1. PROCESS COST ACCOUNTING
Chapter 20
PROCESS COST ACCOUNTING
Chapter 20: Process Cost Accounting
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
Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved.

2. 20 - 2
PROCESS OPERATIONS
C 1
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.
Process costing is used to determine the unit costs of small, identical, low- cost items. We could not justify the use of job order costing for such small items.

3. COMPARING JOB ORDER AND PROCESS OPERATIONS
20 - 3
A 1
Job Order Systems
Custom orders
Heterogeneous products
Low production volume
High product flexibility
Low to medium standardization
Process Systems
Repetitive operations
Homogeneous products
High production volume
Low product flexibility
High standardization
On the left, you see characteristics of a job order system that you learned in the previous chapter. Compare the characteristics of a process costing system on the right with those of a job order system. In a job order system, the focus is on the job, while in a process system, the focus is on the process.

4. COMPARING JOB ORDER AND PROCESS OPERATIONS
20 - 4
COMPARING JOB ORDER AND PROCESS OPERATIONS
A 1
The goods in process account consists of individual jobs in a job order system.
Direct Materials
Direct Labor
Jobs
Finished Goods
Recall that in a job order system we trace direct material costs and direct labor costs to jobs. Factory overhead is an indirect cost that we allocate to jobs using a predetermined overhead rate.
Factory Overhead
Cost for each job

5. COMPARING JOB ORDER AND PROCESS OPERATIONS
20 - 5
COMPARING JOB ORDER AND PROCESS OPERATIONS
A 1
The goods in process account consists of specific processes in a process cost system.
Direct Materials
Direct Labor
Processes
Finished Goods
In a process cost system, we trace direct material costs and direct labor costs to the process. Factory overhead is an indirect cost that we allocate to the process using a predetermined overhead rate. Once the costs are properly accumulated in the process, we will divide these costs by the units processed to get the cost per unit for the period.
Factory Overhead
Cost per unit processed

6. COMPARING JOB ORDER AND PROCESS OPERATIONS
20 - 6
COMPARING JOB ORDER AND PROCESS OPERATIONS
A 1
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
There are a great number of similarities between job order and process costing, so we will use many of the same concepts we learned in Chapter 19 as we study process costing.

7. COMPARING JOB ORDER AND PROCESS OPERATIONS
20 - 7
COMPARING JOB ORDER AND PROCESS OPERATIONS
A 1
Journal entries for both job order and process costing are identical
The difference between job order and process costing lies in how the cost of goods transferred to finished goods is determined.
All of the journal entries – for the acquisition and use of raw materials, the acquisition and use of labor, the incurring and allocation of fixed overhead, and the transfer of completed goods from goods in process to finished goods – are identical.
The difference lies in how to determine the cost of completed goods.

8. COMPARING JOB ORDER AND PROCESS OPERATIONS
20 - 8
COMPARING JOB ORDER AND PROCESS OPERATIONS
A 1
Job order costing
The cost of goods transferred to finished goods is equal to the sum of all of the completed jobs for that period.
Process costing
The cost of goods transferred to finished goods equals the number of completed units times the cost per equivalent unit.
With job order costing, the cost of goods transferred to finished goods is equal to the sum of all of the completed jobs for that period.
With process costing, the cost of goods transferred to finished goods equals the number of completed units times the cost per equivalent unit.

9. GENX COMPANY ─ AN ILLUSTRATION
20 - 9
GENX COMPANY ─ AN ILLUSTRATION
A 1
GenX makes a product called Profen in a process cost system.
Let’s look at an example illustrating the flow of units and costs in a process system.

10. PROCESS OPERATIONS AND COSTS – GENX
PROCESS OPERATIONS AND COSTS – GENX
A 1
Materials
Direct
Indirect
Factory Overhead
Applied Overhead
Goods in Process
Finished Goods
Direct materials and direct labor are traced to the processes. Factory overhead items are indirect and must be applied to the process using a predetermined overhead rate.
Cost of Goods Sold
Indirect
Direct
Labor

11. EQUIVALENT UNITS OF PRODUCTION
C 2
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.
Direct material, direct labor, and factory overhead costs are accumulated for a period of time by process or department. Once the costs are properly accumulated in the process, we will divide these costs by the equivalent units processed to get the cost per unit for the period. The concept of equivalent units can cause some difficulty, so we will use several examples to illustrate its use in process cost systems.

12. EQUIVALENT UNITS OF PRODUCTION
C 2
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. + =
Equivalent units refers to the number of units that could have been started and completed given the cost incurred during a period. For example, 4,000 units that are 60 percent complete would total 2,400 equivalent units (60 percent of 4,000 equals 2,400). Take a few minutes to answer the following two questions. They deal with calculating and using equivalent units. Check your progress on these concepts before moving on.
So, 4,000 units that are 60 percent complete would total 2,400 equivalent units.

13. EQUIVALENT UNITS OF PRODUCTION
EQUIVALENT UNITS OF PRODUCTION
C 2
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?
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?
The number of equivalent units is equal to the 11,500 units [10,000 completed units plus 1,500 (30 percent times 5,000 partially completed units].
10,000 units + (5,000 units × .30) = 11,500 equivalent units

14. COST PER EQUIVALENT UNIT
COST PER EQUIVALENT UNIT
C 2
Cost per equivalent unit =
Product costs for the period Equivalent units for the period
If PencilCo incurred $27,600 in production costs during the period, what is the cost per equivalent unit for the period?
Total production costs for a production period are divided by the equivalent units produced for the period to determine the cost per equivalent unit.
If PencilCo incurred $27,600 in production costs during the period, what is the cost per unit for the period?
The cost per equivalent unit is equal to the $27,600 in costs incurred divided by 11,500 equivalent units.
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit

15. EQUIVALENT UNITS 40% of Material
EQUIVALENT UNITS
C 2
40% of Material
Equivalent units may be different for material, labor, and overhead, given that costs may be added at different stages of a process.
Stage 1
25% of Labor and Overhead
If materials, labor, and overhead are added at different stages in the process, the completion percentages will be different. Multiplying different percentages times the unfinished units will result in different equivalent units for materials, labor, and overhead.
At completion of Stage 1 of the process, material is 40% complete, but labor and overhead are only 25% complete.

16. EQUIVALENT UNITS + = + = 100% 50% 40% of Material 60% of Material
EQUIVALENT UNITS
C 2
40% of Material
60% of Material + =
100%
Stage 1
Stage 2
25% of Labor and Overhead
25% of Labor and Overhead + =
50%
In this example, we see that material is added before labor and overhead, resulting in a higher completion percentage. This is not unusual as material must be present first before the work can begin. Think about baking cookies. All of the ingredients (materials) are present before the processing begins in the oven.

17. The process is now complete.
EQUIVALENT UNITS
C 2
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
Once all of the labor and overhead are added to the materials in the process, the units are complete.
The process is now complete.

18. PROCESS COSTING ILLUSTRATION
C 2
GenX uses a weighted average cost flow system with the following four steps:
Determine physical flow of units.
Compute equivalent units of production.
Compute cost per equivalent unit.
Assign and reconcile costs.
As with all situations involving inventory costs, we must choose a cost flow method. We will use the weighted average method for GenX. Process cost applications can be overwhelming if we do not use a well-planned approach. The four-step procedure will enable us to solve a process cost application in manageable parts. The four steps are:
1. Determine physical flow of units.
2. Compute equivalent units of production.
3. Compute cost per equivalent unit.
4. Assign and reconcile costs.

19. PROCESS OPERATIONS – GENX
PROCESS OPERATIONS – GENX
C 2
Here we see the units processed and the completion percentages. Take a minute to become familiar with these numbers before moving on to the cost information. Process costing applications include lots of numbers and computations, so you may find yourself referring back to this information as we work through the example.

20. PROCESS OPERATIONS – GENX
PROCESS OPERATIONS – GENX
C 2
The beginning inventory costs were incurred in March for the partially completed units left in ending inventory in Grinding. March’s ending inventory in Grinding becomes April’s beginning inventory. The current period’s costs were incurred in Grinding to complete the beginning inventory and to start additional units.

21. DETERMINE PHYSICAL FLOW OF UNITS
DETERMINE PHYSICAL FLOW OF UNITS
C 2
These two amounts are reconciled.
The beginning inventory of units plus the units started in April equal the total units to account for in the Grinding process for April. The total number of units is either completed and transferred to Mixing or is left partially completed in Grinding.

22. COMPUTE EQUIVALENT UNITS OF PRODUCTION - MATERIALS
COMPUTE EQUIVALENT UNITS OF PRODUCTION - MATERIALS
C 2
To convert units to equivalent units, we multiply by the appropriate percentage. Since the materials are added at the start of the period, the physical units ending goods in process have 100% of the materials included in them.

23.
COMPUTE EQUIVALENT UNITS OF PRODUCTION – DIRECT LABOR AND FACTORY OVERHEAD
C 2
Now that we have completed the equivalent units computations for material, we can move on to labor and overhead. We can compute equivalent units for labor and overhead at one time since both labor and overhead have the same completion percentages.

24. COMPUTE EQUIVALENT UNITS OF PRODUCTION
COMPUTE EQUIVALENT UNITS OF PRODUCTION
C 2
The equivalent units computation for material, labor, and overhead from the preceding computations are summarized in this table. Notice that the equivalent units for material differs from the equivalent units for labor and overhead because the completion percentages differed.

25.  COMPUTE THE COST PER EQUIVALENT UNIT
 COMPUTE THE COST PER EQUIVALENT UNIT
C 2
Total costs for April are divided by the equivalent units for April to get the cost per equivalent unit.

26. ASSIGN AND RECONCILE COSTS
ASSIGN AND RECONCILE COSTS
C 2
In the cost reconciliation, we will account for all costs incurred by assigning unit costs to the:
A. 100,000 units transferred out.
B. 20,000 units remaining in ending inventory.
Now that we have completed the computations for equivalent units and for costs per equivalent unit, we can use those results to compute the cost of the 100,000 units completed and transferred out and the cost of the partially completed 20,000 units remaining in the process at the end of April.

27.
C 2
We add the beginning inventory costs to the costs incurred for April to get the total costs to be accounted for GenX.
The cost of the units completed and transferred out of goods in process equal the cost of the 100,000 equivalent units of production for the direct materials, direct labor, and factory overhead.
The cost of ending goods in process inventory is the sum of direct material, direct labor, and factory overhead costs. The number of equivalent units for each product cost is multiplied by the respective unit cost. For example, the direct labor cost in ending inventory, $300, is computed by multiplying 5,000 equivalent units times $0.06 per unit. The total costs accounted for, $27,060, is equal to the total costs of the goods transferred out plus the total costs of the ending goods in process inventory.

28. PROCESS COST SUMMARY Process Cost Summary
PROCESS COST SUMMARY
C 3
Helps managers control their departments.
Provides cost information for financial statements.
Shows the flow of units and costs through work in process.
Helps factory managers evaluate department manager performance.
Process Cost Summary
The computations of equivalent units, unit costs, and cost assignments to units completed and transferred, and to units remaining in ending inventory are summarized in a report called the process cost summary. In addition to providing inventory costs for financial statements, this report helps managers evaluate performance and control department operations.

29.
PROCESS COST SUMMARY
C 3
We will illustrate the process cost summary for GenX in three sections:
Costs charged to production.
Equivalent units of production and cost per equivalent unit.
Cost assignment and reconciliation
The process cost summary has three parts: (1) costs charged to production; (2) computation of equivalent units and cost per equivalent unit; and (3) the cost assignment to unfinished units remaining in process and to units completed and transferred.

30.
PROCESS COST SUMMARY
C 3
The first portion of the Process Cost Summary summarizes costs charged to production, resulting in total costs to account for. Costs charged to production for April include the costs in beginning inventory and the costs for direct material, direct labor, and factory overhead that are incurred in April.

31. PROCESS COST SUMMARY
C 3
The second portion of the Process Cost Summary summarizes the flow of units and the computation of equivalent units for each product cost. In the lower portion, you see the computation of cost per equivalent unit for each product cost for April.

32. PROCESS COST SUMMARY
C 3
The third portion on the Process Cost Summary is the cost assignment and cost reconciliation.
The cost of the 100,000 units completed and transferred (cost of goods manufactured) is $24,200.
Cost of ending goods in process ($2,860) is the sum of direct material, direct labor, and factory overhead costs for the unfinished units. The number of equivalent units for each product cost is multiplied by the respective unit cost. For example, the factory overhead cost in ending inventory, $360, is computed by multiplying 5,000 equivalent units times $0.072 per unit. The total costs accounted for are $27,060, which is equal to the total costs transferred out plus the total costs of ending goods in process inventory.

33. TRENDS IN PROCESS OPERATIONS
TRENDS IN PROCESS OPERATIONS
C 3
Process design
Just-in-time production
Customer orientation
Recent trends in process operations include:
Process design. Management concerns with production efficiency can lead companies to entirely reorganize production processes. For example, instead of producing different types of computers in a series of departments, a separate work center for each computer can be established in one department. The process cost system is then changed to account for each work center’s costs.
Just-in-time production. Companies are increasingly adopting just-in-time techniques. With a just-in-time inventory system, inventory levels can be minimal. If raw materials are not ordered or received until needed, a Raw Materials Inventory account might be unnecessary. Instead, materials cost is immediately debited to the goods in process inventory account. Similarly, a finished goods inventory account may not be needed. Instead, cost of finished goods may be immediately debited to the cost of goods sold account.
Automation. Advances in technology increasingly enable companies to automate their production processes. This allows them to reduce direct labor costs. Reflecting this, some companies focus on conversion costs per equivalent unit, which is the combined costs of direct labor and factory overhead per equivalent unit.
Services. Service-based businesses are increasingly prevalent. For routine, standardized services like oil changes and simple tax returns, computing costs based on the process is simpler and more useful than a cost per individual job.
Customer orientation. Focus on customer orientation also leads to improved processes. A manufacturer of control devices improved quality and reduced production time by forming teams to study processes and suggest improvements. Oregon Ice Cream Company studied customer tastes to develop a more pleasing ice cream texture.
Automation
Services

34.
Process: Example
C 3
Singapore Post, like all other postal organizations, is primarily in the business of providing delivery services.
There are various categories of delivery services based on factors such as time to destination and weight of contents.
Postal organizations brand delivery services. Irrespective of the brand or type of delivery service, postal services involve bulk processing.
The process for SmartPac can be viewed at this link:

35. Business Process Reengineering
Business Process Reengineering
BPR involves redesign of core business processes to achieve improvements in productivity, cycle time and quality.
According to a survey by Bain and company in 2014, a leading global management consulting company, BPR is one of the top 10 management tools used by companies globally.
BPR’s use is more pronounced in regions such as North America where companies are more focused on cost cutting for competitiveness than in countries like China and India where the focus is more on growth.

36. HYBRID COSTING SYSTEMS
HYBRID COSTING SYSTEMS
A 2
Hybrid costing systems contain features of both job order and process operations.
Job Order Costing
Hybrid Costing
Process Costing
Hybrid costing includes features of both job order and process costing. Material costs are traced directly as in job order costing, but conversion costs (labor and overhead) are accounted for in the same manner as used in process costing.
Material costs are accounted for using a job order system.
Conversion costs are accounted for using a process system.

37. PROCESS COSTING JOURNAL ENTRIES
PROCESS COSTING JOURNAL ENTRIES
Let’s look at the accounting journal entries for the process cost system at GenX.
The following journal entries illustrate the recording process for a process cost system.

38. PROCESS COSTING JOURNAL ENTRIES
PROCESS COSTING JOURNAL ENTRIES
P 1
To record material purchased on account, we increase the Raw Materials Inventory account with a debit and increase Accounts Payable with a credit.
When direct material is used, we increase Goods in Process Inventory with a debit and decrease the Raw Materials Inventory account with a credit.
When indirect materials are used, we charge the Factory Overhead account with a debit and decrease the Raw Materials Inventory account with a credit.

39. PROCESS COSTING JOURNAL ENTRIES
PROCESS COSTING JOURNAL ENTRIES
P 2
When salaries and wages are paid, we record the amount in the Factory Payroll account with a debit and reduce Cash with a credit.
The portion of Factory Payroll that is classified as direct labor increases the Goods in Process Inventory account, which is accomplished with a debit.
The portion of Factory Payroll that is classified as indirect direct labor increases the Factory Overhead account, which is accomplished with a debit.

40. PROCESS COSTING JOURNAL ENTRIES
PROCESS COSTING JOURNAL ENTRIES
P 3
Other actual costs for factory overhead items are recorded with a debit to the Factory Overhead account. Prepaid Insurance is an asset account that is reduced with a credit as the insurance coverage is used. Utilities Payable is a liability account that is increased with a credit. Cash is an asset account that is reduced with a credit indicating that cash has been paid. Accumulated Depreciation is a contra asset account that is increased with a credit to reflect the adjusting entry for depreciation on factory buildings and equipment.
Factory overhead is applied to the process using a predetermined overhead rate, resulting in an increase in the Goods in Process Inventory account.

41. PROCESS COSTING JOURNAL ENTRIES
PROCESS COSTING JOURNAL ENTRIES
P 4
Completed units are transferred from production to the Finished Goods Inventory account. We record the increase to Finished Goods Inventory with a debit and record the decrease in Goods in Process Inventory with a credit.
When the completed units are sold, we reduce the Finished Goods Inventory account with a credit. Cost of Goods Sold is an expense account that is recorded with a debit.

42. APPENDIX 20A: FIFO METHOD OF PROCESS COSTING
APPENDIX 20A: FIFO METHOD OF PROCESS COSTING
C 4
The FIFO method of process costing assigns costs to units assuming a first- in, first-out flow of product. The objectives, concepts, and journal entries (not amounts) are the same as for the weighted-average method, but computation of equivalent units of production and cost assignment are slightly different. Accounting for a department’s activity for a period consists of the same four steps that we used with the weighted-average method: (1) determine physical flow, (2) compute equivalent units, (3) compute cost per equivalent unit, and (4) determine cost assignment and reconciliation. To illustrate the FIFO method, we will use the same GenX data that we used to illustrate the weighted-average method.
The same GenX data for April will also be used to illustrate the FIFO method.

43. DETERMINE PHYSICAL FLOW OF UNITS
20 -43
DETERMINE PHYSICAL FLOW OF UNITS
C 4
A physical flow reconciliation is a report that reconciles the physical units started in a period with the physical units completed in that period.
FIFO assumes that the 100,000 units transferred to finished goods during April include the 30,000 units from the beginning goods in process inventory. The remaining 70,000 units transferred out are from units started in April. Of the total 90,000 units started in April, 70,000 were completed, leaving 20,000 units unfinished at period-end.

44. COMPUTE EQUIVALENT UNITS OF PRODUCTION – MATERIALS
COMPUTE EQUIVALENT UNITS OF PRODUCTION – MATERIALS
C 4
Three distinct groups of units must be considered in determining the equivalent units of production under the FIFO method: (a) units in beginning goods in process inventory that were completed this period, (b) units started and completed this period, and (c) units in ending goods in process inventory. We must determine how much material, labor, and overhead are used for each of these unit groups.
(a) We assume that production first completes any units started in the prior period that are in beginning goods in process inventory. The 30,000 physical units in beginning goods in process inventory were 100% complete with respect to direct materials as of the end of the prior period so no materials (0%) are needed in April to complete those 30,000 units. The units in process as of April 1 had already been through 65% of production prior to this period and need only go through the remaining 35% of production. The equivalent units of labor to complete the beginning goods in process are 10,500 (30,000 × 35%). Finally, overhead is applied based on direct labor costs, so GenX computes equivalent units for overhead as it would for direct labor.
(b) After completing any beginning goods in process, FIFO assumes that production begins on newly started units. GenX began work on 90,000 new units this period. Of those units, 20,000 remain incomplete at the end of the period. This means that 70,000 of the units started in April were completed in April. These complete units have received 100% of materials, labor, and overhead.
(c) The 20,000 units started in April that GenX was not able to complete by the end of the period are in ending goods in process inventory. These units consumed materials (100%), labor (25%), and overhead (25%) during the period.

45.  COMPUTE COST PER EQUIVALENT UNIT – FIFO
 COMPUTE COST PER EQUIVALENT UNIT – FIFO
C 4
To compute cost per equivalent unit, we take the product costs for direct materials, direct labor, and factory overhead for the current period only and divide by the equivalent units of production from step 2. It is essential to compute costs per equivalent unit for each input because production inputs are added at different times in the process. The FIFO method computes the cost per equivalent unit based solely on this period’s EUP and costs (unlike the weighted-average method, which adds in the costs of the beginning goods in process inventory).

46. ASSIGN AND RECONCILE COSTS
C 4
The equivalent units determined in step 2 and the cost per equivalent unit computed in step 3 are both used to assign costs (1) to units that the production department completed and transferred to finished goods and (2) to units that remain in process at period-end. We see that the cost of units completed in April includes the $4,620 cost carried over from March for work already applied to the 30,000 units that make up beginning goods in process inventory, plus the $1,544 incurred in April to complete those units. This section also includes the $17,990 of cost assigned to the 70,000 units started and completed this period. The total cost of goods manufactured in April is $24,154 ($4,620 + $1,544 + $17,990).
The cost of units in ending goods in process inventory includes materials, labor, and overhead costs corresponding to the percentage of these resources applied to those incomplete units in April. The costs, $2,935 ($2,200 + $ $400) is the ending balance for the goods in process inventory account.

47. ASSIGN AND RECONCILE COSTS
ASSIGN AND RECONCILE COSTS
C 4
The production manager is responsible for $27,060 in costs: $4,620 that had been assigned to the department’s goods in process inventory as of April 1 plus $22,440 of materials, labor, and overhead costs the department incurred in April. At end of the period, the manager must identify where those costs were assigned. The production manager can report that $24,154 of cost was assigned to units completed in April and $2,935 was assigned to units still in process at period-end. The sum of these amounts ($27,089) is $29 different from the $27,060 total costs incurred by production due to rounding in step 3—rounding errors are common and not a concern.

48.
END OF CHAPTER 20
End of Chapter 20.