CHAPTER 3
Process Costing
Difference Between Job-Order
and Process Costing Systems
Job-Order Costing
 Each unique product or batch is considered a
job
 Manufacturing costs are traced to specific jobs
Process Costing
 Used when homogenous items are produced
 Total costs are divided by total units produced
Process Costing Example
Job-Order Costing System
Process Costing System
Product and Cost Flows
Product Flows Through Departments
 A product typically passes through
multiple departments
 Conversion Costs (Labor and Overhead)
Product and Cost Flows
Cost Flows Through Accounts
 Direct Material
 Direct Labor
 Manufacturing Overhead
 Transferred-in Cost
Flow of Cost Between Processing
Departments
Study Break #1
Which one(s) of the following
characteristics are associated with a
process costing system?
a.
b.
c.
d.
e.
f.
Heterogeneous products
Homogeneous products
Continuous production
Discontinuous production
Costs are traced to jobs
Costs are traced to processing departments
Answer:
b, c, and f
Study Break #2
The best example of a business
requiring a process costing system
would be a(n):
a.
b.
c.
d.
Custom cabinet shop
Antique furniture restorer
Soap manufacturer
Automobile repair shop
Answer:
c. Soap manufacturer
Study Break #3
The costs in a process cost system
are traced to:
a.
b.
c.
d.
Specific jobs
Specific customers
Specific company administrators
Specific production departments
Answer:
d. Specific production departments
Calculating Unit Cost
Equivalent Units
 Partially completed units are converted
to a comparable number of completed
units
Equivalent units – Material and
Converision costs
Example Exercise #1
McMillian Tire Company produces tires used on
small trailers. The month of June ended with
300 tires in process, 85% complete as to direct
materials and 50% complete as to conversion
costs; 2,500 tires were transferred to finished
goods during the month and 2,300 were started
during the month. The beginning WIP
inventory was 65% complete as the direct
materials and 45% complete as to conversion
costs.
1. Determine the denominators to be used in the
calculations of cost per equivalent unit for
materials and conversion costs.
Example Exercise #1 Solution
Materials
 Units completed
 Equivalent units (300*85%)
2,500
255
2,755 units
Labor
 Units completed
 Equivalent units (300*50%)
2,500
150
2,650 units
Calculating Unit Cost
Cost Per Equivalent Unit
 Average unit cost
 Formula
Cost in Beginning WIP + Cost incurred in current period
Units completed + Equivalent units in Ending WIP
Example Exercise #2
The balance in beginning WIP at Bing Rubber
Company for direct labor was $135,000. During
the month of March, an additional $650,000 of
direct labor was incurred, and 25,000 pounds of
rubber were produced. At the end of March,
8,000 pounds of rubber were in process and the
units were 50% complete. At the start of March,
the company had 5,000 pounds of rubber that
were 30% complete.
1. Calculate the cost per equivalent unit for labor
assuming that labor is added uniformly
throughout the production process.
Example Exercise #2 Solution
Direct Labor
 Beginning WIP
 March labor
 Total Labor Cost
$135,000
$650,000
$785,000
Units
 Units completed
 Equivalent units (8,000*50%)
 Total Units
25,000
4,000
29,000
Cost per Equivalent Unit
 $785,000 / 29,000 pounds = $27.07 per pound
Production Cost Report
 Reconciliation of Units
 Reconciliation of Costs
 Details of Cost per Equivalent Unit
Calculations
Reconciliation of Units
Reconciliation of Costs
Basic Steps in Process Costing
 Account for the number of physical units
 Calculate the cost per equivalent unit for
materials, labor, and overhead
 Assign cost to items completed and items
in ending Work in Process
 Account for the amount of product cost
Dealing with Transferred-In Cost
 Process Costing Systems generally
use multiple processes
 Items completed in one processing
department, costs are transferred to
the next department
 When units are completed in the
final process, the costs are
transferred to finished goods
Process Costing and Incremental
Analysis
Incremental Analysis
 Compare change in revenue with
change in cost
Process Costing
 Utilizes an average of fixed and variable
costs
 Could impact decision making when
considering additional production
Full and Incremental Cost