MAC2023 - TOPIC 6: PROCESS COSTING

Cost Accounting
12th Edition, International Edition

PROCESS
COSTING
(PART 2)

TOPIC 6
(Chapter 4 – Hilton & Platt)
MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Explain Transferred-in costs in the
subsequent production
department
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MAC2023 - TOPIC 6: PROCESS COSTING

Transferred-In Costs

 Are costs incurred in previous departments that

are carried forward as the product’s cost when it
moves to a subsequent process in the
production cycle.
 Are also called previous department costs.
 Journal entries are made to mirror the progress
in production from department to department.
 Transferred-in costs are treated as if they are a
separate type of direct material added at the
beginning of the process.

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MAC2023 - TOPIC 6: PROCESS COSTING

Subsequent Production Department

 In manufacturing operations with sequential production

departments, the costs assigned to the units transferred out
of one department remain assigned to those units (partially
completed) as they enter the next department to undergo
further processing.
 In our illustration, the partially completed baseball gloves
transferred out of the Cutting Department go next to the
Stitching Department.
 There the cut-out pieces are stitched together.
 At the end of the process in the Stitching Department,
rawhide lacing is woven through the fingers and along some
edges of each baseball glove.
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MAC2023 - TOPIC 6: PROCESS COSTING

Work-in-Proc e s s Inve ntory: Cutting De partme nt

March 1 balance 57,200 Cost of goods completed 290,400
and transferred out of
Cutting dept.

March cost of direct material, 283,500

direct labor, and applied
MOH
March 31 balance 50,300

Work-in-Proc e s s Inve ntory: S titc hing De partme nt

March 1 balance 68,600
Transferred in cost 290,400 Cost of goods completed and
transferred out of Stitching dept. xxx
March cost of direct material, xxx
direct labor, and applied MOH
March 31 balance xxx

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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Use process costing in the second
production department
– Weighted Average Method
MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example (Weighted

Average)
 MVP Sports Equipment Company makes baseball gloves in
two departments, Cutting and Stitching.
 Assume MVP uses the weighted-average process costing
in both departments.
 The direct material (rawhide lacing) is not added until the
end of the process in Stitching dept.
 The predetermined overhead rate in the Stitching
Department is 100 percent of direct-labor cost. Note that
the predetermined overhead rates are different in the two
production departments.
 Using the following information for the month of March, let’s
prepare a production report for the Stitching Department.
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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example (Weighted

Average)
Work in process, March 1: 10,000 units Cost
Transferred-in: 100% complete $ 61,000*
Direct Material: none -0-
Conversion: 20% complete 7,600*

Units transferred in from Cutting Department during March:: 40,000 units

Units completed during March and transferred out to FG Inv.: 30,000 units
Work in process, March 31: 20,000 units
Transferred in: 100% complete
Materials: none
Conversion: 90% complete

Costs incurred during March

Transferred in from Cutting Dept (WA method)$ ?
Materials cost$ 7,500
Conversion costs:
Direct labor $ 115,000
Applied manufacturing overhead 115,000**
Total conversion costs $ 230,000

*These costs were incurred during the prior month, February

** POHR x Direct labor cost = 100% x $115,000 = $115,000
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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Units

Accounted For (Weighted Average)
① Analysis of Physical Flow of Units

Phys ic al
Units
Work in proc e s s , Marc h 1 10,000
Units s tarte d during Marc h 40,000
Total units to ac c ount for 50,000

Units c omple te d and trans fe rre d out during Marc h 30,000

Work in proc e s s , Marc h 31 20,000
Total units ac c ounte d for 50,000

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Equivalent

Units (Weighted Average)
② Calculation of Equivalent Units

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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Compute the cost per equivalent
unit under the weighted-average
method of process costing

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MAC2023 - TOPIC 6: PROCESS COSTING

Computation of Unit Costs (Weighted

Average)
Trans fe rre d Dire c t
-in Mate rial Conve rs ion Total

Work in Proc e s s , Marc h 1 $ 61,000 $ - $ 7,600 $ 68,600

Cos ts inc urre d during Marc h 290,400 7,500 230,000 527,900
Total c os ts to ac c ount for $ 351,400 $ 7,500 $ 237,600 $ 596,500

Equivale nt units 50,000 30,000 48,000

Cos t pe r e quivale nt unit $ 7.03 $ 0.25 $ 4.95 $ 12.23

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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Analyze the total production costs
for a department under the
weighted-average method of
process costing
MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Total Costs

Analysis of total costs

Cos t of goods c omple te d and trans fe rre d out of S titc hing De pt.
30,000 units × $12.23 pe r e quivale nt unit $ 366,900

Cos ts re maining in work-in-proc e s s on Marc h 31

Trans fe rre d-in:
20,000 e quivale nt units × $7.03 pe r e quivale nt unit $ 140,600
Dire c t Mate rial:
0 e quivale nt units × $0.25 pe r e quivale nt unit $ -
Conve rs ion:
18,000 e quivale nt units × $4.95 pe r e quivale nt unit 89,100

Total c os t of Marc h 31 work-in-proc e s s 229,700

Total c os ts ac c ounte d for $ 596,600

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MAC2023 - TOPIC 6: PROCESS COSTING

Journal entry and WIP account – Stitching

Department
Dr Finished Goods Inventory 366,900
Cr WIP – Stitching Dept 366,900

Work-in-Process Inventory: Stitching Department

March 1 balance 68,600 Cost of goods completed
and transferred out of
Stitching dept. 366,900

March cost of transferred-in, 527,900

direct material, direct
labor, and applied MOH
March 31 balance 229,600

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MAC2023 - TOPIC 6: PROCESS COSTING

Process costing and spoilage

 Spoilage cost: the cost of defective products and

wasted resources that cannot be recovered by rework
or recycling

 When spoilage occurs there are three forms of output

 Units completed and transferred out
 Spoiled units
 Unfinished units remaining in WIP

 Spoiled units are costed using cost per equivalent unit

along with the other two outputs

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MAC2023 - TOPIC 6: PROCESS COSTING

Process costing and spoilage

Step one: Analysis of physical units &
Step two: Calculation of equivalent units

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MAC2023 - TOPIC 6: PROCESS COSTING

Process costing and spoilage

Step three: calculate the unit costs

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MAC2023 - TOPIC 6: PROCESS COSTING

Process costing and spoilage

Step four: analyse the total costs

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MAC2023 - TOPIC 6: PROCESS COSTING

Process costing and spoilage

Journal entry – Normal spoilage

Dr WIP – Finishing Department 690,150

Cr WIP – Mixing Department 690,150

Journal entry – Abnormal spoilage

Dr WIP – Finishing Department 630,900

Loss on abnormal spoilage 59,250
Cr WIP – Mixing Department 690,150

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MAC2023 - TOPIC 6: PROCESS COSTING

Hybrid Costing Systems

 Product-costing systems do not always fall neatly

into either job-costing or process-costing
categories.
 A Hybrid-costing system blends characteristics
from both job-costing and process-costing
systems.
 Many actual production systems are in fact
hybrids.
 Examples include manufacturers of televisions,
dishwashers, and washing machines, and shoes
who tend to use hybrid-costing systems.
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MAC2023 - TOPIC 6: PROCESS COSTING

Hybrid-costing systems, concluded

 The hybrid-costing systems use process costing
to account for the conversion costs and job
costing for the material and customizable
components.
 One specific type of hybrid-costing system is
known as the Operation-Costing System

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MAC2023 - TOPIC 6: PROCESS COSTING

Operation-costing system

 An operation is a standardized method or technique that

is performed repetitively resulting in different finished
goods.
 An operation-costing system is a hybrid-costing system
applied to batches of similar, but not identical, products.
 Within each operation, all product units are treated
exactly alike, using identical amounts of the operation’s
resources.
 Managers find operation costing useful in cost
management because operation costing focuses on
control of physical processes or operations of a given
production system.
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MAC2023 - TOPIC 6: PROCESS COSTING

Hybrid costing systems

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