Process Costing
Chapter 17
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Learning Objective 1
Identify the situations in which
process-costing systems
are appropriate.
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Illustrating Process Costing
Direct Materials, Direct Labor
Indirect Manufacturing Costs
Department
A
Department
B
Finished Goods
Cost of Goods Sold
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Learning Objective 2
Describe the five steps
in process costing.
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Five Steps in Process Costing
Step 1: Summarize the flow of physical units of
output.
Step 2: Compute output in terms of equivalent units.
Step 3: Compute equivalent unit costs.
Step 4: Summarize total costs to account for.
Step 5: Assign total costs to units completed and to
units in ending work in process inventory.
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Learning Objective 3
Calculate equivalent units and
understand how to use them.
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Physical Units (Step 1)
Physical units
Flow of Production
Work in process, beginning
Started during current period
To account for
Completed and transferred out
during current period
Work in process, ending (100%/20%)
Accounted for
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0
35,000
35,000
30,000
5,000
35,000
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Compute Equivalent Units
(Step 2)
Equivalent units
Direct
Conversion
Flow of Production Materials
Costs
Completed and
transferred out
30,000
30,000
Work in process,
ending
5,000 (100%) 1,000 (20%)
Current period work 35,000
31,000
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Compute Equivalent Unit Costs
(Step 3)
Total production costs are $146,050.
Equivalent units
Cost per equivalent unit
Direct Conversion
Materials
Costs
$84,050 $62,000
35,000
31,000
$2.4014
$2.00
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Summarize and Assign Total
Costs (Steps 4 and 5)
Step 4: Total costs to account for: $146,050
Step 5: Assign total costs:
Completed and transferred out
30,000 × $4.4014
$132,043
Work in process, ending (5,000 units)
Direct materials 5,000 × $2.4014
12,007
Conversion costs 1,000 × $2.00
2,000
Total
$146,050
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Learning Objective 4
Prepare journal entries for
process-costing systems.
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Journal Entries Example
Assume that Omaha, Inc. has two processing
departments – Assembly and Finishing.
Omaha, Inc., purchases direct materials as needed.
What is the journal entry for materials?
Work in Process, Assembly
84,050
Accounts Payable Control
84,050
To record direct materials purchased and used
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Journal Entries Example
What is the journal entry for conversion costs?
Work in Process, Assembly
62,000
Various accounts
62,000
To record Assembly Department conversion costs
What is the journal entry to transfer completed
goods from Assembly to Finishing?
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Journal Entries Example
Work in Process, Finishing
132,043
Work in Process, Assembly
132,043
To record cost of goods completed and transferred
from Assembly to Finishing during the period
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Flow of Costs Example
Accounts Payable
84,050
Various Accounts
62,000
WIP Assembly
84,050 132,043
62,000
14,007
WIP Finishing
132,043
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Learning Objective 5
Use the weighted-average
method of process costing.
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Physical Units (Step 1)
Work in process, beginning:
100% material
60% conversion costs
1,000
Units started in process 35,000
Units transferred out:
31,000
Units in ending inventory:
100% material
20% conversion costs
5,000
36,000
36,000
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Compute Equivalent Units (Step 2)
Completed and transferred
Ending inventory
Equivalent units
Materials Conversion
31,000
31,000
5,000
1,000
36,000
32,000
100%
20%
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Compute Equivalent
Unit Costs (Step 3)
Materials
Beginning inventory $ 2,350
Current costs
84,050
Total
$86,400
Equivalent units
36,000
Cost per unit
$2.40
Conversion
$ 5,200
62,000
$67,200
32,000
$2.10
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Summarize and Assign Total
Costs (Steps 4 and 5)
Work in process beginning inventory:
Materials
$ 2,350
Conversion
5,200
Total beginning inventory
$ 7,550
Current costs in Assembly Department:
Materials
$ 84,050
Conversion
62,000
Costs to account for
$153,600
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Summarize and Assign Total
Costs (Steps 4 and 5)
This step distributes the department’s costs to units
transferred out: 31,000 units × $4.50 = $139,500
And to units in ending work in process inventory:
$12,000 + $2,100 = $14,100
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Summarize and Assign Total
Costs (Steps 4 and 5)
Costs transferred out:
31,000 × ($2.40 + $2.10)
Costs in ending inventory:
Materials
5,000 × $2.40
Conversion 1,000 × $2.10
Total costs accounted for:
$139,500
12,000
2,100
$153,600
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Journalizing: Weighted-Average
What are the journal entries in the
Assembly Department?
Work in Process, Assembly 84,050
Accounts Payable Control
84,050
To record direct materials purchased and used
Work in Process, Assembly 62,000
Various accounts
62,000
To record Assembly Department conversion costs
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Journalizing: Weighted-Average
Work in Process, Finishing
139,500
Work in Process, Assembly
139,500
To record cost of goods completed and transferred
from Assembly to Finishing during the period
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Key T-Account:
Weighted-Average
Work in Process Inventory, Assembly
Beg. Inv.
7,550
Transferred
Materials
84,050
to Finishing
Conversion 62,000
139,500
Balance
14,100
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Learning Objective 6
Use the first-in, first-out (FIFO)
method of process costing.
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Compute Equivalent
Units (Steps 1 and 2)
Quantity schedule (Step 1) is the same as
the weighted-average method.
Materials Conversion
Completed and transferred:
From beginning inventory
0
400
Started and completed
30,000
30,000
Ending inventory
5,000
1,000
35,000
31,400
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Compute Equivalent
Units (Step 2)
Materials
Conversion
Completed
and transferred:
Ending inventory
31,000
31,000
5,000 (100%) 1,000 (20%)
36,000
32,000
Beginning inventory 1,000 (100%)
600 (60%)
Equivalent units
35,000
31,400
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Compute Equivalent
Unit Costs (Step 3)
Current costs
Equivalent units
Cost per unit
Materials
$84,050
35,000
$2.40
Conversion
$62,000
31,400
$1.975
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Summarize and Assign Total
Costs (Steps 4 and 5)
Work in process beginning inventory: $
7,550
Current costs:
Material
Conversion
Total
84,050
62,000
$153,600
Same as using weighted-average
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Summarize and Assign Total
Costs (Steps 4 and 5)
Costs transferred out:
From beginning inventory: $7,550
Conversion costs added:
1,000 × 40% × $1.975
790
From current production:
30,000 × $4.375
Total
$ 8,340
131,250
$139,590
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Summarize and Assign Total
Costs (Steps 4 and 5)
Work in process ending inventory:
Materials: 5,000 × $2.40 $12,000
Conversion:
5,000 × 20% × $1.975
Total
1,975
$13,975
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Summarize and Assign Total
Costs (Steps 4 and 5)
Costs transferred out
+
=
$139,590
Cost in ending inventory $ 13,975
$153,565
($35 rounding error)
An alternative approach:
Costs to account for
–
=
$153,600
Cost in ending inventory $ 13,975
Costs transferred out
$139,625
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Key T-Account: FIFO
Work in Process Inventory, Assembly
Beg. Inv.
7,550
Transferred
Materials
84,050
to Finishing
Conversion 62,000
139,625
Balance
13,975
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Comparison of WeightedAverage and FIFO Methods
Weighted
Average
Costs of units
completed and
transferred out
Work in process,
ending
Total costs
accounted for
FIFO Difference
$139,500 $139,625 +$125
14,100
13,975 –$125
$153,600 $153,600
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Learning Objective 7
Incorporate standard costs
into a process-costing system.
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Standard-Costing Method
of Process-Costing Example
Process-costing systems using standard costs
usually accumulate actual costs incurred
separately from the inventory accounts.
Assume that actual materials cost is $84,050
and standard materials cost is $84,250
What are the journal entries in the
Assembly Department?
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Standard-Costing Method
of Process-Costing Example
Direct Materials Control
84,050
Accounts Payable Control
84,050
Work in Process
84,250
Direct Material Variances
200
Direct Materials Control
84,050
To record direct materials purchased and used in
production during the period and variances
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Learning Objective 8
Apply process-costing methods
to cases with transferred-in costs.
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Transferred-In Costs
Weighted-Average Example
Finishing Department beginning WIP inventory:
4,000 units (60% materials) (25% conversion)
Ending work in process inventory:
2,000 units (100% materials) (40%) conversion)
31,000 units transferred-in from Assembly.
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Physical Units (Step 1)
Beginning inventory
Units started in process
Units completed and transferred
to finished goods
Ending inventory
4,000
31,000
35,000
33,000
2,000
35,000
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Compute Equivalent
Units (Step 2)
Equivalent units for transferred-in costs:
Transferred to finished goods
Ending inventory
33,000
2,000
35,000
Inventory is 100% complete for the work
performed in the Assembly Department.
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Compute Equivalent
Units (Step 2)
Equivalent units for direct materials costs:
Transferred to finished goods
33,000
Ending inventory (100%)
2,000
35,000
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Compute Equivalent
Units (Step 2)
Equivalent units for conversion costs
(ending inventory 2,000):
Transferred to finished goods 33,000
Ending inventory (40%)
800
33,800
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Compute Equivalent
Unit Costs (Step 3)
Assume the following costs in the
Finishing Department:
Work in process beginning inventory from:
Assembly Department
$30,200
Direct materials
9,400
Conversion costs
8,000
Total cost in beginning inventory $47,600
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Compute Equivalent
Unit Costs (Step 3)
Current costs in Finishing Department
are as follows:
Costs received from the
Assembly Department
$139,500
Direct materials
9,780
Conversion
42,640
Total
$191,920
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Compute Equivalent
Unit Costs (Step 3)
(Transferred-in costs $30,200 + Costs transferred
in from the Assembly Department $139,500)
÷ 35,000 units
$4.85
(Direct materials $9,400 + $9,780)
÷ 35,000 units
$0.55
(Conversion costs $8,000 + $42,640)
÷ 33,800 units
$1.50
Total unit cost
$6.90
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17 - 47
Summarize and Assign Total
Costs (Steps 4 and 5)
Total costs in beginning inventory
Current costs in Finishing Department
$ 47,600
191,920
$239,520
Costs to account for: $47,600 + $ 191,920 = $239,520
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Summarize and Assign Total
Costs (Steps 4 and 5)
Costs in work in process ending inventory:
Transferred-in costs: 2,000 × $4.85 $ 9,700
Direct materials: 2,000 × $0.55
1,100
Conversion: 2,000 × 40% × $1.50
1,200
Total cost in ending inventory
$12,000
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Summarize and Assign Total
Costs (Steps 4 and 5)
Costs to account for:
$239,520
Costs transferred to finished goods inventory:
33,000 × $6.90
$227,700
Costs in ending work in process inventory:
$12,000 – $180 rounding error
11,820
Total
$239,520
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T-Account Finishing Department
Work in Process Inventory, Finishing
Beg. Inv.
47,600 Transferred to
Transferred-in 139,500 Finished Goods
Materials
9,780 227,700
Conversion
42,640
Balance
11,820
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Transferred-In Costs
FIFO Method
The physical units (Step 1) is the same
as in weighted-average.
Beginning inventory
4,000
Units started in process
31,000
35,000
Units transferred to finished goods 33,000
Ending inventory
2,000
35,000
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Compute Equivalent Units
FIFO (Step 2)
Equivalent units for transferred-in costs:
From beginning work in process
0
Started and completed
29,000
Work in process, ending (100%)
2,000
Total equivalent units
31,000
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Compute Equivalent Units
FIFO (Step 2)
Equivalent units for transferred-in costs:
Transferred to finished goods
33,000
Ending work in process inventory
2,000
Total
35,000
Beg. work in process inventory
– 4,000
Equivalent units
31,000
Inventories are 100% complete for the work
performed in the Assembly Department.
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Compute Equivalent Units
FIFO (Step 2)
Equivalent units for materials costs:
From beginning work in process
1,600
Started and completed
29,000
Work in process, ending (100%)
2,000
Total equivalent units
32,600
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Compute Equivalent Units
FIFO (Step 2)
Equivalent units for material costs
(beginning inventory 4,000):
Transferred to finished goods
33,000
Ending inventory (100%)
Total
Beginning inventory (60%)
2,000
35,000
–2,400
Equivalent units
32,600
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Compute Equivalent Units
FIFO (Step 2)
Equivalent units for conversion costs:
From beginning work in process
3,000
Started and completed
29,000
Work in process, ending (40%)
800
Total equivalent units
32,800
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Compute Equivalent Units
FIFO (Step 2)
Equivalent units for conversion costs (beginning
inventory 4,000, ending inventory 2,000):
Transferred to finished goods
33,000
Ending inventory (40%)
Total
Beginning inventory (25%)
800
33,800
–1,000
Equivalent units
32,800
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Compute Equivalent Unit Costs
FIFO (Step 3)
Cost per equivalent unit:
Transferred-in: $139,590 ÷ 31,000 $4.50
Direct materials: $9,780 ÷ 32,600
0.30
Conversion: $42,640 ÷ 32,800
1.30
Total unit cost
$6.10
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Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
Current costs in Finishing Department: $192,010
Work in process beginning inventory:
47,600
Costs to account for:(same as weighted-average) $239,610
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Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
Work in process ending inventory:
Transferred-in: 2,000 × $4.50
$ 9,000
Direct materials: 2,000 × $0.30
Conversion: 800 × $1.30
Total
600
1,040
$10,640
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Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
Costs transferred out:
From beginning inventory:
$47,600
Direct materials added:
4,000 × 40% × $0.30
480
Conversion costs added:
4,000 × 75% × $1.30
3,900
Total
$51,980
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Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
Total costs transferred out:
From beginning inventory
$ 51,980
From current production: 29,000 × $6.10 176,900
Total
$228,880
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Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
Total costs accounted for:
Transferred to finished goods:
$176,900 + $51,980
$228,880
Work in process ending inventory 10,640
Rounding error
Total
90
$239,610
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17 - 64
Summarize and Assign Total
Costs FIFO (Steps 4 and 5)
Costs to account for
$239,610
Work in process ending inventory – 10,640
Transferred to finished goods
$228,970
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End of Chapter 17
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