1. Prepared by Debby Bloom-Hill CMA, CFM

2. CHAPTER 3
Process Costing

3. Difference Between Job-Order and Process Costing Systems
Job-Order Costing:
Each unique product or batch is considered a job for which cost information is needed.
Necessary to trace manufacturing costs to specific jobs.
When completed, cost of job is removed from Work in Process (WIP) and included in Finished Goods inventory.

4. Difference Between Job-Order and Process Costing Systems
Large quantities produced of homogeneous products.
Average cost = total costs divided by total number of items produced.
When completed, number of units completed times average cost determines cost to be moved from WIP to Finished Goods inventory.
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5. Process Costing System

6. Cost Flows through Departments
Manufacturing operations typically pass through two or more departments.
Costs are accumulated in each department.
Easy to identify when materials are added.
Harder to identify when labor and overhead are added.
Often grouped together as conversion costs.
Assumed to be added evenly throughout the process.

7. Cost Flows through Accounts
The product costs accumulated in process are the same as in job-order costing:
Direct materials.
Direct labor.
Manufacturing overhead.
In addition, a processing department may have costs transferred in from another department.
Each processing department accumulates product cost in a separate WIP account.

8. Cost Flows through Accounts
Direct Material:
Suppose that $142,000 of direct materials are used.
Journal entry:

9. Cost Flows through Accounts
Direct Labor
Suppose that $62,200 of direct labor costs are incurred
Journal entry:
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10. Cost Flows through Accounts
Manufacturing Overhead:
A company may use either actual overhead costs or a predetermined overhead rate to assign overhead to products.
Unless production and overhead costs are constant from month to month, use of actual overhead may result in substantial fluctuations in the unit cost.
For that reason most companies use a predetermined overhead rate.
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11. Cost Flows through Accounts
Manufacturing Overhead:
Suppose manufacturing overhead is applied at a rate of $3 per direct labor dollar.
Journal entry:
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12. Cost Flows through Accounts
Transferred-in Cost:
When a department completes its work, the items are transferred to the next department.
Suppose the Mixing Department completed units with a cost of $360,000:
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13. Flow of Costs Between Processing Departments

14. Calculating Unit Cost Equivalent Units:
Partially completed units are converted to a comparable number of completed units, called equivalent units.
Multiply the number of units by the percent complete to calculate the equivalent units.
100 units that are 50% complete are equivalent to 50 complete units (100 x 50%).
Equivalent units may be different for material and conversion costs if materials and conversion costs enter production at different times.

15. Equivalent Units – Material and Conversion Costs

16. Calculating Equivalent Units
Equivalent units are normally calculated for materials and conversion costs.
The equivalent units produced is the sum of the units finished and the units in ending work in process.
Units finished are always 100% complete in terms of materials and conversion costs.
Multiply the number of units in ending work in process by the corresponding percent complete to calculate the equivalent units.

17. Calculating Unit Cost Cost Per Equivalent Unit:
The average unit cost in a process costing system is referred to as cost per equivalent unit.
The numerator represents the total cost for which a processing department must account in each period.
Divide by the units completed plus the equivalent units in ending Work in Process.

18. Calculating Cost per Equivalent Unit
Consider cost per equivalent unit calculations for the mixing department:
Beginning Work in Process inventory: 10,000 gallons that are 80% complete:
Direct material costs = $18,000.
Direct labor =$7,80.
Overhead = $23,400.
70,000 gallons started, 60,000 gallons completed, 20,000 gallons in ending work in process are 100% complete for material, 50% complete for conversion costs,
Costs added are: Direct material cost = $142,000, Direct labor cost = $62,200, Overhead cost = $186,600.
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19. Cost per EU – Mixing Department
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20. Costs Transferred Out
60,000 gallons completed by the Mixing Department.
Unit cost is $6 per gallon.
$360,000 (60,000 X $6) of cost transferred to the Packaging Department.
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21. Ending Work in Process
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22. Summary of Cost Activity – Mixing Department
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23. Production Cost Report
An end of the month report for a process costing system:
Provides a reconciliation of units.
Provides a reconciliation of costs.
Provides the details of the cost per equivalent unit calculations.
The reconciliations help ensure that mistakes are not made in calculations.

24. Production Cost Report
Reconciliation of Units

25. Production Cost Report
Reconciliation of Costs

26. Dealing with Transferred-In Cost
Packaging Department summary:
Beginning Work in Process 15,000 gallons 50% through packaging operation.
Costs in beginning WIP: materials $10,500, labor $4,500, $9,000 overhead, $92,250 transferred in.
Units transferred in 60,000 gallons with $360,000 transferred in cost.
Costs added: Materials $49,500, labor $27,900, overhead $55,800.
Ending Work in Process 5,000 gallons, 100% complete for material, 40% through packaging operation.

27. Production Cost Report – Packaging Department
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28. Production Cost Report – Packaging Department
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29. Production Cost Report – Packaging Department
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30. Copyright
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