20-1
Chapter
20
McGraw-Hill/Irwin
Process Cost
Accounting
© The McGraw-Hill Companies, Inc., 2005
20-2
Learning objectives
1. Process Operation
2. Process Cost Accounting
3. Equivalent Units of Production
4. Process Costing Illustration
– GenX Company
5. Hybrid Costing System
6. Process Costing Typical Accounting Entries
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-3
1. Process Manufacturing Operations
 Used for production of small,
identical, low-cost items.
 Mass produced in automated
continuous production process.
 Costs cannot be directly traced
to each unit of product.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-4
1. Process Operation
Exh.
20-2
- Comparing Job Order & Process Production
Job Order Systems
Process Systems
 Custom orders
 Repetitive operations
 Heterogeneous products
 Homogeneous products
 Low production volume
 High product flexibility
 Low to medium
standardization
McGraw-Hill/Irwin
 High production volume
 Low product flexibility
 High standardization
© The McGraw-Hill Companies, Inc., 2005
20-5
2. Process Cost Accounting
- Comparing Job Order & Process Production
The Goods in Process
account consists of
individual jobs in a
job order system.
Direct
Materials
Direct
Labor
Factory
Overhead
McGraw-Hill/Irwin
Jobs
Finished
Goods
Cost per
unit for
each job
© The McGraw-Hill Companies, Inc., 2005
20-6
2. Process Cost Accounting
- Comparing Job Order & Process Production
Direct
Materials
Direct
Labor
Factory
Overhead
McGraw-Hill/Irwin
The Goods in Process
account consists of
specific processes in a
process cost system.
Processes
Finished
Goods
Cost per
unit
processed
© The McGraw-Hill Companies, Inc., 2005
20-7
2. Process Cost Accounting
- Job and Process Costing Similarities
Same objective: to 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
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-8
3. Equivalent Units of Production
Costs are accumulated for a period of time
by process or department.
Unit cost is computed by dividing the
accumulated costs by the number of
equivalent units produced in the period.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-9
Equivalent Units of Production
Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
Two one-half full pitchers are
equivalent to one full pitcher.
+
McGraw-Hill/Irwin
=
© The McGraw-Hill Companies, Inc., 2005
20-10
Question
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
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-11
Question
Question
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.
10,000 units + (5,000 units × .30)
= 11,500 equivalent units
1,500
d. 15,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-12
Cost Per Equivalent Unit
Cost per
equivalent
unit
McGraw-Hill/Irwin
Product costs for the period
=
Equivalent units for the period
© The McGraw-Hill Companies, Inc., 2005
20-13
Question
Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCo’s cost per unit for the period?
a.
b.
c.
d.
McGraw-Hill/Irwin
$1.84
$2.40
$2.76
$2.90
© The McGraw-Hill Companies, Inc., 2005
20-14
Question
Question
Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCo’s cost per unit for the period?
a.
b.
c.
d.
McGraw-Hill/Irwin
$1.84
$2.40
$2.76
$2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
© The McGraw-Hill Companies, Inc., 2005
20-15
Equivalent Units
40% of
Material
Stage 1
Equivalent units may be
different for material and labor
and overhead at different
stages of a process.
25% of
Labor and
Overhead
At completion of Stage 1 of the process, material
is 40% complete, but labor and overhead are only
25% complete.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-16
Equivalent Units
40% of
Material
+
60% of
Material
Stage 1
Stage 2
25% of
Labor and
Overhead
25% of
Labor and
Overhead
McGraw-Hill/Irwin
+
=
100%
=
50%
© The McGraw-Hill Companies, Inc., 2005
20-17
Equivalent Units
40% of
Material
60% of
Material
Stage 1
Stage 2
Stage 3
25% of
Labor and
Overhead
25% of
Labor and
Overhead
50% of
Labor and
Overhead
The process is now complete.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-18
4. Process Manufacturing Operations
- GenX Example
GenX makes a
product called
Profen in two
departments,
Grinding (G) and
Mixing (M).
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-19
Process Manufacturing Operations
GenX
Indirect
Materials
Direct
Goods in
Process
Grinding
Indirect
Factory
Applied
Overhead Overhead
Labor
McGraw-Hill/Irwin
Exh.
20-5
Direct
Goods in
Process
Mixing
Finished
Goods
Delivered
to
Customers
© The McGraw-Hill Companies, Inc., 2005
20-20
Accounting for GenX
Let’s look at
actual units
processed and
actual costs
incurred for
GenX.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-21
Accounting for GenX
Exh.
20-12
GenX Grinding Department Production Data for April
Beginning Inventory:
Units of product
30,000
Percentage of completion - direct materials
Percentage of completion - direct labor
100%
33 1/3%
Units started in April
90,000
Units transferred from grinding to mixing
100,000
Ending Inventory:
Units of product
20,000
Percentage of completion - direct materials
Percentage of completion - direct labor
McGraw-Hill/Irwin
100%
25%
© The McGraw-Hill Companies, Inc., 2005
20-22
Accounting for GenX
McGraw-Hill/Irwin
Exh.
Exh.
21-5B
20-12
© The McGraw-Hill Companies, Inc., 2005
20-23
Accounting for GenX
GenX uses a FIFO cost flow system
with the following four steps:




McGraw-Hill/Irwin
Physical flow of units.
Computing equivalent units of production.
Computing cost per equivalent unit.
Cost reconciliation.
© The McGraw-Hill Companies, Inc., 2005
20-24
 Physical Flow of Units
Exh.
20-13
GenX Grinding Department Physical Flow for April
Units to account for:
Beginning inventory
30,000
Units started during April
90,000
120,000
Total number of units
Units accounted for as:
Units transferred from grinding to mixing
Ending inventory
Total number of units
McGraw-Hill/Irwin
100,000
20,000
120,000
© The McGraw-Hill Companies, Inc., 2005
20-25
 Computing Equivalent
Units of Production
Exh.
20-14
GenX Grinding Department
Direct Materials Equivalent Units of Production for April
Units of Percent Added Equivalent
Product
This Period
Units
Beginning goods in process
30,000
0%
0
Goods started and completed
70,000
100%
70,000
20,000
120,000
100%
20,000
90,000
Ending goods in process
Total units
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-26
 Computing Equivalent
Units of Production
Exh.
20-14
100,000 units transferred
from grinding to mixing.
GenX Grinding Department
Direct Materials Equivalent Units of Production for April
Units of Percent Added Equivalent
Product
This Period
Units
Beginning goods in process
30,000
Goods started and completed
70,000
Ending goods in process
Total units
McGraw-Hill/Irwin
20,000
120,000
}
0%
0
100%
70,000
100%
20,000
90,000
100,000
© The McGraw-Hill Companies, Inc., 2005
20-27
 Computing Equivalent
Units of Production
Exh.
20-14
Since materials are added at the
beginning of the process in Grinding, no
additional materials are necessary to
GenXthe
Grinding
Department
complete
beginning
inventory.
Direct Materials Equivalent Units of Production for April
Units of Percent Added Equivalent
Product
This Period
Units
Beginning goods in process
30,000
0%
0
Goods started and completed
70,000
100%
70,000
20,000
120,000
100%
20,000
90,000
Ending goods in process
Total units
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-28
 Computing Equivalent
Units of Production
Exh.
20-15
GenX Grinding Department Direct Labor and Factory
Overhead Equivalent Units of Production for April
Units of Percent Added Equivalent
Product
This Period
Units
Beginning goods in process
30,000
66 2/3%
20,000
Goods started and completed
70,000
100%
70,000
20,000
120,000
25%
5,000
95,000
Ending goods in process
Total units
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-29
 Computing Equivalent
Units of Production
Exh.
20-15
GenX Grinding Department Direct Labor and Factory
Overhead Equivalent Units of Production for April
Units of Percent Added Equivalent
Product
This Period
Units
Beginning goods in process
30,000
Goods started and completed
70,000
Ending goods in process
Total units
McGraw-Hill/Irwin
20,000
120,000
}
100,000
66 2/3%
Transferred
100%
20,000
25%
5,000
95,000
70,000
© The McGraw-Hill Companies, Inc., 2005
20-30
 Computing Equivalent
Units of Production
Exh.
20-15
Since labor and overhead were 331/3
percent complete in the beginning
inventory, 662/3 percent of the work
GenX Grinding Department Direct Labor and Factory
must be completed in April.
Overhead Equivalent Units of Production for April
Units of Percent Added Equivalent
Product
This Period
Units
Beginning goods in process
30,000
66 2/3%
20,000
Goods started and completed
70,000
100%
70,000
20,000
120,000
25%
5,000
95,000
Ending goods in process
Total units
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-31
 Computing Equivalent
Units of Production
Exh.
20-16
GenX Grinding Department
Equivalent Units of Production for April
Activities during April 2002
Beginning goods in process
Direct
Materials
0
Direct
Factory
Labor
Overhead
20,000
20,000
Goods started and completed
in current period
70,000
70,000
70,000
Ending goods in process
20,000
5,000
5,000
Equivalent units of production
for period
90,000
95,000
95,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-32
 Computing Equivalent
Units of Production
Exh.
20-17
GenX Grinding Department
Cost Per Equivalent Unit for April
Activities during April 2002
Costs assigned to grinding
in the current period
Direct
Materials
$ 9,900
Equivalent units of production
in the current period
÷
Cost per equivalent unit for
the current period
= $
McGraw-Hill/Irwin
Direct
Labor
Factory
Overhead
$ 5,700
90,000 ÷
0.11 = $
95,000 ÷
$ 4,275
95,000
0.06 = $ 0.045
© The McGraw-Hill Companies, Inc., 2005
20-33
 Cost Reconciliation
In the cost reconciliation, we will
account for all costs incurred
by assigning unit costs to the:
A. 100,000 units transferred from grinding
to mixing.
B. 20,000 units remaining in ending
inventory.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-34
Exh.
20-18
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-35
Exh.
20-18
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-36
Exh.
20-18
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-37
Exh.
20-18
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-38
Process Cost Summary
Shows the flow
of units and costs
through work in
process.
Provides cost
information for
financial
statements.
Process
Cost
Summary
Helps factory
managers evaluate
department manager
performance.
McGraw-Hill/Irwin
Helps managers
control their
departments.
© The McGraw-Hill Companies, Inc., 2005
20-39
Process Cost Summary
We will illustrate the process cost
summary for the Grinding Department
of GenX in three sections:



Costs charged to department.
Equivalent unit processing costs.
Assignment of costs to output of
department.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-40
Process Cost Summary
McGraw-Hill/Irwin
Exh.
20-19
© The McGraw-Hill Companies, Inc., 2005
20-41
Exh.
20-19
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-42
Exh.
20-19
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-43
Exh.
20-19
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-44
Exh.
20-19
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-45
Exh.
20-19
Current period
unit costs
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-46
Exh.
20-19
Total costs
transferred to Mixing
$6,350 + $15,050 = $21,400
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-47
Exh.
20-19
Total costs
transferred to Mixing
$6,350 + $15,050 = $21,400
$21,400 ÷ 100,000 units transferred = $0.214
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-48
Exh.
20-19
These unit costs differ because the
$0.214 contains costs incurred
in March that differed in amount
from costs incurred in April.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-49
Accounting for GenX
McGraw-Hill/Irwin
Exh.
20-21
© The McGraw-Hill Companies, Inc., 2005
20-50
Accounting for GenX
Exh.
20-21
Material, labor and
overhead are added
at the same rate in Mixing.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-51
GenX Mixing Department
Equivalent Units of Production
McGraw-Hill/Irwin
Exh.
20-22
© The McGraw-Hill Companies, Inc., 2005
20-52
GenX Mixing Department
Equivalent Units of Production
Exh.
20-22
75 percent added to complete
the units in beginning inventory.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-53
Process Cost Summary
McGraw-Hill/Irwin
Exh.
20-23
© The McGraw-Hill Companies, Inc., 2005
20-54
Exh.
20-23
GenX Company Mixing Department
Process Cost Summary for Mixing Department
For the Month Ended April 30
EQUIVALENT UNIT PROCESSING COSTS
Units processed
Beginning goods in process
Units started and completed
Ending goods in process
Total
Total direct materials for April
Direct materials cost per equivalent unit
($2,040/102,000 units)
Total direct labor cost for April
Direct labor cost per equivalent unit
($5,100/102,000 units)
Total factory overhead cost for April
Factory overhead cost per equivalent unit
($1,020/102,000 units)
McGraw-Hill/Irwin
Units of
Product
Equivalent
Units of
Production
16,000
85,000
15,000
116,000
12,000
85,000
5,000
102,000
$
2,040
$
$
0.020
5,100
$
$
0.050
1,020
$
0.010
© The McGraw-Hill Companies, Inc., 2005
20-55
Exh.
20-23
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-56
Exh.
20-23
Total costs
transferred to Finished Goods
$4,480 + $24,990 = $29,470
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-57
Exh.
20-23
Total costs
transferred to Finished Goods
$4,480 + $24,990 = $29,470
Unit cost = $29,470 ÷ 101,000 units transferred
= $0.2918 (rounded)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-58
5. Hybrid Costing Systems
Hybrid costing systems contain features
of both job order and process operations.
Job Order
Costing
Hybrid Costing
Material costs are
accounted for using
a job order system.
McGraw-Hill/Irwin
Process
Costing
Conversion costs are
accounted for using
a process system.
© The McGraw-Hill Companies, Inc., 2005
20-59
6. Process Costing
Typical Accounting Entries
Let’s look at the accounting
journal entries for a process
cost system. We’ll omit the
numbers so that we can focus
on accounts.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-60
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Raw Materials Inventory
Accounts Payable
Page 21
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
Acquired materials on credit for
use in the factory.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-61
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Page 21
Post.
Ref.
Debit
Goods in Process Inv. - Grinding
XXXXX
Goods in Process Inv. - Mixing
XXXXX
Raw Materials Inventory
Credit
XXXXX
To assign costs of direct material
used in the grinding and mixing
departments.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-62
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Factory Overhead
Raw Materials Inventory
Page 21
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
To record indirect materials used
in April.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-63
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Factory Payroll
Cash
Page 21
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
To record factory wages for April.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-64
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Page 21
Post.
Ref.
Debit
Goods in Process Inv. - Grinding
XXXXX
Goods in Process Inv. - Mixing
XXXXX
Factory Payroll
Credit
XXXXX
To assign costs of direct labor
used in the grinding and mixing
departments.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-65
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Factory Overhead
Factory Payroll
Page 21
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
To record indirect labor as
overhead.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-66
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Factory Overhead
Page 21
Post.
Ref.
Debit
Credit
XXXXX
Prepaid Insurance
XXXXX
Accrued Utilities Payable
XXXXX
Cash
XXXXX
Accumulated Depreciation
XXXXX
To record factory overhead items
incurred during April.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-67
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Page 21
Post.
Ref.
Debit
Goods in Process Inv. - Grinding
XXXXX
Goods in Process Inv. - Mixing
XXXXX
Factory Overhead
Credit
XXXXX
Allocated factory overhead costs to
the grinding department and to the
mixing department on the basis of
direct labor cost.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-68
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Page 21
Post.
Ref.
Goods in Process Inv. - Mixing
Goods in Process Inv. - Grinding
Debit
Credit
XXXXX
XXXXX
To record the transfer of partially
completed goods from the grinding
department to the mixing
department.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-69
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Page 21
Post.
Ref.
Finished Goods Inventory
Goods in Process Inv. - Mixing
Debit
Credit
XXXXX
XXXXX
To record the transfer of completed
goods out of production.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-70
Process Costing
Typical Accounting Entries
GENERAL JOURNAL
Date
Description
Cost of Goods Sold
Finished Goods Inventory
Page 21
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
To record cost of goods sold
during April.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
20-71
End of Chapter 20
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005