CHAPTER 3

PROCESS
COSTING

Managerial Accounting, Fourth Edition

Chapter
3-1
 Nature of Process Cost Systems

• Use to apply costs to similar products that are

mass produced in a continuous fashion
Examples include the production of Ice Cream,
Cereal, Paint, and Soft Drinks
• Once started, production continues until product
is completed; processing is the same for the
entire run

Chapter
3-2
 Comparison of Products Produced
Under Process and Job Order Cost Systems

Chapter
3-3
 Job Order Cost and Process Cost Flow

Job Order Cost Systems Process Cost Systems

 Costs are assigned to each  Costs are tracked through a

job. series of connected
manufacturing processes or
departments.

 Products have unique  Products are uniform or

characteristics. relatively homogeneous and
produced in a large volume.

Chapter
3-4
 Job Order Cost vs Process Cost Flow

Chapter
3-5
 Similarities and Differences in Cost Systems

Similarities

• Both costing systems track the three manufacturing

cost elements: direct materials, direct labor, and
manufacturing overhead.

• The accumulation of costs is the same in both systems.

• Flow of costs are assigned to the same general ledger

accounts in both costing systems.

However, the methods of assigning the costs

differ significantly.

Chapter
3-6
 Major Differences Between Job Order and
Process Cost Systems

Chapter
3-7
 Let’s Review
Indicate which of the following statements is not correct:

a. Both a job order and a process cost system track the

same three manufacturing cost elements – direct
materials, direct labor, and manufacturing overhead.

b. A job order cost system uses only one work in process

account, whereas a process cost system uses multiple
work in process accounts.

c. Manufacturing costs are accumulated the same way in a

job order and in a process cost system.

d. Manufacturing costs are assigned the same way in a job

order and in a process cost system.
Chapter
3-8
 Process Cost Flows Illustrated

Example – Tyler Company

Maker of automatic can openers

Manufacturing consists of two processes:

Machining – raw materials are shaped, honed,
and drilled
Assembly – parts assembled and packaged

Materials, labor, and manufacturing overhead

added in both departments

Chapter
3-9
 Process Cost Flows Illustrated

Example – Tyler Company

Chapter
3-10
 Assignment of Manufacturing Costs

• Accumulation of materials, labor, and overhead

costs is the same as in job order costing

Debit Raw Materials Inventory for

purchases of raw materials
Debit Factory Labor for factory labor cost
as incurred
Debit Manufacturing Overhead for overhead
costs as incurred

• However, assignment of the three manufacturing

cost elements to Work in Process is different
Chapter
3-11
 Assignment of Manufacturing Costs

Materials
A process cost system requires fewer material
requisition slips than a job order cost system
Materials are used for processes and not specific jobs
Requisitions are for larger quantities of materials

 The journal entry to record materials used:

Chapter
3-12
 Assignment of Manufacturing Costs

Factory Labor Costs

Time tickets can be used in both systems
The labor cost chargeable to a process can also be obtained
from the payroll register or departmental payroll
summaries.
The journal entry to record factory labor costs:

Chapter
3-13
 Assignment of Manufacturing Costs

Manufacturing Overhead Costs

Objective of assigning overhead –

allocate overhead to departments on an
objective and equitable basis

Use the activity that “drives”

or causes the costs

Machine time used -

primary driver in continuous manufacturing
operations

Chapter
3-14
 Assignment of Manufacturing Costs

Manufacturing Overhead Costs

The entry to allocate overhead to the two

processes is:

Chapter
3-15
 Assignment of Manufacturing Costs

Entries to Transfer Costs Through System

Monthly Entry to transfer goods to next department:

Entry to transfer completed goods to Finished Goods:

Entry to record Cost of Goods sold at the time of sale:

Chapter
3-16
 Let’s Review

In making the journal entry to assign raw materials

costs, a company

a. Debits Finished Goods Inventory.

b. Often debits two or more work in process
accounts.
c. Generally credits two or more work in
process accounts.
d. Credits Finished Goods Inventory.

Chapter
3-17 LO 4: Make the journal entries to assign manufacturing costs
in a process cost system.
 Equivalent Units
Example – XYZ College
Compute the cost of instruction at XYZ College per
full-time equivalent student based on the following
information:
Total cost of instruction is $9,000,000.
There are 900 full-time students and 1,000 part-time
students.
Part-time students take 60% of the classes of a regular
student.

Chapter
3-18
 Equivalent Units Example - Continued

Cost of instruction
per full-time equivalent student

equals

Total cost of instruction

divided by
Number of full-time equivalent (FTE) students

$9,000,000 / 1,500 FTE students = $6,000

Chapter
3-19 LO 5: Compute equivalent units.
 Equivalent Units of Production

Measures the work

done during a period,
expressed in fully
completed units

Used to determine the

cost per unit of the
completed product

Chapter
3-20 LO 5: Compute equivalent units.
 Equivalent Units – Weighted Average Method

• Considers the degree of completion (weighting) of

units completed and transferred out and units in
ending work in process

• Most widely used method

• Beginning work in process not part of computation

of equivalent units

Chapter
3-21
 Equivalent Units – Refinements
Weighted Average Method

Example
The Kellogg Company uses 3 departments (Mixing,
Baking, and Freezing/Packaging) to produce waffles.
Information for the Mixing Department is:

Chapter
3-22
 Equivalent Units – Refinements
Weighted Average Method
Example - Continued
Mixing Department Raw Materials information:
All ingredients (materials) are added at the beginning of the
mixing process
All units, regardless of degree of completion, are 100%
complete as to materials

Mixing Department Conversion Cost information:

Conversion costs = labor costs + overhead costs.

The beginning work in process is 70% complete with respect

to conversion costs and those in ending work in
process are 60% complete.
Chapter
3-23
 Equivalent Units – Refinements
Weighted Average Method

Example - Continued

Computation of Mixing Department’s Equivalent Units

Chapter
3-24
 Equivalent Units

Refined Equivalent Units of Production Formula

Chapter
3-25
 Let’s Review

The Mixing Department’s output during the period

consists of 20,000 units completed and transferred
out, and 5,000 units in ending work in process 60%
complete as to materials and conversion costs.
Beginning inventory is 1,000 units, 40% complete as to
materials and conversion costs. The equivalent units of
production are:

a. 22,600 b. 23,000
c. 24,000 d. 25,000

Chapter
3-26
 Production Cost Report

Key document used to understand activities.

• Prepared for each department and shows:

Production quantity
Cost data

Four steps in preparation:

Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule

Chapter
3-27
 Flow of Costs in Making Waffles

Chapter
3-28
 Comprehensive Example of Process Costing
Basic Information

Chapter
3-29
 Comprehensive Example - Continued

Step 1: Compute Physical Unit Flow -continued

Chapter
3-30
 Comprehensive Example - Continued
Step 2: Compute Equivalent Units of Production
Measure of a department’s productivity
Two computations required:
one for materials and one for conversion costs
• Beginning work in process ignored

Chapter
3-31
 Comprehensive Example Continued

Step 3: Compute Unit Production Costs

• Costs expressed in terms of equivalent units of production
• When equivalent units of production are different for materials
and for conversion costs, three unit costs are computed:

Materials

Conversion

Total Manufacturing

Chapter
3-32
 Comprehensive Example - Continued
Step 3: Compute Unit Production Cost - continued
Total Materials Cost Computation:

• The Computation of Unit Materials Costs:

Chapter
3-33
 Comprehensive Example Continued
Step 3: Compute Unit Production Cost - continued
Conversion Cost Computation:

• The Computation of Unit Conversion Costs:

Chapter
3-34
 Comprehensive Example - Continued

Step 3: Compute Unit Production Cost – continued

Total Manufacturing Cost Per Unit

The computation of unit total manufacturing cost:

Chapter
3-35
 Comprehensive Example - Continued
Step 4: Prepare Cost Reconciliation Schedule
Costs Charged to Mixing Department:

Chapter
3-36
 Production Cost Report - Mixing Department

Chapter
3-37
 Let’s Review

Largo Company has unit costs of $10 for materials

and $30 for conversion costs. If there are 2,500
units in ending work in process, 40% complete as to
conversion costs and fully complete as to materials
cost, the total cost assignable to the ending work
in process inventory is:
a. $45,000.
b. $55,000.
c. $75,000.
d. $100,000.

Chapter
3-38
 Costing Systems – Final Comments

Companies often use a combination of a process cost and a job

order cost system

A job order system provides detailed information related to

the cost of the product - however, often an expensive system
due to the accounting costs involved

When deciding which system to use or whether to use a

combination of systems, a company must weigh
“the costs of implementing the system against the benefits
from the additional information provided”

Chapter
3-39
 Chapter Review - Brief Exercise 3-7
Production costs chargeable to the Finishing Department in June
in Castilla Company are materials $15,000, labor $29,500,
overhead $18,000. Equivalent units of production are materials
20,000 and conversion costs 19,000. Compute the unit costs
for materials and conversion costs.
Unit costs for Materials:
$15,000 ÷ 20,000 units = $.75 per unit

Unit costs for Conversion Costs:

Conversion Costs = $29,500 + 18,000 = $47,500
$47,500 ÷ 19,000 = $2.50 per unit

Total Manufacturing Costs per Unit:

$.75 + $2.50 = $3.25 per unit
Chapter
3-40
 Appendix – FIFO Method

Equivalent units are computed on a first-in, first-out basis

• FIFO usually corresponds to the actual physical flow of goods
• Assumes that the beginning work in process is completed before
new work is started
• Under FIFO, equivalent units are the sum of work performed to:
 Finish the units of beginning work in process inventory
 Complete the units started into production during the
period (referred to as units started and completed)
 Start, but only partially complete, the units in ending work
in process inventory

Chapter
3-41
 Appendix – Fifo Method Example

Chapter
3-42
 Appendix – FIFO vs. Weighted-Average
Major advantage of weighted average method:
Simple to understand and apply
• Where prices do not fluctuate significantly, weighted-average
method is very similar to FIFO method – especially if company
uses Just-in-Time procedures
• Conceptually, the FIFO method is superior because
FIFO measures current performance using only costs
incurred in the current period
Management not responsible for costs from prior period
over which they may not have had control
FIFO provides current cost information which can be used
to establish more accurate pricing strategies
Chapter
3-43
 Let’s Review

Hollins Company uses the FIFO method to compute

equivalent units. It has 2,000 units in beginning WIP,
20% complete as to conversion costs; 25,000 units
started and completed; and 3,000 units in ending WIP,
30% complete as to conversion costs. All units are
100% complete as to materials. Equivalent units for
materials and conversion costs are, respectively:
a. 28,000 and 26,000.
b. 28,000 and 27,500.
c. 27,000 and 26,200.
d. 27,000 and 29,600.

Chapter
3-44