Accounting Principles, 6e
Weygandt, Kieso, & Kimmel
Prepared by
Marianne Bradford, Ph.D.
Bryant College
John Wiley & Sons, Inc.
CHAPTER 22
PROCESS COST ACCOUNTING
After studying this chapter, you should be able to:
1 Understand who uses process cost systems.
2 Explain the similarities and differences between job
order cost and process cost systems.
3 Explain the flow of costs in a process cost system.
4 Make the journal entries to assign manufacturing
costs in a process cost system
5 Compute equivalent units.
CHAPTER 22
PROCESS COST ACCOUNTING
After studying this chapter, you should be able to:
6 Explain the four steps necessary to prepare a
production cost report.
7 Prepare a production cost report.
8 Explain just-in-time processing.
9 Explain activity-based-costing.
PREVIEW OF CHAPTER 22
PROCESS COST ACCOUNTING
Nature of Process
Cost Systems
 Uses
 Similarities and
differences
 Process cost flow
 Assignment of
manufacturing
costs
Equivalent
Units

 Weighted average
method
 Refinements
Comprehensive
Example of
Process Costing
 Physical Units

 Equivalent units of

 Unit Production costs
 Production cost

report
production
 Cost reconciliation
schedule

 Production cost report
PREVIEW OF CHAPTER 22
PROCESS COST ACCOUNTING
Contemporary
Issues
Just-in-time
processing
Activity-based
costing
STUDY OBJECTIVE 1
Understand who uses
process cost systems.
THE NATURE OF PROCESS
COST SYSTEMS
 Process cost systems are used to apply
costs to similar products that are mass
produced in a continuous fashion.
 In a process cost system, costs are
tracked through a series of connected
manufacturing processes or
departments, rather than by individual
jobs (as in job order cost systems).
ILLUSTRATION 22-1
MANUFACTURING PROCESSES
A process cost accounting system is used for continuous process manufacturing, and
it is necessary to record both the accumulation and assignment of manufacturing
costs. A distinctive feature of process cost accounting is that individual Work In
Process Inventory accounts are maintained for each production department or
manufacturing process. In a beverage company, there would be a Work in Process
Inventory account for each of the manufacturing processes, as illustrated below:
Soda
Manufacturing
Processes
Blending
Filling
Packaging
STUDY OBJECTIVE 2
Explain the similarities and differences
between job order cost and process cost
systems.
SIMILARITIES BETWEEN JOB ORDER
COST AND PROCESS COST SYSTEMS
Job order and process cost systems are
similar in three ways:
1. The manufacturing cost elements.
2. The accumulation of the costs of
materials, labor, and overhead.
3. The flow of costs (although the
methods of assigning costs differ
significantly).
DIFFERENCES BETWEEN JOB ORDER
COST AND PROCESS COST SYSTEMS
1.
2.
3.
4.
Job order and process cost systems are
different in three ways:
The number of work in process
accounts used.
Documents used to track costs.
The point at which costs are totaled.
Unit cost computations
ILLUSTRATION 22-4
JOB ORDER VERSUS PROCESS COST
ACCOUNTING
 A feature of process costing is that costs charged to work in
process are summarized in production cost reports.
 Unit costs are calculated by dividing total manufacturing costs for
the period by the units produced during the period.
 The major differences between job order cost accounting and
process cost accounting are summarized below:
Feature
 Work in process accounts
 Summary of manufacturing costs
 Determination of total manufacturing costs
 Unit cost computation
Job Order
Cost Accounting
One for each job
Job cost sheets
Each job
Cost of each job ÷
Units produced
for the job
Process
Cost Accounting
One for each process
Production cost reports
Each period
Total manufacturing costs ÷
Units produced
during the period
STUDY OBJECTIVE 3
Explain the flow of costs
in a process cost system.
ILLUSTRATION 22-5
FLOW OF COSTS IN
PROCESS COST SYSTEMS
Manufacturing
Costs
Raw Materials
Factory Labor
Manufacturing
Overhead
Work in Process
Machining
Department A
Finished Goods
Inventory
Assigned to
Costs
transferred
to
Work in Process
Assembly
Department B
Cost of
completed
work
Cost of
Goods
Sold
Cost of
Goods Sold
PROCESS COST FLOW
 Illustration 22-5 shows the flow of costs through
various accounts in process cost accounting.
 Separate work in process accounts are provided for
each producing department.
 Manufacturing costs are accumulated by debits to
Raw Materials Inventory, Factory Labor, and
Manufacturing Overhead.
 These costs are then assigned to Work in Process,
Finished Goods Inventory, and Cost of Goods Sold.
FLOW OF COSTS IN
PROCESS COST ACCOUNTING
Process Cost Accounting
Raw Materials Inventory
(1) Purchases
(4) Materials
used
4
Factory Labor
(2) Factory labor (5) Factory
incurred
labor used
5
Manufacturing Overhead
(3) Overhead
(6) Overhead
incurred
applied
Work in Process
Production Department A
(4) Materials
(7) Costs
used
transferred
(5) Labor
out
used
(6) Overhead
applied
6
(4)
(5)
Key to Entries:
Accumulation
1. Purchase raw materials
2. Incur factory labor
3. Incur manufacuring
overhead
(6)
(7)
Work in Process
Production Department B
Materials
(8) Cost of
used
completed
Labor
work
used
Overhead
applied
Transferred
in costs
Finished Goods Inventory
(8) Cost of
(9) Cost of goods
completed
sold
work
7
Cost of Goods Sold
(9) Cost of goods
sold
8
8
Key to Entries:
4.
5.
6.
7.
8.
9.
Assignment
Materials are used
Labor is used
Overhead is applied
Costs are transferred
out
Goods are completed
Goods are sold
9
PROCESS COST FLOW
ACCUMULATION OF MANUFACTURING COSTS
The accumulation of materials and labor
costs is the same in process costing as in job
order costing.
1 All raw materials are debited to Raw
Materials Inventory when the materials
are purchased.
2 All factory labor is debited to Factory
Labor when the labor costs are incurred.
STUDY OBJECTIVE 4
Make the journal entries to assign manufacturing
costs in a process cost system.
PROCESS COST FLOW
ASSIGNMENT OF MATERIAL COSTS
 In a process cost system, fewer materials requisition slips are
usually required than in a job order cost system, since materials are
used for processes rather than for specific jobs.
 At Tyler Manufacturing Company, materials are entered at the
beginning of each process.
 The entry to record the materials used is:
Date
June 30
Account Titles and Explanation
Work in Process – Machining
Work in Process – Assembly
Raw Materials Inventory
(To record materials used)
Debit
Credit
xxxx
xxxx
xxxx
PROCESS COST FLOW
ASSIGNMENT OF FACTORY LABOR COSTS
 In process costing, as in job order costing, time tickets may be used to
determine the cost of labor assignable to the production departments.
 The labor cost chargeable to a process can be obtained from the
payroll register or departmental payroll summaries.
The entry to assign these costs is:
Date
June 30
Account Titles and Explanation
Work in Process – Machining
Work in Process – Assembly
Factory Labor
(To assign factory labor to production)
Debit
Credit
xxxx
xxxx
xxxx
PROCESS COST FLOW
ASSIGNMENT OF MANUFACTURING
OVERHEAD COSTS
 In process cost accounting, the objective in assigning overhead is to
allocate the overhead costs to the production departments on an
objective and equitable basis.
That basis is the activity that “drives” or causes the costs.
A primary driver of overhead costs in continuous manufacturing
operations is machine time used, not direct labor.
The entry to allocate overhead to the 2 processes is:
Date
Account Titles and Explanation
Debit
June 30 Work in Process– Machining
Work in Process– Assembly
Manufacturing Overhead
(To assign overhead to processes)
xxxx
xxxx
Credit
xxxx
PROCESS COST FLOW
TRANSFER TO NEXT DEPARTMENT
 At the end of the month, an entry is needed to record
the cost of the goods transferred out of the
department.
The transfer is to the Assembly Department and the
following entry is made:
Date
Account Titles and Explanation
June 30 Work in Process– Assembly
Work in Process– Machining
(To record transfer of units to the Assembly
Department)
Debit
Credit
xxxx
xxxx
PROCESS COST FLOW
TRANSFER TO FINISHED GOODS
 The units completed in the Assembly Department are
transferred to the finished goods warehouse.
The entry for this transfer is as follows:
Date
Account Titles and Explanation
Debit
xxxx
June 30 Finished Goods Inventory
Work in Process– Assembly
(To record transfer of units to finished goods)
Credit
xxxx
PROCESS COST FLOW
TRANSFER TO COST OF GOODS SOLD
 When finished goods are sold, the entry to record the
cost of goods sold is as follows:
Date
Account Titles and Explanation
June 30 Cost of Goods Sold
Finished Goods Inventory
(To record cost of units sold)
Debit
Credit
xxxx
xxxx
END-OF-PERIOD PROCEDURES
MACHINING DEPARTMENT
 By the end of the period, Tyler Manufacturing Company
has accumulated the materials, labor, and overhead costs
in each production department’s Work in Process
account.
 These accumulated costs must now be assigned to
1 the units transferred out of each department and
2 the units in the ending Work in Process in each
department.
 The procedures used in calculating and assigning the
costs present the most difficult challenge to your
understanding of process cost accounting.
END-OF-PERIOD PROCEDURES
MACHINING DEPARTMENT
For each process, it is necessary to perform the following
procedures at the end of the period:
1 Calculate the physical units.
2 Calculate equivalent units of production.
3 Calculate unit costs of production.
4 Assign costs to the units transferred and in process.
5 Prepare the production cost report.
STUDY OBJECTIVE 5
Compute equivalent units.
EQUIVALENT UNITS
 Equivalent units of production are the work done during the
period on the physical units of output, expressed in terms of
fully completed units.
 Equivalent units of production are determined by applying
the percentage of work done to the physical units of output.
 Equivalent units are the sum of the work performed to:
1 Finish the units of beginning work in process inventory.
2 Complete the units started into production during the
period.
3 Start, but only partially complete, the units in ending work
in process inventory.
ILLUSTRATION 22-6
INFORMATION FOR FULL-TIME
STUDENT EXAMPLE
 Suppose you were asked to compute the cost of instruction at your college per
full-time equivalent student. You are provided with the following information.
Costs:
Total cost of instruction
Student population:
Full-time students
Part-time students
$900,000
900
1,000
 Part-time students take 60 percent of the classes of a full-time student during
the year.
 To compute the number of full-time equivalent students per year, you would
make the following computation:
ILLUSTRATION 22-7
FULL-TIME EQUIVALENT UNIT
COMPUTATION
Full-time
Students
900
÷
Equivalent Units
of Part-time
Students
=
÷ (60% x 1,000) =
Full-time
Equivalent
Students
1,500
The cost of instruction per full-time equivalent student is therefore
the total cost of instruction ($900,000) divided by the number of
full-time equivalent students (1,500), which is $600 ($900,000 / 1,500).
ILLUSTRATION 22-8
EQUIVALENT UNITS
OF PRODUCTION FORMULA
Units Completed
and Transferred
Out
÷
Equivalent Units
of Ending Work
in Process
=
Equivalent Units
of production
The formula to compute equivalent units of production is shown above.
This method of computing equivalent units is referred to as the weighted
average method. It considers the degree of completion (weighting) of the
units completed and transferred out and the ending work in process.
It is the method most widely used in practice.
STUDY OBJECTIVE 6
Explain the four steps necessary to prepare
a production cost report.
ILLUSTRATION 22-12
FLOW OF COSTS IN MAKING
EGGO WAFFLES
Production
Cost Report
Raw Materials
Factory Labor
Manufacturing Overhead
Mixing
Department
Production
Cost Report
Baking
Department
Freezing and
Packaging
Department
Production
Cost Report
Finished
Goods
ILLUSTRATION 22-9
INFORMATION FOR
MIXING DEPARTMENT
Mixing Department
Percentage Complete
Physical Units Materials Conversion Costs
Work In process, June 1
100,000
100%
70%
Started into production
800,000
Total Units
900,000
Units transferred out
700,000
Work in process, June 30
200,000
100%
60%
Total Units
900,000
Illustration 22-9 indicates that the beginning work in process is 100 percent
complete as to materials cost and 70 percent complete as to conversion costs.
ILLUSTRATION 22-10
COMPUTATION OF EQUIVALENT UNITS
MIXING DEPARTMENT
Equivalent Units
Materials
Units transferred out
Work in progress, June 30
200,000 X 100%
200,000 X 60%
Conversion Costs
700,000 700,000
200,000
120,000
900,000 820,000
In computing equivalent units, the beginning work in process is not part of the equivalent
units of production formula. The units transferred out to the Baking Department are fully
complete as to both materials and conversion costs. The ending work in process is fully
complete as to materials, but only 60 percent complete as to conversion costs.
Two equivalent unit computations are therefore necessary.
ILLUSTRATION 22-11
REFINED EQUIVALENT UNITS
OF PRODUCTION FORMULA
Units Completed and
Transferred OutMaterials
Units Completed and
Transferred OutConversion Costs
÷
÷
Equivalent Units of
Ending Work
in Process-Materials
Equivalent Units of
Ending Work
in Process-MaterialsConversion Costs
=
=
Equivalent Units
of ProductionMaterials
Equivalent Units
of ProductionConversion Costs
The earlier formula used to compute equivalent units of production can
be refined to show the computations for materials and for conversion
costs as shown above.
Comprehensive Example of
Process Costing
Data for the Mixing Department at
Kellogg Company for the month of
June are shown on the next slide. The
data will be used to complete a
production cost report for the Mixing
Department.
ILLUSTRATION 22-13
UNIT & COST DATA
MIXING DEPARTMENT
Mixing Department
Units :
Work in process, June 1
Direct materials: 100% complete
Conversion costs: 70% complete
Units started into production in June
Units completed and transferred out to Baking Department
Work in process, June 30
Direct materials 100% complete
Conversion costs 60% complete
Costs :
Work in process, June 1
Direct materials: 100% complete
Conversion Costs: 70% complete
Cost of work in process, June 1
Costs incurred during production in June
Direct Materials
Conversion Costs
Costs incurred in June
100,000
800,000
700,000
200,000
50,000
35,000
85,000
400,000
170,000
570,000
ILLUSTRATION 22-14
PHYSICAL UNIT FLOWMIXING DEPARTMENT –STEP 1
Physical units are the actual units to be accounted for during
a period, irrespective of any work performed. To keep track
of these units, it is necessary to add the units started (or
transferred) into production during the period to the units in
process at the beginning of the period. This amount is
referred to as the total units to be accounted for. In the
Mixing Department, 900,000 units must be accounted for.
Mixing Department
Physical Units
Units to be accounted for
Work in process, June 1
Started ( transferred) into production
Total Units
100,000
800,000
900,000
Units accounted for
Completed and transfered out
Work in process, June 30
Total Units
700,000
200,000
900,000
ILLUSTRATION 22-15
COMPUTATION OF EQUIVALENT UNITS
MIXING DEPARTMENT-STEP 2
Once the physical flow of the units is established, it is necessary
to measure the Mixing Department’s productivity in terms of
equivalent units of production. The equivalent unit computation
is as follows:
Equivalent Units
Materials Conversion Costs
700,000 700,000
Units transferred out
Work in process, June 30
200,000 X 100%
200,000
200,000 X 60%
120,000
Total equivalent Units
900,000 820,000
ILLUSTRATION 22-16
MATERIALS COST COMPUTATION
-STEP 3
Unit production costs are costs expressed in terms of equivalent
units of production. When equivalent units of production are
different for materials and conversion costs, three unit costs are
computed: (1) materials, (2) conversion, and (3) total manufacturing.
The computation for Eggo Waffles is as follows:
Work in process, June 1
Direct materials cost
Costs added to production during June
Direct materials cost
Total materials cost
50,000
400,000
$450, 000
ILLUSTRATION 22-18
CONVERSION COSTS COMPUTATION
The computation of total conversion costs is as follows:
Work in process, June 1
Conversion costs
Costs added to production during June
Conversion costs
Total conversion costs
$35,000
170,000
$205,000
ILLUSTRATION 22-21
COSTS CHARGED TO MIXING
DEPARTMENT – STEP 4
The total costs that were charged to the Mixing Department
in June are as follows:
Costs to be accounted for
Work in process, June 1
Started into production
Total costs
85,000
570,000
655,000
ILLUSTRATION 22-22
COST RECONCILIATION SCHEDULE
MIXING DEPARTMENT
The total costs charged to the Mixing Department in June are
therefore $655,000. A cost reconciliation schedule is then
prepared to assign the costs to (1) units transferred out to the
Baking Department and (2) ending work in process.
Mixing Department
Cost Reconciliation Schedule
Costs accounted for
Transferred out ( 700,000 X $0.75)
Work in process, June 30
Materials ( 200,000 X $0.50)
Conversion Costs ( 120,000 X $0.25)
Total costs
$525, 000
$100,000
30,000
130,000
$655,000
STUDY OBJECTIVE 7
Prepare a production cost report.
ILLUSTRATION 22-23
PRODUCTION COST REPORT
Mixing Department
Production Cost Report
For the Month Ended June 30, 2002
Quantities
Units to be accounted for
Work in process, June1
Started into production
Total Units
Units accounted for
Transferred out
Work in process, June 30
Total units
Equivalent Units
Physical Units Materials Conversion Costs
Step 1
Step 2
100,000
800,000
900,000
700,000
200,000
900,000
700,000 700,000
200,000 120,000 ( 200,000 X 60%)
900,000 820,000
ILLUSTRATION 22-23
PRODUCTION COST REPORT
Mixing Department
Production Cost Report
For the Month Ended June 30, 2002
Costs
Unit costs Step 3
Costs in June
Equivalent Units
Unit costs [ (a) /(b)]
Costs to be accounted for
Work in process, June 1
Started into production
Total costs
Equivalent Units
Materials
Conversion Costs
(a) $450,000 $205,000
(b) 900,000
820,000
$0.50
$0.25
Total
$655,000
$0.75
$85,000
570,000
$655,000
ILLUSTRATION 22-23
PRODUCTION COST REPORT
Mixing Department
Production Cost Report
For the Month Ended June 30, 2002
Equivalent Units
Conversion Costs
Cost Reconciliation Schedule, Step 4
Costs accounted for
Transferred out ( 700,000 X$0.75)
Work in process, June 30
Materials ( 200,000 X $0.50)
Conversion Costs ( 120,000 X $0.25)
Total costs
Total
$525,000
$100,000
30,000
130,000
$655,000
STUDY OBJECTIVE 8
Explain just-in-time (JIT)
processing.
CONTEMPORARY DEVELOPMENTS
JUST-IN-TIME PROCESSING
 Continuous process manufacturing has traditionally
been based on a just-in-case philosophy – inventories of
raw materials are maintained just in case some items are
of poor quality or a key supplier is shut down by a strike.
 Subassembly parts are manufactured and stored just in
case they are needed later in the manufacturing process.
 Finished goods are completed and stored just in case
unexpected and rush customer orders are received.
 This philosophy often results in a push approach in
which raw materials and subassembly parts are pushed
through each process.
CONTEMPORARY DEVELOPMENTS
JUST-IN-TIME PROCESSING
 Mostly in response to foreign competition, many U.S. firms
have switched to just-in-time (JIT) processing.
 JIT manufacturing is dedicated to producing the right
products or parts at the right time as they are needed.
 Under JIT processing,
1 raw materials are received just in time for use in production,
2 subassembly parts are completed just in time for use in
finished goods, and
3 finished goods are completed just in time to be sold.
 Illustration 22-24 shows the sequence of activities in JIT
processing.
ILLUSTRATION 22-24
JUST-IN-TIME PROCESSING
100 pairs of
sneakers...
got it!
Sales Order
Received
Goods Manufactured
Send rubber and
shoe laces directly
to the factory.
CONTEMPORARY DEVELOPMENTS
JUST-IN-TIME PROCESSING
 A primary objective of JIT is to eliminate all manufacturing
inventories since inventories are considered to have an adverse
effect on net income because of their high storage and
maintenance costs.
 JIT strives to eliminate inventories by using a pull approach in
manufacturing.
 There are 3 important elements in JIT processing:
1 A company must have dependable suppliers who are willing to
deliver on short notice exact quantities of raw materials
according to precise quality specifications.
2 A multiskilled work force must be developed.
3 A total quality control system must be established throughout
the manufacturing operations.
CONTEMPORARY DEVELOPMENTS
JUST-IN-TIME PROCESSING
The major benefits of JIT processing are:
1 Manufacturing inventories are significantly reduced or
eliminated.
2 Product quality is enhanced.
3 Rework costs and inventory storage costs are reduced or
eliminated.
4 Production cost savings are realized from the improved flow
of goods through the processes.
STUDY OBJECTIVE 9
Explain activity-based costing (ABC).
ILLUSTRATION 22-25
ACTIVITIES AND COST DRIVERS
IN ABC
Activity-based costing (ABC) is a development in product costing that has received
much attention in recent years, and it focuses on the activities performed in producing
a product. In ABC, the cost of a product is equal to the sum of the costs of all activities
performed to manufacture it. ABC recognizes more than a single basis of allocating
activity costs to products is needed in order for cost data to be meaningful and
accurate. In selecting the appropriate basis, ABC seeks to identify the cost drivers that
measure the activities performed on the product. Examples of activities and possible
cost drivers are shown below.
Activity
Ordering raw materials
Receiving raw materials
Materials handling
Production scheduling
Machine setups
Machining (fabricating, assembling, etc.)
Quality control inspections
Factory supervision
Cost Driver
Ordering hours; number of orders
Receiving hours; number of shipments
Number of requisitions; weight of materials;
handling hours
Number of orders
Setup hours; number of setups
Machine hours
Number of inspections
Number of employees
CONTEMPORARY DEVELOPMENTS
ACTIVITY-BASED COSTING
2 important assumptions must be met in order to obtain
accurate product costs under ABC:
1 All overhead costs related to the activity must be driven by the
cost driver used to assign costs to products.
2 All overhead costs related to the activity should respond
proportionally to changes in the activity level of the cost
driver.
CONTEMPORARY DEVELOPMENTS
ACTIVITY-BASED COSTING
Costs of all
manufacturing
overhead activities
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CHAPTER 22
PROCESS COST ACCOUNTING