4-1

Process Costing
Chapter 4
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright © 2016 by McGraw-Hill Education. All rights reserved.

 4-2

Similarities Between Job-Order and Process

Costing
• Both systems assign material, labor, and
overhead costs to products and they provide a
mechanism for computing unit product costs.
• Both systems use the same manufacturing
accounts, including Manufacturing Overhead,
Raw Materials, Work in Process, and Finished
Goods.
• The flow of costs through the manufacturing
accounts is basically the same in both systems.
 4-3

Differences Between Job-Order and Process

Costing
Process costing:
1. Is used when a single product is produced on a
continuing basis or for a long period of time. Job-order
costing is used when many different jobs having
different production requirements are worked on each
period.
2. Systems accumulate costs by department. Job-order
costing systems accumulated costs by individual jobs.
3. Systems compute unit costs by department. Job-order
costing systems compute unit costs by job on the job
cost sheet.
 4-4

Quick Check 
Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
 4-5

Quick Check 
Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
 4-6

Processing Departments
Any unit in an organization where materials, labor,
or overhead are added to the product.

The activities performed in a processing department

are performed uniformly on all units of production.

Furthermore, the output of a processing department

must be homogeneous.

Products in a process costing environment typically

flow in a sequence from one department to another.
 4-7

Learning Objective 4-1

Record the flow of

materials, labor, and
overhead through a process
costing system.
 4-8

The Flow of Materials, Labor, and Overhead

Costs

Direct
Materials

Direct Labor Work in Finished

Process Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-9

The Flow of Costs in a Job-Order Costing

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

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-10

The Flow of Costs in a Processing Costing

System
Costs are traced and
applied to departments
Direct in a process cost
Materials system.

Direct Labor
Processing Finished
Department Goods

Manufacturing Cost of
Overhead Goods
Sold
 4-11

T-Account and Journal Entry Views of

Process Cost Flows

For purposes of this example, assume there

are two processing departments –
Departments A and B.
We will use T-accounts and journal entries.
 4-12

Process Cost Flows: The Flow of Raw

Materials (in T-account form)
Work in Process
Raw Materials Department A
• Direct • Direct
Material
s Material
s

Work in Process
Department B
• Direct

Material
s
 4-13

Process Cost Flows: The Flow of Raw

Materials (in journal entry form)

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Raw Materials XXXXX
 4-14

Process Cost Flows: The Flow of Labor

Costs (in T-account form)
Salaries and Work in Process
Wages Payable Department A
• Direct
• Direct
Labor • Material
Direct
s
Labor

Work in Process
Department B
• Direct

•Material
Direct
s
Labor
 4-15

Process Costing: The Flow of Labor Costs

(in journal entry form)

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
 4-16

Process Cost Flows: The Flow of Manufacturing

Overhead Costs (in T-account form)

Work in Process
Department A
Manufacturing • Direct
Overhead • Material
Direct
• Actual • Overhead s
Labor
Overhe Applied to • Applied
ad Work in Overhea
Process d
Work in Process
Department B
• Direct

•Material
Direct
s
Labor
• Applied
Overhea
 4-17

Process Cost Flows: The Flow of Manufacturing

Overhead Costs (in journal entry form)

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
 4-18

Process Cost Flows: Transfers from WIP-Dept.

A to WIP-Dept. B (in T-account form)

Work in Process Work in Process

Department A Department B
• Direct Transferred • Direct
Materials to Dept. B Materials
• Direct • Direct
Labor Labor
• Applied • Applied
Overhea Overhea
d • Transferred
d
from Dept.
A

Department
Department Department
Department
A
A B
B
 4-19

Process Cost Flows: Transfers from WIP-Dept. A to

WIP-Dept. B (in journal entry form)

Work in Process - Department B XXXXX

Work in Process - Department A XXXXX
 4-20

Process Cost Flows: Transfers from WIP-Dept. B

to Finished Goods (in T-account form)

Work in Process
Department B Finished Goods
• Direct • Cost of • Cost of
Materials Goods Goods
• Direct Manufactur Manufacture
Labor ed d
• Applied
Overhea
• Transferred
d
from Dept.
A
 4-21

Process Cost Flows: Transfers from WIP-Dept. B to

Finished Goods (in journal entry form)

Finished Goods XXXXX

Work in Process - Department B XXXXX
 4-22

Process Cost Flows: Transfers from Finished

Goods to COGS (in T-account form)
Work in Process
Department B Finished Goods
• Direct • Cost of • Cost of • Cost of
Materials Goods Goods Goods
• Direct Manufactur Manufacture Sold
Labor ed d
• Applied
Overhea
• Transferred
d
from Dept. Cost of Goods Sold
A
• Cost of
Goods
Sold
 4-23

Process Cost Flows: Transfers from Finished

Goods to COGS (in journal entry form)

Cost of Goods Sold XXXXX

Finished Goods XXXXX
 4-24

Equivalent Units of Production

Equivalent units are the
product of the number
of partially completed
units and the
percentage completion
of those units.

These partially completed units complicate the

determination of a department’s output for a given
period and the unit cost that should be assigned to
that output.
 4-25

Equivalent Units – The Basic Idea

Two half completed products are
equivalent to one complete product.

+ = 1

So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
 4-26

Quick Check 
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
b. 11,500
c. 13,500
d. 15,000
 4-27

Quick Check 
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 × 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
 4-28

Calculating Equivalent Units

Equivalent units can be calculated
two ways:
The First-In, First-Out Method – FIFO is
covered in the appendix to this chapter.

The Weighted-Average Method – This method

will be covered in the main portion of the chapter.
 4-29

Learning Objective 4-2

Compute the equivalent

units of production using
the weighted-average
method.
 4-30

Equivalent Units of Production

Weighted-Average Method

The weighted-average method . . .

1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.
 4-31

Treatment of Direct Labor

Direct
Materials Direct labor costs
may be small
Manufacturing in comparison to
Dollar Amount

Overhead
other product
costs in process
Direct
Labor
cost systems.

Type of Product Cost

 4-32

Treatment of Direct Labor

Direct
Materials
Direct labor and
Conversion
manufacturing
Dollar Amount

Direct
Labor
overhead may be
combined into
Direct Manufacturing one classification
Labor Overhead of product
cost called
conversion costs.
Type of Product Cost
 4-33

Weighted-Average – An Example
Smith Company reported the following activity in
the Assembly Department 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%

 4-34

Weighted-Average – An Example
The first step in calculating the equivalent units is to identify
the units completed and transferred out of Assembly
Department in June (5,400 units)

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
 4-35

Weighted-Average – An Example
The second step is to identify the equivalent units of production
in ending work in process with respect to materials for the
month (540 units) and adding this to the 5,400 units from
step one.
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540

Equivalent units of Production in

the Department during June 5,940
 4-36

Weighted-Average – An Example
The third step is to identify the equivalent units of production in
ending work in process with respect to conversion for the month
(270 units) and adding this to the 5,400 units from step one.

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
 4-37

Weighted-Average – An Example
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
 4-38

Weighted-Average – An Example
6,000 Units Started
Materials

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
 4-39

Weighted-Average – An Example
6,000 Units Started
Conversion

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

900 × 30%
270 Equivalent Units
5,670 Equivalent units
of production
 4-40

Learning Objective 4-3

Compute the cost per

equivalent unit using the
weighted-average method.
 4-41

Compute and Apply Costs

Beginning Work in Process Inventory: 300 units
Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units

Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130

Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete
 4-42

Compute and Apply Costs

The formula for computing the cost per equivalent
unit is:

Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit Equivalent units of production
 4-43

Compute and Apply Costs

Here is a schedule with the cost and equivalent
unit information.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

 4-44

Compute and Apply Costs

Here is a schedule with the cost and equivalent
unit information.
$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

Cost per equivalent unit $ 21.00 $ 15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00

 4-45

Learning Objective 4-4

Assign costs to units using

the weighted-average
method.
 4-46

Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
 4-47

Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
 4-48

Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
 4-49

Computing the Cost of Units Transferred Out

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400
 4-50

Computing the Cost of Units Transferred Out

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit $ 21.00 $ 15.00
 4-51

Computing the Cost of Units Transferred Out

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit $ 21.00 $ 15.00
Cost of units transferred out $ 113,400 $ 81,000 $ 194,400
 4-52

Learning Objective 4-5

Prepare a cost
reconciliation report.
 4-53

Reconciling Costs
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790
 4-54

Reconciling Costs
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 15,390
Cost of units transferred out 194,400
Total cost accounted for $ 209,790
 4-55

End of Chapter 4