CH17

PROCESS COSTING

Part 1
Made by:
Mahmoud Alqasem
ILLUSTRATING PROCESS COSTING:

 Process costing system: a costing system in which the cost

object is masses of identical or similar units of a product or
service.
ILLUSTRATING PROCESS COSTING:

Job Costing Process Costing

 Distinct, identifiable  Masses of similar and
units. identical units.
 Each job uses different  Each unit uses the same
quantities of production quantities of production
resources. resources.
 Cost pre unit is the  Cost per unit is the
average cost for job units average costs for all units
produced. (Job costs / produced. (production
Job units produced). costs /units produced).
ILLUSTRATING PROCESS COSTING:

 Process costing systems separate costs into cost categories

according to when costs are:
“introduced into the process”
 Most companies classify these categories in two:

Direct Material Cost Conversion Cost

Costs types - Direct material - Direct labor
- Manufacturing overhead
Introduced - Added at beginning - Added through process
Timing - Added through process (mostly)
- Added at ending
ILLUSTRATING PROCESS COSTING:

 The following graphic represents how process costing goes:

 Illustrated example:

DL MOH DL MOH
DM
Used
1000 Completed Completed
units 920 units 870units
Raw Stage Stage Finished
material
warehouse A B Goods

Units
Incomplete Incomplete sold
80 units 50 units
(End W.I.P) (End W.I.P)
Cost of
Goods
Sold
ILLUSTRATING PROCESS COSTING:

 As you noticed before about Stage A and Stage B:

Completed Completed
920 units 870units
Stage Stage
A B

Incomplete Incomplete
80 units 50 units
(End W.I.P) (End W.I.P)
 Process outputs in each stage are classified into:
a) Completed units and transferred out. (completed 100%).
b) Ending Work In Process (still not completed, even form DM
or Conversion costs or both).
 Your main objective of “Process Costing” is to compute the
cost of these outputs.
ILLUSTRATING PROCESS COSTING:

 We are going to illustrate process costing in three cases,

starting with the simplest case and introducing additional
complexities in subsequent cases :

1. Case 1—Process costing with zero beginning and zero ending

work-in-process inventory.

2. Case 2—Process costing with zero beginning work -in-process

inventory and some ending work-in-process inventory.

3. Case 3—Process costing with both some beginning and some

ending work-in-process inventory.
CH17
PROCESS COSTING

Part 2
Made by:
Mahmoud Alqasem
ILLUSTRATING PROCESS COSTING:

 We are going to illustrate process costing in three cases,

starting with the simplest case and introducing additional
complexities in subsequent cases :

1. Case 1—Process costing with zero beginning and zero ending

work-in-process inventory.

2. Case 2—Process costing with zero beginning work -in-process

inventory and some ending work-in-process inventory.

3. Case 3—Process costing with both some beginning and some

ending work-in-process inventory.
 Process costing with zero beginning and zero
ending work-in-process inventory.

CASE 1
Conversion
DM costs
Used illustrated
1000
units
Completed
1000 units
paragraph

Raw material Stage Stage

warehouse A B
 Example 1: ABC Manufacturing Inc. the
following are data for the assembly department
(Stage A) for January 2018:

Physical Direct Conversion Total

CASE 1
units materials costs costs
Beg. WIP (January 1) 0
illustrated
*Degree of completion Beg. WIP
Example
Started during January 400
Completed and transferred out 400
Ending WIP (January 31) 0
*Degree of completion End WIP

Total costs added during January $32,000 $24,000 $56,000

 Required: Compute the cost of output units.

 Example Solution:

 The production outputs here were just

completed and transferred units. CASE 1

illustrated
• Total costs of completed and transferred: Example
= DM + C.C
= 32000 + 24000
= $56,000

• Cost per unit:

= DM per unit + C.C per unit
= (32000/400) + (24000/400)
= $80 + $60
= $140 / unit
 Process costing with zero beginning and some
ending work-in-process inventory.

CASE 2
Conversion
DM costs
Used illustrated
1000 Completed paragraph
units 920 units

Raw material Stage Stage

warehouse A B

Incomplete
80 units
(End W.I.P)
 Example 2: ABC Manufacturing Inc. the
following are data for the assembly department
(Stage A) for February 2018: (assume that ABC
added DM at beginning of the process, and C.C CASE 2
added through process)
Physical Direct Conversion Total
units materials costs costs illustrated
Beg. WIP (February 1) 0 Example
*Degree of completion Beg. WIP

Started during February 400

Completed and transferred out 175
Ending WIP (February 28) 225
*Degree of completion End WIP 100% 60%
Total costs added during February $32,000 $18,600 $50,600

 Required: Compute the cost of output units.

 Example Solution:

 The production outputs here were two:

a) Completed and transferred out. CASE 2
b) Ending Work-in-Process.
illustrated
Example

Before we continue to solve this example,

we must take in consideration the
following:
First: We have no problem to compute the cost of
completed and transferred units (such as
Example 1). CASE 2
Second: We cannot compute the cost of Ending
work in process directly. Units here are not
illustrated
completed. because each unit of this category is Example
still not incurred with all costs that make it
completed.

Third: To compute Ending work in process, we

must treat these units (ending WIP) as if it be
completed. These units called (Equivalent Units).
Example: (computing equivalent units)
ABC has the following information:

Ending WIP are 100 units CASE 2

Total costs of these units are $420.
Completion percentage for these units is 70% illustrated
Example
So, Equivalent units:
= 100 * 0.70
= 70 Equivalent units.
So, Cost per Equivalent units is:
= $420/ 70
= $6 per Equivalent units

Note: If we spend $420 on 70 units instead of

100 units, then these 70 units will be completed.
That is the idea of Equivalent units.
 (((Back to Example 2)))
 Example 2: ABC Manufacturing Inc. the
following are data for the assembly department
(Stage A) for February 2018: (assume that ABC
added DM at beginning of the process, and C.C CASE 2
added through process).
Physical Direct Conversion Total illustrated
units materials costs costs
Example
Beg. WIP (February 1) 0
*Degree of completion Beg. WIP

Started during February 400

Completed and transferred out 175
Ending WIP (February 28) 225
*Degree of completion End WIP 100% 60%
Total costs added during February $32,000 $18,600 $50,600

 Required: Compute the cost of output units.

 Example Solution:

The production outputs here were two:

a) Completed and transferred out. CASE 2
b) Ending Work-in-Process.
illustrated
 Solution Steps: Example
Step 1: Compute Equivalent units:
For Direct material (DM):
* Completed and transferred:
= No. of Physical units * 100%
= 175 * 100% = 175 Eq. units
* Ending WIP:
= No. of Physical units * Completion percentage
= 225 * 100% = 225 Eq. units

* Total Eq. units for DM = 400 Eq. units

…. Continue

Step 1: Compute Equivalent units:

For Conversion Costs (C.C): CASE 2
* Completed and transferred:
= No. of Physical units * 100%
= 175 * 100% = 175 Eq. units illustrated
* Ending WIP: Example
= No. of Physical units * Completion percentage
= 225 * 60% = 135 Eq. units

* Total Eq. units for DM = 310 Eq. units

…. Continue

Step 2: Compute Cost per Equivalent unit:

For DM: CASE 2
= Total (DM) costs / DM Equivalent units
= $32,000 / 400
= $80 per Equivalent unit illustrated
Example

For C.C:
= Total (C.C) costs / C.C Equivalent units
= $18,600 / 310
= $60 per Equivalent unit
…. Continue

Step 3: Assign Costs to Outputs:

* Completed and transferred out costs: CASE 2
= (DM costs) + (C.C costs)
= (Eq. units DM * Cost per unit DM)
+ (Eq. units C.C * Cost per unit C.C) illustrated
= (175 * 80) + (175 * 60) Example
= 14,000 + 10,500
= $24,500

* Ending Work In Process costs :

= (DM costs) + (C.C costs)
= (Eq. units DM * Cost per unit DM)
+ (Eq. units C.C * Cost per unit C.C)
= (225* 80) + (135* 60)
= 1 8,000 + 8,100
= $26,100

= $50,600 TOTAL COSTS

CH17
PROCESS COSTING

Part 3
Made by:
Mahmoud Alqasem
ILLUSTRATING PROCESS COSTING:

 We are going to illustrate process costing in three cases,

starting with the simplest case and introducing additional
complexities in subsequent cases :

1. Case 1—Process costing with zero beginning and zero ending

work-in-process inventory.

2. Case 2—Process costing with zero beginning work -in-process

inventory and some ending work-in-process inventory.

3. Case 3—Process costing with both some beginning and some

ending work-in-process inventory.
 Process costing with both some beginning and
some ending work -in-process inventory.
Incomplete
100 units
(Beg. W.I.P)
CASE 3
came from Conversion
previous period costs
illustrated
Completed paragraph
950 units

Raw material Stage Stage

warehouse A B
DM
Used
1000
units
Incomplete
150 units
(End W.I.P)
 You must noticed the input and output units in
Stage A as the following:

CASE 3
Input units Output units

Beg. W.I.P Completed & transferred illustrated

out units. paragraph
100 units 950 units
Stage
A
1000 units 150 units

Started units Ending W.I.P

 Conclusion :
• Completed and transferred out:
= Beg. WIP + Started & Completed
CASE 3
So,
• Started & Completed units: illustrated
= Completed & transferred out – Beg. WIP Equation
= 950 units – 100 units
= 850 units.

Also,
• Started & Completed units:
= Started units – Ending WIP
= 1000 units – 150 units
= 850 units.
 Example 3: ABC Manufacturing Inc. the
following are data for the assembly department
(Stage A) for March 2018: (assume that ABC
added DM at beginning of the process, and C.C CASE 3
added through process)
Physical Direct Conversion Total
units materials costs costs illustrated
Beg. WIP (March 1) 225 $18,000 $8,100 $26,100 Example
*Degree of completion Beg. WIP 100% 60%
Started during March 275
Completed and transferred out 400
Ending WIP (March 31) 100
*Degree of completion End WIP 100% 50%
Total costs added during March $19,800 $16,380 $36,180

 Required: Compute the cost of output units.

 Only in this case, a company must follow
one of two methods to compute the
costs of the output units:
CASE 3
1. Weighted Average Method.
illustrated
2. First-IN-First-Out (FIFO) Method. Example
CH17
PROCESS COSTING

Part 4
Made by:
Mahmoud Alqasem
ILLUSTRATING PROCESS COSTING:

 We are going to illustrate process costing in three cases,

starting with the simplest case and introducing additional
complexities in subsequent cases :

1. Case 1—Process costing with zero beginning and zero ending

work-in-process inventory.

2. Case 2—Process costing with zero beginning work -in-process

inventory and some ending work-in-process inventory.

3. Case 3—Process costing with both some beginning and some

ending work-in-process inventory.
 Example 3: ABC Manufacturing Inc. the
following are data for the assembly department
(Stage A) for March 2018: (assume that ABC
added DM at beginning of the process, and C.C CASE 3
added through process)
Physical Direct Conversion Total
units materials costs costs illustrated
Beg. WIP (March 1) 225 $18,000 $8,100 $26,100 Example
*Degree of completion Beg. WIP 100% 60%
Started during March 275
Completed and transferred out 400
Ending WIP (March 31) 100
*Degree of completion End WIP 100% 50%
Total costs added during March $19,800 $16,380 $36,180

 Required: Compute the cost of output units.

 Only in this case, a company must follow
one of two methods to compute the
costs of the output units:
CASE 3
1. Weighted Average Method.
illustrated
2. First-IN-First-Out (FIFO) Method. Example
1. Weighted Average Method:
Solution:
Step1: Compute the “equivalent units” .
 For Direct Material: CASE 3
* Completed & transferred out:
= No. of Physical units * 100%
= 400 * 100% = 400 Equivalent units
illustrated
* Ending WIP:
Example
= No. of Physical units * Completion percentage
= 100 * 100% = 100 Equivalent units
W.A
Total Eq. units for DM = 500 units. Method
1. Weighted Average Method:
Solution:
Step1: Compute the “equivalent units” .
 For Conversion Costs: CASE 3
* Completed & transferred out:
= No. of Physical units * 100%
= 400 * 100% = 400 Equivalent units
illustrated
* Ending WIP:
Example
= No. of Physical units * Completion percentage
= 100 * 50% = 50 Equivalent units
W.A
Total Eq. units for C.C = 450 Equivalent units. Method
1. Weighted Average Method:
Solution:
Step 2: Compute the “Cost per equivalent unit”.
 For Direct Materials: CASE 3
= Total (DM) costs / DM Equivalent units
= ((Beg WIP Costs DM + Total costs added DM))
illustrated
/ DM Equivalent units.
Example
= ($18,000 + $19,800) / 500
= $75.60 per Equivalent unit

W.A
 For Conversion Costs:
Method
= Total (C.C) costs / C.C Equivalent units
= ((Beg WIP Costs C.C + Total costs added C.C))
/ C.C Equivalent units.
= ($8,100 + $16,380) / 450
= $54.40 per Equivalent unit
1. Weighted Average Method:
Solution:
Step 3: Assign Costs to Outputs.
* Completed & transferred out units costs: CASE 3
= (DM) costs + (C.C) costs
= (Eq. units DM * Cost per Eq. unit DM)
illustrated
+ (Eq. units C.C * Cost per Eq. units C.C)
Example
= (400 * $75.60) + (400 * $54.40)
= $30,240 + $21 ,760 = $52,000.

W.A
* Ending WIP units costs:
Method
= (DM) costs + (C.C) costs
= (Eq. units DM * Cost per Eq. unit DM)
+ (Eq. units C.C * Cost per Eq. units C.C)
= (100 * $75.60) + (500 * $54.40)
= $7,560 + $2,720 = $10,280.

* TOTAL COSTS = $62,280

1. Weighted Average Method:
Solution:
Step 3: Assign Costs to Outputs.
* TOTAL COSTS = $62,280 CASE 3
Physical Direct Conversion Total
units materials costs costs
Beg. WIP (March 1) 225 $18,000 $8,100 $26,100 illustrated
*Degree of completion Beg. WIP 100% 60%
Example
Started during March 275
Completed and transferred out 400
W.A
Ending WIP (March 31) 100 Method
*Degree of completion End WIP 100% 50%
Total costs added during March $19,800 $16,380 $36,180

$62,280
Example 17-19 (Text book)
Physical
units
Direct
materials
Conversion
costs
CASE 3
Beg. WIP (May 1) 80 $493,360 $91,040
*Degree of completion Beg. WIP 90% 40% illustrated
Started during May 500 Example
Completed and transferred out 460
Ending WIP (May 31) 120
*Degree of completion End WIP 60% 30%
W.A
Total costs added during May
Method
$3,220,000 $1,392,000

Required:
• Compute the costs of outputs using the
weighted average method.
CH17
PROCESS COSTING

Part 5
Made by:
Mahmoud Alqasem
ILLUSTRATING PROCESS COSTING:

 We are going to illustrate process costing in three cases,

starting with the simplest case and introducing additional
complexities in subsequent cases :

1. Case 1—Process costing with zero beginning and zero ending

work-in-process inventory.

2. Case 2—Process costing with zero beginning work -in-process

inventory and some ending work-in-process inventory.

3. Case 3—Process costing with both some beginning and some

ending work-in-process inventory.
 Example 3: ABC Manufacturing Inc. the
following are data for the assembly department
(Stage A) for March 2018: (assume that ABC
added DM at beginning of the process, and C.C CASE 3
added through process)
Physical Direct Conversion Total
units materials costs costs illustrated
Beg. WIP (March 1) 225 $18,000 $8,100 $26,100 Example
*Degree of completion Beg. WIP 100% 60%
Started during March 275
Completed and transferred out 400
Ending WIP (March 31) 100
*Degree of completion End WIP 100% 50%
Total costs added during March $19,800 $16,380 $36,180

 Required: Compute the cost of output units.

2. FIFO Method:
Solution:
Step1: Compute the “equivalent units” .
 For Direct Material: CASE 3
* Completed & transferred out:
▪ Beg. WIP:
illustrated
= physical units * (1 – completion percentage)
Example
= 225 * (1 - 100%) = Zero Eq. units
▪ Star ted & completed: (400 – 225 = 175)
= physical units * 100%
FIFO
= 175 * 100% = 175 Eq. units
Method
* Ending WIP:
= No. of Physical units * Completion percentage
= 100 * 100% = 100 Eq. units

Total Eq. units for DM = 275 Eq. units.

2. FIFO Method:
Solution:
Step1: Compute the “equivalent units” .
 For Conversion Costs: CASE 3
* Completed & transferred out:
▪ Beg. WIP:
illustrated
= physical units * (1 – completion percentage)
Example
= 225 * (1 - 60%) = 90 Eq. units
▪ Star ted & completed: (400 – 225 = 175)
= physical units * 100%
FIFO
= 175 * 100% = 175 Eq. units
Method
* Ending WIP:
= No. of Physical units * Completion percentage
= 100 * 50% = 50 Eq. units

Total Eq. units for DM = 315 Eq. units.

2. FIFO Method:
Solution:
Step 2: Compute the “Cost per equivalent unit”.
 For Direct Materials: CASE 3
= Total costs added DM / DM Equivalent units.
= $19,800 / 275
illustrated
= $72 per Equivalent unit
Example
 For Conversion Costs:
= Total costs added C.C / C.C Equivalent units.
FIFO
= $16,380 / 315
Method
= $52 per Equivalent unit
2. FIFO Method:
Solution:
Step 3: Assign Costs to Outputs.
* Completed & transferred out units costs: CASE 3
▪ Beg. WIP costs:
= (DM) costs + (C.C) costs + Beg WIP (March1)
illustrated
= (Zero * $72) + (90 * $52) + $26,100
Example
= Zero + $4,680 + $26,100 = $30,780
▪ Star ted & completed units costs :
= (DM) costs + (C.C) costs
FIFO
= (175 * $72) + (175 * $52)
Method
= $12,600 + $9,100 = $27,700
= $58,480
* Ending WIP units costs:
= (DM) costs + (C.C) costs
= (100 * $72) + (50 * $52)
= $7,200 + $2,600 = $9,800
* TOTAL COSTS = $62,280
 W.A Vs. FIFO
CASE 3
W.A FIFO Differences
illustrated
Completed & transferred out costs
52,000 $52,480 + 480 Example

Ending WIP costs

10,280 9,800 – 480

$62,280 $62,280 Zero

Total Costs
Example 17-19 (Text book)
Physical
units
Direct
materials
Conversion
costs
CASE 3
Beg. WIP (May 1) 80 $493,360 $91,040
*Degree of completion Beg. WIP 90% 40% illustrated
Started during May 500 Example
Completed and transferred out 460
Ending WIP (May 31) 120
*Degree of completion End WIP 60% 30%
FIFO
Total costs added during May
Method
$3,220,000 $1,392,000

Required:
• Compute the costs of outputs using the FIFO
method.
 PROCESS COSTING JOURNAL ENTRIES:

The journal entries for Process Costing are almost the same journal
entries for Job Costing except:

Job Costing: Process Costing:

• When units in work in process • When units in work in process
become completed. (become become completed and
finished goods) transferred to the next stage.

The Entry: The Entry:

Finished Goods XX WIP – Stage B XX

WIP XX WIP – Stage A XX
The end of this
Chapter

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Made by:
Mahmoud Alqasem