Chapter
4
Systems Design:
Process Costing
4-2
Process Costing
To help
set prices
To evaluate
products
How are unit
costs used?
To evaluate
production
efficiency
To determine
balance sheet
inventory
4-3
Comparing Job Costing
and Process Costing
Job costing
 Costs accumulated by
the job.
 Work in process has a
job cost record for
each job.
 Many unique, high
cost jobs.
 Jobs built to customer
order.
Process costing
 Costs accumulated by
department or process.
 Work in process has a
production report for each
batch of products.
 A few identical, low cost
products.
 Units continuously
produced for inventory in
automated process.
4-4
Comparing Job Costing
and Process Costing
Direct
Materials
Direct Labor
Manufacturing
Overhead
Work in process
contains individual jobs
in a
job cost system.
Work in
Process
Finished
Goods
Cost of
Goods
Sold
4-5
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
4-6
Comparing Job Costing
and Process Costing
Same objective: determine
the cost of products
Same Inventory accounts: raw materials,
work in process, and finished goods
Same overhead assignment method:
predetermined rate times actual activity
Assigning Costs to Products –
All Units Fully Completed
No beginning or ending
Work in Process Inventory
Common when a company is
successful at just-in-time production
Manufacturing costs for a period
Cost per
=
unit
Units produced for the period
4-7
Assigning Costs to Products –
Some Units Not Fully Completed
Same objective: determine
No beginning
in products
Process Inventory
theWork
cost of
Ending Work in Process Inventory consists
Same Inventory accounts: raw materials,
of units started during the period, but
work in process,
goods
incomplete
at the and
end finished
of the period.
Same
overhead
assignment
method:
We must
now deal
with the concept
predetermined
rate times
actual activity
of equivalent
units.
4-8
Assigning Costs to Products –
Some Units Not Fully Completed
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
4-9
4-10
Process Cost Flows
Raw Materials
•Purchases
•Direct
Materials
•Indirect
Materials
Manufacturing
Overhead
Actual
•Other
Overhead
•Indirect
Materials
Applied
Work in Process
Department A
•Direct
Materials
Work in Process
Department B
•Direct
Materials
4-11
Process Cost Flows
Wages Payable
•Direct
Labor
•Indirect
Labor
Manufacturing
Overhead
Actual
•Other
Overhead
•Indirect
Materials
•Indirect
Labor
Applied
Work in Process
Department A
•Direct
Materials
•Direct
Labor
Work in Process
Department B
•Direct
Materials
•Direct
Labor
4-12
Process Cost Flows
Wages Payable
•Direct
Labor
•Indirect
Labor
Manufacturing
Overhead
Actual
Applied
•Other •Overhead
Overhead Applied to
•Indirect Work in
Materials Process
•Indirect
Labor
Work in Process
Department A
•Direct
Materials
•Direct
Labor
•Applied
Overhead
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
4-13
Process Cost Flows
Work in Process
Department A
•Direct
Transferred
Materials
to Dept. B
•Direct
Labor
•Applied
Overhead
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
4-14
Process Cost Flows
Work in Process
Department B
Finished Goods
•Direct
•Cost of
•Cost of
•Cost of
Materials
Goods
Goods
Goods
•Direct
Manufactured
Manufactured
Sold
Labor
•Applied
Overhead
•Transferred
Cost of Goods Sold
from Dept. A
•Cost of
Goods
Sold
4-15
Production Report
Shows the flow
of units and costs
through work in
process
Provides cost
information for
financial
statements
Production
Report
Becomes the
job cost sheet
in process
costing
Helps managers
control their
departments
4-16
Production Report
Production Report
Section 1
Section 2
Section 3
A quantity schedule
showing the flow of units
and the computation of
equivalent units.
A computation of
cost per equivalent unit.
4-17
Production Report
Production Report
Section 1
 A reconciliation of cost
flows for the period,
including:
vTotal cost for units
Section 2
completed and
transferred from the
processing department.
vTotal cost for partially
Section 3
completed units
remaining in work in
process.
4-18
Equivalent Units of Production
Equivalent units are partially complete
and are part of work in process
inventory. Partially completed
products are expressed in terms of a
smaller number of fully completed
units.
4-19
Equivalent Units of Production
Two half completed products are
equivalent to one completed product.
+
=
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
4-20
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.
4-21
Assigning Costs Using
Weighted-Average Costing
Beginning
Inventory
250 units
1,250 units
1,100 units
completed
1,000 units
started
Ending
Inventory
150 units
Now let’s examine the five-step process.
4-22
Weighted Average Example
Materials
Beginning
Work in Process
250 Units
100% Complete
1,000 Units Started
850 Units Started
and Completed
1,100 Units Completed
150 Equivalent Units
1,250 Equivalent units
of production
Ending
Work in Process
150 Units
100% Complete
150 × 100%
4-23
Weighted Average Example
Conversion
Beginning
Work in
Process
250 Units
80%
Complete
Work to
Complete
Process
20%
1,000 Units Started
850 Units Started
and Completed
Ending
Work in Process
150 Units
33 1/3% Complete
250 Units
1,100 Units Completed
50 Equivalent Units
1,150 Equivalent units
of production
150 × .333%
4-24
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 see an example.
4-25
Costs Transferred in
from Prior Departments
Complete the five-step process for Ace CD Inc. to
assign costs to units completed and to units left in
Percentage Complete
process for June.
Flow of units in June
Beginning WIP inventory
Transferred-in during June
Units completed
Ending WIP inventory
Units Materials Conversion Trans-in
20,000
100%
25%
100%
60,000
65,000
100%
100%
100%
15,000
40%
60%
100%
Flow of costs in June
Costs incurred in June
Beginning WIP inventory
Transferred-in during June
Units completed
Ending WIP inventory
Total Costs
Units Materials Conversion Trans-in
$ 25,500 $
31,300 $ 45,000
20,000
10,000
2,000
15,000
60,000
65,000
15,000
4-26
Costs Transferred in
from Prior Departments
Flow of Units in June
Units to account for
Beginning WIP inventory
Units transferred in during June
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
20,000
60,000
80,000
65,000
15,000
80,000
?
?
?
?
?
?
?
?
?
4-27
Costs Transferred in
from Prior Departments
Flow of Units in June
Units to account for
Beginning WIP inventory
Units transferred in during June
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
20,000
60,000
80,000
65,000
15,000
80,000
65,000
?
?
65,000
?
?
100% complete for material,
conversion, and transferred-in units.
65,000
?
?
4-28
Costs Transferred in
from Prior Departments
Flow of Units in June
Units to account for
Beginning WIP inventory
Units transferred in during June
Total units to account for
Units accounted for
Completed and transferred out
Ending WIP inventory
Total units accounted for
40% of 15,000 units
Step 1
Step 2
Physical
Equivalent Units
Units Material Conversion Trans-in
20,000
60,000
80,000
65,000
15,000
80,000
65,000
6,000
71,000
65,000
9,000
74,000
65,000
15,000
80,000
60% of 15,000 units
Transferred-in units are 100% complete
4-29
Costs Transferred in
from Prior Departments
Flow of Costs in June
Costs to account for (Step 3)
Costs in beginning WIP inventory
Current period costs
Total costs to account for
Material Conversion Trans-in
$ 10,000 $
25,500
$ 35,500 $
Total
2,000 $ 15,000 $ 27,000
31,300
45,000
101,800
33,300 $ 60,000 $ 128,800
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
?
?
?
?
?
?
?
?
?
?
?
?