8
Process-Costing
Systems
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
8-2
Learning Objective 1
8-3
Process Costing
Production environment
 Homogenous units
 Mass produced
 Automated
 Continuous flow
8-4
Process Costing
Production environment
 Homogenous units
 Mass produced
 Automated
 Continuous flow
Costing procedure
Costs are recorded
for a department.
Department costs are
assigned equally to
units produced.
8-5
Learning Objective 2
8-6
Why Process Costing Is Useful
To help
set prices
To evaluate
products
How are unit
costs used?
To evaluate
production
efficiency
To determine
balance sheet
inventory
Process Costing – The Cost Inputs
Direct
Materials
Dollar Amount
8-7
Direct labor costs
are usually small
Manufacturing in comparison to
Overhead
other product
costs in process
Direct
cost systems.
Labor
(high level of
automation)
Type of Product Cost
Process Costing – Conversion Costs
Direct
Materials
Dollar Amount
8-8
Conversion
Direct labor costs
are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)
Type of Product Cost
So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.
8-9
Comparing Job Costing
and Process Costing
Job costing
Process costing

Costs accumulated by the
job.

Costs accumulated by
department or process.

Work in process has a job
cost record for each job.


Many unique, high cost
jobs.
Work in process has a
production report for each
batch of products.

Jobs built to customer
order.
A few identical, low cost
products.

Units continuously
produced for inventory in
automated process.

8-10
Comparing Job Costing
and Process Costing
Work in process
contains individual
jobs in a
job cost system.
Direct
Materials
Direct Labor
Manufacturing
Overhead
Jobs
Finished
Goods
Cost of
Goods
Sold
8-11
Comparing Job Costing
and Process Costing
Direct
Materials
Direct Labor
& Overhead
(Conversion)
Work in process
contains homogenous
products in a process
cost system.
Products
Finished
Goods
Cost of
Goods
Sold
8-12
Comparing Job Costing
and Process Costing
Same objective:
objective: determine
determine
Same
thecost
cost of
of products
products
the
Same
Same Inventory
Inventory accounts:
accounts: raw
raw materials,
materials,
work
work in
in process,
process, and
and finished
finished goods
goods
Same
Same overhead
overhead assignment
assignment method:
method:
predetermined
predetermined rate
rate times
times actual
actual activity
activity
8-13
Learning Objective 3
8-14
Department With No Beginning or
Ending WIP Inventory
Same
objective:ordetermine
No beginning
ending
the
of products
Work
incost
Process
Inventory
a company
is
Same Common
Inventorywhen
accounts:
raw materials,
successful
at just-in-time
production
work in process,
and finished
goods
assignment
method:
Manufacturing
costs
for a period
CostSame
per overhead
=
predetermined
rate
times actual
activity
unit
Units
produced
for the
period
8-15
Department With No Beginning or
Ending WIP Inventory
Spirit Beverages produces a sport drink. During October, the
Blending Department had the following manufacturing costs:
Direct materials
Conversion costs
Total costs to be assigned
$16,000
5,600
$21,600
Spirit started and completed 8,000 four-bottle packages during
October. Spirit had no beginning work in process inventory.
Compute the manufacturing unit costs for October.
Direct materials
Conversion costs
Mfg. cost per completed unit
$16,000 ÷ 8,000 units = $ 2.00
5,600 ÷ 8,000 units = $ 0.70
$21,600 ÷ 8,000 units = $ 2.70
8-16
Department With Ending WIP
Inventory
Same objective: determine
No beginning
in products
Process Inventory
theWork
cost of
Ending
Work in Process
Inventory
consists
Same Inventory
accounts:
raw materials,
of incomplete
units atand
the finished
end of the
period.
work in process,
goods
Same
overhead
assignment
method:
We must
now deal
with the concept
predetermined
rate times
actual activity
of equivalent
units.
8-17
Department With Ending WIP
Inventory
Samenow
objective:
determine
We must
deal with
the concept
theequivalent
cost of products
of
units.
Equivalent
unitsaccounts:
is a concept
expressing
Same
Inventory
raw
materials,
partially complete units as a smaller number
work in process, and finished goods
of fully complete units.
CostSame
per overhead
assignment
method:
Manufacturing
costs
for a period
=
equivalent
predetermined
rate times
actual
activity
Equivalent
units
for the
period
unit
8-18
Equivalent Units Example
Two one-half filled cups are
equivalent to one full cup.
+
=
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
8-19
Assigning Costs to Products
Let’s look at the five-step
process for assigning costs
to units produced, followed
by an example using the five
steps.
8-20
Assigning Costs to Products –
The Five-step Process
 Summarize the flow of physical units (number of
units completed and number of units remaining in
process).
 Compute the number of equivalent units produced.
 Summarize the total costs to be accounted for
(costs in beginning work in process inventory and
the costs incurred in the current period).
 Compute costs per equivalent unit.
 Assign unit costs from  to units completed and to
units in ending work-in-process inventory.
8-21
Department With Ending WIP
Inventory
Spirit incurred the following manufacturing costs in October
(same data as before):
Direct materials
Conversion costs
Total costs to be assigned
$16,000
5,600
$21,600
Spirit started 8,000 units and completed 6,000 units in October.
Spirit had no beginning work in process inventory. All direct
materials had been added to each unit still in process, but only
20 percent of conversion costs had been incurred for the 2,000
units still in process.
Complete the five-step process to assign
costs to units produced in October.
8-22
Department With Ending WIP
Inventory – Equivalent Units
Flow of Units in October
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Ending work in process inventory
Total units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
0
8,000
8,000
6,000
2,000
8,000
?
?
?
?
?
?
8-23
Department With Ending WIP
Inventory – Equivalent Units
Flow of Units in October
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Ending work in process inventory
Total units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
0
8,000
8,000
6,000
2,000
8,000
6,000
?
?
Units completed and transferred are 100%
complete for both material and conversion.
6,000
?
?
8-24
Department With Ending WIP
Inventory – Equivalent Units
Flow of Units in October
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Ending work in process inventory
Total units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
0
8,000
8,000
6,000
2,000
8,000
All material had been added to
units remaining in process.
6,000
2,000
8,000
6,000
?
?
8-25
Department With Ending WIP
Inventory – Equivalent Units
Flow of Units in October
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Ending work in process inventory
Total units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
0
8,000
8,000
6,000
2,000
8,000
20% of 2,000 units
6,000
2,000
8,000
6,000
400
6,400
8-26
Department With Ending WIP
Inventory – Assigning Costs
Flow of Costs in October
Costs to account for (Step 3)
Costs in beginning work in process inventory
Current period costs
Total costs to account for
Material Conversion
$
0
16,000
$ 16,000
$
$
Total
0 $
0
5,600
21,600
5,600 $ 21,600
Equivalent Units
Costs per equivalent unit (Step 4)
8,000
?
6,400
?
?
Costs accounted for (Step 5)
Costs transferred
Cost of ending work in process inventory
Total costs accounted for
?
?
?
?
?
?
?
?
?
8-27
Department With Ending WIP
Inventory – Assigning Costs
Flow of Costs in October
Costs to account for (Step 3)
Costs in beginning work in process inventory
Current period costs
Total costs to account for
Equivalent Units
Costs per equivalent unit (Step 4)
Costs accounted for (Step 5)
Costs transferred
Cost of ending work in process inventory
Total costs accounted for
Material Conversion
$
0
16,000
$ 16,000
$
8,000
2.00
$
Total
$
0 $
0
5,600
21,600
5,600 $ 21,600
$
6,400
0.875
?
?
?
$16,000 ÷ 8,000 equivalent units
$5,600 ÷ 6,400 equivalent units
?
?
?
$ 2.875
?
?
?
8-28
Department With Ending WIP
Inventory – Assigning Costs
Flow of Costs in October
Costs to account for (Step 3)
Costs in beginning work in process inventory
Current period costs
Total costs to account for
Material Conversion
$
0
16,000
$ 16,000
Equivalent Units
Costs per equivalent unit (Step 4)
$
Costs accounted for (Step 5)
Costs transferred
Cost of ending work in process inventory
Total costs accounted for
$ 12,000
?
?
8,000
2.00
$
Total
$
0 $
0
5,600
21,600
5,600 $ 21,600
$
6,400
0.875
$ 2.875
5,250
?
?
$ 17,250
?
?
$
6,000 equivalent units @ $2.00
6,000 equivalent units @ $0.875
8-29
Department With Ending WIP
Inventory – Assigning Costs
Flow of Costs in October
Costs to account for (Step 3)
Costs in beginning work in process inventory
Current period costs
Total costs to account for
Material Conversion
$
0
16,000
$ 16,000
Equivalent Units
Costs per equivalent unit (Step 4)
$
Costs accounted for (Step 5)
Costs transferred
Cost of ending work in process inventory
Total costs accounted for
$ 12,000
4,000
$ 16,000
8,000
2.00
$
Total
$
0 $
0
5,600
21,600
5,600 $ 21,600
$
6,400
0.875
$
$
2,000 equivalent units @ $2.00
400 equivalent units @ $0.875
$ 2.875
5,250 $ 17,250
350
4,350
5,600 $ 21,600
8-30
Learning Objective 4
8-31
Department with Beginning &
Ending WIP Inventory
When there is Beginning WIP, the
determination of equivalent units
becomes somewhat more complicated.
Primary question to be answered:
Which units were completed first
during the period?
(How you answer this question will
affect the Total EU for the period.)
8-32
Department with Beginning &
Ending WIP Inventory
Weighted Average vs. FIFO
WeightedAverage
All units and costs
are considered
together to determine
average cost per EU,
regardless of
whether the costs
were incurred last
period or currently.
FIFO
Costs are accounted
for by layer. Cost per
EU for this period is
computed separately
from the Cost per EU
for last period.
8-33
Department with Beginning &
Ending WIP Inventory
Weighted Average vs. FIFO
WeightedAverage
All units and costs
are considered
together to determine
average cost per EU,
regardless of
whether the costs
were incurred last
period or currently.
WeightedAverage is
the most
commonly
used
method.
8-34
Assigning Costs Using
Weighted-Average Costing
The weighted average method . . .


Makes no distinction between work done in the prior period
and work done in the current period.
Blends together units and costs in beginning inventory with
units and costs in the current period.
The FIFO method is covered in Appendix A.
Let’s revisit Spirit in December
where we have a beginning
inventory from the previous month.
8-35
Beginning and Ending Inventory
Weighted-Average Costing
Spirit had the following cost and
unit data for December:
Percentage Complete
Total Costs
Units Materials Conversion Materials Conversion
Beginning WIP inventory
2,000
40%
80% $
2,000 $
1,000
Costs incurred in Dec.
20,000
7,000
Units Started in Dec.
12,000
Units completed
10,000
100%
100%
Ending WIP inventory
4,000
25%
60%
Complete the five-step process to assign costs to units
completed and to units left in process for December.
8-36
Beginning and Ending Inventory
Weighted-Average Costing
First let’s look at a flow chart
showing the blending of units
in beginning work in process
inventory with units started
during the month.
8-37
Beginning and Ending Inventory
Weighted-Average Costing
Beginning
Inventory
2,000 units
14,000 units
10,000 units
completed
12,000 units
started
Ending
Inventory
4,000 units
Now let’s examine the five-step process.
8-38
Beginning and Ending Inventory
Weighted-Average Costing
Flow of Units in December
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Ending work in process inventory
Total units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
4,000
14,000
?
?
?
?
?
?
8-39
Beginning and Ending Inventory
Weighted-Average Costing
Flow of Units in December
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Ending work in process inventory
Total units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
4,000
14,000
10,000
?
?
Units completed and transferred are 100%
complete for both material and conversion.
10,000
?
?
8-40
Beginning and Ending Inventory
Weighted-Average Costing
Flow of Units in December
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Ending work in process inventory
Total units accounted for
25% of 4,000 units
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
4,000
14,000
10,000
1,000
11,000
60% of 4,000 units
10,000
2,400
12,400
8-41
Beginning and Ending Inventory
Weighted-Average Costing
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
Costs accounted for (Step 5)
Costs assigned to units transferred
Cost of ending work in process inventory
Total costs accounted for
11,000
?
?
?
?
12,400
?
?
?
?
?
?
?
?
8-42
Beginning and Ending Inventory
Weighted-Average Costing
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
Costs accounted for (Step 5)
Costs assigned to units transferred
Cost of ending work in process inventory
Total costs accounted for
11,000
$
2.00 $
?
?
?
12,400
0.6452 $ 2.6452
?
?
?
$22,000 ÷ 11,000 equivalent units
$8,000 ÷ 12,400 equivalent units
?
?
?
8-43
Beginning and Ending Inventory
Weighted-Average Costing
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
11,000
$
2.00 $
12,400
0.6452 $ 2.6452
Costs accounted for (Step 5)
Costs assigned to units transferred
Cost of ending work in process inventory
Total costs accounted for
$ 20,000 $
?
?
6,452 $ 26,452
?
?
?
?
10,000 equivalent units @ $2.00
10,000 equivalent units @ $0.6452
8-44
Beginning and Ending Inventory
Weighted-Average Costing
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
11,000
$
2.00 $
12,400
0.6452 $ 2.6452
Costs accounted for (Step 5)
Costs assigned to units transferred
Cost of ending work in process inventory
Total costs accounted for
$ 20,000 $
2,000
$ 22,000 $
6,452 $ 26,452
1,548
3,548
8,000 $ 30,000
1,000 equivalent units @ $2.00
2,400 equivalent units @ $0.6452
8-45
Learning Objective 5
8-46
Costs Transferred in
from Prior Departments

Multiple departments in a process result in units and
costs that are transferred from a prior department to
the current department.

These transferred-in costs are treated exactly like a
direct material that is added at the beginning of a
production process.

Let’s revisit Spirit. with the addition of transferred-in
units and costs. We will use the December
information and the weighted-average method.
8-47
Costs Transferred in
from Prior Departments
Complete the five-step process for Spirit to assign costs to
units completed and to units left in process for December.
Flow of units in December
Beginning WIP inventory
Transferred-in during Dec.
Units completed
Ending WIP inventory
Percentage Complete
Units Materials Conversion Trans-in
2,000
40%
80%
100%
12,000
10,000
100%
100%
100%
4,000
25%
60%
100%
Flow of costs in December
Costs incurred in Dec.
Beginning WIP inventory
Transferred-in during Dec.
Units completed
Ending WIP inventory
Total Costs
Units Materials Conversion Trans-in
$ 20,000 $
7,000 $ 52,000
2,000
2,000
1,000
5,000
12,000
10,000
4,000
8-48
Costs Transferred in
from Prior Departments
Flow of Units in December
Units to account for
Beginning WIP inventory
Units transferred in during Dec.
Total units to account for
Units accounted for
Completed and transferred out
Ending WIP inventory
Total units accounted for
Step 1
Step 2
Physical
Equivalent Units
Units Material Conversion Trans-in
2,000
12,000
14,000
10,000
4,000
14,000
?
?
?
?
?
?
?
?
?
8-49
Costs Transferred in
from Prior Departments
Flow of Units in December
Units to account for
Beginning WIP inventory
Units transferred in during Dec.
Total units to account for
Units accounted for
Completed and transferred out
Ending WIP inventory
Total units accounted for
Step 1
Step 2
Physical
Equivalent Units
Units Material Conversion Trans-in
2,000
12,000
14,000
10,000
4,000
14,000
10,000
?
?
10,000
?
?
100% complete for material,
conversion, and transferred-in units.
10,000
?
?
8-50
Costs Transferred in
from Prior Departments
Flow of Units in December
Units to account for
Beginning WIP inventory
Units transferred in during Dec.
Total units to account for
Units accounted for
Completed and transferred out
Ending WIP inventory
Total units accounted for
25% of 4,000 units
Step 1
Step 2
Physical
Equivalent Units
Units Material Conversion Trans-in
2,000
12,000
14,000
10,000
4,000
14,000
10,000
1,000
11,000
10,000
2,400
12,400
10,000
4,000
14,000
60% of 4,000 units
Transferred-in units are 100% complete
8-51
Costs Transferred in
from Prior Departments
Flow of Costs in December
Costs to account for (Step 3)
Costs in beginning WIP inventory
Current period costs
Total costs to account for
Equivalent units
Costs per equivalent unit (Step 4)
Costs accounted for (Step 5)
Costs assigned to units transferred
Cost of ending WIP inventory
Total costs accounted for
Material Conversion Trans-in
$ 2,000 $
20,000
$ 22,000 $
11,000
?
?
?
?
Total
1,000 $ 5,000 $ 8,000
7,000
52,000
79,000
8,000 $ 57,000 $ 87,000
12,400
?
?
?
?
14,000
?
?
?
?
?
?
?
?
8-52
Costs Transferred in
from Prior Departments
Flow of Costs in December
Costs to account for (Step 3)
Costs in beginning WIP inventory
Current period costs
Total costs to account for
Material Conversion Trans-in
$ 2,000 $
20,000
$ 22,000 $
1,000 $ 5,000 $ 8,000
7,000
52,000
79,000
8,000 $ 57,000 $ 87,000
Equivalent units
Costs per equivalent unit (Step 4)
11,000
$ 2.00 $
12,400
14,000
0.6452 $ 4.0714 $ 6.7166
Costs accounted for (Step 5)
Costs assigned to units transferred
Cost of ending WIP inventory
Total costs accounted for
$22,000 ÷ 11,000 equivalent units
?
?
?
?
?
?
?
?
?
Total
?
?
?
$57,000 ÷ 14,000 equivalent units
$8,000 ÷ 12,400 equivalent units
8-53
Costs Transferred in
from Prior Departments
Flow of Costs in December
Costs to account for (Step 3)
Costs in beginning WIP inventory
Current period costs
Total costs to account for
Material Conversion Trans-in
$ 2,000 $
20,000
$ 22,000 $
1,000 $ 5,000 $ 8,000
7,000
52,000
79,000
8,000 $ 57,000 $ 87,000
Equivalent units
Costs per equivalent unit (Step 4)
11,000
$ 2.00 $
12,400
14,000
0.6452 $ 4.0714 $ 6.7166
Costs accounted for (Step 5)
Costs assigned to units transferred $ 20,000 $
Cost of ending WIP inventory
?
Total costs accounted for
?
6,452 $ 40,714 $ 67,166
?
?
?
?
?
?
10,000 equivalent units @ $2.00
Total
10,000 equivalent units @ $4.0714
10,000 equivalent units @ $0.6452
8-54
Costs Transferred in
from Prior Departments
Flow of Costs in December
Costs to account for (Step 3)
Costs in beginning WIP inventory
Current period costs
Total costs to account for
Material Conversion Trans-in
$ 2,000 $
20,000
$ 22,000 $
1,000 $ 5,000 $ 8,000
7,000
52,000
79,000
8,000 $ 57,000 $ 87,000
Equivalent units
Costs per equivalent unit (Step 4)
11,000
$ 2.00 $
12,400
14,000
0.6452 $ 4.0714 $ 6.7166
Costs accounted for (Step 5)
Costs assigned to units transferred $ 20,000 $
Cost of ending WIP inventory
2,000
Total costs accounted for
$ 22,000 $
6,452 $ 40,714 $ 67,166
1,548
16,286
19,834
8,000 $ 57,000 $ 87,000
1,000 equivalent units @ $2.00
Total
4,000 equivalent units @ $4.0714
2,400 equivalent units @ $0.6452
8-55
Learning Objective 6
8-56
Accounting for Spoilage Costs
Spoilage represents the amount of resources that go
into the process, but DO NOT result in finished product.
Managers face key problems related to spoilage:
1. Identifying whether it exists.
2. Determining whether it can be eliminated.
3. Deciding whether eliminating it is worthwhile.
4. Determining the cost of spoilage.
The 5-step approach discussed earlier can
be modified by including spoilage
8-57
Accounting for Spoilage Costs
Normal spoilage occurs as a part of the regular operations
of an efficient process.
Abnormal spoilage is the result of unusual operating problems.
Abnormal spoilage is in addition to normal spoilage,
and is recorded as a loss of the period.
We will illustrate the spoilage using the December data for
Spirit Beverages, but without the transferred-in costs.
8-58
Accounting for Spoilage Costs
Percentage Complete
Total Costs
Units Materials Conversion Materials Conversion
Beginning WIP inventory
2,000
40%
80% $
2,000 $
1,000
Costs incurred in Dec.
20,000
7,000
Units Started in Dec.
12,000
Units completed
10,000
100%
100%
Spoiled units
500
20%
50%
Ending WIP inventory
3,500
25%
60%
Spoilage is found at an inspection when 20% of the material
has been added and the conversion is 50% complete.
8-59
Accounting for Spoilage Costs
Beginning
Inventory
2,000 units
14,000 units
10,000 units
completed
12,000 units
started
Spoilage
500 units
Ending
Inventory
3,500 units
Complete the five-step process to assign costs to units
completed and to units left in process for December.
8-60
Accounting for Spoilage Costs
Flow of Units in December
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Spoiled units
Ending work in process inventory
Total units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
500
3,500
14,000
?
?
?
?
?
?
?
?
8-61
Accounting for Spoilage Costs
Flow of Units in December
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Spoiled units
Ending work in process inventory
Total units accounted for
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
500
3,500
14,000
10,000
?
?
?
Units completed and transferred are 100%
complete for both material and conversion.
10,000
?
?
?
8-62
Accounting for Spoilage Costs
Flow of Units in December
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Spoiled units
Ending work in process inventory
Total units accounted for
20% of 500 units
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
500
3,500
14,000
10,000
100
?
?
50% of 500 units
10,000
250
?
?
8-63
Accounting for Spoilage Costs
Flow of Units in December
Units to account for
Beginning work in process inventory
Units started this period
Total units to account for
Units accounted for
Completed and transferred out
Spoiled units
Ending work in process inventory
Total units accounted for
25% of 3,500 units
Step 1
Physical
Units
Step 2
Equivalent Units
Material Conversion
2,000
12,000
14,000
10,000
500
3,500
14,000
10,000
100
875
10,975
60% of 3,500 units
10,000
250
2,100
12,350
8-64
Accounting for Spoilage Costs
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
Costs accounted for (Step 5)
Costs assigned to units transferred
Spoiled units
Cost of ending work in process inventory
Total costs accounted for
10,975
?
?
?
?
?
12,350
?
?
?
?
?
?
?
?
?
?
8-65
Accounting for Spoilage Costs
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
10,975
$ 2.0046 $
Costs accounted for (Step 5)
Costs assigned to units transferred
Spoiled units
Cost of ending work in process inventory
Total costs accounted for
$22,000 ÷ 10,975 equivalent units
?
?
?
?
12,350
0.6478 $ 2.6523
?
?
?
?
?
?
?
?
$8,000 ÷ 12,350 equivalent units
8-66
Accounting for Spoilage Costs
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
10,975
$ 2.0046 $
12,350
0.6478 $ 2.6523
Costs accounted for (Step 5)
Costs assigned to units transferred
Spoiled units
Cost of ending work in process inventory
Total costs accounted for
$ 20,046 $
?
?
?
6,478 $ 26,524
?
?
?
?
?
?
10,000 equivalent units @ $2.0046
10,000 equivalent units @ $0.6478
8-67
Accounting for Spoilage Costs
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
10,975
$ 2.0046 $
12,350
0.6478 $ 2.6523
Costs accounted for (Step 5)
Costs assigned to units transferred
Spoiled units
Cost of ending work in process inventory
Total costs accounted for
$ 20,046 $
200
?
?
6,478 $ 26,524
162
362
?
?
?
?
100 equivalent units @ $2.0046
250 equivalent units @ $0.6478
8-68
Accounting for Spoilage Costs
Flow of Costs in December
Material Conversion Total
Costs to account for (Step 3)
Costs in beginning work in process inventory $ 2,000 $
1,000 $ 3,000
Current period costs
20,000
7,000
27,000
Total costs to account for
$ 22,000 $
8,000 $ 30,000
Equivalent units
Costs per equivalent unit (Step 4)
10,975
$ 2.0046 $
12,350
0.6478 $ 2.6523
Costs accounted for (Step 5)
Costs assigned to units transferred
Spoiled units
Cost of ending work in process inventory
Total costs accounted for
$ 20,046 $
200
1,754
$ 22,000 $
6,478 $ 26,524
162
362
1,360
3,114
8,000 $ 30,000
875 equivalent units @ $2.0046
2,100 equivalent units @ $0.6478
8-69
Process Cost Flows
Let’s conclude our discussion
of process costing by examining
the cost flows in a twodepartment process, A and B.
We will use T-accounts and start
with materials.
8-70
Process Cost Flows
Materials Inventory
•Purchases
•Direct
Materials
Factory Overhead
•Other
Overhead
WIP Dept. A
•Direct
Materials
WIP Dept. B
•Direct
Materials
8-71
Process Cost Flows
Materials Inventory
•Purchases
•Direct
Materials
•Indirect
Materials
Factory Overhead
•Other
Overhead
•Indirect
Materials
WIP Dept. A
•Direct
Materials
WIP Dept. B
•Direct
Materials
8-72
Process Cost Flows
Next let’s add labor and
manufacturing overhead
to the process cost flows.
Are you with me?
8-73
Process Cost Flows
Wages Payable
•Indirect
Labor
Factory Overhead
•Other
Overhead
•Indirect
Materials
•Indirect
Labor
WIP Dept. A
•Direct
Materials
WIP Dept. B
•Direct
Materials
8-74
Process Cost Flows
Wages Payable
•Indirect
Labor
•Direct
Labor
Factory Overhead
•Overhead
•Other
Overhead Applied to
Work in
•Indirect
Materials Process
•Indirect
Labor
WIP Dept. A
•Direct
Materials
•Conversion
WIP Dept. B
•Direct
Materials
•Conversion
8-75
Process Cost Flows
Next let’s transfer work
from Department A to
Department B. Are you
ready?
8-76
Process Cost Flows
WIP Dept. A
•Direct
Materials
•Transferred
to Dept. B
•Conversion
WIP Dept. B
•Direct
Materials
•Conversion
•Transferred
from Dept. A
8-77
Process Cost Flows
Now let’s complete the
goods in Department B and
sell them. Still with me?
8-78
Process Cost Flows
WIP Dept. B
Finished Goods
•Direct
•Cost of
Materials
Goods
•Conversion
Mfd.
•Transferred
from Dept. A
•Cost of
Goods
Mfd.
Cost of Goods Sold
8-79
Process Cost Flows
WIP Dept. B
Finished Goods
•Direct
•Cost of
Materials
Goods
•Conversion
Mfd.
•Transferred
from Dept. A
•Cost of
Goods
Mfd.
Cost of Goods Sold
•Cost of
Goods
Sold
•Cost of
Goods
Sold
8-80
Learning Objective 7
8-81
Cost Assignment to Products Using FIFO




The weighted-average inventory
method mixes previous period costs
with those of the present period.
FIFO assumes that units in the
beginning inventory were completed.
Count production in this period only
when calculating equivalent units.
This allows managers to identify and
manage current period costs.
8-82
Learning Objective 8
8-83
Comparing Weighted-Average and
FIFO Costing Methods



Using FIFO to isolate current period
costs is useful when the beginning
inventory balance is very large.
Otherwise, the smaller the beginning
inventory balance, the closer the unit
cost results under both methods.
Though either method is acceptable
for external reporting, separating the
costs with FIFO is preferable.
8-84
Learning Objective 9
8-85
Operation Costing


A hybrid of job-order and process
costing.
Applied to production activities:



with repetitive operations (so
conversion costs do not change).
when different materials may be used
(so materials costs could change).
Examples:


Fabrics used in shirt manufacturing
Engines used in similar cycle bodies
8-86
End of Chapter 8