Lecture 13

Process Costing

Readings
Chapter 17,Cost Accounting, Managerial Emphasis, 14th edition by Horengren
Chapter 4, Managerial Accounting 12th edition by Garrison, Noreen, Brewer

1
 Learning Objectives
 Record the flow of materials, labor, and overhead through a process cost
system.
 Compute the equivalent units of production using the weighted-average
method.
 Compute the cost per equivalent unit using the weighted-average method.
 Assign costs to units using the weighted-average method.
 Compute the equivalent units of production using the FIFO method.
 Compute the cost per equivalent unit using the FIFO method.
 Assign costs to units using the FIFO method
 Allocate service department costs to operating departments using the
direct method.
 To allocate service department costs to operating departments using the
step-down method.
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Job-Costing and Process Costing:
Opposite Ends of a Continuum

Job-Costing Systems Process-Costing

Systems
Distinct, identifiable
units of a product Masses of identical
or service or similar units of a
product or service
Examples:
Custom-made Examples:
machines, Food,
Houses Chemical processing

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Process-Costing
 Process-costing is a system where the unit cost of a
product or service is obtained by assigning total
costs to many identical or similar units
 Each unit receives the same or similar amounts of
direct materials costs, direct labor costs, and
manufacturing overhead
 Unit costs are computed by dividing total costs
incurred by the number of units of output from the
production process

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Process-Costing Assumptions
 Direct Materials are added at the beginning of the
production process, or at the start of work in a
subsequent department down the assembly line
 Conversion Costs are added equally along the
production process

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Five-Step Process-Costing Allocation
1. Summarize the flow of physical units of output
2. Compute output in terms of equivalent units
3. Compute cost per equivalent unit
4. Summarize total costs to account for
5. Assign total costs to units completed and to units in
ending Work-in-Process

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Equivalent Units
 A derived amount of output units that:
1. Takes the quantity of each input in units completed
and in unfinished units of work in process and
2. converts the quantity of input into the amount of
completed output units that could be produced with
that quantity of input
 Are calculated separately for each input (direct
materials and conversion cost)

7
Steps 1 & 2 Illustrated

8
Steps 3, 4 & 5, Illustrated

9
General Ledger Cost Flows Illustrated

10
Weighted-Average Process-Costing
Method
 Calculates cost per equivalent unit of all work done to
date (regardless of the accounting period in which it
was done)
 Assigns this cost to equivalent units completed &
transferred out of the process, and to incomplete units
in still in-process

11
Weighted-Average Process-Costing
Method
 Weighted-average costs is the total of all costs in the
Work-in-Process Account divided by the total
equivalent units of work done to date
 The beginning balance of the Work-in-Process
account (work done in a prior period) is blended in
with current period costs

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Steps 1 & 2 Illustrated

13
Steps 3, 4 & 5 Illustrated

14
Result of the Process
 Two critical figures arise out of Step Five of the cost
allocation process:
1. The amount of the Journal Entry transferring the
allocated cost of units completed and sent from
Work-in-Process Inventory to Finished Goods
Inventory
2. The ending balance of the Work-in-Process Inventory
account that will appear on the Balance Sheet

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First-in, First-Out
Process-Costing Method
 Assigns the cost of the previous accounting period’s
equivalent units in beginning work-in-process
inventory to the first units completed and
transferred out of the process
 Assigns the cost of equivalent units worked on
during the current period first to complete
beginning inventory, next to stat and complete new
units, and lastly to units in ending work-in-process
inventory

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First-in, First-Out
Process-Costing Method
 The beginning balance of the Work-in-Process
account (work done in a prior period) is kept separate
from current period costs

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Steps 1 & 2, Illustrated

18
Steps 3, 4 & 5, Illustrated

19
Result of the Process (as before)
 Two critical figures arise out of Step Five of the cost
allocation process:
1. The amount of the Journal Entry transferring the
allocated cost of units completed and sent from
Work-in-Process Inventory to Finished Goods
Inventory
2. The ending balance of the Work-in-Process Inventory
account that will appear on the Balance Sheet

20
Standard Costing and Process Costing
 Teams of design and process engineers, operations
personnel, and management accountants work
together to determine separate standard costs per
equivalent unit on the basis of different technical
processing specifications for each product
 Standard costs replace actual costs in equivalent unit
calculations

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Steps 1 & 2, Illustrated

22
Steps 3, 4 & 5, Illustrated

23
General Ledger Cost Flows Illustrated

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Transferred-in Costs
 Are costs incurred in previous departments that are
carried forward as the products cost when it moves
to a subsequent process in the production cycle
 Also called Previous Department Costs
 Journal entries are made to mirror the progress in
production from department to department
 Transferred-in costs are treated as if they are a
separate type of direct material added at the
beginning of the process

25
Steps 1 & 2, Illustrated

26
Steps 3, 4 & 5, Illustrated

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Steps 1 & 2, Illustrated

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Steps 3, 4 & 5, Illustrated

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Hybrid Costing Systems
 A Hybrid-Costing System blends characteristics from
both job-costing and process-costing systems
 Many actual production systems are in fact hybrids
 Examples include manufacturers of televisions,
dishwashers and washing machines, as well as Adidas

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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 cost.
 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.

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 Differences Between Job-Order and
Process Costing
 Process costing 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 are worked on each period.
 Process costing systems accumulate costs by
department. Job-order costing systems accumulated
costs by individual jobs.
 Process costing systems compute unit costs by
department. Job-order costing systems compute unit
costs by job on the job cost sheet.

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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.

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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.

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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.

35
Comparing Job-Order and Process
Costing

Direct
Materials

Work in Finished
Direct Labor
Proces Goods
s

Manufacturing Cost of
Overhead Goods
Sold
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Comparing Job-Order
and Process Costing
Costs are traced and
applied to individual
Direct jobs in a job-order
Materials cost system.

Finished
Direct Labor Jobs
Goods

Manufacturing Cost of
Overhead Goods
Sold
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Comparing Job-Order
and Process Costing
Costs are traced and
applied to departments
Direct in a process cost
Materials system.

Processing Finished
Direct Labor
Department Goods

Manufacturing Cost of
Overhead Goods
Sold
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T-Account and Journal Entry Views of
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.

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Process Cost Flows
(in T-account form) Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B
•Direct
Materials

40
Process Cost Flows
(in journal entry form)
GENERAL JOURNAL Page 4
Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.

41
Process Cost Flows
(in T-account form) Work in Process
Department A
Wages Payable
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor

42
Process Costing
(in journal entry form)
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.

43
Process Cost Flows
(in T-account form) Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
44
Process Costing
(In journal entry form)
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.

45
Process Cost Flows
(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
Overhead Overhead
•Transferred
from Dept. A

46
Process Costing
(in journal entry form)
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 Cost Flows
(in T-account form)
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A

48
Process Costing
(in journal entry form)
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 Cost Flows
(in journal entry form)
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labor
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold

•Cost of
Goods
Sold

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Process Costing
(in journal entry form)
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 Lecture 13

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