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Chapter Four

Process Costing
and Hybrid Product-
Costing Systems

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Comparison of Job-Order Costing
and Process Costing
Process
Process Job-order
Costing
Costing Costing

 Used for production of small,

identical, low cost items.
 Mass produced in automated
continuous production process.
 Costs cannot be directly traced to
each unit of product.
McGraw-Hill/Irwin
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Comparison of Job-Order Costing
and Process Costing
Process
Process Job-order
Costing
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill

McGraw-Hill/Irwin

Comparison of Job-Order Costing
and Process Costing
Job-order costing
 Costs accumulated by
the job.
 Work in process has a
job-cost sheet for each
job.
 Many unique, high cost
jobs.
 Jobs built to customer
order.
McGraw-Hill/Irwin
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Process costing
 Costs accumulated by
department or process.
 Work in process has a
production report for
each batch of products.
 A few identical, low cost
products.
 Units continuously
produced for inventory
in automated process.
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Process Cost Flows

Let’s examine the cost flows

in a process cost system
with Departments A and B.
We will use T-accounts and
start with materials.

McGraw-Hill/Irwin
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Process Cost Flows

Work in Process
Raw Materials Department A
•Purchases •Direct •Direct
Material Material
•Indirect
Material

Factory Overhead
•Other
Overhead
•Indirect
Material

McGraw-Hill/Irwin
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Process Cost Flows

Next let’s add labor and

manufacturing overhead
to the process cost
flows. Are you with me?

McGraw-Hill/Irwin
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Process Cost Flows

Salaries and Work in Process
Department A
Wages Payable
•Direct
•Direct
Material
Labor
•Direct
•Indirect
Labor
Labor
•Overhead

Factory Overhead
•Other •Overhead
Overhead Applied to
•Indirect Work in
Material Process
•Indirect
Labor
McGraw-Hill/Irwin
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Process Cost Flows

Next let’s transfer work

from Department A to
Department B. Are you
ready?

McGraw-Hill/Irwin
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Process Cost Flows

Work in Process
Department A
•Direct •Transferred
Material to Dept. B
•Direct
Labor
•Overhead

Work in Process
Department B
•Transferred
from Dept. A

McGraw-Hill/Irwin
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Process Cost Flows

Next let’s add material, labor,

and manufacturing overhead
to Department B. Are you
with me?

McGraw-Hill/Irwin
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Process Cost Flows

Work in Process
Raw Materials Department A
•Purchases •Direct •Direct •Transferred
Material Material to Dept. B
•Direct
Labor
•Overhead

Work in Process
Department B
Salaries and •Transferred
from Dept. A
Wages Payable
•Direct
•Direct Material
Labor •Direct
Labor

McGraw-Hill/Irwin
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Process Cost Flows

Work in Process
Department A
•Direct •Transferred
Material to Dept. B
•Direct
Labor
Factory Overhead •Overhead

•Other •Overhead Work in Process

Overhead Applied to Department B
•Indirect Work in
•Transferred
Material Process from Dept. A
•Indirect •Direct
Labor Material
•Direct
Labor
•Overhead
McGraw-Hill/Irwin
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Process Cost Flows

Now let’s complete the

goods in Department B and
sell them. Still with me?

McGraw-Hill/Irwin
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Process Cost Flows

Work in Process
Department B Finished Goods
•Transferred •Cost of •Cost of •Cost of
from Dept. A Goods Goods Goods
•Direct Mfd. Mfd. Sold
Material
•Direct
Labor
•Overhead
Cost of Goods Sold
•Cost of
Goods
Sold

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Process Costing
Direct Direct-labor costs
Material are usually small
in comparison to
Dollar Amount

Manufacturing other product

Overhead costs in process
cost systems.
Direct (high level of
Labor automation)

Type of Product Cost

McGraw-Hill/Irwin
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Process Costing
Direct Direct-labor costs
Material are usually small
in comparison to
Conversion
Dollar Amount

other product
costs in process
cost systems.
(high level of
automation)

Type of Product Cost

So, direct labor and manufacturing overhead are often

combined into one product cost called conversion.
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Differences Between Job-Order
and Process Costing
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.

Finished
Direct Labor Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
McGraw-Hill/Irwin
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Differences Between Job-Order
and Process Costing
The work-in-process
account consists of
individual products in a
Direct Material
process cost system.

Direct Labor Finished

& Overhead
Products Goods
(Conversion)

When direct labor is a relatively small amount Cost of

compared to material and overhead, it is often Goods
combined with overhead. Sold
McGraw-Hill/Irwin
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Equivalent Units: A Key Concept

Costs are accumulated for a period of time

for products in work-in-process inventory.
Products in work-in-process inventory at
the beginning and end of the period are
only partially complete.
Equivalent units is a concept expressing
these partially completed products as a
smaller number of fully completed
products.
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Equivalent Units Example

Two one-half completed products are

equivalent to one completed product.

+ = l

So, 10,000 units 70 percent complete

are equivalent to 7,000 complete units.

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Equivalent Units Question 1

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
McGraw-Hill/Irwin
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Equivalent Units Question 1

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 × .30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
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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 for the period
unit

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Equivalent Units Question 2

If Jones incurred $27,600 in
production costs for the 11,500
equivalent units. What was Jones’s
cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90

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Equivalent Units Question 2

If Jones incurred $27,600 in
production costs for the 11,500
equivalent units. What was Jones’s
cost per equivalent unit for the period?
a. $1.84
$27,600 ÷ 11,500 equivalent units
b. $2.40
= $2.40 per equivalent unit
c. $2.76
d. $2.90

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Departmental Production Report

 Analysis of  Calculation
physical flow of equivalent
of units. units.

Production
Report

 Computation  Analysis of
of unit costs. total costs.

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Equivalent Units of Production –
Weighted-Average Method
The weighted-average method . . .
 Makes no distinction between work done in the
prior period and work done in the current period.
 Blends together units and costs from the prior
period and the current period.

The FIFO method is a more

complex method and is
rarely used in practice.

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Production Report Example

At this point, we need

to look at an example
to illustrate the
departmental
production report.
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Production Report Example

MVP Sports Equipment Company makes baseball

gloves in two departments, Cutting and Stitching.
MVP uses the weighted-average cost procedure.
Material is added at the beginning of the Cutting
Department, and conversion is incurred uniformly
throughout the process.
Using the following information for the month of
March, let’s prepare a production report for the
Cutting Department.
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Production Report Example

Work in process, March 1: 20,000 units Cost
Materials: 100% complete. $ 50,000
Conversion: 10% complete. 7,200

Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 units

Materials 100% complete.
Conversion 50% complete.

Costs incurred during March

Materials cost $ 90,000
Conversion cost 193,500

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Production Report Example

 Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

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Production Report Example

 Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
50% of 10,000 units
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Beginning inventory % is not used in weighted-average method.

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Production Report Example

 Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
100% of 10,000 units, all
Total units to account for 50,000
material added at beginning
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

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Production Report Example

 Computation of unit costs
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units

$2.80 + $4.46
$200,700 ÷ 45,000 equivalent units
McGraw-Hill/Irwin
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Production Report Example

 Analysis of total costs
Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
All costs
Total costs accounted for accounted for $ 340,700

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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 Costs Charged Conversion costs

to batches as in assigned to batches
job-order costing. as in process costing.

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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 accounts.
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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.

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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.

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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.

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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.

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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.

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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.

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End of Chapter 4
I’m ready to process
some leisure time.

McGraw-Hill/Irwin