Nature of Process Cost Systems
Similarities and Differences Between Job
Order Cost and Process Cost Systems
Job Order Cost

Costs assigned to each job.

Products have unique
characteristics.
17-1
Process Cost

Costs tracked through a
series of connected mfg
processes or departments
… (mixing, baking, packaging etc).

Products are uniform or
identical (homogenous) and
produced in a large volume.
Nature of Process Cost Systems
Process and Job Cost Comparison
Illustration 17-2
17-2
Nature of Process Cost Systems
One Work In Process Account
Every production department has it’s own Work-In-Process account.
If you have 5 departments you have 5 “Work-In-Process” accounts
17-3
Nature of Process Cost Systems
Process Cost Flow
TCorp makes skateboard wheels. Manufacturing consists of two
processes: machining and assembly. Machining Dept shapes &
drills materials. Assembly Dept assembles & packages the parts.
Illustration 17-5
17-4
Assigning Manufacturing Costs


17-5
Handling materials, labor, and overhead same as in Ch 16.
►
Debit Raw Materials Inv for purchases of raw materials
CREDIT W-I-P to assign direct materials costs.
►
Debit Factory Labor for factory labor incurred.
CREDIT W-I-P to assign direct labor costs.
►
Debit Factory (Mfg) Overhead for actual cost incurred
CREDIT W-I-P to apply (estimated) Mfg Overhead costs.
Use of more than one W-I-P (Work-In-Process) is different
in “process cost” (ch 17) versus “job order cost” (Ch 16)
Nature of Process Cost Systems
Material Costs

17-6
A process cost system requires fewer material requisition
slips than a job order cost system.
►
Materials are used for processes and not specific jobs.
►
Requisitions are for larger quantities of materials.
►
Journal entry to record materials used:
Assigning Manufacturing Costs


17-7
Handling materials, labor, and overhead same as in Ch 16.
►
Debit Raw Materials Inv for purchases of raw materials
CREDIT W-I-P to assign direct materials costs.
►
Debit Factory Labor for factory labor incurred.
CREDIT W-I-P to assign direct labor costs.
►
Debit Factory (Mfg) Overhead for actual cost incurred
CREDIT W-I-P to apply (estimated) Mfg Overhead costs.
Use of more than one W-I-P (Work-In-Process) is different
in “process cost” (ch 17) versus “job order cost” (Ch 16)
Nature of Process Cost Systems
Factory Labor Costs
17-8

Time tickets may be used in both systems.

All labor costs incurred within a production department
are a cost of processing.

The journal entry to record factory labor costs:
Assigning Manufacturing Costs


17-9
Handling materials, labor, and overhead same as in Ch 16.
►
Debit Raw Materials Inv for purchases of raw materials
CREDIT W-I-P to assign direct materials costs.
►
Debit Factory Labor for factory labor incurred.
CREDIT W-I-P to assign direct labor costs.
►
Debit Factory (Mfg) Overhead for actual cost incurred
CREDIT W-I-P to apply (estimated) Mfg Overhead costs.
Use of more than one W-I-P (Work-In-Process) is different
in “process cost” (ch 17) versus “job order cost” (Ch 16)
Nature of Process Cost Systems
Manufacturing Overhead Costs
17-10

Objective of assigning overhead is to allocate overhead to
production departments on objective and equitable basis.

Use the activity that “drives” or causes the costs.

Machine time used - primary driver.

Journal entry to allocate overhead:
Nature of Process Cost Systems
17-11
Equivalent Units of Production
(EUP)
A term used in cost accounting to arrive at the cost per unit.
* associated with the units that are not completed at the end
of an accounting period (work-in-process).
* indicates how much work was done on the work units that
are still in-process units at the end of a designated period.
* basically, all of the work-in-process inventory at the end of
a period is expressed as fully-completed units which gives us
the equivalent units of production.
17-12
Equivalent Units of Production
(EUP)
Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
2 half full pitchers = 1 full pitcher.
+
17-13
=
Equivalent Units
Illustration: Suppose a professor is asked to compute the cost
of instruction per full-time equivalent student at your college.
The college’s finance dept. provides the following information.
Illustration 17-6
Costs:
Total cost of instruction
$9,000,000
Student population:
17-14
Full-time students
900
Part-time students
1,000
Equivalent Units
Illustration: Part-time students take 60% of the classes of a
full-time student during the year. To compute the number of fulltime equivalent students per year, you would make the
following computation.
Illustration 17-7
Cost of instruction per full-time equivalent student =
Total cost of instruction
Number of full-time equivalent students
$9,000,000
/
$
17-15
1,500
6,000
Equivalent Units
Weighted Average Method

Considers the degree of completion (weighting) of
units completed and transferred out and units in
ending work in process.

Most widely used method.

Beginning work in process not part of computation of
equivalent units.
Illustration 17-8
17-16
Equivalent Units
Weighted Average Method
Illustration: Output of the Packaging Dept consists of:
• 10,000 units completed and transferred out,
• 5,000 units in ending W-I-P which are 70% completed.
Calculate the equivalent units of production.
Completed units …………………...... __________
Work in process equivalent units …. __________
17-17
Equivalent Units
Weighted Average Method
Illustration: Output of the Packaging Dept consists of:
• 10,000 units completed and transferred out,
• 5,000 units in ending W-I-P which are 70% completed.
Calculate the equivalent units of production.
Completed units …………………………
Work in process EU (5,000 x 70%) …….
17-18
10,000
3,500
13,500
EUP while still “work-in-process”
80% of
Material
20% of
Material
W-I-P
Mixing
W-I-P
Baking
35% of
Labor and
Overhead
25% of
Labor and
Overhead
Month
End
At this point in time
100% Complete
for Materials
Month
End
At this point in time
Month
End
60% Complete
for Labor &
Overhead
The bread (product) is still a work “In Process”.
The Manufacturing Process is NOT complete.
17-19
Equivalent Units
Refinements on the Weighted-Average Method
Illustration: Kellogg produces Eggo® Waffles using three
departments: Mixing, Baking, and Packaging.
The Mixing Department combines dry ingredients, including
flour, salt, and baking powder, with liquid ingredients, including
eggs and vegetable oil, to make waffle batter.
Illustration 17-9 provides information related to the Mixing
Department at the end of June.
17-20
Equivalent Units
Refinements on the Weighted-Average Method
Illustration: Info for the Mixing Dept at the end of June.
* Conversion costs = labor costs + overhead costs.
17-21
Equivalent Units

Beginning work in process is not part of the
equivalent-units-of-production formula … WHY NOT ?
17-22
Conversion Costs
Conversion costs are those costs required to convert raw materials
into finished goods that are ready for sale.
Conversion costs = Direct labor + Manufacturing overhead
Examples of costs that may be considered conversion costs are:
Direct labor & benefits
Equipment depreciation
Equipment maintenance
Factory rent
Factory supplies
Factory insurance
Factory utilities
Factory supervisors
Most conversion costs are likely to be “manufacturing overhead”.
17-23
The fabricating department has the following production and
cost data for the current month.
Beginning
Work in Process
–0–
Units
Transferred Out
15,000
Ending
Work in Process
10,000
Materials are entered at the beginning of the process. The
ending work in process units are 30% complete as to
conversion costs.
Compute the equivalent units of production for (a) materials and
(b) conversion costs.
17-24
The fabricating department has the following production and
cost data for the current month.
Beginning
Work in Process
–0–
Units
Transferred Out
15,000
Ending
Work in Process
10,000
Compute the equivalent units of production for (a) materials and
(b) conversion costs.
Units transferred out …………. 15,000
Ending work in process units .. 10,000
25,000
17-25
The fabricating department has the following production and
cost data for the current month.
Beginning
Work in Process
–0–
Units
Transferred Out
15,000
Ending
Work in Process
10,000
Compute the equivalent units of production for (a) materials and
(b) conversion costs.
Units transferred out …… 15,000
Equiv Units-ending WIP .. 3,000
18,000
17-26
(10,000 x 30%)
Production
Cost
Report
17-27
Production Cost Report
A production cost report is the

Key document used to understand activities.

Prepared for each department and shows Production
Quantity and Cost data.

Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
17-28
Production Cost Report
Illustration 17-12
Flow of costs in making
Eggo® Waffles
17-29
17-30
17-31
Production Cost Report
Illustration 17-13
Unit and cost
data—Mixing
Department
17-32
Production Cost Report
Compute the Physical Unit Flow (Step 1)
17-33

Physical units - actual units to be accounted for
during a period, regardless of work performed.

Total units to be accounted for - units started (or
transferred) into production during the period + units
in production at beginning of period.

Total units accounted for - units transferred out
during period + units in process at end of period.
Production Cost Report
Compute the Physical Unit Flow (Step 1)
Illustration 17-14
17-34
Production Cost Report
Compute Equivalent Units of Production (Step 2)
Mixing Department

Department adds materials at beginning of process and

Incurs conversion costs uniformly during the process.
Illustration 17-15
17-35
Production Cost Report
Compute Unit Production Costs (Step 3)

Costs expressed in terms of equivalent units of
production.

When equivalent units of production are different for
materials and for conversion costs, three unit costs are
computed:
1. Materials
2. Conversion
3. Total Manufacturing
17-36
Production Cost Report
Compute Unit Production Costs (Step 3)
Compute total materials cost related to Eggo® Waffles:
Work in process, June 1
Direct materials costs
Illustration 17-16
$ 50,000
Cost added to production during June
Direct material cost
Total material costs
400,000
$450,000
Illustration 17-17
17-37
LO 6
Production Cost Report
Compute Unit Production Costs (Step 3)
Compute total conversion costs related to Eggo® Waffles:
Work in process, June 1
Conversion costs
Illustration 17-18
$ 35,000
Costs added to production during June
Conversion costs
Total conversion costs
170,000
$205,000
Illustration 17-19
17-38
Production Cost Report
Compute Unit Production Costs (Step 3)
Illustration 17-19
Compute total manufacturing costs per unit:
Illustration 17-20
17-39
Production Cost Report
Prepare a Cost Reconciliation Schedule
(Step 4)
Kellogg charged total costs of $655,000 to the Mixing
Department in June, calculated as follows.
Costs to be accounted for
Work in process, June 1
Started into production
Total costs
17-40
Illustration 17-21
$ 85,000
570,000
$655,000
Production Cost Report
Illustration 17-22
17-41
Illustration 17-23
Production Cost Report
Prepare the
Production
Cost Report
17-42
LO 7
Production Cost Report
Costing Systems – Final Comments

Companies often use a combination of a process cost
and a job order cost system.

Called operations costing, this hybrid system is similar
to process costing in its assumption that standardized
methods are used to manufacture the product.

At the same time, the product may have some
customized, individual features that require the use of
a job order cost system.
17-43