1. CHAPTER 17
Process Costing

2. Chapter 17 learning objectives
Identify the situation in which process- costing systems are appropriate
Understand the basic concepts of process- costing and compute average unit costs
Describe the five steps in process costing and calculate equivalent units
Use the weighted-average method and first-in, first-out (FIFO) method of process costing
Previously, we’ve studied job costing. In chapter 17, we will study process costing. In this chapter, we have 6 learning objectives. Presented here are the first 4:
Identify the situation in which process-costing systems are appropriate
Understand the basic concepts of process-costing and compute average unit costs
Describe the five steps in process costing and calculate equivalent units
Use the weighted-average method and first-in, first-out (FIFO) method of process costing

3. Chapter 17 learning objectives, concluded
Apply process-costing methods to situations with transferred-in costs
Understand the need for hybrid-costing systems such as operation-costing
Here are the final 2 of our 6 learning objectives for the chapter:
Apply process-costing methods to situations with transferred-in costs
Understand the need for hybrid-costing systems such as operation-costing

4. Job versus Process Costing
Job-Costing Systems
Distinct, identifiable
units of a product
or service
Examples:
Custom-made
machines,
houses
Process-Costing
Systems
Masses of identical
or similar units of a
product or service
Examples:
Food,
chemical processing
Here we have a comparison of job-costing and process-costing systems.
Job costing systems are used for distinct, identifiable units of a product or service while process costing is used for masses of identical or similar units of a product or service.
From page 665

5. Process Costing
Process costing is a system where the unit cost of a product or service is obtained by assigning total costs to many identical or similar units of output.
Unit costs are computed by dividing total costs incurred by the number of units of output from the production process.
Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead.
Process costing is a system where the unit cost of a product or service is obtained by assigning total costs to many identical or similar units of output.
Unit costs are computed by dividing total costs incurred by the number of units of output from the production process.
Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead. 5

6. More on job-vs-process-costing
In a job-costing system, individual jobs use different quantities of resources, so it would be incorrect to cost each job at the same average production cost.
In contrast, when identical or similar units of products or services are mass-produced, process costing is used to calculate an average production cost for all units produced.
A little more information about job-vs-process-costing:
In a job-costing system, individual jobs use different quantities of resources, so it would be incorrect to cost each job at the same average production cost.
In contrast, when identical or similar units of products or services are mass-produced, process costing is used to calculate an average production cost for all units produced.

7. Process-Costing cost categories
Process-costing systems separate costs into cost categories according to when costs are introduced into the process.
1. Direct materials are usually added at the beginning of the production process, or at the start of work in a subsequent department down the assembly line.
2. Conversion costs are generally added equally along the production process.
Process-costing systems separate costs into cost categories according to when costs are introduced into the process.
1. Direct materials are usually added at the beginning of the production process, or at the start of work in a subsequent department down the assembly line.
2. Conversion costs are generally added equally along the production process.
In situations where this is not the case, additional categories of either direct materials or conversion costs would need to be added.

8. Process-costing: three cases
Let’s look at the process-costing process three ways:
No beginning or ending work-in-process inventories.
No beginning work-in-process inventory and some ending work-in-process inventory.
Both beginning and ending work-in-process inventories are present.
Let’s look at the process-costing process three ways:
No beginning or ending work-in-process inventories
No beginning work-in-process inventory and some ending work-in-process inventory
Both beginning and ending work-in-process inventories are present

9. Process costing – case 1
When using process costing without any beginning or ending work-in-process inventory, all costs that were introduced to the process during the period will be assigned to the finished units leaving work-in-process inventory at the end of the period.
When using process costing without any beginning or ending work-in-process inventory, all costs that were introduced to the process during the period will be assigned to the finished units leaving work-in-process inventory at the end of the period.

10. Five-Step Process-Costing Allocation
Summarize the flow of physical units of output.
Compute output in terms of equivalent units.
Summarize total costs to account for.
Compute cost per equivalent unit.
Assign total costs to units completed and to units in ending work-in-process.
We use a five-step process to allocate costs under process-costing:
Summarize the flow of physical units of output.
Compute output in terms of equivalent units.
Summarize total costs to account for.
Compute cost per equivalent unit.
Assign total costs to units completed and to units in ending work-in-process.

11. Equivalent Units A derived amount of output units that:
Takes the quantity of each input in units completed and in unfinished units of work in process and
Converts the quantity of input into the amount of completed output units that could be produced with that quantity of input.
Are calculated separately for each input. (direct materials and conversion cost)
When calculating equivalent units in step 2, focus on quantities and disregard dollar amounts until after the equivalent units are computed.
The first step is simply to summarize the flow of physical units.
The second step requires that we determine the equivalent units.
If, for example, I expended all my effort to complete one unit, I would have 1 unit. On the other hand, if instead I expended all my effort to produce two units each of which were 50% complete, I would have the EQUIVALENT of 1 unit.
Equivalent units:
Are a derived amount of output units that:
Takes the quantity of each input in units completed and in unfinished units of work in process and
Converts the quantity of input into the amount of completed output units that could be produced with that quantity of input
Are calculated separately for each input (direct materials and conversion cost)
When calculating equivalent units in step 2, focus on quantities and disregard dollar amounts until after the equivalent units are computed

12. Steps 1 and 2 example, case 2 (no Beg WIP, some ending wip)
In this example, we have no beginning work-in-process but do have ending work-in-process.
The focus for these steps, as we said, is on units. Since the units are 100% complete as to materials, we have 225 equivalent units for DM; since the units are only 60% complete as to conversion costs, we have 135 equivalent units for conversion costs. This is calculated by taking 225 x 60%.
Please note that if the percentage of completion is estimated incorrectly, that will translate into an incorrect unit cost. Exhibit 17-1 page 669

13. Steps 3, 4, and 5, example, case 2 (no beg wip, some ending wip)
The costs added during the period are the only costs in the process because in this example, we do not have beginning work-in-process. Of the $50,600, steps 3, 4 and 5 allow us to determine how much of that cost was completed and will be transferred out and how much should remain in work-in-process.
Notice that the costs for DM and CC are divided by the equivalent units for DM and CC to obtain the cost per equivalent unit. That unit cost is used in step 5 to assign the costs.
Exhibit 17-2 page 670

14. General Ledger Cost Flows Illustrated
In this illustration of the cost flows for process costing, we see how the values move from account to account. Each of the transactions shown must be journalized, then posted just as any other transaction would be.
Exhibit 17-3 page 671

15. Weighted-Average Process-Costing Method
Process costing can be accomplished using the weighted-average method or the FIFO method. We’ll look first at weighted- average.
Calculates cost per equivalent unit of all work done to date. (regardless of the accounting period in which it was done)
Assigns this cost to equivalent units completed and transferred out of the process, and to equivalent units in ending work-in-process inventory.
Process costing can be accomplished using the weighted-average method or the FIFO method. We’ll look first at weighted-average
Calculates cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done)
Assigns this cost to equivalent units completed and transferred out of the process, and to equivalent units in ending work-in-process inventory.

16. Weighted-Average Process-Costing Method
The Weighted-average cost is the total of all costs entering the work-in-process account divided by the total equivalent units of work done to date.
The beginning balance of the work-in-process account (work done in a prior period) is blended in with current period costs.
Let’s look at Case 3 (with both beginning and ending work-in-process inventory using the Weighted Average method.)
The Weighted-average cost is the total of all costs in the work-in-process account divided by the total equivalent units of work done to date.
The beginning balance of the work-in-process account (work done in a prior period) is blended in with current period costs.
Let’s look at Case 3 (with both beginning and ending work-in-process inventory using the Weighted Average method.)

17. Steps 1 and 2 example, case 3, with beg & ending wip
In this table, we are completing steps 1 and 2 where the company has both beginning and ending work-in-process inventory. Please note that we are added existing WIP units to new units started during the period giving us a total, in this example, of 500 units to account for. Exhibit 17-4 page 673

18. Steps 3, 4, and 5, example, case 3, with beg & ending wip
Still using case 3, we complete steps 3, 4 and 5. Note that in step 3 we now have costs that we started the period with in addition to those that were added in during the period.
Exhibit 17-5 page 674

19. Result of the Process
Two critical figures arise out of step 5 of the cost allocation process:
The amount of the journal entry transferring the allocated cost of units completed and sent from work-in-process inventory to finished goods inventory
The ending balance of the work-in-process inventory account that will appear on the balance sheet.
Two critical figures arise out of step 5 of the cost allocation process:
The amount of the journal entry transferring the allocated cost of units completed and sent from work-in-process inventory to finished goods inventory
The ending balance of the work-in-process inventory account that will appear on the balance sheet

20. First-in, First-Out (FIFO) Process-Costing Method
Assigns the cost of the previous accounting period’s equivalent units in beginning work- in-process inventory to the first units completed and transferred out of the process.
Assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to started and completed new units, and finally to units in ending work-in-process inventory.
Recall we mentioned that process costing can be accomplished using either the weighted-average method or the FIFO (first-in, first-out) method. We’ll look now at the FIFO (First-in, First-out) method.
Assigns the cost of the previous accounting period’s equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process
Assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to started and completed new units, and lastly to units in ending work-in-process inventory

21. First-in, First-Out Process-Costing Method
A distinctive feature of FIFO process-costing method is that work done on beginning inventory is kept separate from work done in the current period.
There is no blending of costs as we saw with the weighted-average method.
A distinctive feature of FIFO process-costing method is that work done on beginning inventory is kept separate from work done in the current period.
There is no blending of costs as we saw with the weighted-average method.

22. Steps 1 and 2, example, case 3, with beg & ending wip (FIFO)
In this table, we are performing the five steps of process costing for a company with beginning and ending work-in-process using the FIFO method.
Note how the units (and equivalent units) from beginning work-in-process are kept separate from the units started and completed and remaining in work-in-process. Of course, this is due to the fact that we are not blending the costs and must keep them separate. We are still accounting for the 500 units as in the prior example. Exhibit 17-6 page 676

23. Steps 3, 4, and 5, example, case 3, with beg & ending wip (FIFO)
Completing steps 3, 4 and 5 for a company using FIFO with both beginning and ending inventory, we again see that in step #5 as we are assigning the costs, we keep the costs from beginning inventory separate from the assignment of costs for units started and completed or started and remaining in work-in-process.
The end result is, of course, the same in that we are assigning the costs. Exhibit 17-7 page 677

24. Result of the Process (no change from weighted average)
Two critical figures arise out of step 5 of the cost-allocation process:
The amount of the journal entry transferring the allocated cost of units completed and sent from work-in-process inventory to finished goods inventory.
The ending balance of the work-in-process inventory account that will appear on the balance sheet.
Two critical figures arise out of step 5 of the cost-allocation process (note no change from weighted average method):
The amount of the journal entry transferring the allocated cost of units completed and sent from work-in-process inventory to finished goods inventory
The ending balance of the work-in-process inventory account that will appear on the balance sheet

25. Comparing weighted-average and fifo methods
FIFO assumes that all the higher-cost units (from our example) from the previous period in beginning wip are the first to be completed and transferred out and that ending wip consists of only the lower-cost current-period units.
The weighted-average method smooths out the cost per equivalent unit by assuming that more lower-cost units are transferred out and some higher-cost remain in ending wip.
Some information that can be used to compare the two methods are:
FIFO assumes that all the higher-cost units (from our example) from the previous period in beginning wip are the first to be completed and transferred out and that ending wip consists of only the lower-cost current-period units
The weighted-average method smooths out the cost per equivalent unit by assuming that more lower-cost units are transferred out and some higher-cost remain in ending wip

26. Comparing weighted-average and fifo methods, concluded
Managers use information from process- costing systems to make pricing and product- mix decisions and understand how well a firm’s processes are performing.
FIFO provides managers with information about changes in the costs per unit from one period to the next.
In a period of rising prices, the weighted- average method will decrease taxes because cost of goods sold will be higher and operating income lower.
Managers use information from process-costing systems to make pricing and product-mix decisions and understand how well a firm’s processes are performing.
FIFO provides managers with information about changes in the costs per unit from one period to the next.
In a period of rising prices, the weighted-average method will decrease taxes because cost of goods sold will be higher and operating income lower.

27. Transferred-In Costs
Are costs incurred in previous departments that are carried forward as the product’s cost when it moves to a subsequent process in the production cycle.
Are also called previous department costs.
Journal entries are made to mirror the progress in production from department to department.
Transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process.
Transferred-in costs:
Are costs incurred in previous departments that are carried forward as the product’s cost when it moves to a subsequent process in the production cycle.
Are also called previous department costs.
Journal entries are made to mirror the progress in production from department to department.
Transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process.
Let’s look at an example for a company with both beginning and ending wip as well as with transferred in costs for both the weighted-average method and the FIFO method.

28. Steps 1 and 2, example for beginning and ending wip and transferred-in costs, weighted average
You can see on this slide, which is an example of a company using weighted-average with beginning and ending wip as well as transferred-in costs, that the transferred in costs are merely added to the physical units much as the cost of units added are. Exhibit 17-8 page 682

29. Steps 3, 4, and 5, example for beg & ending wip and transferred-in costs, weighted average
Once again in calculating the costs, we can blend the costs from beginning work-in-process with new costs added from the transfer-in. This unit cost will be used to assign costs to completed and transferred out and ending work-in-process units. Exhibit 17-9 page 683

30. Steps 1 and 2, example for beg & ending wip and transferred-in costs, fifo
Here we see steps 1 and 2 for the same example using FIFO rather than weighted-average. Note how the units from beginning inventory are kept separate. This is required in this method because the costs are not blended.
Just as we saw in our example without transferred-in costs, but with beginning and ending work-in-process, beginning inventories are separated so we can use the appropriate (last period) costs.
Exhibit page 684

31. Steps 3, 4, and 5, example for beg & ending wip and transferred-in costs, fifo
Here you can see the assignment of costs for a company using FIFO, with transferred in costs as well as beginning and ending inventories. Exhibit page 685

32. Points to remember about transferred-in costs
Be sure to include the transferred-in costs from previous departments in your calculations.
When calculating the costs to be transferred using the FIFO method, do not overlook costs that were in beginning wip which may now be part of the units transferred.
Unit costs may fluctuate between periods so transferred units may contain batches accumulated at different costs (using FIFO).
Some additional information regarding transferred-in costs:
Be sure to include the transferred-in costs from previous departments in your calculations
When calculating the costs to be transferred using the FIFO method, do not overlook costs that were in beginning wip which may now be part of the units transferred
Unit costs may fluctuate between periods so transferred units may contain batches accumulated at different costs (using FIFO).

33. Points to remember about transferred-in costs, concluded
Those unit costs discussed in item #3 on the prior slide will be transferred to the next department at ONE AVERAGE UNIT cost.
Units may be measured in different denominations in different departments (feet in one department and yards in another or kilos vs. liters). In this case, measurements must be converted to the correct measure.
Those unit costs discussed in item #3 on the prior slide will be transferred to the next department at ONE AVERAGE UNIT cost.
Units may be measured in different denominations in different departments (feet in one department and yards in another or kilos vs. liters). In this case, measurements must be converted to the correct measure

34. Hybrid Costing Systems
Product-costing systems do not always fall neatly into either job-costing or process- costing categories.
A Hybrid-costing system blends characteristics from both job-costing and process-costing systems.
Many actual production systems are in fact hybrids.
Examples include manufacturers of televisions, dishwashers, and washing machines, and shoes who tend to use hybrid- costing systems.
Product-costing systems do not always fall neatly into either job-costing or process-costing categories.
A Hybrid-costing system blends characteristics from both job-costing and process-costing systems.
Many actual production systems are in fact hybrids.
Examples include manufacturers of televisions, dishwashers, and washing machines, and shoes who tend to use hybrid-costing systems.

35. Hybrid-costing systems, concluded
The hybrid-costing systems use process costing to account for the conversion costs and job costing for the material and customizable components.
One specific type of hybrid-costing system is known as the Operation-Costing System
The hybrid-costing systems use process costing to account for the conversion costs and job costing for the material and customizable components.
One specific type of hybrid-costing system is known as the Operation-Costing System

36. Operation-costing system
An operation is a standardized method or technique that is performed repetitively resulting in different finished goods.
An operation-costing system is a hybrid-costing system applied to batches of similar, but not identical, products.
Within each operation, all product units are treated exactly alike, using identical amounts of the operation’s resources.
Managers find operation costing useful in cost management because operation costing focuses on control of physical processes or operations of a given production system.
With regard to the particular type of hybrid-costing system called an Operation-Costing System,
An operation is a standardized method or technique that is performed repetitively resulting in different finished goods.
An operation-costing system is a hybrid-costing system applied to batches of similar, but not identical, products.
Within each operation, all product units are treated exactly alike, using identical amounts of the operation’s resources.
Managers find operation costing useful in cost management because operation costing focuses on control of physical processes of a given production system.

37. Terms to learn TERMS TO LEARN PAGE NUMBER REFERENCE Equivalent units
First-in, first-out (FIFO) process-costing method
Page 676
Hybrid-costing system
Page 685
Operation
Page 686
Operation-costing system
Previous-department costs
Page 681
Transferred-in costs
Weighted-average process-costing method
Page 673