cost
Cost Reconciliation
Reconciliation
We
We will
will account
account for
for all
all costs
costs incurred
incurred
by
by assigning
assigning unit
unit costs
costs to
to the:
the:
A.
A. 100,000
100,000 units
units completed
completed and
and
transferred.
transferred.
B.
B. 20,000
20,000 units
units remaining
remaining in
in ending
ending
work
work in
in process
process inventory.
inventory.
End
End