Chapter 3
Process Costing
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 3-1
Describe the key features of a
process costing system.
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Basic Concepts in Process Costing
Process costing is used by companies that produce homogeneous
products or services using a series of standardized processes.
Canned and bottled goods, frozen foods, paper products, and
petroleum products are examples of homogeneous products that
result from a standardized process. Although process costing is
most often identified with manufacturing companies, it can also be
used by service firms that perform routine processes, such as an
insurance company that has a claims and reimbursement process
or a financial institution that processes home refinance loans.
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Flow of Costs in Process Costing
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Process Costing Production Report
The foundation of a process costing system is the
production report. In the report we provide information
about:
1.The number of units produced.
2.The manufacturing costs transferred into Work in
Process Inventory.
3.The manufacturing costs transferred out of Work in
Process Inventory to Finished Goods Inventory.
4.The number of units remaining in process at the end of
the period.
5.The cost of units remaining in process at the end of the
period.
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Learning Objective 3-2
Reconcile the number of physical
units using the weighted-average
method.
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Preparing the Production Report
(Weighted-Average Method)
Step 1: Reconcile the
number of physical
units worked on
during the period.
Step 2:Translate the
physical units into
equivalent units.
Step 3: Calculate
the cost per
equivalent unit.
Step 5: Prepare a
Production
Report.
Step 4: Reconcile
the total cost of
work in process.
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Prepare the Production Report
(Weighted-Average Method)
Step 1: Reconcile the number of physical units.
(Unit = 1 Barrel of Wine)
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Prepare the Production Report
(Weighted-Average Method)
Step 1: Reconcile the number of physical units.
(Unit = 1 Barrel of Wine)
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Process Costing Production Report
Step 2: Convert Physical Units Into Equivalent Units
The next step in preparing the production report is to calculate the number
of equivalent units. An equivalent unit is a measure used to convert
partially completed units into the equivalent of a full unit. Consider the
information below.
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Additional Factors in Processing
Costing
1. We have not discussed process costing when the FIFO
method is applied. This material in covered in Supplement
3A to this chapter. The only difference between the two
methods is how we treat beginning inventory.
2. We have not considered how to account for subsequent
departments in process costing. We did not look at
extending our example to cover the Bottling Department.
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Supplement 3A
FIFO Method
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Step 1: Reconcile the Number of
Physical Units
FIFO assumes that the units in beginning inventory were
completed first. So, not all units that were completed during
the current period were started in the current period.
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Supplement 3B
Journal Entries for Process Costing
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 3-S2
Prepare journal entries to record the
flow of manufacturing costs in a
process cost system.
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Weighted-Average Vs. FIFO
Process Costing
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End of Chapter 3
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