1. CHAPTER 17 PROCESS COSTING
Eugene Sauls

2. Costing Systems
Standard Costing
Actual Costing
Job Order
Process

3. PROCESS COSTING
Used with non-unique production, i.e, all items are basically the same.
An example is a beer producer
Periodic (monthly) costs are allocated on a proportional basis
Units in ending work-in-process will be allocated a proportional amount of costs

4. ILLUSTRATION
Chico Cola Co. uses a weighted average process costing system (we will deal with LIFO, FIFO later).
They began January with 1,000 bottles in process. All materials had been added ($200 costs were assigned in December) and they are assumed to be 1/2 complete as to conversion (labor and overhead) ($300 were assigned in December).

5. During January, enough materials were added to produce 10,000 bottles of product. The materials cost $2,110.
January conversion costs were $5,790
9,500 bottles were completed
1,500 bottles were in work-in-process, complete as to materials and 2/3 complete as to conversion costs
ALLOCATE THE COSTS

6. ALLOCATE MATERIAL COSTS
COSTS TO BE ALLOCATED:
$200 in beginning inventory and
$2,110 incurred during January
Allocate the $2,310 to goods completed and to ending work-in-process
COMPLETED (9,500 x 1.0)
ENDING WIP (1,500 x 1.0)
TOTAL $2,310
9,500
X 2,310 =
$1,995
11,000
1,500
$ 315

7. ALLOCATE CONVERSION COSTS
COSTS TO BE ALLOCATED:
$300 in beginning inventory and
$5,790 incurred during January
Allocate the $6,090 to goods completed and to ending work-in-process
COMPLETED (9,500 x 1.0)
ENDING WIP (1,500 x 2/3)
TOTAL $6,090
9,500
X 6,090 =
$5,510
10,500
1,000
$ 580

8. DIAGRAMMATICALLY (You will have to do it this way.)
CC $300
10,000
M $2,110
CC $5,790
9,500
1,500 (2/3)

9. SOLUTION
1,000 M $200
CC $300
10, ,500
M $2, ,500
CC 5,790
M $1,995
M $315
CC $5,510
CC $580
$7,505
$895

10. DIFFERENT ALGORITHM
Let’s use a different technique to solve the same problem. We will arrive at the same solution.
1- Calculate the equivalent units, i.e., the number of units over which costs are applied.
2- Calculate units costs for materials and for conversion costs
3- Apply the unit costs to goods completed and to work-in-process

11. EQUIVALENT UNITS 9,500 units of costs to finished goods
Materials: We will apply
9,500 units of costs to finished goods
1,500 units of costs to work-in-process
11,000 Equivalent units of materials
Conversion Costs: We will apply
1,000 units of costs to WIP (1,500 X 2/3)
10,500 Equivalent units of conversion costs

12. UNIT COSTS
MATERIALS:
Total costs
Equivalent units
CONVERSION COSTS:
TOTAL
= $ 2,310
11,000
= $0.21
= $6,090
10,500
= $0.58
$0.79

13. APPLY COSTS 1,000 M $200 CC $300 10,000 9,500 M $2,110 1,500 (2/3)
10, ,500
M $2, ,500 (2/3)
CC 5,790
@ $0.79
$7,505
M: 1,500
@ $0.21
$315
CC: 1,000
@ $0.58
$580

14. ADD SECOND DEPARTMENT
In Department 2 the product is worked on until the very end of the process where paint is sprayed on the units
Beginning WIP inventory was 2,000 units, ¼ complete as to conversion.
Costs in beginning WIP was:
Transferred In ( Prior Dept. Costs) $1,695
Conversion Costs $110
January’s conversion costs were $440
Units completed: 10,500 units
Ending WIP: 1,000 units that were ½ complete as to conversion

15. DIAGRAM
Paint
$1,050
2,000 TI $1, CC $110
10,500
9,500
$7505
1,000 (1/2 conversion)
$440

16. SOLUTION EU: Transferred In 10,500 + 1,000 = 11,500
Material (Paint) ,500
Conversion 10, ,000 (1/2) = 11,000
UNIT COSTS
TI ($7,505 + $1,695) / 11,500 = $0.80
MATERIAL $1,050 / 10,500 = $0.10
CONVERSION ($440 + $110) / 11,000 = $0.05
Total $0.95

17. APPLY COSTS 10,500 1,000 (1/2) @ $0.95 $9,975 TI 1,000 @ $0.80 $800
CC $0.05 $25

18. “T” ACCOUNTS (Yes, again)
Materials WIP WIP 2
Purchased
Conversion
Incurred
Finished Goods
2,110
,805
7,505
9,975
2,110
1,050
7,505
1,050
5,790
440
895
5,790
825
440
9,975

19. ADD A SECOND PERIOD
During February, 9,500 units were added and 10,000 were completed.
Ending WIP was 1,000 units that were ½ complete as to conversion
February material costs were $2,105.
February conversion costs were $5,405

20. DIAGRAM M: $315 1,500 (2/3) CC $580 9,500 10,000 1,000 (1/2) M: $2,105

21. CALCULATE E.U. Materials 10,000 Completed 1,000 WIP 11,000
Conversion ,000 Completed
(1,000 X ½) WIP
10,500

22. CALCULATE UNIT COSTS = $0.22 = $0.57 MATERIALS $315 + $2,105 11,000
CONVERSION COSTS
$580 + $5,405
10,500
= $0.22
= $0.57
TOTAL = $0.79

23. APPLY COSTS @$0.79 $7,900 M: $315 1,500 (2/3) CC $580 9,500 10,000
9, ,000
Mat 2, ,000 (1/2)
CC 5, M:
CC:
@$0.79
$7,900
1,000
@$0.22
$220
500
@$0.57
$285

24. RECONCILING COSTS Costs to account for: Beg. WIP $315 + $580 = $ 895
Put In $2,105 + $5,405 = $7,510
$8,405
Costs accounted for:
Completed $7,900
End. WIP $220 + $285 =

25. ADDING LIFO OR FIFO
LIFO OR FIFO can be applied but it makes the allocation more complex.
Let’s deal only with FIFO
Remember that FIFO separate current costs from prior period costs.
So, there will be n+1 unit costs, where n = number of departments.
Use the information from Dept. 1 for January, except that ending WIP is 1/3 complete, instead of 2/3 complete.

26. RECONSTRUCTION OF DATA
1,000 (1/2) M $200
CC $300
10, ,500
M $2, ,500 (1/3)
CC 5,790

27. CALCULATE EU MATERIALS Completed 9,500 - Beg WIP -1,000 End. WIP 1,500
Total ,000
CONVERSION
- Beg WIP (1,000 X ½)
End. WIP (1,500 X 1/3)
Total ,500

28. CALCULATE UNIT COSTS MATERIALS = $0.211 CONVERSION COSTS $5,790
$2,110
= $0.211
10,000
$5,790
= $0.609
9,500

29. APPLY COSTS M $200 CC $300 CC 500X0.609=$304 $804 @$0.82 $6,970
1,000 (1/2)
10,000
M $2,110
CC 5,790 M:
CC:
CC 500X0.609=$304
1,000
$804
8,500
@$0.82
$6,970
1,500 (1/3)
= $317
1,500 X = $305