IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Process Costing
Chapter 11
Objectives:
• Explain the basic ideas underlying process
costing and how they differ from job costing
• Compute costs in process costing system
• Demonstrate the weighted average and FIFO
methods for process costing
• Analyze process costing with multiple
departments
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Type of Business Using
Process Costing









__________
__________
__________
__________
__________
__________
__________
__________
__________
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Comparing
Job Costing vs Process Costing
Job costing




Process costing
Costs accumulated by the
job.

Work in process has a job
cost record for each job.

Many unique jobs.
Jobs built to customer
order.


Costs accumulated by
department or process.
Work in process has a
production report for each
batch of products.
Homogenous products.
Units continuously produced
for inventory in automated
process.

Same objective:
_________________________

Same inventory account:
_________________________

Same OH assignment method: _________________________
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Comparing
Job Costing vs Process Costing
Job Costing
Direct Materials
Direct Labor
Finished
Goods
Factory
Overhead
Cost of
Goods
Sold
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Comparing
Job Costing vs Process Costing
Process Costing
Finished
Goods
Cost of
Goods
Sold
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Dollar Amount
Dollar Amount
Characteristics of
Process Costing
Direct
Direct
Materials
Materials
Conversion
Factory
Overhead
____________
____________
____________
____________
Direct
Labor
Type
Product
Cost
Type
ofof
Product
Cost
So, direct labor and factory overhead are often
combined into one product cost called
_______________.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Characteristics of Process
Costing
Process costing accumulates costs by process or
department and then assigns them to a large number of
nearly identical products.
Continuous
mass production
unit cost 
Similar
processes
Homogeneous
products
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Equivalent Units
Equivalent units is a concept expressing partially complete units as a smaller
number of fully complete units.
Cost per
equivalent
unit
•
•
•
Manufacturing costs for a period
Equivalent units for the period
=
We want to find the unit cost of performing a certain process in a given period,
but
1
A manufacturing firm typically has partially completed units at the end of an
accounting period
Equivalent units  Physical Units
+
=
Two one-half filled cups are equivalent to one full cup.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Equivalent Units
During its first month of business, Jones started 15,000 units and completed
10,000 units, leaving 5,000 units in process 30 percent complete. How many
equivalent units of production did Jones have for the month?
a.
10,000
b.
11,500
c.
13,500
d.
15,000
Now assume that Jones incurred $27,600 in production costs. What was Jones’
cost per equivalent unit for the period?
a.
$1.84
b.
$2.40
c.
$2.76
d.
$2.90
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Flow of Costs in Process
Costing
• Costs flow through different processes or departments
• Use separate WIP Inventory account for each department
• DM, DL, OH costs can be entered directly into either production
department’s WIP Inventory account, not just the first department
• Transfer of costs from a department  subsequent departments  FG
Inventory  Cost of goods sold
• Transfer-in-costs (TI): costs of goods completed in the prior department
and transferred into the department during the period
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
5 Steps in Process
Costing
 Analyze the physical flow of physical units.
________
________
________
________
________
________
 Calculate equivalent units of production for all
manufacturing cost elements.
 Determine total cost for each manufacturing cost
element.
 Compute cost per equivalent unit for each
manufacturing cost element.
 Assign the total manufacturing costs to units completed
and units of work in process at the end of the period.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Process Costing Method
Weighted-Average
Method
• __________________
__________________
__________________
__________________
• Blends together units and
costs in beginning inventory
with units and costs in the
current period.
FIFO Method
• __________________
__________________
__________________
• Assumes units in
beginning work in process
inventory are completed
and transferred first.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Weighted Average vs FIFO
Which one is better?
 FIFO costing results in a current period cost that can
be used for performance evaluation.
 If there is no beginning inventory (JIT) or if beginning
inventory is small, FIFO and weighted-average produce
the same results.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Ex 1: Basic Process Costing
(No Beginning Inventory)
Adapted from Horngren et al. (2002) page 587
•
XYC Inc. produces portable CD players in large quantities. Assume that the
company has two departments, assembly and testing. The manufacturing
costs in Assembly Dept during February were:
DM added
DL
OH
•
$60,800
$50,000
$40,000
Assume no beginning inventory of WIP. Suppose work on 19,000 CD players
was begun in the assembly department during February, but only 17,000 CD
players were fully completed. All the parts had been made or placed in
process, but only half the labor had been completed for each of the CD
players still in process
• Compute the costs of units completed and transferred to the Testing
Dept and the cost of ending WIP.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Ex 2: Process Costing
(with beginning inventory; use weighted-Average)
Adapted from Horngren et al. (2002) page 587
•
ABC Inc. manufactures electric drills. Material is introduced at the beginning
of the process in the Assembly Department. Conversion costs are applied
uniformly throughout the process. As the process in completed, goods are
immediately transferred to Finishing Dept.
•
Data for the Assembly Dept for the July 20X1:
•WIP, June 30: $175,500 ………………………………….. 10,000 units
($138,000 materials and $37,500 conversion costs); completed for DM but only
25% completed for conversion costs
•Units started during July ………………………………….. 80,000 units
•Units completed during July ……………………………... 70,000 units
•WIP, July 31: 100% completed for DM, but only 50% completed for conversion
costs ………………………………………….…. 20,000 units
•DM added during July………………………………………….. $852,000
•Conversion costs added during July …………………………$634,500
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Process Costing with
Multiple 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.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Ex 3: Process Costing with Transferred In
Costs
Deparment Costs
Units
Physical flow:
Beginning inventory
Ending inventory
Unit started (transferred in)
Started and completed
Costs incurred:
Beginning inventory
Current Costs
Prior
Direct Conversion
Departme
Costs
Materials
nt's Costs
100%
100%
100%
100%
2000
4000
12000
8000
$
$
40%
25%
80%
60%
100%
100%
5,000 $ 2,000 $
52,000 $ 20,000 $
1,000
7,000
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