1. CHAPTER 16
Process Costing

2. Cost Accounting Systems
determine the costs associated with products (or services).
_________ Cost System (last chapter)
used for unique or custom ordered products
_________ Cost System (this chapter)
is used for mass produced items

3. Process Costing
Process costing is used to attach cost to units produced that are
Identical and low in cost
Mass produced
Manufactured with an automated and continuous flow of production
_____________ is used when costs cannot be directly traced to each individual unit
_____________ = department or process rather than the individual job.

4. Flow of Costs
We must be able to understand the flow of costs through a process costing system. Remember though
The flow of costs is similar to that for a job cost system except
Each department or process has its own WIP inventory account
The products may go through several processing departments ________ being transferred to Finished Goods Inventory.

5. Job Order and Process Cost Systems Compared
Job Order Cost System
Direct materials
Job Cost
Sheets
Dept. A and Dept. B
Direct labor
Finished goods
Factory overhead
Process Cost System
Direct
materials
Dept. B
Finished goods
Dept. A
Direct
labor
Factory
overhead
Direct
labor
Factory
overhead

6. Both systems:
determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhead costs.
allocate overhead using a predetermined overhead rate (or activity-based costing).
maintain perpetual records with subsidiary ledgers for materials, work in process, and finished goods.

7. Job Costing versus Process Costing
The cost of goods transferred to finished goods equals the number of completed units times the _____ _________________
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

8. Cost Categories
At its simplest, we use cost categories in the first department
_____________
added all at the beginning of the process
_____________– (direct labor and overhead)
added evenly throughout each process
In a subsequent processing departments, we will have an additional cost category
costs attaching in all previous departments

9. Flow of Costs in a Process Cost System
FOH – Melting
WIP – Melting
Finished Goods DM
Actual
costs
incurred DL
Cost of Goods Sold
FOH – Casting
WIP – Casting
Actual
costs
incurred DL
Direct materials used in production DM
Direct labor used in production DL

10. Flow of Costs in a Process Cost System
FOH – Melting
WIP – Melting
Finished Goods DM
Actual
costs
incurred
FOHA DL
FOHA
Cost of Goods Sold
FOH – Casting
WIP – Casting
Actual
costs
incurred
FOHA DL
FOHA
Factory overhead applied to work in process
FOHA

11. Flow of Costs in a Process Cost System
FOH – Melting
WIP – Melting
Finished Goods
Actual
costs
incurred
FOHA DM
TRAN DL
FOHA
Cost of Goods Sold
FOH – Casting
WIP – Casting
FOHA
TRAN
Actual
costs
incurred DL
FOHA
TRAN
Cost of goods transferred to WIP – Casting

12. Flow of Costs in a Process Cost System
FOH – Melting
WIP – Melting
Finished Goods
Actual
costs
incurred
FOHA DM
TRAN
COGM DL
FOHA
Cost of Goods Sold
FOH – Casting
WIP – Casting
Actual
costs
incurred
FOHA
TRAN
COGM DL
FOHA
Cost of goods manufactured and transferred to finished goods
COGM

13. Flow of Costs in a Process Cost System
FOH – Melting
WIP – Melting
Finished Goods
Actual
costs
incurred
FOHA DM
TRAN
COGM
SOLD DL
FOHA
Cost of Goods Sold
FOH – Casting
WIP – Casting
SOLD
TRAN
COGM
Actual
costs
incurred
FOHA DL
FOHA
Finished goods sold
SOLD

14. Flow of Costs in a Process Cost System
FOH – Melting
WIP – Melting
Finished Goods
Actual
costs
incurred
FOHA DM
TRAN
COGM
SOLD DL
FOHA
Cost of Goods Sold
FOH – Casting
WIP – Casting
SOLD
TRAN
COGM
Actual
costs
incurred
FOHA DL
FOHA
Summary of cost flows

15. Four Step Program
To attach cost to the units worked on during the period, we follow a five step process
1. Summarize the physical flow of units
2. Calculate the equivalent units of production.
3. Calculate Costs per Equivalent Unit for each component of cost.
4. Assign costs to the units completed and transferred out and to the WIP EI units.
After the four steps are completed, we will prepare the production cost report.

16. Beginning and Ending WIP Inventories
We need to make an assumption about how costs flow through a department.
_____________ is where we will focus our study and will be used in all of our problems.
We will not cover the FIFO method.

17. The Four Steps… Step 1: Determine the physical flow of goods.
We will summarize the actual units that were worked on during the month:
Beginning Inventory (BI)
+ Units Started
= Total Number of Units Accounted for
Then reconcile to the actual units transferred out to the next dept. during the month:
Completed & Transferred Out (C&T Out)
+ Ending Inventory (EI)

18. Comments
We make separate unit calculations for direct materials and conversion costs (DL and FOH) because
They are typically added at different times.
If direct materials are all added at the beginning of the process, then any units left on hand will be ______% complete with respect to the materials.

19. Step 2: Equivalent units
Compute _________________of Production: In accounting for the units in process during the period, we must compute the equivalent units worth of work done during the period for
Material costs
Conversion costs
Direct Labor
Factory Overhead

20. Question C2
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?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
Here is the first of your two questions. .

21. Step 3: Calculating Costs per Equivalent Unit
Once you know how many equivalent units of material, labor and OH have been completed on all units in process during the period, you can express _________________________
Cost incurred to date / equivalent units
Calculate cost/EU for each component of cost
direct materials and
conversion costs (DL & FOH).

22. Step 3: Calculating Costs per Equivalent Unit (Weighted Average)
We focus on the equivalent units of work done in the previous period and in the current period.
The W/A method combines the Costs of Beginning Inventory in Process with Costs Incurred during the period.

23. Step 4: Assigning & Reconciling Costs
Multiply these unit costs times the equivalent units worth of work done on
The units completed and transferred out during the period.
The units left in ending inventory
The total of the cost of units completed and transferred out during the period Goes out of WIP(1) and into WIP(2).
The Cost of units left remains in ending WIP inventory

24. Now on to the Sample Problem