Process-Costing
Systems
Chapter 8
Process costing
Characteristics
Identical units
Continuous flow production
Never “complete”
Move from process (or department) to process
Costs are accumulated by process for a time
period
Allocated to “equivalent units” of output during the
period
Equivalent units
Amount of finished units that could have
been completed, given the materials or
effort involved
Three units started into production
One is completed
One is ¾ completed
One is ¼ completed
Two equivalent units are produced (1 + ¾ + ¼)
Equivalent units
May have different number of equivalent units
for materials, labor and overhead
Using the previous example, assume
all materials are added at the beginning
1 + 1 + 1 = 3 equivalent units for materials
conversion costs are added throughout the
process
1 + ¾ + ¼ = 2 equivalent units for
conversion costs
Equivalent units
Try this one
At the beginning of the period
5 units, each ½ complete, are in process
During the period
27 more units are put into production
At the end of the period
6 units, each ¾ complete, are still in process
How many equivalent units were produced?
The process
Step 1 – Summarize flow of physical units
How many were in beginning inventory?
How many were started?
How many are still in ending inventory?
Step 2 – Calculate equivalent units
Beginning inventory was completed
Of the units started
Some were completed
Some are in ending inventory
The process
Step 3 – Summarize costs to be
accounted for
Cost in beginning inventory
Cost added during the period
Step 4 – Calculate cost per equivalent unit
Step 5 – Assign costs to completed units
and ending inventory
Production cost report
Part 1 – Units
Summary of physical and equivalent units
Where did they come from?
Where did they go?
Part 2 – Costs
Summary of costs
Calculation of cost per equivalent units
Assignment of costs
Transferred out
Work in process
(Step 1)
Physical
units
Flow of units
Units to be accounted for:
Beginning work in process inventory
Units started this period
Total units to be accounted for
-
Units accounted for: (Step 3)
Completed and transferred out
In ending work in process inventory
Total units accounted for
Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory
Cost added in current period
Total costs to be accounted for
$
-
$
-
-
-
-
Cost per equivalent unit (Step 4)
Costs accounted for: (Step 5)
Cost assigned to units transferred out
Cost in ending work in process inventory
Total costs accounted for
(Step 2)
Equivalent units
Conversion
Direct
costs
materials
$
-
$
-
Example 1
No beginning inventory
18,000 units started
2,000 in ending work in process inventory
40% complete as to materials
30% complete as to conversion cost
Current period costs
Materials - $45,360
Conversion costs - $68,060
(Step 1)
Physical
units
Flow of units
Units to be accounted for:
Beginning work in process inventory
Units started this period
Total units to be accounted for
18,000
18,000
Units accounted for: (Step 3)
Completed and transferred out
In ending work in process inventory
Total units accounted for
Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory
Cost added in current period
Total costs to be accounted for
16,000
2,000
18,000
$
113,420
$ 113,420
Cost per equivalent unit (Step 4)
Costs accounted for: (Step 5)
Cost assigned to units transferred out
Cost in ending work in process inventory
Total costs accounted for
(Step 2)
Equivalent units
Direct
Conversion
materials
costs
$ 108,800
4,620
$ 113,420
16,000
800
16,800
$
16,000
600
16,600
$
$
45,360
45,360
$
68,060
68,060
$
2.70
$
4.10
$
43,200
2,160
45,360
$
65,600
2,460
68,060
$
$
Example 2
Beginning and ending inventories
4,000 units in beginning work in process
80% complete as to materials
50% complete as to conversion costs
25,000 units started
3,000 units in ending work in process
60% complete as to materials
50% complete as to conversion costs
Costs
Materials: Beg. WIP - $7,040, current - $51,660
Conversion: Beg. WIP - $1,500, current - $20,400
(Step 1)
Physical
units
Flow of units
Units to be accounted for:
Beginning work in process inventory
Units started this period
Total units to be accounted for
4,000
25,000
29,000
Units accounted for: (Step 3)
Completed and transferred out
In ending work in process inventory
Total units accounted for
Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory
Cost added in current period
Total costs to be accounted for
26,000
3,000
29,000
$
$
8,540
72,060
80,600
Cost per equivalent unit (Step 4)
Costs accounted for: (Step 5)
Cost assigned to units transferred out
Cost in ending work in process inventory
Total costs accounted for
(Step 2)
Equivalent units
Direct
Conversion
materials
costs
$
$
75,605
4,995
80,600
26,000
1,800
27,800
$
26,000
1,500
27,500
$
$
7,040
51,660
58,700
$
1,500
20,400
21,900
$
2.1115
$
0.7964
$
54,899
3,801
58,700
$
20,705
1,195
21,900
$
$
Example 3
Costs transferred from prior department
Units and costs transferred out of previous
department (example 2) to department 2
Cumulative costs from prior department are
treated as a separate cost category in current
department
Units are 100% complete as to prior department
Transferred-in units are the “units started” in the
current department
Example 3
In department 2
1,000 units in beginning work in process
70% complete as to materials
60% complete as to conversion costs
2,000 units in ending work in process
30% complete as to materials
20% complete as to conversion costs
Costs
Materials: Beg. WIP - $420, current - $14,940
Conversion: Beg. WIP - $840, current - $34,720
Flow of units
Units to be accounted for:
Beginning work in process inventory
Units started this period
Total units to be accounted for
Units accounted for: (Step 3)
Completed and transferred out
In ending work in process inventory
Total units accounted for
Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory
Cost added in current period
Total costs to be accounted for
(Step 1)
Physical
units
Conversion
costs
1,000
26,000
27,000
3,890
$
$ 125,265
$ 129,155
$ 122,440
6,715
$ 129,155
$
$
420
14,940
15,360
$
840
34,720
35,560
2.8976
$
0.6000
$
1.4000
72,440
5,795
78,235
$
15,000
360
15,360
$
35,000
560
35,560
$
$
2,630
75,605
78,235
$
$
$
$
25,000
400
25,400
25,000
600
25,600
25,000
2,000
27,000
25,000
2,000
27,000
Cost per equivalent unit (Step 4)
Costs accounted for: (Step 5)
Cost assigned to units transferred out
Cost in ending work in process inventory
Total costs accounted for
Prior
department
(Step 2)
Equivalent units
Direct
materials
$
$
First-in, first-out method
Previous examples used weighted
average method
Costs in beginning inventory were combined
with current period costs
First-in, first-out method separates the two
Assumes units in beginning inventory were
finished first
First-in, first-out method
Equivalent unit calculation includes
Work done to complete the units in beginning
inventory
Work done on new units started
100% for those started and completed
<100% for those started but not completed
First-in, first-out method
 Beginning inventory costs are only assigned to
units in beginning inventory
 Some current period costs are added to complete them
 Units started are only assigned current period costs
 Costs accounted for includes
 Beginning inventory cost transferred out
 Current costs added to complete beginning inventory
 Current costs of units started and completed
 Current costs in ending inventory
First-in, first-out method
 Example 2 using FIFO method
 4,000 units in beginning work in process
 80% complete as to materials
 50% complete as to conversion costs
 25,000 units started
 3,000 units in ending work in process
 60% complete as to materials
 50% complete as to conversion costs
 Costs
 Materials: Beg. WIP - $7,040, current - $51,660
 Conversion: Beg. WIP - $1,500, current - $20,400
Example 2 - FIFO
Flow of units
Units to be accounted for:
Beginning work in process inventory
Units started this period
Total units to be accounted for
Units accounted for: (Step 3)
Beginning inventory completed
Started and transferred out
Total units transferred out
In ending work in process inventory
Total units accounted for
(Step 1)
Physical
units
(Step 2)
Equivalent units
Conversion
Direct
costs
materials
4,000
25,000
29,000
4,000
22,000
26,000
3,000
29,000
800
22,000
22,800
1,800
24,600
2,000
22,000
24,000
1,500
25,500
Example 2 - FIFO
Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory
Cost added in current period
Total costs to be accounted for
$
$
8,540
72,060
80,600
Cost per equivalent unit (Step 4)
Costs accounted for: (Step 5)
Cost from beginning inventory transferred out
Cost to complete beginning inventory
Total cost for beginning inventory
Cost assigned to units started and completed
Total cost of units transferred out
Cost in ending work in process inventory
Total costs accounted for
$
$
$
$
8,540
3,280
11,820
63,800
75,620
4,980
80,600
$
$
$
7,040
51,660
58,700
$
1,500
20,400
21,900
$
2.1000
$
0.8000
$
7,040
1,680
8,720
46,200
54,920
3,780
58,700
$
1,500
1,600
3,100
17,600
20,700
1,200
21,900
$
$
$
$
$
$
Accounting for spoilage
Spoiled units have incurred some cost but
are not transferred to the next stage
Treated as a separate line item for
Units accounted for
Equivalent units
Costs accounted for
Accounting for spoilage
 Example 2 with spoilage
 4,000 units in beginning work in process
 80% complete as to materials, 50% as to conversion costs
 25,000 units started
 800 units spoiled
 50% complete as to materials, 30% as to conversion costs
 2,200 units in ending work in process
 60% complete as to materials, 50% as to conversion costs
 Costs
 Materials: Beg. WIP - $7,040, current - $51,660
 Conversion: Beg. WIP - $1,500, current - $20,400
(Step 1)
Physical
units
Flow of units
Units to be accounted for:
Beginning work in process inventory
Units started this period
Total units to be accounted for
4,000
25,000
29,000
Units accounted for: (Step 3)
Completed and transferred out
Spoiled units
In ending work in process inventory
Total units accounted for
Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory
Cost added in current period
Total costs to be accounted for
26,000
800
2,200
29,000
$
$
8,540
72,060
80,600
Cost per equivalent unit (Step 4)
Costs accounted for: (Step 5)
Cost assigned to units transferred out
Cost assigned to spoiled units
Cost in ending work in process inventory
Total costs accounted for
(Step 2)
Equivalent units
Direct
Conversion
materials
costs
$
$
$
75,884
1,039
3,676
80,600
26,000
400
1,320
27,720
$
26,000
240
1,100
27,340
$
$
7,040
51,660
58,700
$
1,500
20,400
21,900
$
2.1176
$
0.8010
$
$
55,058
847
2,795
58,700
$
$
20,827
192
881
21,900
$
$
Journal entries
Same as for job-order costing
Dollar value of units transferred out
represents the cost moving from WIP to
the next stage in the process
Another WIP account (department)
Finished goods inventory
Dollar value of spoiled goods is debited to
an expense account
Operation costing
Hybrid of job-order and process-costing
Products goes through a combination of
common processes and individual
processes
No special accounting required
Units may be transferred out of a process to
become a separate job or vice-versa