Chapter 4Process Costing

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 costs.

• 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.

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 having different production requirements 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.

Sequential Processing Departments

T-Account Model of Process Costing Flows

Process Costing and Direct Labor

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

DirectMaterials

Type of Product Cost

Do

llar

Am

ou

nt

DirectLabor

Mfg. Ovhd.

Process Costing and Direct Labor

Type of Product Cost

Do

llar

Am

ou

nt Conversion

Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may becombined into one product cost called combined into one product cost called conversionconversion..Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may be

combined into one product cost called combined into one product cost called conversionconversion..

DirectMaterials

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

Work in process, January 1: 0 units Manufacturing Costs in Beginning Inventory: $0

Production started during January: 1,000 unitsProduction completed during January: 1,000 units

Costs added to production in January: $50,000

Work in process, January 31: 0 unitsManufacturing Costs in Ending Inventory: $0

Manufacturing Costs transferred out in January: ?

Example A – JanuaryNo Beginning/No Ending Inventory

Work in process, February 1: 0 units Manufacturing Costs in Beginning Inventory: $0

Production started during February: 1,000 unitsProduction completed during February: 800 units

Costs added to production in February $45,000

Work in process, February 28 (50% complete): 200 unitsManufacturing Costs in Ending Inventory: ?

Manufacturing Costs transferred out in February: ?

Example A – FebruaryNo Beginning/Some Ending Inventory

Equivalent Units of Production

Equivalent units are the product of the number of partially completed units and the percentage completion of those

units. Partially completed units are thus expressed in terms of a smaller number of fully completed units

Equivalent Units of Production

Two half completed products are equivalent to one completed product.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

+ = 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

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

Quick Check

Calculating and Using Equivalent Units of ProductionTo calculate the cost per

equivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units of productionfor the period

Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Quick Check

Work in process, March 1 (50% complete): 200 units Manufacturing Costs in Beginning Inventory: $5,000

Production started during March: 1,500 unitsProduction completed during March: 1,200 units

Costs added to production in March $65,000

Work in process, March 31 (40% complete): 500 unitsManufacturing Costs in Ending Inventory: ?

Manufacturing Costs transferred out in March: ?

Example A – MarchSome Beginning/Some Ending Inventory

Equivalent Units of ProductionWeighted-Average Method

The weighted-average method . . .

1. Blends together costs from prior and current periods.

2. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.

3. Ignores percentage completion of the Beginning Inventory

The weighted-average method . . .

1. Blends together costs from prior and current periods.

2. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.

3. Ignores percentage completion of the Beginning Inventory

Weighted-Average Method• For each category of cost (material and

conversion) in each processing department the following calculations are made:

Costs to be Costs of Costs addedaccounted = beginning WIP + during the

for inventory current period

Equivalent Units Equivalent unitsunits of = transferred + of ending WIP

production out inventory

Weighted-Average Method

Costs to be accounted forCost per = EU Equivalent units of production

Costs of units Units Cost = ×transferred out transferred out per EU

Costs of units in Equivalent units of Cost = × ending WIP inventory ending WIP inventory per EU

Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.

Double Diamond uses the weighted average cost procedure.

Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.

Double Diamond uses the weighted average cost procedure.

Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

Production Report Example

Work in process, May 1: 200 units Materials: 55% complete $ 9,600Conversion: 30% complete 5,575

Production started during May: 5,000 unitsProduction completed during May: 4,800 units

Costs added to production in May:Materials cost $ 368,600Conversion cost 350,900

Work in process, May 31: 400 units Materials 40% complete

Conversion 25% complete

Manufacturing Costs in Ending Inventory: ?

Manufacturing Costs transferred out in May: ?

Production Report Example

Production Report Example

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100

5,200 4,960 4,900

Section 1: Quantity Schedule with Equivalent Units

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900

Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900

Cost per equivalent unit 76.25$ 72.75$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00

Production Report Example Section 2: Compute cost per equivalent unit

Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100

Total work in process, May 31

Total cost accounted for

4,800 units @ $149.00

Production Report Example Section 3: Cost Reconciliation

Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 12,200 160 Conversion 7,275 100

Total work in process, May 31 19,475

Total cost accounted for 734,675$

160 units @ $76.25

Production Report Example Section 3: Cost Reconciliation

All costs accounted for

100 units @ $72.75