1. Process Costing Chapter 04 Introduction to Managerial Accounting
Chapter 4: Process Costing
Managers need to assign costs to products to facilitate external financial reporting and internal decision making. This chapter illustrates an absorption costing approach to calculating product costs known as process costing.
Introduction to Managerial Accounting
Brewer, Garrison,Noreen
Power Points from website - adapted by Cynthia Fortin, CPA, CMA

2. Similarities Between Job-Order and Process Costing
Material, labor, and overhead costs assigned to products to compute unit product costs.
Same manufacturing accounts.
Same flow of costs
Job-order and process costing are similar in that they both deal with assigning materials, labor, and overhead to products as a way to calculate the unit product cost.
Both systems use Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory.
The flow of costs is similar, but not exactly the same, in the two systems.

3. Quick Check  Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Can you identify the most likely circumstances where a process costing system may be used?

4. Quick Check  Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Can you identify the most likely circumstances where a process costing system may be used?

5. Differences

6. Manufacturing Overhead
Job-Order Costing
Direct Materials
Work in Process
Finished Goods
Direct Labor
Cost of Goods Sold
The flow of costs through the manufacturing accounts is basically the same for process and job-order costing.
Direct materials, direct labor, and manufacturing overhead are added to Work in Process. When work in process is completed, the costs are transferred to Finished Goods. When finished goods are sold, the costs are transferred to Cost of Goods Sold.
Manufacturing Overhead

7. Manufacturing Overhead
Comparing Job-Order
Costs are traced and applied to individual jobs in a job-order cost system.
Direct Materials
Jobs
Finished Goods
Direct Labor
There is a key fundamental difference between process and job-order costing systems. Job-order costing systems trace and apply manufacturing costs to jobs. One Work in Process account is often used to accumulate costs for all jobs. The individual job cost sheets serve as a subsidiary ledger.
Manufacturing Overhead
Cost of Goods Sold

8. Process Costing Processing Department
Costs are traced and applied to departments in a process cost system.
Direct Materials
Processing
Department
Finished Goods
Direct Labor
In a process costing system, costs are traced to departments that process the goods. In some companies there may be several processing departments that goods must pass through to become finished goods. A separate Work in Process account is maintained for each processing department. Material, labor, and overhead costs transferred from one department’s Work in Process account to another department’s Work in Process account are called transferred-in costs.
Manufacturing Overhead
Cost of Goods Sold

9. Sequential processing departments

10. T-Account Views of Process Cost Flows
Megan's Classic Cream Soda, a company that has two processing departments—Formulating and Bottling.
Formulating Department
ingredients are checked for quality (Raw material: water, sugar, carbon dioxide and flavours)
mixed and injected with carbon dioxide to create bulk cream soda.
Bottling Department (Raw material: bottles, caps and packing)
bottles are checked for defects,
filled with cream soda,
capped, visually inspected again for defects,
packed for shipping.
Let’s look at the flow of process costs through the T-accounts and related journal entries for a manufacturing company that has two departments—Department A and Department B.

11. Process Cost Flows: The Flow of Raw Materials
Work in Process Formulating
Raw Materials
Direct Materials
Direct Materials
Work in Process Bottling
Direct materials can be requisitioned for use in both Department A and Department B. These direct materials are likely to be different in nature. Direct material costs are debited to the appropriate departmental Work in Process account depending upon where the materials were added to the production process. The Raw Materials Inventory account is credited for the corresponding amounts.
To record materials used in each department

12. Process Cost Flows: The Flow of Labor Costs
Salaries and Wages Payable
Work in Process Formulating
Direct Materials
Direct Labor
Direct Labor
Work in Process Bottling
Direct labor is transferred from the Salaries and Wages Payable account into the Work in Process account of Departments A and B depending upon where the individual employee worked. Direct labor costs are debited to the appropriate departmental Work in Process account depending upon where the labor was added to the production process. Salaries and Wages Payable is credited for the corresponding amounts.
Direct Materials
To record labor costs in each department

13. Process Cost Flows: The Flow of Manufacturing Overhead Costs
Work in Process Formulating
Direct Materials
Manufacturing Overhead
Direct Labor
Actual Overhead
Overhead Applied to Work in Process
Applied Overhead
Work in Process Bottling
Manufacturing overhead is applied to each processing department based on a predetermined rate for each department. The predetermined rate does not have to be based on the same cost driver for each processing department. Manufacturing overhead costs are debited to the respective departmental Work in Process accounts. Manufacturing overhead is credited by the corresponding amounts.
Direct Materials
Direct Labor
Applied Overhead
To record applied mfg overhead in each department

14. Process Cost Flows: Transfers from WIP-Formulating to WIP Bottling
Work in Process Formulating
Work in Process Bottling
Direct Materials
Transferred to Bottling
Transferred from Formulating
Direct Materials
Direct Labor
Direct Labor
Applied Overhead
Applied Overhead
The cost of units complete as to processing in Department A are transferred into Department B for additional work. Department B has incurred additional costs to work on units that were in process at the beginning of the period. The transferred-in costs from Department A are added to the manufacturing costs incurred in Department B.

15. Process Cost Flows: Transfers from WIP Bottling to Finished Goods
Work in Process Bottling
Finished Goods
Direct Materials
Cost of Goods Manufactured
Cost of Goods Manufactured
Direct Labor
Applied Overhead
Transferred from Formulating
Here we see the transfer of completed goods from Work in Process—Department B into Finished Goods Inventory. The costs transferred represent the cost of goods manufactured.

16. Process Cost Flows: Transfers from Finished Goods to COGS
Work in Process Bottling
Finished Goods
Direct Materials
Cost of Goods Manufactured
Cost of Goods Manufactured
Cost of Goods Sold
Direct Labor
Applied Overhead
Transferred from Formulating
Once we sell finished goods, we debit Cost of Goods Sold and credit Finished Goods Inventory.
Cost of Goods Sold
Cost of Goods Sold

17. Equivalent units
After materials, labor, and overhead costs have been accumulated in a department, the department's output must be determined so that unit product costs can be computed.
W.I.P. has partially completed units which will be translated into
an equivalent number of completed units.

18. Equivalent Units – The Basic Idea
Two half-completed products are equivalent to one complete product. + = 1
The basic idea behind equivalent units is quite easy to understand, but the computation of equivalent can become complex. Here we can say the two half-completed units of production are equal to one complete unit. Using this logic, we can say that 10,000 units that are 70% complete are equivalent, or the same as, 7,000 complete units.
So, 10,000 units 70% complete are equivalent to 7,000 complete units.

19. Quick Check 
For the current period, Jones 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 Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Read the information carefully and determine how many equivalent units of production were manufactured during the period.

20. Quick Check 
For the current period, Jones 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 Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units × 0.30) = 11,500 equivalent units
The correct answer is 11,500 equivalent units. How did you do?

21. Equivalent Units of Production
The weighted-average method . . .
Makes no distinction between work done in prior or current periods.
Blends together units and costs from prior and current periods.
Equivalent units = Units transferred out + equivalent units in ending Work in Process Inventory.
When we use the weighted-average method we make no distinction between work done in the prior period and work done in the current period. We blend together the units and costs from both the prior and current period.
We determine the cost per equivalent unit by dividing costs for the period by the equivalent units of production. The equivalent units of production for a department are the number of units transferred to the next department (or finished goods) plus the equivalent units in the department’s ending Work in Process Inventory.

22. Compute and Apply Costs
The formula for computing the cost per equivalent unit is:
Cost per equivalent unit =
Cost of beginning Work in Process Inventory
Cost added during the period
Equivalent units of production +
We calculate the cost per equivalent unit by adding together the cost of beginning Work in Process Inventory and the cost added during the period. We divide the total dollar amount by the number of equivalent units we previously calculated.

23. Treatment of Direct Labor
Direct Materials
Direct labor costs may be small in comparison to other product
costs in process cost systems.
Manufacturing Overhead
Dollar Amount
Direct Labor
In today’s economy, direct labor costs are becoming small when compared to materials and overhead costs. Automation is one of the causes for this shift.
Type of Product Cost

24. Treatment of Direct Labor
Direct Materials
Direct labor and manufacturing overhead may be combined into one classification of product cost called conversion costs.
Conversion
Direct Labor
Dollar Amount
Direct Labor
As a consequence of the change in volume of direct labor costs, many companies combine labor and overhead costs and refer to the total as conversion costs. That is, these are the costs incurred to convert the direct materials into a finished good. We will make extensive use of the notion of direct materials and conversion costs in the remainder of this chapter.
Manufacturing Overhead
Type of Product Cost

25. Double Diamond Skis Production Process

26. Shaping and Milling Dept. Data for May operations

27. Skis process.docx