CHAPTER 16
Process Costing
Cost Accounting Systems
determine the costs associated with
products (or services).
• _________ Cost System (last chapter)
 used for unique or custom ordered products
• _________ Cost System (this chapter)
 is used for mass produced items
Process Costing
• Process costing is used to attach cost to units
produced that are
 Identical and low in cost
 Mass produced
 Manufactured with an automated and continuous
flow of production
• _____________ is used when costs cannot be
directly traced to each individual unit
• _____________ = department or process rather
than the individual job.
Flow of Costs
• We must be able to understand the flow of
costs through a process costing system.
Remember though
 The flow of costs is similar to that for a job cost
system except
• Each department or process has its own WIP inventory
account
 The products may go through several processing
departments ________ being transferred to
Finished Goods Inventory.
Job Order and Process Cost Systems Compared
Job Order Cost System
Direct materials
Job Cost
Sheets
Dept. A and
Dept. B
Direct labor
Factory overhead
Finished
goods
Process Cost System
Direct
materials
Dept. A
Direct Factory
labor overhead
Dept. B
Direct Factory
labor overhead
Finished
goods
Both systems:
 determine a product cost by measuring the
amount of direct materials and direct labor
used and allocating overhead costs.
 allocate overhead using a predetermined
overhead rate (or activity-based costing).
 maintain perpetual records with subsidiary
ledgers for materials, work in process, and
finished goods.
Job Costing versus Process Costing
Job order costing
The cost of goods
transferred to
finished goods is
equal to the sum of
all of the completed
jobs for that period
Process costing
The cost of goods
transferred to finished
goods equals the
number of completed
units times the _____
_________________
Cost Categories
• At its simplest, we use 2 - 3 cost categories in
the first department
 _____________
• added all at the beginning of the process
 _____________– (direct labor and overhead)
• added evenly throughout each process
• In a subsequent processing departments, we will
have an additional cost category
 _____________
• costs attaching in all previous departments
Flow of Costs in a Process Cost System
FOH – Melting
Actual
costs
incurred
WIP – Melting
Finished Goods
DM
DL
Cost of Goods Sold
FOH – Casting
Actual
costs
incurred
WIP – Casting
DL
DM
Direct materials used in production
DL
Direct labor used in production
Flow of Costs in a Process Cost System
FOH – Melting
Actual
costs
incurred
FOHA
WIP – Melting
Finished Goods
DM
DL
FOHA
Cost of Goods Sold
FOH – Casting
Actual
costs
incurred
WIP – Casting
FOHA
DL
FOHA
FOHA
Factory overhead applied to work in process
Flow of Costs in a Process Cost System
FOH – Melting
Actual
costs
incurred
FOHA
WIP – Melting
DM
Finished Goods
TRAN
DL
FOHA
Cost of Goods Sold
FOH – Casting
Actual
costs
incurred
FOHA
WIP – Casting
TRAN
DL
FOHA
TRAN
Cost of goods transferred to WIP – Casting
Flow of Costs in a Process Cost System
FOH – Melting
Actual
costs
incurred
FOHA
WIP – Melting
DM
TRAN
Finished Goods
COGM
DL
FOHA
Cost of Goods Sold
FOH – Casting
Actual
costs
incurred
FOHA
WIP – Casting
TRAN
COGM
DL
FOHA
COGM Cost of goods manufactured and transferred to finished goods
Flow of Costs in a Process Cost System
FOH – Melting
Actual
costs
incurred
FOHA
WIP – Melting
DM
TRAN
Finished Goods
COGM
SOLD
DL
FOHA
Cost of Goods Sold
FOH – Casting
Actual
costs
incurred
FOHA
WIP – Casting
TRAN
DL
FOHA
SOLD
Finished goods sold
COGM
SOLD
Flow of Costs in a Process Cost System
FOH – Melting
Actual
costs
incurred
FOHA
WIP – Melting
DM
TRAN
Finished Goods
COGM
SOLD
DL
FOHA
Cost of Goods Sold
FOH – Casting
Actual
costs
incurred
FOHA
WIP – Casting
TRAN
COGM
DL
FOHA
Summary of cost flows
SOLD
Four Step Program
• To attach cost to the units worked on during
the period, we follow a five step process
 1. Summarize the physical flow of units
 2. Calculate the equivalent units of
production.
 3. Calculate Costs per Equivalent Unit for
each component of cost.
 4. Assign costs to the units completed and
transferred out and to the WIP EI units.
• After the four steps are completed, we will
prepare the production cost report.
Beginning and Ending WIP Inventories
• We need to make an assumption about how
costs flow through a department.
 _____________ is where we will focus our study
and will be used in all of our problems.
 We will not cover the FIFO method.
The Four Steps…
• Step 1: Determine the physical flow of goods.
 We will summarize the actual units that were
worked on during the month:
Beginning Inventory (BI)
+ Units Started
= Total Number of Units Accounted for
 Then reconcile to the actual units transferred out to
the next dept. during the month:
Completed & Transferred Out (C&T Out)
+ Ending Inventory (EI)
= Total Number of Units Accounted for
Comments
• We make separate unit calculations for direct
materials and conversion costs (DL and FOH)
because
 They are typically added at different times.
• If direct materials are all added at the beginning
of the process, then any units left on hand will
be ______% complete with respect to the
materials.
Step 2: Equivalent units
• Compute _________________of Production: In
accounting for the units in process during the
period, we must compute the equivalent units
worth of work done during the period for
 Material costs
 Conversion costs
• Direct Labor
• Factory Overhead
Question
C2
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
Step 3: Calculating Costs per Equivalent
Unit
• Once you know how many equivalent units of material,
labor and OH have been completed on all units in
process during the period, you can express
_________________________
• Cost incurred to date / equivalent units
• Calculate cost/EU for each component of cost
 direct materials and
 conversion costs (DL & FOH).
Step 3: Calculating Costs per Equivalent
Unit (Weighted Average)
• We focus on the equivalent units of work done
in the previous period and in the current period.
• The W/A method combines the Costs of
Beginning Inventory in Process with Costs
Incurred during the period.
Step 4: Assigning & Reconciling Costs
• Multiply these unit costs times the equivalent
units worth of work done on
 The units completed and transferred out during the
period.
 The units left in ending inventory
• The total of the cost of units completed and
transferred out during the period Goes out of
WIP(1) and into WIP(2).
• The Cost of units left remains in ending WIP
inventory
Now on to the Sample Problem