Process Costing

Chapter 18

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights

Production of Goods and
Services and Costing
Systems
Job Order Costing Process Costing
 Custom orders  Repetitive operations
 Unique products
 Identical products
 Low production volume
 High production volume
 High product flexibility
 Low product flexibility
 Lowto medium
standardization of labor  High standardization of
and material labor and material

18-2
Process 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.

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill
18-3
Tracking the Physical Flow
and Related Production
Costs
The Work in Process
Direct account consists of
Materials individual jobs in
job costing.

Direct Finished
Jobs
Labor Goods

Factory Cost per

Overhead unit for
each job
18-4
Tracking the Physical Flow
and Related Production
Costs
The Work in Process
Direct account consists of
Materials specific processes in
process costing.

Finished
Processes
Goods

Direct Labor
and Factory Cost per
Overhead unit
(Conversion) processed
18-5
Tracking the Physical Flow
and Related Production
Costs
Same objective: to determine
the cost of products

Same inventory accounts: raw materials,

work in process, and finished goods

Same overhead assignment method:

predetermined rate times actual activity

18-6
Understanding Cost Flows
Direct
Materials
Indirect

Work in
Process
Assembly
Work in
Finished
Process
Goods
Packaging
Conversion
Costs
Delivered
to
Labor Factory Customers
Overhead
18-7
Understanding Cost Flows
Costs
Costs are
are accumulated
accumulated for
for aa period
period
of
of time
time by
by process
process or
or department.
department.

Unit
Unit cost
cost is
is computed
computed by by dividing
dividing the
the
accumulated
accumulated costs
costs by
by the
the number
number of
of units
units
produced
produced in in the
the period.
period.

IfIf partially
partially complete
complete units
units remain
remain in
in
process,
process, we we must
must use
use equivalent
equivalent units
units as
as
the
the divisor
divisor to
to obtain
obtain unit
unit costs.
costs.
18-8
Process Costing and
Equivalent Units
Equivalent
Equivalent units
units is
is aa concept
concept expressing
expressing aa
number
number of
of partially
partially completed
completed units
units as
as aa
smaller
smaller number
number of of fully
fully completed
completed units.
units.

Two one-half full pitchers are

equivalent to one full pitcher.

+ = 1

18-9
Cost per Equivalent Unit

Cost per
Product costs for the period
equivalent =
Equivalent units for the period
unit

18-10
 Process Costing and
Equivalent Units
40% of
Material Equivalent
Equivalent units
unitsmay
maybe be
different
different for
formaterial
material and
and
Stage 1 conversion
conversion atatdifferent
different stages
stages
of
ofaa process.
process.
25% of
Conversion

At
Atcompletion
completion of of Stage
Stage11of
ofthe
theprocess,
process,
material
material is
is 40%
40% complete,
complete,but
butconversion
conversion
is
isonly
only 25%
25% complete.
complete.
18-11
 Process Costing and
Equivalent Units
40% of 60% of
Material + Material = 100%

Stage 1 Stage 2

25% of
Conversion
+ 25% of
Conversion
= 50%

18-12
 Process Costing and
Equivalent Units
40% of 60% of
Material Material

Stage 1 Stage 2 Stage 3

25% of 25% of 50% of

Conversion Conversion Conversion

The process is now complete.

18-13
Evaluating Departmental
Efficiency
Only those costs incurred within a department are
considered for efficiency analysis. Costs transferred
in from other departments should not be allowed to
cloud the picture.

Comparing the current period’s unit costs, for material

and conversion, with budgeted unit costs or with last
period’s unit costs are common efficiency measures.

18-14
Ethics, Fraud and
Corporate Governance
Overstating the number of equivalent units
of production understates the cost per
equivalent, resulting in an understatement of
cost of goods manufactured and sold, and
an overstatement of income.

Overstating the number of equivalent units

in ending inventory understates cost of
goods sold and overstates income.

18-15
End of Chapter 18

18-16