Chapter 4

Process Costing and Hybrid

Product-Costing Systems

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 4-1 – List and explain the
similarities and important differences between job-order
and process costing.

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Comparison of Job-Order Costing and
Process Costing
Process
Process Job-order
Costing
Costing Costing

 Used for production of small,

identical, low cost items.
 Mass produced in automated
continuous production processes.
 Costs cannot be directly traced to
each unit of product.
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Comparison of Job-Order Costing and
Process Costing
Process
Process Job-order
Costing
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill

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 Comparison of Job-Order Costing and
Process Costing

Job-order costing Process costing

Costs accumulated by the
job.
Work in process has a job-
cost sheet for each job.
Many unique, high cost
jobs.
Costs accumulated by
department or process.
Work in process has a
production report for each
batch of products.
A few identical, low cost

Jobs built to customer

products.
order. Units continuously produced
for inventory in automated
process.
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Differences Between Job-Order and Job Job-
Order Costing
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
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 Differences Between Job-Order and Process
Costing
The work-in-process
account consists of
individual products in a
Direct Material
process-cost system.

Direct Labor Finished

& Overhead Products Goods
(Conversion)

When direct labor is a relatively small amount Cost of

compared to material and overhead, it is often Goods
combined with overhead. Sold
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Learning Objective 4-2 – Prepare journal entries to record
the flow of costs in a process-costing system with sequential
production departments

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 Process Cost Flows
One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material
Cost of goods completed Cost of goods sold
Direct labor
Applied manufacturing and transferred to during current
overhead finished goods period

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 Journal Entry
Direct Material, Direct Labor, and
Overhead Applied
 Process Cost Flows
Two Sequential Production Departments
Work-in-Process Inventory Work-in-Process Inventory
Production Department A Production Department B
Direct material Cost of goods completed
Direct labor in department A and Cost of goods completed
Applied manufacturing transferred to and transferred to
overhead department B finished goods

Direct material
Direct labor
Applied manufacturing
overhead

Finished Goods Inventory Cost of Goods Sold

Cost of goods sold
during current period

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 Journal Entry
Dept. B – Transferred In Costs
 Journal Entry
Dept. B – Direct materials, Direct
Labor, and Manufacturing Overhead
 Journal Entry
Goods Completed
Journal Entry
Goods Sold
Learning Objective 4-3 – Prepare a table of
equivalent units under weighted-average process
costing.

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 Equivalent Units: A Key Concept
 Costs are accumulated for a period of time for products
in work-in-process inventory.

 Products in work-in-process inventory at the beginning

and end of the period are only partially complete.

 Equivalent units is a concept expressing these partially

completed products as a smaller number of fully
completed products.
Equivalent Units Example
Two half completed products are
equivalent to one completed product.

+ = l

So, 10,000 units that are 70% complete

are equivalent to 7,000 complete units.

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 Equivalent Units Question 1
For the current period, Jones started
15,000 units and completed 10,000 units,
leaving 5,000 units in process 30%
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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 Equivalent Units Question 1
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 × .30)
b. 11,500
= 11,500 equivalent units
c. 13,500
d. 15,000
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Equivalent Units Question 2
Jones incurred $27,600 in
production costs for the 11,500
equivalent units. What was Jones’s
cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90

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Equivalent Units Question 2
Jones incurred $27,600 in
production costs for the 11,500
equivalent units. What was Jones’s
cost per equivalent unit for the period?
a. $1.84
b. $2.76 $27,600 ÷ 11,500 equivalent units
c. $2.40 = $2.40 per equivalent unit
d. $2.90

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Calculating and Using Equivalent Units of
Production
To calculate the direct materials and conversion costs per
equivalent unit for the period:

Materials
cost per Materials cost for the period
= Materials equivalent units for
equivalent
the period
unit
Conversion
cost per Conversion cost for the period
equivalent =
Conversion equivalent units for
the period
unit
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Departmental Production Report
Analysis of Calculation
physical flow of equivalent
of units. units.

Production
Report

Computation Analysis of
of unit costs. total costs.

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 Equivalent Units of Production –
Weighted-Average Method
The weighted-average method . . .
Makes no distinction between work done in the prior period
and work done in the current period.
Blends together units and costs from the prior period and the
current period.

The FIFO method is a more

complex method and is
rarely used in practice.

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 Production Report Example
 MVP Sports Equipment Company makes baseball gloves in two
departments, Cutting and Stitching.
 MVP uses the weighted-average process costing.

 Material is added at the beginning of the Cutting Department,

while conversion is incurred uniformly throughout the process.
 Using the following information for the month of March, let’s
prepare a production report for the Cutting Department.

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 Production Report Example
Work in process, March 1: 20,000 units Cost
Materials: 100% complete $ 50,000
Conversion: 10% complete 7,200

Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 units

Materials 100% complete
Conversion 50% complete

Costs incurred during March

Materials cost 90,000
Conversion costs:
Direct labor $ 86,000
Applied manufacturing overhead 107,500
Total conversion costs 193,500
Total costs to account for $ 340,700

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 Production Report Example
 Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

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 Production Report Example
 Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000
50% of 10,000 units

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Beginning inventory % is not used in weighted-average method.

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 Production Report Example
 Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
100% of 10,000 units, all
Total units to account for 50,000
material added at beginning
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

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Learning Objective 4-4 – Compute the cost
per equivalent unit under the weighted-average
method of process costing.

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Production Report Example
 Computation of unit costs
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units

$2.80 + $4.46
$200,700 ÷ 45,000 equivalent units
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Learning Objective 4-5 – Analyze the total
production costs for a department under the
weighted-average method of process costing.

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 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

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 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

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 Production Report Example
 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

All costs
Total costs accounted for accounted for $ 340,700

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Learning Objective 4-6 – Prepare a departmental
production report under weighted-average process
costing.

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 MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Direct
Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000

Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

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Actual Costing vs. Normal Costing

Manufacturing
overhead is
Actual costs of applied
manufacturing overhead to Work-in-
are entered in Work-in- Process Inventory
Process Inventory using a
predetermined
overhead rate

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 Departmental Production Report
Analysis of
physical flow
of units.
Calculation
of equivalent
units.
Computation
of unit costs.

Analysis of
total costs.

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Learning Objective 4-7 – Describe how an operation
costing system accumulates and assigns the costs of direct-material
and conversion activity in a batch manufacturing process.

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 Operation Costing
Operation costing employs some aspects
of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

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 Operation Costing
Operation costing employs some aspects
of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Material costs are charged Conversion costs

to batches as in are assigned to batches
job-order costing. as in process costing.

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End Chapter 4

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