Transparency Master 18(3)-1
JOB ORDER VS.
PROCESS COSTING
Job Order Costing
Used by manufacturers who make
special orders, customized products,
or standard products produced in
batches.
Process Costing
Used by manufacturers who mass
produce large quantities of identical
units in a continuous flow.
Transparency Master 18(3)-2
SIMILARITIES IN JOB ORDER
AND PROCESS COSTING
Both systems determine a product cost by
measuring the amount of direct materials
and direct labor used and allocating overhead costs.
Both systems allocate overhead using a
predetermined overhead rate(s).
Both systems maintain perpetual inventory
records with subsidiary ledgers for materials, work in process, and finished goods.
Transparency Master 18(3)-3
DIFFERENCES IN JOB ORDER
AND PROCESS COSTING
Job Order:
Costs are accumulated by job.
Cost to Make One Unit
=
Cost of the Job
No. of Units in the Job
Process Costing:
Costs are accumulated by department for a time period (for example, one month).
Cost to Make One Unit
in One Department
=
Department’s Cost
for the Month
No. of Units Produced
during the Month
To find the total unit cost, add the unit costs incurred in each department.
Transparency Master 18(3)-4
FLOW OF COSTS IN A
PROCESS COST SYSTEM
Assume that Advanced Technologies, a computer manufacturer,
makes its product in three departments: Assembly, Testing, and
Packing. Materials and component parts are added in the Assembly
Department. Packing materials are added in the Packing Department.
Materials
Cost of
Materials
materials
used in
purchased
assembly
Materials
used in
packing
WIP—Assembly
Materials
Cost of units
Direct Labor
transferred
Overhead
to testing
(applied)
WIP—Testing
Costs from
Cost of units
assembly
transferred
Direct Labor
to packing
Overhead
(applied)
WIP—Packing
Costs from
Cost of
testing
completed
Materials
units
Direct Labor
Overhead
(applied)
Finished Goods
Cost of
Cost of
completed
units sold
units
Cost of Goods Sold
Cost of
units sold
Transparency Master 18(3)-5
FIFO PROCESS COSTING
DEMONSTRATION PROBLEM
ADVANCED TECHNOLOGIES
—ASSEMBLY DEPARTMENT
Advanced Technologies produces notebook computers in three departments: Assembly, Testing, and Packing. Prior to the start of the
production process, all the materials and component parts needed to
assemble a computer are placed into a “kit.” Manufacturing begins
when the Assembly Department receives a kit and begins putting the
computer together. Therefore, all materials are added at the beginning of work in the Assembly Department. Conversion costs are added evenly throughout the assembly process.
Assume that the Assembly Department of Advanced Technologies
began April with 800 units in its work in process inventory. Assembly
on these units was 3/4 complete at the beginning of the month. During the month, 3,000 units were started in the Assembly Department.
At the end of the month, 300 of the units started were still in process;
assembly on these units was 2/3 complete.
The costs associated with production in assembly during April were
as follows:
Cost of units in beginning work in process inventory
Cost of materials used in April
Cost of direct labor and overhead for April
$228,000
630,000
527,000
Transparency Master 18(3)-6
PROCESS COSTING
PRACTICE PROBLEM
ADVANCED TECHNOLOGIES
—TESTING DEPARTMENT
Advanced Technologies’ Testing Department receives completed
computers from the Assembly Department. These computers are run
through several diagnostic tests to ensure they work properly.
The Testing Department began the month of April with 100 units in
work in process. Testing on these units was 40% complete. During
the month, 3,500 units were transferred in from assembly. There were
500 units in Testing’s ending work in process, which were 20% complete.
The costs associated with production in the Testing Department during April were as follows:
Cost of units in beginning work in process inventory
Direct materials (transferred in from assembly)
Cost of direct labor and overhead for April
$ 40,000
1,288,000
158,000
Transparency Master 18(3)-7
PROCESS COSTING
PRACTICE PROBLEM
ADVANCED TECHNOLOGIES
—TESTING DEPARTMENT
Solution
STEP 1: Determine the units to be assigned costs.
Beginning Work in Process Inventory
Units Started and Completed During
the Month (3,500 – 500)
Ending Work in Process Inventory
Total
100
3,000
500
3,600
Transparency Master 18(3)-8
PROCESS COSTING
PRACTICE PROBLEM
ADVANCED TECHNOLOGIES
—TESTING DEPARTMENT
Solution
STEP 2: Calculate equivalent units of production.
Materials equivalent units:
Beginning WIP Inventory
Units Started and Completed
Ending WIP Inventory
Whole
Units
100
3,000
500
% Materials
Added in April
0
100%
100%
Equivalent
Units
0
3,000
500
3,500
Whole
Units
100
3,000
500
% Conversion
Added in April
60%
100%
20%
Equivalent
Units
60
3,000
100
3,160
Conversion equivalent units:
Beginning WIP Inventory
Units Started and Completed
Ending WIP Inventory
Transparency Master 18(3)-9
PROCESS COSTING
PRACTICE PROBLEM
ADVANCED TECHNOLOGIES
—TESTING DEPARTMENT
Solution
STEP 3:
Determine the cost per equivalent unit.
$1,288,000
Materials Cost/Equivalent Unit
=
=
$368
=
$ 50
3,500 equiv. units
$158,000
Conversion Cost/Equivalent Unit =
3,160 equiv. units
Transparency Master 18(3)-10
PROCESS COSTING
PRACTICE PROBLEM
ADVANCED TECHNOLOGIES
—TESTING DEPARTMENT
Solution
STEP 4: Allocate costs to transferred and partially completed units.
Cost assigned to the units in beginning work in process:
Direct
Materials
Beginning WIP Balance
Cost to Complete:
Equivalent Units for April
Cost per Equivalent Unit
Cost of April 1 WIP
Transferred to Packing Dept.
0
 $368
0
Conversion
Cost
60
 $50
$ 3,000
Total
Cost
$40,000
3,000
$43,000
(Continued)
Transparency Master 18(3)-11
PROCESS COSTING
PRACTICE PROBLEM
ADVANCED TECHNOLOGIES
—TESTING DEPARTMENT
Solution
(Concluded)
Cost assigned to the units that were started and completed:
Direct
Materials
Started and Completed:
Equivalent Units
Cost per Equivalent Unit
Cost of units Started &
Completed in April

3,000
$368
$1,104,000
Conversion
Cost

Total
Cost
3,000
$50
$150,000
$1,254,000
Cost assigned to units in ending work in process inventory:
Direct
Materials
Ending WIP Inventory:
Equivalent Units
Cost per Equivalent Unit
Cost of Ending WIP
500
 $368
$184,000
Conversion
Cost
100
 $50
$5,000
Total
Cost
$189,000
Transparency Master 18(3)-12
COST OF PRODUCTION REPORT
Advanced Technologies
Cost of Product Report—Assembly Department
For the Month Ended April 30
UNITS
WHOLE UNITS
Units charged to production:
Inventory in process, April 1 .....
800
Received from materials
storeroom ................................
3,000
Total units accounted for
by Assembly ............................
3,800
Units to be assigned costs:
Inventory in process, April 1 .....
800
Started and completed in April..
2,700
Transferred to Testing
Department ..............................
3,500
Inventory in process, April 30 ...
300
Total units to be assigned cost .
3,800
EQUIVALENT UNITS
Direct Materials Conversion
0
2,700
200
2,700
2,700
300
3,000
2,900
200
3,100
(Continued)
Transparency Master 18(3)-13
COST OF PRODUCTION REPORT
(Concluded)
COSTS
Units costs:
Total costs for April in Assembly .......................
Total equivalent units..........................................
Cost per equivalent unit......................................
Costs charged to production:
Inventory in process, April 1 ..............................
Costs incurred in April ........................................
Total costs accounted for in Assembly .............
Costs allocated to completed and
partially completed units:
Inventory in process, April 1—balance ..............
To complete inventory in process, April 1.........
Started and completed in April ...........................
Transferred to Testing Dept. in April .................
Inventory in process, April 30 ............................
Total costs assigned by Assembly ....................
Direct Materials
COSTS
Conversion
$630,000
 3,000
$210
$527,000
 3,100
$170
Total Costs
$ 228,000
1,157,000
$1,385,000
$
0
567,000
$ 34,000
459,000
63,000
34,000
$ 228,000
34,000
1,026,000
$1,288,000
97,000
$1,385,000
Transparency Master 18(3)-14
Decision Making Using
Process Cost Data
Solution
Materials Cost per Pound
Shift 1
Shift 2
By Line
Average
Line 1
$6.00
$7.00
Line 2
$6.00
$7.00
Line 3
$6.50
$7.50
Line 4
$6.00
$7.00
By Shift
Average
$6.13
7.13
$6.52
$6.52
$7.02
$6.52
$6.65
It is clear from the table above that increasing the speed of
the machines has a very negative impact on materials consumption. The materials cost per pound on Shift 2 averages a
full $1.00 per pound greater than on Shift 1. What makes Shift
1 different from Shift 2? The speeds, the employees, the supervisors, and the time of day. Which of these is likely the
cause of our problems? Line 3 gives us some additional
clues. Line 3 has the highest average machine speed and the
highest average materials cost per pound. Thus, the cost differences appear to be related to the machine speed issue.
Apparently, headquarters management is expecting Bundy’s
plant to perform up to the standard of some of the plants with
newer equipment. Bundy’s plant appears to be unable to operate at the higher speeds without some major process engineering work.
Transparency Master 18(3)-15
AVERAGE COST METHOD
PROCESS COSTING
DEMONSTRATION PROBLEM
Healthy Harvest Company is a bakery that makes
breads. The manufacturing department is organized
into three departments: dough making, baking, and
packaging. The following information is related to the
dough making department.
Cost data for the month of April:
Work in process inventory,
April 1 (100 units, 40% complete)
Direct materials cost (for 2,050 units)
Direct labor cost
Factory overhead applied
Total production costs
$ 49.00
400.00
80.00
220.00
$749.00
Unit data:
Units transferred to Baking in April
Units in work in process on April 30
(80% complete)
2,100
50
Transparency Master 18(3)-16
AVERAGE COST METHOD
PROCESS COSTING
PRACTICE PROBLEM
Healthy Harvest Company is a bakery that makes
breads. The manufacturing department is organized
into three departments: dough making, baking, and
packaging. The following information is related to the
baking department.
Cost data for the month of April:
Work in process inventory,
April 1 (300 units, 10% complete)
Direct materials cost (for 2,100 units)
Direct labor cost
Factory overhead applied
Total production costs
$
99.00
735.00
42.00
168.00
$1,044.00
Unit data:
Units transferred to Packaging in April
Units in work in process on April 30
(60% complete)
2,200
200
Transparency Master 18(3)-17
AVERAGE COST METHOD
PRACTICE PROBLEM SOLUTION
STEP 1: Determine the units to be assigned costs.
Units in WIP, April 1
Units started in production,
based on materials requisitioned
Total units to be accounted for
300
2,100
2,400
Units transferred out to
the next dept. (Baking)
Units in WIP, April 30
Total units to be accounted for
2,200
200
2,400
STEP 2: Calculate equivalent units of production.
Equivalent units transferred to Packaging
in April (2,200 × 100%)
Equivalent units in work in process
on April 30 (200 × 60%)
Total equivalent units
2,200
120
2,320
(continued)
Transparency Master 18(3)-18
AVERAGE COST METHOD
PRACTICE PROBLEM SOLUTION
(Concluded)
STEP 3: Determine the cost per equivalent unit.
Cost/Equivalent Unit =
$1,044
2,320 equiv. units = $0.45
STEP 4: Allocate costs to transferred and partially
completed units.
Costs transferred to the Packaging Department
(2,200 equivalent units × $0.45)
$ 990
Costs of Baking’s WIP on April 30
(120 equivalent units × $0.45)
54
Total production costs assigned $1,044