CHAPTER 20 … PROCESS COSTING
Learning Objective 1: Distinguish between process costing and job order costing.
A. In job costing, costs are accumulated on job cost records for individual jobs. A single Work in
Process Inventory account is used.
B. In process costing, all units go through the same production process and therefore have the same
unit cost. Each process requires the use of a separate Work in Process Inventory account.
C. Exhibit 20-1 illustrates a comparison of job costing and process costing.
Learning Objective 2: Compute equivalent units.
A. Equivalent units are the number of completed units that could have been manufactured with the
costs incurred during the period.
B. To find equivalent units, an estimate of the stage of completion of the incomplete units must be
made (for example, 25% complete).
C. Then, multiply this percentage by the number of incomplete units. Add this number to the number of
units finished and the result will be equivalent units.
D. The number of equivalent units may be different for materials and conversion costs.
Learning Objective 3: Use process costing to assign costs to units completed and to
units in ending work in process inventory.
A. Process cost accounting is performed in four steps:
1. The flow of costs is illustrated in Exhibit 20-4.
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2. The flow of units is summarized by ensuring that the units in beginning work in process +
units started during the period is equal to the units completed + the units in ending work in
process. (illustrated in Exhibit 20-6)
3. Equivalent units are computed. (illustrated in Exhibit 20-6)
4. A time line for adding direct materials and conversion is illustrated in Exhibit 20-5.
5. Total costs to account for are summarized. (illustrated in Exhibit 20-7)
6. Unit costs are computed by dividing direct material and conversion costs by their
individual equivalent units. (illustrated in Exhibit 20-8)
7. Unit costs are then applied to the actual units completed and transferred out by multiplying the
units completed by the cost per equivalent unit. Unit costs are applied to the unfinished units
by multiplying the unfinished units by completion percentage and then by the cost per
equivalent unit. (illustrated in Exhibit 20-9)
B. Journal entries for direct materials, direct labor, and manufacturing overhead in a process cost
system parallel those for a job order system.
1. To requisition materials:
Work in Process Inventory
Materials Inventory
2. To apply labor and overhead:
XXX
Work in Process Inventory
Manufacturing Wages
Work in Process Inventory
Manufacturing Overhead
XXX
XXX
XXX
XXX
XXX
3. To transfer the cost of completed units to the next department:
Work in Process Inventory
(second department)
Work in Process Inventory
(first department)
XXX
XXX
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Learning Objective 4: Use the weighted-average method to assign costs to units
completed and to units in ending work in process inventory in a second department.
A. Equivalent units of production include not only the current period’s equivalent units but also the
equivalent units already in process at the beginning of the period.
1. The same four steps are used.
2. Steps 1 and 2 are illustrated in Exhibit 20-12.
3. Step 3 is illustrated in Exhibit 20-13.
4. Step 4 is illustrated in Exhibit 20-14.
5. A production cost report is illustrated in Exhibit 20-16 using the weighted-average method.
Appendix: The FIFO process costing method.
A. The first-in, first-out (FIFO) method costs equivalent units using costs incurred during the period
the work is done.
1. The flow of physical units and the computation of equivalent units is summarized in Exhibit
2-01A-2.
2. Exhibit 20A-3 summarizes the total costs to account for and computes the cost per equivalent
unit.
3. Exhibit 20A-4 assigns costs to units completed and to units in ending work in process
inventory.
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