Chapter
4
Systems Design:
Process Costing
Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
 Many units of a single, homogeneous product
flow evenly through a continuous production
process.
 One unit of product is indistinguishable from any
other unit of product..
 Each unit of product is assigned the same
average cost.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Types of Costing Systems Used to
Determine Product Costs
Process
Process
Costing
Costing
Job-order
Job-order
Costing
Costing
Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Differences Between Job-Order and
Process Costing
Job order costing
 Many jobs are worked
during the period.
 Costs are accumulated
by individual jobs.
 Job cost sheet is the
key document.
 Unit cost computed by
job.
Process costing
 A single product is
produced for a long
period of time.
 Costs are accumulated
by departments.
 Department production
report is key document.
 Unit costs are computed
by department.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Process Costing
Dollar Amount
Direct
Materials
Manufacturing
Overhead
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct
Labor
Type of Product Cost
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Process Costing
Direct
Materials
Dollar Amount
Conversion
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Type of Product Cost
So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Comparing Job-Order and Process
Costing
Direct
Materials
Direct Labor
Manufacturing
Overhead
Irwin/McGraw-Hill
Work in
Proces
s
Finished
Goods
Cost of
Goods
Sold
© The McGraw-Hill Companies, Inc., 2000
Comparing Job-Order and Process
Costing
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
Direct Labor
Manufacturing
Overhead
Irwin/McGraw-Hill
Jobs
Finished
Goods
Cost of
Goods
Sold
© The McGraw-Hill Companies, Inc., 2000
Comparing Job-Order and Process
Costing
Direct
Materials
Direct Labor
Manufacturing
Overhead
Irwin/McGraw-Hill
Costs are traced and
applied to departments
in a process cost
system.
Processing
Department
Finished
Goods
Cost of
Goods
Sold
© The McGraw-Hill Companies, Inc., 2000
Process Cost Flows
Work in Process
Department A
•Direct
Transferred
Materials
to Dept. B
•Direct
Labor
•Applied
Overhead
Irwin/McGraw-Hill
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
© The McGraw-Hill Companies, Inc., 2000
Process Cost Flows
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
Cost of Goods Sold
from Dept. A
•Cost of
Goods
Sold
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Equivalent Units of Production
Equivalent units are partially complete
and are part of work in process
inventory. Partially completed
products are expressed in terms of a
smaller number of fully completed
units.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Equivalent Units of Production
Two half completed products are
equivalent to one completed product.
+
=
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Equivalent Units
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
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Calculating and Using Equivalent
Units of Production
To calculate the cost per
equivalent unit for the period:
Cost per
equivalent
unit
Irwin/McGraw-Hill
=
Costs for the period
Equivalent units of production
for the period
© The McGraw-Hill Companies, Inc., 2000
Equivalent Units
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
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Equivalent Units of Production –
Weighted Average Method
The weighted average method . . .
Makes no distinction between work done in prior
and current period.
Blends together units and costs from prior
period and current period.
Let’s see how this works!
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Weighted Average Example
Smith Company reported the following activity
in Department A for the month of June:
Percent Completed
Units
Work in process, June 1
300
Units started into production in June
6,000
Units completed and transferred out
of Department A during June
5,400
Work in process, June 30
Irwin/McGraw-Hill
900
Materials
Conversion
40%
20%
60%
30%
© The McGraw-Hill Companies, Inc., 2000
Weighted Average Example
Equivalent units are calculated as follows:
Materials
Units completed and transferred
out of Department A in June
Irwin/McGraw-Hill
5,400
Conversion
5,400
© The McGraw-Hill Companies, Inc., 2000
Weighted Average Example
Equivalent units are calculated as follows:
Materials
Units completed and transferred
out of Department A in June
5,400
Conversion
5,400
Work in process, June 30:
900 units × 60%
Equivalent units of Production in
Department A during June
Irwin/McGraw-Hill
540
5,940
© The McGraw-Hill Companies, Inc., 2000
Weighted Average Example
Equivalent units are calculated as follows:
Materials
Units completed and transferred
out of Department A in June
5,400
Conversion
5,400
Work in process, June 30:
900 units × 60%
540
900 units × 30%
Equivalent units of Production in
Department A during June
Irwin/McGraw-Hill
270
5,940
5,670
© The McGraw-Hill Companies, Inc., 2000
Weighted Average Example
Materials
Beginning
Work in Process
300 Units
40% Complete
6,000 Units Started
5,100 Units Started
and Completed
5,400 Units Completed
540 Equivalent Units
5,940 Equivalent units
of production
Irwin/McGraw-Hill
Ending
Work in Process
900 Units
60% Complete
900 × 60%
© The McGraw-Hill Companies, Inc., 2000
Weighted Average Example
Conversion
Beginning
Work in Process
300 Units
20% Complete
6,000 Units Started
5,100 Units Started
and Completed
5,400 Units Completed
270 Equivalent Units
5,670 Equivalent units
of production
Irwin/McGraw-Hill
Ending
Work in Process
900 Units
30% Complete
900 × 30%
© The McGraw-Hill Companies, Inc., 2000
Production Report
Shows the flow
of units and costs
through work in
process
Provides cost
information for
financial
statements
Production
Report
Becomes the
job cost sheet
in process
costing
Irwin/McGraw-Hill
Helps managers
control their
departments
© The McGraw-Hill Companies, Inc., 2000
Production Report
Production Report
Section 1
Section 2
A quantity schedule
showing the flow of units
and the computation of
equivalent units.
A computation of
cost per equivalent unit.
Section 3
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Production Report
Production Report
Section 1
 A reconciliation of cost
flows for the period,
including:
Total cost for units
Section 2
completed and
transferred from the
processing department.
Total cost for partially
Section 3
Irwin/McGraw-Hill
completed units
remaining in work in
process.
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
 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.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Cost
$ 3,000
1,000
Work in process, May 1: 200 units
Materials:
50% complete.
Conversion:
30% complete.
Units started into production in May:
Units completed and transferred out in May:
Costs added to production in May
Materials cost
Conversion cost
5,000
4,800
$ 74,000
70,000
Work in process, May 31: 400 units
Materials
40% complete.
Conversion
25% complete.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for:
Work in process, May 1
Started into production
Total units
200
5,000
5,200
Equivalent units
Materials
Conversion
Units accounted for as follows:
Completed and transferred
Irwin/McGraw-Hill
4,800
4,800
4,800
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for:
Work in process, May 1
Started into production
Total units
200
5,000
5,200
Equivalent units
Materials
Conversion
Units accounted for as follows:
Completed and transferred
Work in process, May 31
Materials 40% complete
4,800
400
4,800
160
5,200
Irwin/McGraw-Hill
4,800
4,960
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for:
Work in process, May 1
Started into production
Total units
200
5,000
5,200
Equivalent units
Materials
Conversion
Units accounted for as follows:
Completed and transferred
Work in process, May 31
Materials 40% complete
Conversion 25% complete
4,800
400
4,800
160
5,200
Irwin/McGraw-Hill
4,800
4,960
100
4,900
© The McGraw-Hill Companies, Inc., 2000
Production Report Example`
Section 2: Compute cost per equivalent unit
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
Irwin/McGraw-Hill
Materials
Conversion
4,000
$ 3,000
$
144,000
74,000
$148,000
$ 77,000
$
4,960
1,000
70,000
$
71,000
4,900
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
Cost per equivalent unit
Materials
Conversion
4,000
$ 3,000
$
144,000
74,000
$148,000
$ 77,000
$
4,960
$ 15.524
1,000
70,000
$
71,000
4,900
$77,000 ÷ 4,960 units = $15.524 (rounded)
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
Materials
Conversion
4,000
$ 3,000
$
144,000
74,000
$148,000
$ 77,000
$
4,960
Equivalent units
$ 15.524
Cost per equivalent unit
Total cost per equivalent unit = $15.524 + $14.490 = $30.014
1,000
70,000
$
71,000
$
4,900
14.490
$71,000 ÷ 4,900 units = $14.490 (rounded)
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Section 3: Cost Reconciliation
Total
Cost
Cost accounted for as follows:
Transferred out during May
Work in process, May 31:
Materials
Conversion
Equivalent Units
Materials
Conversion
4,800
4,800
160
100
Total work in process, May 31
Total cost accounted for
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Section 3: Cost Reconciliation
4,800 units @ $30.014
Cost accounted for as follows:
Transferred out during May
Work in process, May 31:
Materials
Conversion
Total
Cost
$144,067
Equivalent Units
Materials
Conversion
4,800
4,800
160
100
Total work in process, May 31
Total cost accounted for
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Production Report Example
Section 3: Cost Reconciliation
160 units @ $15.524
Cost accounted for as follows:
Transferred out during May
Work in process, May 31:
Materials
Conversion
Total work in process, May 31
Total cost accounted for
Irwin/McGraw-Hill
Total
Cost
Equivalent Units
Materials
100
units @Conversion
$14.49
$144,067
4,800
2,484
1,449
160
3,933
All costs
accounted for
$148,000
4,800
100
© The McGraw-Hill Companies, Inc., 2000
Operation Costing
Operation costing employs some aspects
of both job-order and process costing.
Job-order
Costing
Operation Costing
(Products produced in batches)
Material Costs Charged
to batches as in
job-order costing.
Irwin/McGraw-Hill
Process
Costing
Conversion costs
assigned to batches
as in process costing.
© The McGraw-Hill Companies, Inc., 2000
End of Chapter 4
I’m going to process
some leisure time,
unless you want to see
some journal entries.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000