CHAPTER
3
PROCESS COSTING
CHAPTER INTRODUCTION
There are two primary systems for calculating the cost of inventory: a job-order costing system and a
process costing system. In a job-order costing system, each unique product is a “job” for which the
company needs cost information. Thus, it is necessary to trace manufacturing costs to specific jobs.
When jobs are completed, the cost of the jobs is removed from Work in Process Inventory and added
to Finished Goods Inventory. When completed jobs are sold, the cost of the jobs is removed from
Finished Goods Inventory and added to Cost of Goods Sold.
This chapter describes a process costing system, which is essentially a system of averaging.
Dividing production costs by the total number of homogeneous items produced results in an average
unit cost. When items are completed, multiplying the number of units completed by the average unit
cost determines the cost to remove from Work in Process Inventory and add to Finished Goods
Inventory. When items are sold, multiplying the number of units sold by the average unit cost
determines the cost to remove from Finished Goods Inventory and add to Cost of Goods Sold.
Objectives, Terms, and Discussions.
LO1
Describe how products flow through departments and how costs flow through accounts.
PRODUCT AND COST FLOWS
Product Flows through Departments – In the manufacturing operations of a company using
process costing, a product typically must pass through two or more departments, and costs are
accumulated in each department. Generally, identifying the stage when materials enter the production
process is easy. However, determining exactly when labor and overhead are added to the process is
more difficult. Labor and overhead are often grouped together and referred to as conversion costs.
These costs are often assumed to enter the process evenly throughout the process.
Cost Flows through Accounts – The product costs accumulated in a process costing system are
essentially the same costs considered in a job-order costing system: direct material, direct labor, and
manufacturing overhead. In addition, a processing department may have a cost called transferred-in
cost. This is a cost incurred in one processing department that is transferred to the next processing
Chapter 3 Process Costing
49
department. For example, the cost transferred into packaging from mixing becomes a material cost
added to packaging. However, it is called a “transferred in” cost.
Each processing department accumulates product cost in a separate departmental Work in
Process account. The following entries illustrate the flow of costs between processing departments:
Assume that $142,000 of direct material is used during the month in the Mixing Department:
Work in Process, Mixing
Raw Materials Inventory
(To record use of raw materials)
142,000
142,000
Assume that $62,200 of direct labor cost is incurred during the month in the Mixing
Department:
Work in Process, Mixing
Wages Payable
(To record direct labor cost)
62,200
62,200
To assign overhead to products in a process costing system, a company may use either actual
overhead cost or a predetermined overhead rate. However, most companies use a predetermined
overhead rate to assign overhead to Work in Process. Assume that at the beginning of the year, the
Mixing Department estimates it will incur $2,160,000 of overhead cost and $720,000 of direct labor
cost. Using direct labor as an allocation base, the department calculates a predetermined overhead
rate of $3 for each dollar of direct labor cost. If $62,200 of direct labor costs were incurred during the
current month, $186,600 ($62,200 × $3) of overhead would be assigned to Work in Process:
Work in Process, Mixing
Manufacturing Overhead
(To record manufacturing overhead
applied to Work in Process)
186,600
186,600
The cost of items transferred from one department to the next is referred to as transferred-in
cost. Suppose that during the month, the Mixing Department completes units with a cost of $360,000
and transfers the units to the Packaging Department. The entry to record the transfer is:
Work in Process, Packaging
Work in Process, Mixing
(To record transfer of units from
Mixing to Packaging)
LO2
360,000
360,000
Discuss the concept of an equivalent unit.
CALCULATING UNIT COST
Process costing is essentially a system of averaging. An essential concept in process costing is the
concept of an equivalent unit.
Equivalent Units – In calculating the average unit cost, it is necessary to take into account the
number of partially completed units in work in process in terms of an equivalent number of whole
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Study Guide to accompany Jiambalvo Managerial Accounting
units. When partially completed units are converted to a comparable number of completed units, they
are referred to as equivalent units. For example, if 100 units in work in process are 50 percent
completed, then they are equivalent to 50 whole units (100 × 50%). The number of equivalent units
in work in process may be different for material and conversion costs because material and
conversion costs enter the production process at different times.
LO3
Calculate the cost per equivalent unit.
Cost per Equivalent Unit - The average cost in a process costing system is referred to as cost per
equivalent unit. The formula for calculating the cost per equivalent unit is:
Cost per
equivalent unit
=
Cost in beginning WIP + Costs incurred in current period
Units completed + Equivalent units in ending WIP
The numerator represents the total cost for which a processing department must account in each
period. The cost per equivalent unit is used to spread the total cost over the units completed and the
units in process at the end of the period.
LO4
Calculate the cost of goods completed and the ending Work in Process balance in a
processing department.
CALCULATING AND APPLYING COST PER EQUIVALENT UNIT: MIXING DEPARTMENT
EXAMPLE
An example demonstrates the application of cost per equivalent units for the Mixing Department of
Kent Chemical Company. Suppose at the beginning of April, the Mixing Department has on hand
beginning work in process inventory consisting of 10,000 gallons of wood preservative that are 80
percent complete. During the month 70,000 gallons are started and 60,000 gallons are completed. At
the end of April, 20,000 gallons are on hand that are 50 percent complete. The cost in beginning
Work in Process consists of $18,000 of material cost, $7,800 of labor cost, and $23,400 of overhead
cost. During April, the Mixing Department incurs $142,000 of material cost and $62,200 of labor
cost. The predetermined overhead rate is $3 for each dollar of direct labor cost. Therefore $186,600
($3 × $62,200) of overhead is applied to production during the month. The cost per equivalent unit
for the Mixing Department is as follows:
Cost
Beginning WIP
Cost incurred during April
Total Cost
Material
$ 18,000
142,000
$160,000
Labor
$ 7,800
62,200
$70,000
Overhead
$ 23,400
186,600
$210,000
Units
Units completed
Equivalent units, Ending WIP
Total units
60,000
20,000
80,000
60,000
10,000
70,000
60,000
10,000
70,000
Cost per equivalent unit
(Total cost  total units)
$2
+
$1
+
$3
Total
$ 49,200
390,800
$440,000
=
$6
As shown above, 60,000 gallons were competed by the Mixing Department during April and
transferred to the Packaging Department. The unit cost is $6. Therefore, $360,000 ($60,000 gallons x
Chapter 3 Process Costing
51
$6) of cost is related to the units completed and transferred out. The entry at the end of April to
record the transfer is:
Work in Process, Packaging
Work in Process, Mixing
(To record transfer of units from
Mixing to Packaging)
360,000
360,000
The ending balance in Work in Process in the Mixing Department is $80,000 [(20,000 × $2
of material) + (10,000 × $1 of labor) + (10,000 × $3 of overhead)].
LO5
Describe a production cost report.
PRODUCTION COST REPORT
A production cost report is an end-of-the-month report for a process costing system that provides a
reconciliation of units and costs as well as details of the cost per equivalent unit calculations. These
reconciliations help ensure that mistakes are not made in calculations.
Reconciliation of Units – Assuming no loss of units (e.g., due to evaporation, damage, or theft), the
number of units in beginning work in process inventory plus the number of units started during the
period will be equal to the number of units completed plus the number of units in ending work in
process inventory. In the previous example, the Mixing Department had 10,000 units in beginning
work in process Inventory and 70,000 units were started during the period, which means that 80,000
units must be accounted for as completed or remaining in ending work in process inventory. Since
60,000 units were completed and transferred to the Packaging Department and 20,000 units remained
in ending work in process inventory, all the units are accounted for.
Units in beginning
Work in Process
10,000
+ Units started
70,000
=
Units completed
60,000
+ Units in ending
Work in Process
20,000
80,000
80,000
Reconciliation of Costs – For each period, the total cost that must be accounted for is the sum of the
costs in beginning Work in Process and the costs incurred during the period. As shown in Illustration
3-7 in the textbook, in the Mixing Department this amounts to $440,000. The cost must be either
transferred out with the completed units or remain in ending Work in Process inventory. Since
$360,000 was transferred out to Packaging and $80,000 remained in ending Work in Process
inventory, the total cost of $440,000 has been accounted for.
Costs in beginning
Work in Process
$ 49,200
+ Costs incurred
During the period
390,800
$440,000
Cost
transferred out
=
+ Cost in ending
Work in Process
$360,000
80,000
$440,000
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Study Guide to accompany Jiambalvo Managerial Accounting
BASIC STEPS IN PROCESS COSTING: A SUMMARY
There are four basic steps in process costing.
 Step 1. Account for the number of physical units. This is the number of physical units
in work in process at the beginning of the period plus the number of units started during
the period. This should equal the number of units completed and transferred to the next
department or to Finished Goods Inventory plus the units remaining in ending Work in
Process Inventory.
 Step 2. Calculate the cost per equivalent unit for material, labor and overhead. The
numerator includes the cost in beginning Work in Process plus the cost incurred during
the month for material, labor and overhead. The denominator includes the number of
units completed plus the number of equivalent units in ending Work in Process
Inventory.
 Step 3. Assign cost to items completed and items remaining in ending Work in Process
Inventory. The cost of completed items is the product of the total cost per equivalent unit
and the number of units completed. The cost remaining in ending Work in Process is the
sum of the products of equivalent units in process and cost per equivalent unit for
material, labor, and overhead.
 Step 4. Account for the amount of product cost. The cost of beginning Work in Process
Inventory plus the cost incurred during the period should equal the amount of cost
assigned to completed items plus the amount of cost assigned to ending Work in Process
Inventory.
This chapter illustrated the use of process costing in the Mixing Department of Kent
Chemical Company. The units were transferred from Mixing to Packaging. In addition to using the
same procedures already used to calculate product cost in the Mixing Department, Packaging must
also account for the transferred-in costs. In steps one and four of the Production Cost Report,
Packaging will account for its units and amounts in the same manner as did Mixing. However, in step
two, the calculation of cost per equivalent unit must account for the transferred-in costs. The sum of
transferred in cost in beginning Work in Process plus the cost transferred-in during the month is the
numerator of the calculation. The denominator is the sum of the units completed plus the equivalent
units in ending Work in Process. The result is a cost per equivalent unit for transferred-in cost. In
step three, once the units are completed in the Packaging Department, they include the cost of both
the mixing operation and the packaging operation and they are ready to be transferred to Finished
Goods. The cost of ending Work in Process is composed of material, labor, overhead, and
transferred-in cost. For each cost category, the equivalent units in ending Work in Process is
multiplied by the cost per equivalent unit. Illustration 3-8 in the textbook provides an example of the
Production Cost Report for the Packaging Department.
PROCESS COSTING AND INCREMENTAL ANALYSIS
Recall from Chapter 1 that whenever we make a decision, we need to perform incremental
analysis. We need to determine the change in revenue and the change in cost assuming a particular
decision alternative is selected. If the change is positive, the decision alternative is “good” since it
will have a positive impact on firm profit. If the net change is negative, the decision alternative is
“bad” in that it will have a negative impact on firm profit. When using process costing information to
make a decision, we have to be careful to recognize that the cost per unit is typically the average of
fixed and variable costs. Thus, it does not measure the change in cost associated from producing an
additional unit.
Chapter 3 Process Costing
53
‘YOU GET WHAT YOU MEASURE!” AND MANUFACTURING PROCESS
Cost information for a manufacturing firm can be quite useful. Additionally, nonmonetary
performance measures can help a manufacturing company create value. If a performance measure is
viewed as important, then employees will pay more attention to the measure. The important point to
remember is that manufacturing companies can create value by measuring performance related to
important company goals.
Just as with job-order costing, process costing systems provide information on the full cost of
units produced rather than their incremental cost. Since decision making relies on incremental
analysis, care must be taken not to treat full cost as if it were incremental cost.
Review of Key Terms
Conversion costs: The total cost of labor and
overhead. (90)
Cost per equivalent unit: The sum of the cost
in beginning work in process and the cost
incurred in the current period divided by the
sum of the units completed and the equivalent
units in ending work in process. (94)
Equivalent units: Partially completed units
expressed as a comparable number of whole
units. (93)
Production cost report: A report in a
process costing system that provides a
reconciliation of units and a reconciliation
of costs as well as the details of the cost
per equivalent unit calculations. (96)
Transferred-in cost: The cost a prior
processing department incurs and transfers
to the next processing department. (91)
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Study Guide to accompany Jiambalvo Managerial Accounting
Chapter 3 – True/False
________ 1.
The two primary systems for calculating the cost of inventory are process and joborder.
________ 2.
Process costing is essentially a system of averaging.
________ 3.
An example of a firm using a process costing system is Exxon Mobil.
________ 4.
In a process costing system, dividing production costs by the total number of
homogeneous items produced results in equivalent units of production.
________ 5.
The product costs accumulated in a process costing system are not the same as those
costs considered in a job-order costing system.
________ 6.
When a processing department completes items, they are transferred to the next
department along with the related costs. This cost is called sunk cost.
________ 7.
The journal entry to record the use of direct material in the Mixing Department
would include a credit to Work in Process, Mixing.
________ 8.
In the formula for determining cost per equivalent unit, the costs in beginning Work
in Process plus the costs incurred in the current period is divided by the units
completed plus equivalent units in beginning inventory.
________ 9.
A production cost report provides a reconciliation of only units.
________ 10.
In a production cost report, for each period the total costs to be accounted for is the
sum of the beginning Work in Process and the costs incurred during the period.
________ 11.
The cost of beginning Work in Process Inventory plus the costs incurred during the
period should equal the amount of costs assigned to completed items plus the amount
of costs assigned to items in ending Work in Process Inventory.
________ 12.
Step 2 in process costing is to account for the number of physical units.
Chapter 3 Process Costing
55
Chapter 3 - Key Terms Matching
Match the terms, found in Chapter 3, with the following definitions:
a. Conversion costs
b. Cost per equivalent unit
c. Equivalent units
d. Production cost report
e. Transferred-in cost
________ 1.
Partially completed units converted to a comparable number of completed units.
________ 2.
A cost incurred in one processing department that is transferred to the next
processing department.
________ 3.
An end-of-the-month report for a process costing system that provides a
reconciliation of units and a reconciliation of costs as well as the details of the cost
per equivalent unit calculations.
________ 4.
The average unit cost in a process costing system.
________ 5.
Labor and overhead.
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Study Guide to accompany Jiambalvo Managerial Accounting
Chapter 3 – Multiple Choice
1.
Process costing is a method for accumulating cost in a manufacturing environment that is:
a.
the only generally accepted method.
b.
essentially a process of averaging.
c.
a method where manufacturing costs are traced to specific jobs.
d.
an appropriate method of assigning costs to inventory for a custom home
manufacturer.
2.
Conversion costs consist of:
a.
direct labor and indirect labor only.
b.
direct labor and manufacturing overhead.
c.
direct materials and direct labor only.
d.
direct materials and indirect materials only.
3.
In the manufacturing operations of a company using process costing, a product typically must
a.
pass through two or more departments and costs are accumulated in each department.
b.
pass through two or more processes and costs are accumulated by job.
c.
pass through the entire manufacturing process before costs are assigned to products.
d.
be assigned costs based on estimated cost of materials, labor and overhead.
4.
Generally, identifying the stage in which an item is added to the production process is easy
for which of the following?
a.
Material, labor and overhead.
b.
Material and labor only.
c.
Labor only.
d.
Material only.
5.
In a process costing system, each processing department accumulates product cost in which
of the following departmental account?
a.
Finished goods.
b.
Manufacturing Overhead.
c.
Work in Process.
d.
Raw materials.
6.
The Body Care, Inc. produces body lotion that goes through three departments – A, B, and C.
Department B has 80,000 liters in the beginning Work in Process. An additional 350,000
liters are added into production during the current period. The ending Work in Process
inventory totaled 60,000 liters. How many liters were transferred to Department C?
a.
330,000.
b.
370,000.
c.
410,000.
d.
430,000.
7.
In a process costing system, costs are accumulated:
a.
By job.
b.
By processing department.
a.
By jobs and processing departments.
b.
By accounting cycle.
Chapter 3 Process Costing
57
8.
The number of equivalent units in Work in Process may be different for material and
conversion costs because:
c.
conversion costs cannot be assigned to Work in Process until the manufacturing
process is complete while material costs can be assigned at any time.
d.
material cost is assigned for each equivalent unit while conversion cost is assigned
for each actual unit.
c.
material and conversion costs enter the production process at different times.
d.
conversion cost can be assigned to Work in Process at any time while all material
costs are added at the beginning of the manufacturing process.
9.
The formula for determining the cost per equivalent unit is:
a. Cost of beginning WIP + Cost incurred in current period
Units completed + Equivalent units in ending WIP
b. Cost incurred in current period + Cost of ending WIP
Units completed + Equivalent units in ending WIP
c. Cost incurred in current period
Units completed
d.
Cost in ending WIP
Equivalent units in ending WIP
The following data are to be used in answering 10 and 11.
The Dudes Diaper Company uses a process costing system to account for the cost of manufacturing
cloth diapers. The diapers go through two departments, Cutting and Assembly. Assembly started the
month with 8,000 diapers in beginning Work in Process Inventory that were 70 percent complete
with respect to conversion costs. An additional 40,000 diapers were transferred from Cutting to
Assembly. At the end of the month there were 6,000 diapers in the ending Work in Process Inventory
of the Assembly Department that were 75 percent with respect to conversion costs.
10.
How many diapers were transferred to finished goods during the month?
a.
600.
b.
2,000.
c.
38,000.
d.
42,000.
11.
What were the equivalent units of production for conversion costs in the Assembly
Department for the month?
a.
38,000.
b.
38,900.
c.
41,100.
d.
46,500.
12.
Which of the following is not one of the steps in solving a process costing problem?:
a.
Account for the number of physical units.
b.
Calculate the cost per equivalent unit.
c.
Assign cost to items completed and items in ending Work in Process
d.
Assign cost in ending Work in Process to specific jobs.
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Study Guide to accompany Jiambalvo Managerial Accounting
Exercise 3 –1
The Cabelle Corporation uses a process costing system. Materials are added at
the beginning of the process and conversion costs are incurred uniformly throughout the
manufacturing process. On December 1, 2013, the Assembly Department had 12,000 units that were
60 percent complete. During December the department added 78,000 units into production. On
December 31, the Assembly Department had 16,000 units in ending work in process that were 40
percent complete with respect to labor and overhead.
1.
2.
Prepare a Unit Reconciliation schedule of a Production Cost Report for the Assembly
department.
Units in Beginning WIP
_____________
Units started during December
_____________
Units to account for
_____________
Units completed and transferred to Sewing
_____________
Units in Ending WIP
_____________
Units accounted for
_____________
Compute total equivalent units for materials and for conversion costs for the Assembly
Department for December.
Units
Materials
Labor
Overhead
Units completed
__________
__________
__________
EU, ending WIP
__________
__________
__________
Total Units
__________
__________
__________
Chapter 3 Process Costing
59
Exercise 3 – 2
Berry, Inc. produces an array of organic spice mixes that goes through two
processes – blending and packaging. Material and conversion costs are incurred uniformly
throughout the manufacturing process. Complete the Cost Reconciliation section of the May, 2014
Production Cost Report for the Blending Department of Berry, Inc.
Production Cost Report
Blending Department
May 2014
Unit Reconciliation
Units in Beginning WIP (80% complete)
Units started during May
Units to account for
Units completed and transferred
Units in Ending WIP (60% complete)
Units accounted for
4,000
68,000
72,000
70,000
2,000
72,000
Cost per Equivalent Unit Calculation
Material
Labor
Overhead
Total
5,440
80,000
$85,440
$ 600
35,000
$35,600
$ 16,040
236,720
$252,760
Cost
Beginning WIP
Cost incurred – May
Total
$ 10,000
121,720
$131,720
Units
Units completed
EU ending WIP
Total
70,000
1,200
71,200
70,000
1,200
71,200
70,000
1,200
71,200
Cost per EU
$1.85
$1.20
$.50
$
$3.55
Cost Reconciliation
Total cost to account for
_______________
Cost of completed units (__________@_____)
_______________
Cost of Ending WIP:
Materials (__________@_____)
_______________
Labor (__________@_____)
_______________
Overhead (__________@_____)
_______________
Total cost accounted for
_______________
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Study Guide to accompany Jiambalvo Managerial Accounting
Exercise 3 – 3 Sand Toys, Inc. buys plastic that is used as a direct material in the production
of toy pails. After work is completed in the Shaping Department, pails are transferred to the
Finishing Department where a handle is added. Direct materials are added at the beginning of the
process while conversion costs are incurred uniformly throughout the process. During the month of
June the following cost were incurred in the Shaping Department:
Direct Materials
Labor
Overhead
$16,200
7,900
11,850
During June, the first month of operation, the Shaping Department started a total of 20,000 pails, of
which a total of 17,500 were completed during the month. The remaining 2,500, which were in work
in process on June 30, were 90 percent complete with respect to conversion costs.
1.
2.
Prepare a Unit Reconciliation schedule for Sand Toys.
Units in Beginning WIP
____________________
Units started during June
____________________
Units to account for
____________________
Units completed and transferred to Finishing
____________________
Units in Ending WIP
____________________
Units accounted for
____________________
Compute total equivalent units for materials and for conversion costs for the Shaping
Department for June.
Units
Materials
Labor
Overhead
Units completed
__________
__________
__________
EU, ending WIP
__________
__________
__________
Total Units
__________
__________
__________
Chapter 3 Process Costing
61
Exercise 3 – 3 Continued
3.
Compute the cost per unit for materials and conversion.
Material
Labor
Overhead
Total Cost
Costs:
Beginning WIP
__________
__________
__________
__________
Cost incurred – June
__________
__________
__________
__________
Total
__________
__________
__________
__________
Units completed
__________
__________
__________
EU, Ending WIP
__________
__________
__________
Total
__________
__________
__________
Cost per equivalent unit
__________
__________
__________
Units
4.
__________
Complete a cost reconciliation schedule.
Total cost to account for
_______________
Cost of completed units (__________@_____)
_______________
Cost of Ending WIP:
Materials (__________@_____)
_______________
Labor (__________@_____)
_______________
Overhead (__________@_____)
_______________
Total cost accounted for
_______________
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Study Guide to accompany Jiambalvo Managerial Accounting
Problem 3 – 4
The Mathis Company manufacturers a product that goes through two
departments: Mixing and Finishing. During the month of May the following data were recorded for
the Mixing Department:
Units in Beginning WIP
Units started during May
Units transferred
Units in Ending WIP
Costs added during May
Units
16,000
50,000
40,000
26,000
Materials
$ 79,730
Labor
$ 33,680
Overhead
$ 16,760
$220,000
$400,000
$100,000
The ending work in process was 70 percent complete with respect to materials and 60 percent
complete with respect to labor and overhead. Prepare a Production Cost Report for May.
Production Cost Report
Mixing Department
May
Unit Reconciliation
Units in Beginning WIP
Units started during May
Units to account for
Units completed and transferred to Finishing
Units in Ending WIP
Units accounted for
____________________
____________________
____________________
____________________
____________________
____________________
Cost per Equivalent Unit Calculation
Material
Labor
Costs:
Beginning WIP
__________
__________
Cost incurred – May
__________
__________
Total
__________
__________
Units
Units completed
__________
__________
EU, Ending WIP
__________
__________
Total
__________
__________
Cost per equivalent unit
__________
__________
Overhead
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
Cost Reconciliation
Total cost to account for
Cost of completed units (__________@_____)
Cost of Ending WIP:
Materials (__________@_____)
Labor (__________@_____)
Overhead (__________@_____)
Total cost accounted for
Total Cost
__________
_______________
_______________
_______________
_______________
_______________
_______________
Chapter 3 Process Costing
Problem 3 – 5
Fill in the missing information in Mitchell’s Production Cost Report.
Unit Reconciliation
Units in Beginning WIP (100% material, 10% conversion costs)
Units started
Units to account for
Units completed
Units in Ending WIP (80% material, 60% conversion costs)
Units accounted for
Cost per Equivalent Unit Calculation
Material
Labor
Costs:
Beginning WIP
$6,680
$16,915
Cost incurred – May
?
?
Total
?
?
Units completed
EU, Ending WIP
Total
Cost per equivalent unit
?
?
?
$3.00
Cost of completed units
Cost of Ending WIP:
Materials
Labor
Overhead
Total cost accounted for
Overhead
?
?
?
$8.00
Cost Reconciliation
Total cost to account for
5,000
?
?
?
12,000
?
$1,159,800
$969,000
?
?
?
$1,159,80
Total Cost
$30,405
?
?
$54,000
?
?
?
?
?
$14.50
?
63
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Study Guide to accompany Jiambalvo Managerial Accounting
Solutions – True/False
1. T
2. T
3. T
4. F In a process costing system, dividing production costs by the total number of equivalent
items produced results in an average unit cost.
5. F The product costs accumulated in a process costing system are essentially the same costs
considered in a job-order costing system.
6. F When one processing department completes its work, the items are transferred to the
next department along with the related costs. This cost is referred to as transferred-in
costs.
7. F The journal entry to record the use of direct material in the Mixing Department would
include a debit to Work in Process, Mixing.
8. F In the formula for determining cost per equivalent unit, the costs in beginning Work in
Process plus the costs incurred in the current period is divided by the units completed
plus equivalent units in ending inventory.
9. F A production cost report provides a reconciliation of units and costs.
10. T
11. T
12. F Step 1 in process costing is to account for the number of physical units.
Solutions – Key Terms Matching
1.
2.
3.
c. Equivalent units
e. Transferred-in cost
d Production cost report
4.
5.
b. Cost per equivalent unit
a. Conversion costs
Solutions – Multiple Choice
1.
2.
3.
4.
5.
6.
b
b
a
d
c
b
7.
8.
9.
10.
11.
12.
b
c
a
d
d
d
Chapter 3 Process Costing
65
Solution – Exercise 3 – 1
The Cabelle Corporation uses a process costing system.
Materials are added at the beginning of the process and conversion costs are incurred uniformly
throughout the manufacturing process. On December 1, 2013, the Assembly Department had 12,000
units that were 60 percent complete. During December the department added 78,000 units into
production. On December 31, the Assembly Department had 16,000 units in ending work in process
that were 40 percent complete with respect to labor and overhead.
1. Prepare a Unit Reconciliation schedule of a Production Cost Report for the Assembly
department.
2.
Units in Beginning WIP
12,000
Units started during December
78,000
Units to account for
90,000
Units completed and transferred to Sewing
74,000
Units in Ending WIP
16,000
Units accounted for
90,000
Compute total equivalent units for materials and for conversion costs for the Assembly
Department for January.
Units
Materials
Labor
Overhead
Units completed
74,000
74,000
74,000
EU, ending WIP
16,000
6,400
6,400
Total Units
90,000
80,400
80,400
66
Study Guide to accompany Jiambalvo Managerial Accounting
Solution – Exercise 3 – 2
Berry, Inc. produces an array of organic spice mixes that goes
through two processes – blending and packaging. Material and conversion costs are incurred
uniformly throughout the manufacturing process. Complete the Cost Reconciliation section of the
May, 2014 Production Cost Report for the Blending Department of Berry, Inc.
Production Cost Report
Blending Department
May 2014
Unit Reconciliation
Units in Beginning WIP (80% complete)
Units started during May
Units to account for
Units completed and transferred
Units in Ending WIP (60% complete)
Units accounted for
4,000
68,000
72,000
70,000
2,000
72,000
Cost per Equivalent Unit Calculation
Material
Labor
Overhead
Total
5,440
80,000
$85,440
$ 600
35,000
$35,600
$ 16,040
236,720
$252,760
Cost
Beginning WIP
Cost incurred – May
Total
$ 10,000
121,720
$131,720
Units
Units completed
EU ending WIP
Total
70,000
1,200
71,200
70,000
1,200
71,200
70,000
1,200
71,200
Cost per EU
$1.85
$1.20
$.50
$
Cost Reconciliation:
Total cost to account for
$252,760
Cost of completed units (70,000 @ $3.55)
$248,500
Cost of ending WIP
Materials (1,200 units @ $1.85)
Labor (1,200 units @ $1.20)
Overhead (1,200 units @ $0.50)
$2,220
1,440
600
4,260
$252,760
$3.55
Chapter 3 Process Costing
67
Solution – Exercise 3 – 3
Sand Toys, Inc. buys plastic that is used as a direct material in
the production of toy pails. After work is completed in the Shaping Department, pails are transferred
to the Finishing Department where a handle is added. Direct materials are added at the beginning of
the process while conversion costs are incurred uniformly throughout the process. During the month
of June the following cost were incurred in the Shaping Department:
Direct Materials
Labor
Overhead
$16,200
7,900
11,850
During June, the first month of operation, the Shaping Department started a total of 20,000 pails, of
which a total of 17,500 were completed during the month. The remaining 2,500, which were in work
in process on June 30, were 90 percent complete with respect to conversion costs.
1. Prepare a Unit Reconciliation schedule for the Sand Toys.
Units in Beginning WIP
-0Units started during June
20,000
Units to account for
20,000
Units completed and transferred to Finishing
17,500
Units in Ending WIP
2500
Units accounted for
20,000
2. Compute total equivalent units for materials and conversion costs for June.
Units
Materials
Labor
Units completed
17,500
17,500
EU, ending WIP
2,500
2,250
Total Units
20,000
19,750
3.
Compute the cost per unit for materials and conversion.
Material
Labor
Costs:
Beginning WIP
-0-0Cost incurred – June
$16,200
$7,900
Total
$16,200
$7,900
Units
Units completed
EU, Ending WIP
Total
Cost per equivalent unit
17,500
2,500
20,000
$.81
4. Complete a cost reconciliation schedule.
Reconciliation
Total cost to account for
Cost of completed units (17,500 @ $1.81)
Cost of Ending WIP:
Materials (2,500 @ $.81)
Labor ( 2,250 @ $.40)
Overhead ( 2,250 @ $ .60)
Total cost accounted for
17,500
2,250
19,750
$.40
Overhead
Overhead
17,500
2,250
19,750
Total Cost
-0$11,850
$11,850
-0$35,950
$35,950
17,500
2,250
19,750
$ .60
$1.81
$35,950
$31,675
2,025
900
1,350
4,275
$35,950
68
Study Guide to accompany Jiambalvo Managerial Accounting
Solution – Problem 3 – 4
The Mathis Company manufacturers a product that goes
through two departments: Mixing and Finishing. During the month of May the following data were
recorded for the Mixing Department:
Units in Beginning WIP
Units started during May
Units transferred
Units in Ending WIP
Costs added during May
Units
16,000
50,000
40,000
26,000
Materials
$ 79,730
Labor
$ 33,680
Overhead
$ 16,760
$220,000
$400,000
$100,000
The ending work in process was 70 percent complete with respect to materials and 60 percent
complete with respect to labor and overhead. Prepare a Production Cost Report for May.
Production Cost Report
Mixing Department
May
Unit Reconciliation
Units in Beginning WIP
Units started during May
Units to account for
16,000
50,000
66,000
Units completed and transferred to Finishing
Units in Ending WIP
Units accounted for
40,000
26,000
66,000
Cost per Equivalent Unit Calculation
Cost
Material
Beginning WIP
$ 79,730
Cost incurred - May
220,000
Total
$299,730
Units
Units completed
40,000
EU, Ending WIP
18,200
Total
58,200
Cost per EU
$5.15
Labor
$ 33,680
400,000
$433,680
Overhead
$ 16,760
100,000
$116,760
40,000
15,600
55,600
40,000
15,600
55,600
$7.80
$2.10
Cost Reconciliation
Total costs to account for
$850,170
Cost of completed units (40,000 @ $15.05)
Cost of Ending WIP:
Materials (18,200 @ $5.15)
Labor (15,600 @ $7.80)
Overhead (15,600 @ $2.10)
Total cost accounted for
$602,000
$93,730
121,680
32,760
248,170
$850,170
Total
$130,170
720,000
$850,170
$15.05
Chapter 3 Process Costing
Solution – Problem 3 – 5
Fill in the missing information in Mitchell’s Production Cost
Report.
Unit Reconciliation
Units in Beginning WIP (100% material, 10% conversion costs)
Units started
Units to account for
Units completed
Units in Ending WIP (80% material, 60% conversion costs)
Units accounted for
Cost per Equivalent Unit Calculation
Material
Labor
Costs:
Beginning WIP
$6,680
$16,915
Cost incurred – May
136,120
344,685
Total
142,800
361,600
Units completed
EU, Ending WIP
Total
Cost per equivalent unit
Cost Reconciliation
Total cost to account for
Cost of completed units
Cost of Ending WIP:
Materials
Labor
Overhead
Total cost accounted for
69
38,000
9,600
47,600
$3.00
Overhead
38,000
7,200
45,200
$8.00
$1,159,800
$969,000
$28,800
57,600
104,400
Cost per EU: $3.00 + $8.00 + $14.50 = $25.50
Units complete: $969,000/$25.50 = 38,000
Units accounted for: 38,000 + 12,000 = 50,000
Units to account for: 50,000
Units Started: 50,000 – 5,000 = 45,000
EU, Ending WIP material: 12,000 x .80 = 9,600
EU, Ending WIP labor and overhead: 12,000 x .60 = 7,200
Cost of Ending WIP Material: $3 x 9,600 = $28,800
Cost of Ending WIP Labor: $8.00 x 7,200 = $57,600
Cost of Ending WIP Overhead: $14.50 x 7,200 = $104,400
Cost incurred in May: $1,159,800 = $54,000 = $1,105,800
Total cost, material: 47,600 x $3.00 = $142,800
Cost incurred May: $142,800 - $6,680 = $136,120
Total cost, labor: 45,200 x $8 = $361,600
Cost incurred May: $361,600 - $16,913 = $344,685
Total cost, overhead: 45,200 x $14.50 = $655,400
Cost incurred, May: $655,400 = $30,405 = $624,995
5,000
45,000
50,000
38,000
12,000
50,000
190,800
$1,159,800
Total Cost
$30,405
624,995
655,400
$54,000
1,105,800
1,159,800
38,000
7,200
45,200
$14.50
$25.50