Process Costing: Mcgraw-Hill/Irwin

Chapter
18
PROCESS COSTING
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Learning
Learning Objective
Objective
To distinguish production
procedures that match
with process costing from
those that correspond
with job order costing.
LO1
Production
Production of
of Goods
Goods and
and Services
Services
and
and Costing
Costing Systems
Systems
Job Order Costing Process Costing
 Custom orders  Repetitive operations
 Unique products
 Identical products
 Low production volume
 High production volume
 High product flexibility
 Low product flexibility
 Low to medium
standardization of labor  High standardization of
and material labor and material

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.
Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill
Learning
Learning Objective
Objective
To account for the physical

flows and related cost
flows when using
process costing.
LO2
Tracking
Tracking the
the Physical
Physical Flow
Flow and
and
Related
Related Production
Production Costs
Costs
The Work in Process
Direct account consists of
Materials individual jobs in
job costing.
Direct Finished
Jobs
Labor Goods
Factory Cost per

Overhead unit for
each job
Tracking
Tracking the
the Physical
Physical Flow
Flow and
and
Related
Related Production
Production Costs
Costs
The Work in Process
Direct account consists of
Materials specific processes in
process costing.
Finished
Processes
Goods
Direct Labor
and Factory Cost per
Overhead unit
(Conversion) processed
Tracking
Tracking the
the Physical
Physical Flow
Flow and
and
Related
Related Production
Production Costs
Costs
Same objective: to determine

the cost of products
Same inventory accounts: raw materials,

work in process, and finished goods
Same overhead assignment method:

predetermined rate times actual activity

Understanding
Understanding Cost
Cost Flows
Flows
Direct
Materials
Work in
Indirect Process
Assembly
Work in
Finished
Process
Goods
Packaging
Conversion
Costs
Delivered
to
Labor Factory Customers
McGraw-Hill/Irwin
Overhead © The McGraw-Hill Companies, Inc., 2008
Understanding
Understanding Cost
Cost Flows
Flows
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.

Understanding
Understanding Cost
Cost Flows
Flows
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.
Learning
Learning Objective
Objective
To demonstrate how to
calculate equivalent units.
LO3
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.
Two one-half full pitchers are

equivalent to one full pitcher.
+ = 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 ofof
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
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 ofof
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
Learning
Learning Objective
Objective
To use the costs of resources

consumed to calculate the
cost per equivalent unit
of production.
LO4
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. WhatWhat 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. WhatWhat 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
Equivalentunits
unitsmay
maybe be
different
different for
formaterial
materialand
and
Stage 1
conversion
conversion at atdifferent
different stages
stages
of
ofaaprocess.
process.
25% of
Conversion
At
Atcompletion
completionof of Stage
Stage 11of
of the
theprocess,
process,
material
materialis
is40%
40%complete,
complete,but
butconversion
conversion
is
isonly
only25%
25% complete.
complete.
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
Conversion + Conversion = 50%

Process
Process Costing
Costing and
and
Equivalent
Equivalent Units
Units
40% of 60% of
Material Material
Stage 1 Stage 2 Stage 3
25% of 25% of 50% of

Conversion Conversion Conversion
The
Theprocess
processis
isnow
nowcomplete.
complete.

Process
Process Costing
Costing
Owl Inc. uses

FIFO process
costing in its
Fabrication
Department where
a product called
Strata is made.

Process
Process Costing
Costing
Owl Inc Fabrication Department Data For April

Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Ending Inventory:

Process
Process Costing
Costing
Owl Inc Fabrication Department Data For April

Beginning Inventory:
Units started in April 90,000
Material
Units transferred fromisfabrication
added attothe
mixing 100,000
Endingbeginning
Inventory: of the process so
it isofalways
Units product 100% complete. 20,000

Physical
Physical Flow
Flow of
of Units
Units
April Fabrication Department Physical Flow
Units to account for:

Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000
Units accounted for as:

Units transferred from Fabrication to Mixing 100,000
Ending inventory 20,000
Total number of units 120,000

Computing
Computing Equivalent
Equivalent
Units
Units of
of Production
Production
Fabrication Department
Direct Material Equivalent Units of Production - April
Units of Percent Added Equivalent

Product This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000

Computing
Equivalent
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 inventory.

Beginning goods in process 30,000 0% 0
Total units 120,000 90,000

Computing
Equivalent
Units
Units of
of Production
Production
100,000 units completed
and transferred.

Beginning goods in process
Goods started and completed
30,000
70,000 } 100,000
0%
100% 70,000
0

Total units 120,000 90,000

Computing
Equivalent
Units
Units of
of Production
Production
Conversion Equivalent Units of Production - April

Beginning goods in process 30,000 60% 18,000
Total units 120,000 93,000

Computing
Equivalent
Units
Units of
of Production
Production
Since conversion is 40 percent
complete in the beginning inventory,
60 percent of the work must be
completed
Fabrication Departmentin April.

Beginning goods in process 30,000 60% 18,000
Total units 120,000 93,000

Computing
Equivalent
Units
Units of
of Production
Production

100,000
Beginning goods in process
Goods started and completed
30,000
70,000 } 60%
Transferred
100%
18,000
70,000
Total units 120,000 93,000

Computing
Equivalent
Units
Units of
of Production
Production
Summary of Fabrication Department
Equivalent Units of Production - April
Direct
Activities during April Material Conversion
Units from beginning inventory
processed in current period 0 18,000
Units started and completed
in current period 70,000 70,000
Units in ending inventory at
end of current period 20,000 5,000
Equivalent units of production

for period 90,000 93,000

Process
Process Costing
Costing and
and
Equivalent
Equivalent Units
Units
April Work in Process Costs
Beginning work in process $ 22,380
Costs added in April:
Direct material 45,000
Conversion 55,800
Total costs to account for $ 123,180

Cost
Cost per
per Equivalent
Equivalent Unit
Unit
Cost Per Equivalent Unit - April
Direct
Materials Conversion
Total cost of resource for
April $ 45,000 $ 55,800
Equivalent units of production

in April ÷ 90,000 ÷ 93,000
Cost per equivalent unit for

April = $ 0.50 = $ 0.60

Learning
Learning Objective
Objective
To use the cost per

equivalent unit to
assign costs to the
work completed
during the period.
LO5
Cost
Cost of
of Completed
Completed Units
Units
Fabrication Department Work in Process

Cost Summary for April
Cost of completed units
From beginning work in process
April 1 balance $ 22,380
Costs to complete April 1 inventory
Direct material
Conversion
Started and completed
Total completed and transferred

Cost
Cost of
of Completed
Completed Units
Units

Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Started and completed
Total completed and transferred

Cost
Cost of
of Completed
Completed Units
Units

Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Started and completed (70,000 × $1.10) 77,000
Total completed and transferred (100,000 units) $ 110,180
$0.50 + $0.60 = $1.10

Learning
Learning Objective
Objective
To create a process costing

production report and
use the report for
decision making.
LO6
Tracking
Tracking Costs
Costs Using
Using aa Process
Process
Costing
Costing Production
Production Report
Report
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.

Tracking
Tracking Costs
Costs Using
Using aa Process
Process
Costing
Costing Production
Production Report
Report
Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Cost of ending work in process
Direct material (20,000 × $0.50) $ 10,000
Conversion
Total cost accounted for
Tracking
Tracking Costs
Costs Using
Using aa Process
Process
Costing
Costing Production
Production Report
Report
Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Cost of ending work in process
Direct material (20,000 × $0.50) $ 10,000
Conversion (5,000 × $0.60) 3,000 13,000
Total cost accounted for $ 123,180
Tracking
Tracking Costs
Costs Using
Using aa Process
Process
Costing
Costing Production
Production Report
Report
Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Cost of ending work in process All costs accounted for
Direct material (20,000 × $0.50) $ 10,000
Conversion (5,000 × $0.60) 3,000 13,000
Total cost accounted for $ 123,180
Ethics,
Ethics, Fraud,
Fraud, and
and
Corporate
Corporate Governance
Governance
Overstating equivalent units of

resources in ending inventory will
understate cost of goods sold, and
thereby overstate income.
Equivalent units of production can be

overstated by inflating the application
of direct labor and overhead
(conversion costs) to work in process.

End
End of
of Chapter
Chapter 18
18

Process Costing: Mcgraw-Hill/Irwin

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Chapter

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Typical process cost applications:

To account for the physical

Factory Cost per

Same objective: to determine

Same inventory accounts: raw materials,

Same overhead assignment method:

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Two one-half full pitchers are

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

To use the costs of resources

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Stage 1 Stage 2 Stage 3

25% of 25% of 50% of

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Owl Inc. uses

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Owl Inc Fabrication Department Data For April

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Owl Inc Fabrication Department Data For April

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

April Fabrication Department Physical Flow

Units to account for:

Units accounted for as:

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Units of Percent Added Equivalent

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Units of Percent Added Equivalent

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Units of Percent Added Equivalent

Ending work in process 20,000 100% 20,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Units of Percent Added Equivalent

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Units of Percent Added Equivalent

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Units of Percent Added Equivalent

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Equivalent units of production

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Equivalent units of production

Cost per equivalent unit for

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

To use the cost per

Fabrication Department Work in Process

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Fabrication Department Work in Process

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Fabrication Department Work in Process

$0.50 + $0.60 = $1.10

To create a process costing

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Overstating equivalent units of

Equivalent units of production can be

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008