Systems Design:

Process Costing
 LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Prepare journal entries to record the flow of
materials, labour and overhead through a
process costing system.
2. Compute the equivalent units of production for
a period by the weighted-average method.
3. Prepare a quantity schedule for a period by the
weighted-average method.
4. Compute the costs per equivalent unit for a
period by the weighted-average method.
5. Prepare a cost reconciliation for a period by the
weighted-average method.
Types of Costing Systems Used to
Determine Product Costs

Process Job-order
Costing Costing

 Many
Manyunits
unitsof of aasingle,
single,homogeneous
homogeneousproduct
product
flow
flowevenly
evenlythrough
throughaacontinuous
continuousproduction
production
process.
process.
 One
One unit
unitof
ofproduct
productis is indistinguishable
indistinguishablefrom
fromany
any
other
other unit
unit of
of product.
product.
 Each
Eachunit
unit of
of product
product isisassigned
assigned the
thesame
same
average
averagecost.
cost.
Types of Costing Systems Used to
Determine Product Costs

Process
Process Job-order
Job-order
Costing
Costing Costing
Costing

Typical
Typical process
process cost
cost applications:
applications:
 Petrochemical
 Petrochemical refinery
refinery
 Paint
 Paint manufacturer
manufacturer
 Paper
 Paper mill
mill
Differences Between Job-Order and
Process Costing

Job
Job order
order costing
costing Process
Process costing
costing
 Many
Many jobs
jobs are
are worked
worked  A
A single
single product
product is
is
during
during the
the period.
period. produced
produced for for aa long
long
period
period ofof time.
time.
 Costs
Costs are
are accumulated
accumulated
by
by individual
individual jobs.
jobs.  Costs
Costs are
are accumulated
accumulated
by
by departments.
departments.
 Job
Job cost
cost sheet
sheet is
is the
the
key
key document.
document.  Department
Department production
production
report
report is
is key
key document.
document.
 Unit
Unit cost
cost computed
computed by by
job.
job.  Unit
Unit costs
costs are are computed
computed
by
by department.
department.
Process Costing
Direct Direct
Directlabour
labour costs
costs
Materials may
may bebe small
small
in
incomparison
comparisonto to
Dollar Amount

Manufacturing other
other product
product
Overhead costs
costsininprocess
process
cost
costsystems.
systems.
Direct
Labour

Type of Product Cost

Process Costing
Direct Direct
Directlabour
labour costs
costs
Materials may
may bebe small
small
Conversion in
incomparison
comparisonto to
Dollar Amount

other
other product
product
costs
costsininprocess
process
cost
costsystems.
systems.

Type of Product Cost

So,
So,direct
directlabour
labourand
andmanufacturing
manufacturingoverhead
overheadare
areoften
often
combined
combinedintointo one
oneproduct
product cost
costcalled
called conversion.
conversion.
Comparing Job-Order and Process
Costing

Direct
Direct
Materials
Materials

Direct Work in Finished

Finished
Direct Labour
Labour Goods
Process Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
Comparing Job-Order and Process
Costing

Costs
Costs are
are traced
traced and
and
applied
applied to
to individual
individual
Direct
Direct jobs
jobs in
in aa job-order
job-order
Materials
Materials cost
cost system.
system.

Direct Finished
Finished
Direct Labour
Labour Jobs
Jobs Goods
Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
Comparing Job-Order and Process
Costing

Costs
Costs areare traced
traced and
and
applied
applied toto departments
departments
Direct
Direct in
in aa process
process cost
cost
Materials
Materials system.
system.

Direct Processing
Processing Finished
Finished
Direct Labour
Labour Goods
Department
Department Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
Process Cost Flows

Let’s look at cost flows in a

process cost system with
Departments A and B. We
will use T-accounts and start
with materials.
Process Cost Flows
Work in Process
Department A
Raw Materials
•Purchases •Direct •Direct
Materials Materials
•Indirect
Materials

Manufacturing Work in Process

Overhead Department B
Actual Applied •Direct
•Other Materials
Overhead
•Indirect
Materials
Process Cost Flows
Work in Process
Wages Payable Department A
•Direct
•Direct Materials
Labour •Direct
•Indirect Labour
Labour

Manufacturing Work in Process

Overhead Department B
Actual Applied •Direct
•Other Materials
Overhead
•Direct
•Indirect
Labour
Materials
•Indirect
Labour
Process Cost Flows
Work in Process
Wages Payable Department A
•Direct
•Direct Materials
Labour •Direct
•Indirect Labour
Labour •Applied
Overhead
Manufacturing Work in Process
Overhead Department B
Actual Applied •Direct
•Other •Overhead Materials
Overhead Applied to
•Direct
•Indirect Work in
Labour
Materials Process
•Indirect •Applied
Labour Overhead
Process Cost Flows

Next, transfer work from

Department A to
Department B.
Process Cost Flows

Work in Process Work in Process

Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labour Labour
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A
Process Cost Flows

Now let’s complete the

goods in Department B and
sell them.
Process Cost Flows

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labour
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold
•Cost of
Goods
Sold
Equivalent Units of Production

Equivalent units are partially complete

and are part of work in process
inventory. Partially completed
products are expressed in terms of a
smaller number of fully completed
units.
Equivalent Units of Production

Two half completed products are

equivalent to one completed product.

+ =
So,
So, 10,000
10,000 units
units 70
70 percent
percent complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
Equivalent Units

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
Equivalent Units

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
Calculating and Using Equivalent Units
of Production

To calculate the cost per

equivalent unit for the period:

Cost per
Costs for the period
equivalent = Equivalent units of production
unit for the period
Equivalent Units
Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent
unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Equivalent Units
Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent
unit for the period?
a. $1.84
$27,600
$27,600 ÷÷ 11,500
11,500 equivalent
equivalent units
units
b. $2.40 == $2.40
$2.40 per
per equivalent
equivalent unit
unit
c. $2.76
d. $2.90
Equivalent Units of Production –
Weighted Average Method

The Weighted Average method . . .

– Makes no distinction between work done in prior
and current period.
– Blends together units and costs from prior
period and current period.

Let’s see how this works!

Weighted Average Example

Smith Company reported the following activity

in Department A for the month of June:

Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

Weighted Average Example

Equivalent units are calculated as follows:

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Weighted Average Example

Equivalent units are calculated as follows:

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540

Equivalent units of Production in

Department A during June 5,940
Weighted Average Example

Equivalent units are calculated as follows:

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
Weighted Average Example
Equivalent
Equivalent units
units of
of production
production always
always equals:
equals:
Units
Units completed
Equivalent units are
completed and transferred
calculated
and transferred as follows:
++ Equivalent
Equivalent units
units remaining
remaining inin work
work in
in process
process

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
Weighted Average Example

Materials
Materials 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

5,400 Units Completed

540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production
Weighted Average Example

Conversion
Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

5,400 Units Completed

270 Equivalent Units 900 × 30%
5,670 Equivalent units
of production
Production Report

Shows the flow Provides cost

of units and costs information for
through work in financial
process statements

Production
Report

Becomes the
job cost sheet Helps managers
in process control their
costing departments
Production Report

Production Report

AA quantity
quantity schedule
schedule
showing
showing the
the flow
flow of
of units
units
Section 1 and
and the
the computation
computation ofof
equivalent
equivalent units.
units.


AA computation
computation of
of
Section 2 cost
cost per
per equivalent
equivalent unit.
unit.

Section 3
Production Report

Production Report

 AA reconciliation
reconciliation of
of cost
cost
flows
flows for
for the
the period,
period,
Section 1 including:
including:
Total
Total cost
cost for
for units
units
completed
completed and and
Section 2 transferred
transferred from
from the
the
processing
processing department.
department.
Total
Total cost
cost for
for partially
partially
completed
completed units
units
Section 3 remaining
remaining in in work
work in
in
process.
process.
Production Report Example

• Double Diamond Skis uses process costing to

determine unit costs in its Shaping and Milling
Department.
• Double Diamond uses the Weighted Average
cost procedure.
• Using the following information for the month of
May, let’s prepare a production report for
Shaping and Milling.
Production Report Example

Work in process, May 1: 200 units Cost

Materials: 50% complete. $ 3,000
Conversion: 30% complete. 1,000

Units started into production in May: 5,000

Units completed and transferred out in May: 4,800

Costs added to production in May

Materials cost $ 74,000
Conversion cost 70,000

Work in process, May 31: 400 units

Materials 40% complete.
Conversion25% complete.
Production Report Example

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Production Report Example

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160

5,200 4,960
Production Report Example

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900
Production Report Example`

Section 2: Compute cost per equivalent unit

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 4,000 $ 3,000 $ 1,000
Costs added in the Shipping
and Milling Department 144,000 74,000 70,000
Total cost $148,000 $ 77,000 $ 71,000

Equivalent units 4,960 4,900

Production Report Example

Section 2: Compute cost per equivalent unit

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 4,000 $ 3,000 $ 1,000
Costs added in the Shipping
and Milling Department 144,000 74,000 70,000
Total cost $148,000 $ 77,000 $ 71,000

Equivalent units 4,960 4,900

Cost per equivalent unit $ 15.524

$77,000 ÷ 4,960 units = $15.524 (rounded)

Production Report Example

Section 2: Compute cost per equivalent unit

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 4,000 $ 3,000 $ 1,000
Costs added in the Shipping
and Milling Department 144,000 74,000 70,000
Total cost $148,000 $ 77,000 $ 71,000

Equivalent units 4,960 4,900

Cost per equivalent unit $ 15.524 $ 14.490
Total cost per equivalent unit = $15.524 + $14.490 = $30.014

$71,000 ÷ 4,900 units = $14.490 (rounded)

Production Report Example

Section 3: Cost Reconciliation

Total Equivalent Units

Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
Production Report Example

Section 3: Cost Reconciliation

Total Equivalent Units

4,800 units @ $30.014 Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May $144,067 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
Production Report Example

Section 3: Cost Reconciliation

Total Equivalent Units

160 units @ $15.524 Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May $ 144,067 4,800 4,800
Work in process, May 31:
Materials 2,484 160
Conversion 100
Total work in process, May 31
Total cost accounted for
Production Report Example

Section 3: Cost Reconciliation

Total Equivalent Units

100 units @ $14.490 Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May $ 144,067 4,800 4,800
Work in process, May 31:
Materials 2,484 160
Conversion 1,449 100
Total work in process, May 31 3,933
Total cost accounted for $ 148,000
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
MaterialCosts
CostsCharged
Charged Conversion
Conversioncosts
costs
to
tobatches
batchesas
asin
in assigned
assignedtotobatches
batches
job-order
job-ordercosting.
costing. as
asin
inprocess
processcosting.
costing.
Process Costing
Typical Accounting Entries

Let’s look at the accounting

journal entries for a process
cost system. We’ll omit the
numbers so that we can focus
on concepts.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX
To record cost of goods sold.
End of Presentation