ACC 3200
Process Costing
Learning Objectives
 Describe the key features of a process costing system.
 Reconcile the number of physical units using the weighted
average method
 Calculate equivalent units using the weighted average method.
 Calculate equivalent units using the weighted average method
 Prepare a process costing production report using the weighted
average method
 Prepare Journal Entries for Process Costing
3-3
Job Order versus Process Costing
Job Order Costing versus Process Costing
Description
Type of
product
Manufacturing
approach
Job Order Costing
Unique products and services,
such as a custom-built ship.
Customized to the needs of the
customer or client
Cost
accumulation
Major cost
report
Costs accumulated by job or
customer
Job cost sheet for each unique
unit, customer, or job
Process Costing
Homogeneous products and
services, such as cans of soda
Mass-production of products in
series of standardized
processes
Costs accumulated by process
Production report for each
major production process
3-4
Flow of Costs in Process Costing
3-5
Process Costing Production Report
The foundation of a process costing system is the
production report. In the report we provide information
about:
1.The number of units produced.
2.The manufacturing costs transferred into Work in
Process Inventory.
3.The manufacturing costs transferred out of Work in
Process Inventory to Finished Goods Inventory.
4.The number of units remaining in process at the end of
the period.
5.The cost of units remaining in process at the end of the
period.
3-6
Process Costing Production Report
Section 1 of Example Production Report
(Unit = 1 Barrel of Wine)
CK Mondavi
Process Costing Production Report
Crushing, Fermenting and Aging (CFA) Process
Physical
Units:
Units
Beginning Inventory
200
Started this Period
1,800
Total
2,000
Equivalent Units
Direct
Materials Conversion
Completed
1,600
1,600
1,600
Ending Inventory
400
400
240
Total
2,000
2,000
1,840
The report tells managers
about the total number of
units worked on and where
they are in the process.
Equivalent units are used to
convert partially complete
units into the equivalent
number of full units.
3-7
Process Costing Production Report
The costs
are either
transferred
Section
2 of
Example Production
out with the units completed, or
kept in the processing (Costs)
department.
CK Mondavi
Process Costing Production Report
Crushing, Fermenting and Aging (CFA) Process
Direct
Costs:
Total
Conversion
Materials
$ 165,120
$ 81,120
$ 84,000
Beginning Inventory
1,728,000
918,000
810,000
Current Period Costs
$ 1,893,120
999,120
894,000
Total Cost
1,840
2,000 ÷
÷
Equivalent Units
543
$
447
$
Cost Per Equivalent Unit
Cost of Units Completed
Ending Inventory
Total
$ 715,200
178,800
$ 894,000
$ 868,800
130,320
$ 999,120
$ 1,584,000
309,120
$ 1,893,120
Report
The second part of
the production
report shows the
total manufacturing
costs incurred during
the period.
3-8
Weighted Average vs. FIFO
Process Costing
3-9
Preparing the Production Report
(Weighted Average Method)
3-10
Step 1: Reconcile the Number of
Physical Units
3-11
Step 1: Reconcile the Number of
Physical Units
Mondavi CFA Process Physical Flow
Beginning Barrels in Process
Barrels Started
Total Barrels to Account For
200
1,800
2,000
Barrels Completed
Ending Barrels in Process
Total Barrels Accounted For
?
1,600
400
2,000
3-12
Diagram of the Crushing, Fermenting,
and Aging Process
3-13
Step 2: Translate Physical Units into
Equivalent Units
We need to calculate equivalent units because a
process usually has some partially completed units
in its beginning and ending inventory.
+
=
1
3-14
Step 2: Translate Physical Units into
Equivalent Units
1. Direct materials are added at the beginning of the process. So, once
a unit is started, it will have 100% of the required direct materials.
2. Conversion costs are incurred uniformly in the process.
3. The 1,600 units that were transferred to bottling during the period are
100% complete for material and conversion.
4. The 400 units in ending inventory are 60% complete as to conversion
costs.
3-15
Step 2: Translate Physical Units into
Equivalent Units
Exh.
20-22
3-16
Step 3: Calculate Cost per Equivalent
Unit
÷
÷
3-17
Step 4: Reconcile the Total Cost of
Work in Process
Work in Process Inventory (CFA)
Beginning costs:
Cost of goods completed
Direct materials
84,000
Conversion costs
81,120
Current period costs:
Direct materials
810,000
Conversion costs
918,000
Total cost
1,893,120
Ending Balance
?
?
Work in Process Inventory (Bottling)
3-18
Step 4: Reconcile the Total Cost of
Work in Process
Cost Assigned to Units Completed and Ending Inventory
Completed
Ending Inventory
Direct Materials
Cost
Direct
per
Material
Units
Unit
Cost
1,600 × $ 447 = $715,200
400 ×
447 = 178,800
$894,000
Conversion
Cost
per
Conversion
Units
Unit
Cost
1,600 × $ 543 = $ 868,800
240 × 543 =
130,320
$ 999,120
Total Cost
$ 1,584,000
309,120
$ 1,893,120
3-19
Step 4: Reconcile the Total Cost of
Work in Process
Work in Process Inventory (CFA)
Beginning costs:
Cost of goods completed
Direct materials
84,000
Conversion costs
81,120
Current period costs:
Direct materials
810,000
Conversion costs
918,000
Total cost
1,893,120
Ending Balance
1,584,000
309,120
Work in Process Inventory (Bottling)
1,584,000
3-20
Step 5: Prepare a Production Report
Section 1 of the Production Report
CK Mondavi
Process Costing Production Report (Weighted Average)
Crushing, Fermenting and Aging (CFA) Process
For the Quarter Ended March 31, 2009
Step 1
Physical
Units:
Units
Units to be accounted for:
Beginning inventory
200
Started this period
1,800
Step 2
Total
2,000
Equivalent Units
Direct
Units accounted for:
Materials Conversion
Completed
1,600
1,600
1,600
Ending inventory
400
400
240
Total
2,000
2,000
1,840
3-21
Step 5: Prepare a Production Report
Section 2 of the Production Report
CK Mondavi
Process Costing Production Report (Weighted Average Method)
Crushing, Fermenting and Aging (CFA) Process
For the Quarter Ended March 31, 2009
Step 3: Cost per equivalent unit
Costs:
Direct
Costs to be accounted for:
Materials
Conversion
Total
Beginning inventory
$
84,000
$ 81,120
$ 165,120
Current period costs
810,000
918,000
1,728,000
Total cost
894,000
999,120
$ 1,893,120
Equivalent units
÷
2,000 ÷
1,840
Cost per equivalent unit
$
447
$
543
$
990
Cost accounted for:
Step 4: Reconcile the total cost
Cost of units completed
$ 715,200
$ 868,800
$ 1,584,000
Ending inventory
178,800
130,320
309,120
Total
$ 894,000
$ 999,120
$ 1,893,120
3-22
Additional Factors in Processing
Costing
1. We have not discussed process costing when the FIFO
method is applied. This material in covered in the
Supplement to this chapter. The only difference
between the two methods is how we treat beginning
inventory.
2. We have not considered how to account for
subsequent departments in process costing. We did
not look at extending our example to cover the Bottling
Department.
3-23
Journal Entries for Process Costing
Purchase of Raw Materials
Mondavi purchased $35,000 of materials on account.
Issue of Raw Material into Production
Mondavi adds $20,000 of grapes to production.
3-24
Journal Entries for Process Costing
Recording Actual Conversion Costs
Mondavi incurred the following actual conversion costs:
Description
Conversion Cost (Actual)
Cash
Utilities Payable
Accumulated Depreciation
Debit
Credit
36,250
16,000
5,000
15,250
3-25
Journal Entries for Process Costing
Recording Applied Conversion Costs
Mondavi applies conversion costs to work in process
based on a predetermined rate, using direct materials
cost as the allocation base. The rate is 125% of
direct materials cost.
3-26
Summary of Recorded Transactions
Raw Materials
Beg. Bal. = 0
Work in Process (CFA)
Beg. Bal. = 0
Pur. = 35,000
Conversion Cost
Actual
36,250
Applied
Work in Process
Bottling
3-27
Journal Entries for Process Costing
Transfer of Cost from CFA to Bottling
Mondavi transfers the entire balance, $45,000, from
the work in process (CFA) account to the Bottling
work in process account.
3-28
Journal Entries for Process Costing
Issue of Raw Material into the Bottling Process
Mondavi issues an $10,000 worth of direct
materials into Bottling Department.
3-29
Journal Entries for Process Costing
Recording Applied Conversion Costs
Mondavi applies conversion costs to the Bottling
Department using direct materials cost as the
allocation base. The rate is 87.5 percent of
direct materials cost.
3-30
Updated Summary of Recorded
Transactions
Raw Materials
Beg. Bal. = 0
Work in Process CFA
Beg. Bal. = 0
Pur. 35,000
Trans. 45,000
5,000
0
Conversion Cost
Actual
Applied
Work in Process
Bottling
Beg. Bal. = 0
36,250
2,500
63,750
3-31
Journal Entries for Process Costing
Transferring to Finished Good Inventory
Mondavi transfers the entire balance from Bottling
and Packaging to Finished Goods Inventory.
Description
Finished Goods Inventory
Work-in-Process Inventory (Bottling)
Debit
Credit
63,750
63,750
Unit costs for the 1,250 cases (15,00 bottles) produced:
3-32
Journal Entries for Process Costing
Sales of Finished Goods.
Mondavi sold 12,000 bottles in the winery gift shop for
for $8.00 per bottle. The entry to record the sale is:
Description
Cash (12,000 × $8.00)
Debit
Credit
96,000
Sales Revenue
96,000
The entry to record the cost of goods sold is:
Description
Cost of Goods Sold (12,000 × $4.25 )
Finished Goods Inventory
Debit
Credit
51,000
51,000
3-33
Journal Entries for Process Costing
Adjusting for Underapplied Conversion Cost
Description
Cost of Goods Sold
Debit
Credit
2,500
Conversion Cost
2,500
Conversion Cost
Actual
36,250
Applied
25,000
8,750
Underapplied 2,500
Finished Goods
Cost of Goods Sold
Beg. Bal. = 0
Goods Comp. 63,750
12,750
Adjusted 53,500
Supplement
FIFO Method
3-35
Step 1: Reconcile the Number of
Physical Units
Physical
Units
Beginning
Units in
Process
+
Units
Started and
Completed
+
Ending
Units in
Process
FIFO assumes that the units in beginning inventory
were completed first. So, not all units that were
completed during the current period were started in the
current period.
3-36
Step 1: Reconcile the Physical Units
Mondavi CFA Process Physical Flow
Beginning Barrels in Process
Barrels Started and Completed
Ending Barrels in Process
Total Barrels Accounted For
200
1,400
400
2,000
Units Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400
OR
Units Started
and Completed
=
Units
Beginning
‒
Completed
Units
= 1,600 – 200 = 1,400
OR
Units Started
and Completed
=
Units
Ending
‒
Started
Units
= 1,800 – 400 = 1,400
3-37
Step 2: Translate Physical Units into
Equivalent Units
Beginning inventory is 100% complete as to
materials and 70% complete as to conversion.
Complete as to materials
200 units × 30% = 60
400 units × 60% = 240
3-38
Step 3: Calculate Cost per Equivalent
Unit
3-39
Step 4: Reconcile the Total Cost of
Work in Process
Work in Process Inventory (CFA)
Beginning costs:
Direct materials
84,000 Mondavi CFA Process
84,000
Conversion costs
81,120
81,120
Cost of Ending Inventory
Conversion
Total
Current period costs:
60 × 540 Materials
32,400
Equivalent
units in Ending
Inventory
400
240
Direct materials
810,000
1,400 × 450
630,000
Cost
per Equivalent
× $
450 × $ 756,000
540
Conversion
costs Unit918,000 1,400 × 540
Cost of
Ending Inventory
$ 180,000 + $ 1,583,520
129,600 = $ 309,600
Total
cost
1,893,120
Ending Balance
309,600
Work in Process Inventory (Bottling)
1,583,520
3-40
Step 5: Prepare a Production Report
Section 1 of the Production Report
CK Mondavi
Process Costing Production Report (FIFO Method)
Crushing, Fermenting and Aging (CFA) Process
For the Quarter Ended March 31, 2009
Step 1
Physical
Units:
Units
Units to be accounted for:
Beginning inventory
200
Started this period
1,800
Step 2
Total
2,000
Equivalent Units
Direct
Units accounted for:
Materials Conversion
Beginning work in process
200
60
Completed
1,400
1,400
1,400
Ending inventory
400
400
240
Total
2,000
1,800
1,700
3-41
Step 5: Prepare a Production Report
Section 2 of the Production Report
CK Mondavi
Process Costing Production Report (FIFO Method)
Crushing, Fermenting and Aging (CFA) Process
For the Quarter Ended March 31, 2009
Step 3: Cost per equivalent unit
Costs:
Direct
Materials
Conversion
Current period costs
810,000
918,000
Equivalent units
÷
1,800
÷
1,700
Cost per equivalent unit
$
450
$
540
Cost to be accounted for:
Step 4: Reconcile the total cost
Beginning work in process
$ 84,000
$ 81,120
Current period costs
810,000
918,000
Total costs
$ 894,000
$ 999,120
Cost accounted for:
Beginning inventory balance
$ 84,000
$ 81,120
Cost to complete beginning inv.
32,400
Started and completed
630,000
756,000
Ending inventory
180,000
129,600
Total costs
$ 894,000
$ 999,120
Total
$ 1,728,000
$
990
$ 165,120
1,728,000
$ 1,893,120
$ 165,120
32,400
1,386,000
309,600
$ 1,893,120
End of Topic 6