Chapter 3
Process Costing
QUESTIONS
1. Job-order costing systems and process costing systems are the two primary accounting
systems used to record production costs.
2. Equivalent units is the quantity of partially completed units expressed in terms of whole
units. The number is used in calculating the average unit costs under process costing.
3. Direct labor and overhead, together, are called conversion costs.
4. The costs associated with units received from a preceding department within the company
for further processing are called transferred-in costs.
5. Material may enter at the start of a production process while labor and overhead are
incurred throughout the process.
6. Cost per equivalent unit = (Cost in beginning work in process + Cost incurred in current
period) ÷ (Units completed + Equivalent units in ending work in process).
7. Cost to account for = (Cost in beginning work in process + Cost incurred in current period).
8. Reconciliation helps to ensure that mistakes are not made in calculations and units are not
“lost.”
9. Transferred-in costs are the costs associated with units received from a preceding
department within the company received for further processing. Therefore, they occur in all
production departments except the first.
10. The four steps involved in preparing a production cost report are as follows:
a. Account for the number of physical units
b. Calculate the cost per equivalent unit for material, labor, and overhead
c. Assign costs to items completed and items in ending work in process
d. Account for the amount of product cost
3-2
Jiambalvo Managerial Accounting
EXERCISES
E1. In the production of chips, much of manufacturing overhead is a fixed cost.
This cost is assigned to completed items and work in process. By starting a
large number of items at year end, and given the simplifying assumption that
items in process are 50% complete, a significant proportion of the fixed
manufacturing overhead will end up in work in process, which reduces the
cost of finished items and ultimately the cost of goods sold. The result is that
profit will be artificially inflated.
This approach to increasing profit may mislead investors and other
stakeholders and cause them to make bad decisions. Thus, the behavior is not
ethical.
E2. Cost per equivalent unit is calculated for material, labor and overhead. For
each of these items, we sum the cost in beginning work in process and the cost
incurred during the period. This becomes the numerator of the calculation.
Then, we determine the number of units completed and the equivalent units in
ending work in process. This becomes the denominator of the calculation.
It is important to note that the equivalent units in ending work in process may
be different for material, labor, and overhead. This is because material, labor,
and overhead enter the production process at different times.
E3. a. There are 11 steps:
Brew House
Step 1, malted barley—barley is mixed with water, dried and cured.
Step 2, mill—the grain is cracked by steel grinders.
Step 3, mash tun—malt is mixed with warm water in the mash tun.
Step 4, lauter tun—the mash is pumped into the lauter tun where it is sprayed
with hot water to help extract sugar from the malt.
Chapter 3 Process Costing
3-3
Step 5, brew kettle–the base of beer, or “wort,” is pumped into the brew kettle
where it is boiled, concentrated and clarified.
Step 6, heat exchanger—the wort is cooled before it is moved to a
fermentation cellar where it will become beer. In order to speed the cooling
process, it is passed through a heat exchanger.
In the cellar
Step 7, fermenter—here, specially cultured yeast, Saccharomyces cerevisiae,
is added to induce fermentation.
Step 8, filtration—after the beer has been cold cellared in the fermenter, it is
passed through a filter.
Packaging
Step 9, bottling—the bottling line is made up of several components. At the
heart of the system is a counter-pressured filler which is capable of filling 400
bottles a minute.
Step 10, kegging—Redhook uses ‘Snakey’ kegs, which have the advantage of
being much easier to sterilize and fill than older types such as ‘Golden Gates.’
Step 11, shipping—ales are shipped out to stores and pubs across the United
States in refrigerated trucks to keep them fresh.
b. For each type of beer that Red Hook produces, a large number of identical
units are produced in a continuous process. Thus, the company is likely to
use process costing.
c. Barley is added at the start. In step 7, yeast is added.
d. The process is capital intensive. Large pieces of equipment are maintained
by only one or two workers. For example, the automated bottling line fills
400 bottles a minute.
3-4
Jiambalvo Managerial Accounting
E4. Units in beginning work in process
Units started in July
Units to account for
Units completed
Units in ending work in process
Total units accounted for
1,000
43,000
44,000 cans
40,000
?
44,000 cans
Units in ending work in process = 44,000 - 40,000 = 4,000 cans.
E5. Units in beginning work in process
Units started in August
Units to account for
Units completed
Units in ending work in process
Total units accounted for
10,000
?
52,000 gallons
40,000
12,000
52,000 gallons
Units started in August = 52,000 - 10,000 = 42,000 gallons.
Chapter 3 Process Costing
E6. Direct Labor
Beginning WIP
Cost incurred in May
Total cost
$120,000
500,000
$620,000
Units
Units completed
Equivalent units, ending WIP
(2,000 pounds × 50%)
Total
10,000 pounds
1,000
11,000 pounds
Cost per equivalent unit = $620,000 ÷ 11,000 pounds = $56.36 per pound
E7. Let X = the cost in beginning work in process
Material:
($140,000 + X) ÷ (30,000 + 10,000) = $5
X = $60,000
Labor:
($60,000 + X) ÷ (30,000 + 2,000) = $2
X = $4,000
Overhead:
($87,000 + X) ÷ (30,000 + 2,000) = $3
X = $9,000
3-5
3-6
Jiambalvo Managerial Accounting
E8. The denominator is equal to units completed plus equivalent units in ending
work in process.
Material
Units completed
Equivalent units in ending work in process
Total
2,700
400
3,100
Labor
Units completed
Equivalent units in ending work in process
Total
2,700
250
2,950
Overhead
Units completed
Equivalent units in ending work in process
Total
2,700
250
2,950
E9. a. Cost per equivalent unit for material is $6.10. Material cost in items
completed is $244,000. Therefore, the number of completed units is 40,000
(i.e., $244,000 ÷ $6.10).
Units in beginning work in process
Units started in July
Units to account for
1,000
43,000
44,000 cans
Units completed
Units in ending work in process
Total units accounted for
40,000
?
44,000
This implies that 4,000 units are in ending work in process.
b. Cost of ending work in process is $5,800 as follows:
Material (.2 × 4,000 units × $6.10)
Labor and overhead (.1 × 4,000 units × $2.30)
Ending work in process
$4,880
920
$5,800
Chapter 3 Process Costing
E10. Ending Work in Process
Material (800 × 1.0 × $0.50)
Labor and overhead (800 × .8 × $0.90)
Total
Cost of Items Completed
Material (4,000 × $0.50)
Labor and overhead (4,000 × $0.90)
Total
$400
576
$976
$2,000
3,600
$5,600
E11. Ending Work in Process
Material (4 × .8 × $2,500)
Labor (4 × .6 × $1,000)
Overhead (4 × .6 × $2,000)
Total
$ 8,000
2,400
4,800
$15,200
Cost of Items Completed
Material (85 × $2,500)
Labor (85 × $1,000)
Overhead (85 × $2,000)
Total
$212,500
85,000
170,000
$467,500
3-7
3-8
Jiambalvo Managerial Accounting
E12. a. Material:
Cost in beginning work in process
Cost incurred during the period
Total
Conversion costs:
Cost in beginning work in process
Cost incurred during the period
Total
Equivalent units in ending work in process:
Material (1,000 units × .8)
Conversion costs (1,000 × .4)
Cost per equivalent unit for material:
$422,180 ÷ (41,000 + 800)
Cost per equivalent unit for conversion costs:
$380,880 ÷ (41,000 + 400)
Total cost per equivalent units
b. Cost of items completed in October:
41,000 units × $19.30
c. Cost of ending work in process:
Material cost
(800 × $10.10)
Conversion cost
(400 × $9.20)
Total cost of ending work in process
$ 18,000
404,180
$422,180
$
9,000
371,880
$380,880
800
400
$10.10
9.20
$19.30
$791,300
$ 8,080
3,680
$11,760
Chapter 3 Process Costing
PROBLEMS
P1. a. The company started the month with 5,000 units and 100,000 units were
entered into production. Thus, the company must account for 105,000
units. At the end of the month, the company had 2,000 units in ending
work in process. This implies that 103,000 units were completed
(105,000 - 2,000).
The denominators for the calculations of cost per equivalent are:
Units
Completed
103,000
103,000
103,000
Material
Labor
Overhead
Beginning WIP
Material
Labor
Overhead
Total
Equivalent Units
in Ending WIP
2,000
1,600
1,600
Cost Added
Total
$65,250
6,151
7,147
$78,548
$68,250
6,276
7,322
$81,848
$3,000
125
175
$3,300
Total
105,000
104,600
104,600
Denominator Cost per EU
105,000
104,600
104,600
b. Cost of items completed in May is $80,340:
103,000 units × $0.78 = $80,340
Cost of items in ending work in process:
Material (2,000 equivalent units × $0.65)
Labor (1,600 equivalent units × $0.06)
Overhead (1,600 equivalent units × $0.07)
Total
$1,300
96
112
$1,508
c. Beginning work in process
Cost added
Total
$ 3,300
78,548
$81,848
Cost of items completed
Cost of ending WIP
Total
$80,340
1,508
$81,848
$0.65
0.06
0.07
$0.78
3-9
3-10
Jiambalvo Managerial Accounting
P2. a. The company started the month with 600 units and 3,200 units were
entered into production. Thus, the company must account for 3,800 units.
At the end of the month, the company had 800 units in ending work in
process. This implies that 3,000 units were completed (3,800 - 800).
The denominators for the calculations of cost per equivalent are:
Material
Labor
Overhead
Units
Completed
3,000
3,000
3,000
Beginning
WIP
Material
$ 48,000
Labor
12,600
Overhead
84,000
Total $144,600
Equivalent Units
in Ending WIP
480
400
400
Cost Added
$ 317,400
94,500
590,900
$1,002,800
Total
$ 365,400
107,100
674,900
$1,147,400
Cost per
Denominator
EU
3,480
$105.00
3,400
31.50
3,400
198.50
$335.00
b. Cost of items completed in May is $1,005,000:
3,000 units × $335.00 = $1,005,000
Cost of items in ending work in process:
Material (480 equivalent units × $105.00)
Labor (400 equivalent units × $31.50)
Overhead (400 equivalent units × $198.50)
Total
Total
3,480
3,400
3,400
$ 50,400
12,600
79,400
$142,400
c. Beginning work in process
Cost added
Total
$ 144,600
1,002,800
$1,147,400
Cost of items completed
Cost of ending WIP
Total
$1,005,000
142,400
$1,147,400
Chapter 3 Process Costing
P3. a. Olympic Laminators—September
Unit Reconciliation
Units in beg. WIP (60% material, 30% conversion costs)
Units started during
Units to account for
3-11
3,000
4,000
7,000
Units completed
Units in ending WIP (50% material, 20% conversion costs)
Units accounted for
2,000*
5,000
7,000
*Computed as 7,000 - 5,000 = 2,000.
Cost per Equivalent Unit Calculation
Material
Cost
Beginning WIP
$144,000
Cost incurred during Sept. 216,000
Total
$360,000
Units
Units completed
Equivalent units,
ending WIP
Total
Cost per equivalent unit
Labor
Overhead
$120,000
531,000
$651,000
$ 20,000
52,000
$72,000
2,000
2,000
2,000
2,500
4,500
1,000
3,000
1,000
3,000
$80
$217
$24
Total
$ 284,000
799,000
$1,083,000
$321
Cost Reconciliation
Total cost to account for
$1,083,000
Cost of completed units (2,000 units × $321)
Cost of ending WIP
Material (2,500 equivalent units × $80)
Labor (1,000 equivalent units × $217)
Overhead (1,000 equivalent units × $24)
Total cost accounted for
$ 642,000
b. Finished Goods Inventory
Work in Process Inventory
$200,000
217,000
24,000
441,000
$1,083,000
642,000
642,000
3-12
Jiambalvo Managerial Accounting
P4. Aussie Yarn Company—August
Unit Reconciliation
Units in beg. WIP ((100% material, 60% conversion costs)
Units started during
Units to account for
Units completed
Units in ending WIP (100% material, 40% conversion costs)
Units accounted for
5,000
25,000
30,000
26,000*
4,000
30,000
*Computed as 30,000 - 4,000 = 26,000.
Cost per Equivalent Unit Calculation
Cost
Beginning WIP
Cost incurred during Sept.
Total
Material
Labor
Overhead
Total
$ 4,000
22,280
$26,280
$ 1,050
9,990
$11,040
$ 1,450
11,522
$12,972
$ 6,500
43,792
$50,292
Units
Units completed
Equivalent units,
ending WIP
Total
26,000
26,000
26,000
4,000
30,000
1,600
27,600
1,600
27,600
Cost per equivalent unit
$0.876
$0.400
$0.470
$1.746
Cost Reconciliation
Total cost to account for
$50,292
Cost of completed units (26,000 units × $1.746)
Cost of ending WIP
Material (4,000 equivalent units × $0.876)
Labor (1,600 equivalent units × $0.400)
Overhead (1,600 equivalent units × $0.470)
Total cost accounted for
$45,396
$3,504
640
752
4,896
$50,292
Chapter 3 Process Costing
P5. a.
b.
c.
d.
Work in process, dept. 1
80,000
Material inventory
To record material used in department 1
80,000
Work in process, dept. 2
20,000
Material inventory
To record material used in department 2
20,000
Work in process, dept. 1
Wages payable
To record labor in department 1
45,000
45,000
Work in process, dept. 2
Wages payable
To record labor in department 2
55,000
3-13
55,000
Work in process, dept. 1
230,000
Manufacturing overhead
To record overhead applied in department 1
230,000
Work in process, dept. 2
110,000
Manufacturing overhead
To record overhead applied in department 2
110,000
Work in process, dept. 2
381,000
Work in process, dept. 1
381,000
To record cost of units transferred from department 1 to department 2
Note: This includes all beginning costs and costs incurred, since there is
no ending work in process in this department (26,000 + 80,000 + 45,000
+ 230,000).
Finished goods inventory
576,000
Work in process, dept. 2
576,000
To record cost units completed and transferred to finished goods.
Note: 46,000 + 20,000 + 55,000 + 110,000 + 381,000 – 36,000 =
576,000.
3-14
Jiambalvo Managerial Accounting
P6. a.
b.
c.
d.
e.
P7. a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Work in process
40,000
Material inventory
To record material used in production
Work in process
Wages payable
To record labor
8,000
8,000
Work in process
Manufacturing overhead
To record overhead applied
32,000
Finished goods inventory
Work in process
To record cost of units completed
80,000
Cost of goods sold
Finished goods inventory
To record cost of units sold
80,000
300
2,000
300
180
180
2,000
1,880
1,880
2.25
5.40
10.80
18.45
40,000
32,000
80,000
80,000
Chapter 3 Process Costing
P8. Step 1.
Cost per equivalent unit = 1.6667 + 1.3091 + 2.6182 = 5.594
Cost of completed items (given) = $2,797,000
Cost per equivalent unit = $5.594
Therefore, the number of completed units = $2,797,000 ÷ 5.594 = 500,000
Step 2.
Units in ending WIP (given)
Add number of completed units
Units accounted for
10,000
500,000
510,000
Step 3.
Units to account for = units accounted for
Less units in beginning WIP (given)
Units started during December
510,000
20,000
490,000
Step 4.
Equivalent units, ending WIP:
Material (10,000 × 100%)
Labor (10,000 × 10%)
Overhead (10,000 × 10%)
Step 5.
Units completed (calculated above)
Total units for cost per equivalent unit calculation:
Material = 500,000 + 10,000
Labor and Overhead = 500,000 + 1,000
10,000
1,000
1,000
500,000
510,000
501,000
3-15
3-16
Jiambalvo Managerial Accounting
Step 6.
Total cost in cost per equivalent unit calculation:
Material = 510,000 × $1.6667
Labor = 501,000 × 1.3091
Overhead = 501,000 × 2.6182
$850,017.00
$655,859.10
$1,311,718.20
Step 7.
Cost incurred in December:
Material = $850,017.00 - 33,334.00
Labor = $655,859.10 - 5,236.40
Overhead = $1,311,718.20 - 10,472.80
$816,683.00
$650,622.70
$1,301,245.40
Step 8.
Cost Reconciliation:
Total cost to account for
$2,817,594.30
Cost of completed units (500,000 × $5.594)
$2,797,000.00
Cost of Ending WIP
$16,667.00
Materials (10,000 × $1.6667)
1,309.10
Labor (1,000 × $1.3091)
Overhead (1,000 × $2.6182)
2,618.20
20,594.30
Total cost accounted for:
$2,817,594.30
Chapter 3 Process Costing
3-17
P9. Mixing Department, Oral Care Toothpaste—April
Unit Reconciliation
Units in beg. WIP (100% material, 80% conversion costs)
Units started during
Units to account for
10,000
600,000
610,000
Units completed
Units in ending WIP (100% material, 70% conversion costs)
Units accounted for
590,000*
20,000
610,000
*Computed as 610,000 - 20,000 = 590,000.
Cost per Equivalent Unit Calculation
Material
Overhead
Total
800
65,640
$66,440
$ 1,680
119,120
$120,800
$ 6,480
430,860
$437,340
590,000
590,000
590,000
20,000
610,000
14,000
604,000
14,000
604,000
$0.11
$0.20
Cost
Beginning WIP
$ 4,000
Cost incurred during April 246,100
Total
$250,100
Units
Units completed
Equivalent units,
ending WIP
Total
Cost per equivalent unit
$0.41
Labor
$
$0.72
3-18
Jiambalvo Managerial Accounting
Cost Reconciliation
Total cost to account for
$437,340
Cost of completed units (590,000 units × $0.72)
Cost of ending WIP
Material (20,000 equivalent units × $.41)
Labor (14,000 equivalent units × $.11)
Overhead (14,000 equivalent units × $.20)
Total cost accounted for
$ 424,800
$8,200
1,540
2,800
Packing Department, Oral Care Toothpaste—April
Unit Reconciliation
Units in Beg. WIP (50% material, 40% conversion costs)
Units started during
Units to account for
Units completed
Units in ending WIP (90% material, 80% conversion costs)
Units accounted for
*Computed as 600,500 - 30,000 = 570,500.
12,540
$437,340
10,500
590,000
600,500
570,500*
30,000
600,500
Chapter 3 Process Costing
3-19
Cost per Equivalent Unit Calculation
Material
Labor Overhead Trans.In
Total
Cost
Beginning WIP
$ 630
Cost incurred during Sept. 77,045
Total
$77,675
$ 42 $
84 $ 7,455
5,903 11,890 424,800
$5,945 $11,974 $432,255
$ 8,211
519,638
$527,849
Units
Units completed
Equivalent units,
ending WIP
Total
Cost per equivalent unit
570,500 570,500 570,500
570,500
27,000 24,000 24,000
597,500 594,500 594,500
30,000
600,500
$0.130
$0.010
$0.020
$0.720
Cost Reconciliation
Total cost to account for
Cost of completed units (570,500 units × $0.880)
Cost of ending WIP
Material (27,000 equivalent units × $.130)
Labor (24,000 equivalent units × $.010)
Overhead (24,000 equivalent units × $.020)
Trans. in (30,000 equivalent units × $.720)
Total cost accounted for
* Difference between cost to account for and cost
accounted for due to rounding.
$0.880
$527,849
$ 502,040
$ 3,510
240
480
21,600
25,830
$527,870*
3-20
Jiambalvo Managerial Accounting
P10. Mixing Department, Carnival Caramel Company—March
Unit Reconciliation
Units in beg. WIP (100% material, 80% conversion costs)
Units started during
Units to account for
2,000
40,000
42,000
Units completed
Units in ending WIP (100% material, 60% conversion costs)
Units accounted for
41,000*
1,000
42,000
*Computed as 42,000 - 1,000 = 41,000.
Cost per Equivalent Unit Calculation
Material
Cost
Beginning WIP
Cost incurred during Sept.
Total
Units
Units completed
Equivalent units,
ending WIP
Total
Cost per equivalent unit
Labor
$
Overhead
Total
$ 3,760
84,840
$88,600
$ 2,000
40,840
$42,840
800
20,832
$21,632
$ 960
23,168
$24,128
41,000
41,000
41,000
1,000
42,000
600
41,600
600
41,600
$1.02
$0.52
$0.58
$2.12
Chapter 3 Process Costing
Cost Reconciliation
Total cost to account for
$88,600
Cost of completed units (41,000 units × $2.12)
Cost of ending WIP
Material (1,000 equivalent units × $1.02)
Labor (600 equivalent units × $.52)
Overhead (600 equivalent units × $.58)
Total cost accounted for
$86,920
$1,020
312
348
1,680
$88,600
Shaping Department, Carnival Caramel Company—March
Unit Reconciliation
Units in beg. WIP (70% conversion costs)
3,000
Units started during
41,000
Units to account for
44,000
Units completed
Units in ending WIP (50% conversion costs)
Units accounted for
*Computed as 44,000 – 500 = 43,500.
43,500*
500
44,000
3-21
3-22
Jiambalvo Managerial Accounting
Cost per Equivalent Unit Calculation
Material Labor
Cost
Beginning WIP
—
Cost incurred during Sept. —
Total
—
Overhead
Trans.In
$ 450 $ 290.00 $ 6,360
11,800 8,022.50 86,920
$12,250 $8,312.50 $93,280
Units
Units completed
Equivalent units, ending WIP
Total
43,500
250
43,750
43,500
250
43,750
Cost per equivalent unit
$0.28
$0.19
7,100.00
106,742.50
$113,842.50
43,500
500
44,000
$2.12
Cost Reconciliation
Total cost to account for
Cost of completed units (43,500 units × $2.59)
Cost of ending WIP
Material
Labor (250 equivalent units × $.28)
Overhead (250 equivalent units × $.19)
Trans. in (500 equivalent units × $2.12)
Total cost accounted for
Total
$2.59
$113,842.50
$ 112,665.00
$
0.00
70.00
47.50
1,060.00
1,177.50
$113,842.50