1. University of California, Santa Barbara
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College

2. 21 Process Costing Learning Objectives
After studying this chapter, you should be able to:
[1] Understand who uses process cost systems.
[2] Explain the similarities and differences between job order cost and process cost systems.
[3] Explain the flow of costs in a process cost system.
[4] Make the journal entries to assign manufacturing costs in a process cost system.
[5] Compute equivalent units.
[6] Explain the four steps necessary to prepare a production cost report.
[7] Prepare a production cost report.
[8] Explain just-in-time (JIT) processing.
[9] Explain activity-based costing (ABC).

3. Accounting Principles
Preview of Chapter 21
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso

4. The Nature of Process Cost Systems
Uses of Process Cost Systems
To apply costs to similar products that are mass-produced in a continuous fashion
Examples include the production of Cereal, Paint, Manufacturing Steel, Oil Refining and Soft Drinks
Illustration 21-1
LO 1 Understand who uses process cost systems.

5. The Nature of Process Cost Systems
Process and Job Cost Comparison
Illustration 21-2
LO 1 Understand who uses process cost systems.

6. The Nature of Process Cost Systems
Question
Which of the following items is not a characteristic of a process cost system:
a. Once production begins, it continues until the finished product emerges.
b. The focus is on continually producing homogenous products.
c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.
d. The products produced are heterogeneous in nature.
LO 1 Understand who uses process cost systems.

7. The Nature of Process Cost Systems
Process Costing for Service Companies
Service companies that
provide specific, nonroutine services will probably benefit from using a job order cost system.
perform routine, repetitive services will probably be better off with a process cost system.
LO 1 Understand who uses process cost systems.

8. The Nature of Process Cost Systems
Similarities and Differences Between Job Order Cost and Process Cost Systems
Job Order Cost
Costs assigned to each job.
Products have unique characteristics.
Process Cost
Costs tracked through a series of connected manufacturing processes or departments.
Products are uniform or relatively homogeneous and produced in a large volume.
LO 2 Explain the similarities and differences between job order cost and process cost systems.

9. The Nature of Process Cost Systems
Illustration 21-3
Job order cost and process cost flow
Illustration 21-3
LO 2 Explain the similarities and differences between job order cost and process cost systems.

10. The Nature of Process Cost Systems
Similarities
Differences
Manufacturing cost elements.
Accumulation of the costs of materials, labor, and overhead.
Flow of costs.
Number of work in process accounts used.
Documents used to track costs.
Point at which costs are totaled.
Unit cost computations.
LO 2 Explain the similarities and differences between job order cost and process cost systems.

11. The Nature of Process Cost Systems
Illustration 21-4
Job order versus process cost systems
LO 2 Explain the similarities and differences between job order cost and process cost systems.

12. The Nature of Process Cost Systems
Question
Indicate which of the following statements is not correct:
Both a job order and a process cost system track the same three manufacturing cost elements – direct materials, direct labor, and manufacturing overhead.
b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used.
c. Manufacturing costs are accumulated the same way in a job order and in a process cost system.
d. Manufacturing costs are assigned the same way in a job order and in a process cost system.
LO 2

13. > DO IT! False True False False
Indicate whether the following statements are true or false.
A law firm is likely to use process costing for major lawsuits.
A manufacturer of paintballs is likely to use process costing.
Both job order and process costing determine product costs at the end of a period of time, rather than when a product is completed.
Process costing does not keep track of manufacturing overhead.
False
True
False
False
Advance slide in presentation mode to reveal answers.
LO 2

14. The Nature of Process Cost Systems
Process Cost Flow
Tyler Company manufactures roller blade and skateboard wheels that it sells to manufacturers and retail outlets. Manufacturing consists of two processes: machining and assembly. The Machining Department shapes, hones, and drills the raw materials. The Assembly Department assembles and packages the parts.
Illustration 21-5
LO 3 Explain the flow of costs in a process cost system.

15. The Nature of Process Cost Systems
Assigning Manufacturing Costs—Journal Entries
Accumulation of materials, labor, and overhead costs is the same as in job order costing.
Debit - Raw Materials Inventory for purchases of raw materials.
Debit - Factory Labor for factory labor incurred.
Debit - Manufacturing Overhead for overhead cost incurred.
Assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

16. The Nature of Process Cost Systems
Material Costs
A process cost system requires fewer material requisition slips than a job order cost system.
Materials are used for processes and not specific jobs.
Requisitions are for larger quantities of materials.
Journal entry to record materials used:
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

17. The Nature of Process Cost Systems
Factory Labor Costs
Time tickets may be used in both systems.
All labor costs incurred within a production department are a cost of processing.
The journal entry to record factory labor costs:
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

18. The Nature of Process Cost Systems
Manufacturing Overhead Costs
Objective of assigning overhead is to allocate overhead to production departments on objective and equitable basis.
Use the activity that “drives” or causes the costs.
Primary driver is machine time used.
Journal entry to allocate overhead:
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

19. The Nature of Process Cost Systems
Transfers
Transfer to next department:
Transfer to Finished Goods:
Transfer to record Cost of Goods sold :
LO 4

20. The Nature of Process Cost Systems
Question
In making the journal entry to assign raw materials costs:
a. The debit is to Finished Goods Inventory.
b. The debit is often to two or more work in process accounts.
c. The credit is generally to two or more work in process accounts.
d. The credit is to Finished Goods Inventory.
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

21. >
DO IT!
Blue Diamond Company manufactures ZEBO through two processes: blending and bottling. In June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending $6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in the Blending Department to the Bottling Department. The Bottling Department transfers units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

22. >
DO IT!
Journalize the assignment of these costs to the two processes.
To Record Materials Used:
Work in Process—Blending 18,000
Work in Process—Bottling 4,000
Raw Materials Inventory 22,000
To Assign Factory Labor to Production:
Work in Process—Blending 12,000
Work in Process—Bottling 5,000
Factory Labor 17,000
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

23. >
DO IT!
Journalize the assignment of these costs to the two processes.
To Assign Overhead to Production:
Work in Process—Blending 6,000
Work in Process—Bottling 2,500
Manufacturing Overhead 8,500
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

24. > DO IT! Journalize the transfer of units as appropriate.
To Record Transfer of Units to the Bottling Department:
Work in Process—Bottling 19,000
Work in Process—Blending 19,000
To Record Transfer of Units to Finished Goods:
Finished Goods Inventory 11,000
Work in Process—Bottling 11,000
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

25. Equivalent Units
Illustration: Suppose you have a work-study job in the office of your college’s president, and she asks you to compute the cost of instruction per full-time equivalent student at your college. The college’s vice president for finance provides the following information.
Costs:
Total cost of instruction $9,000,000
Student population:
Full-time students 900
Part-time students 1,000
Illustration 21-6
LO 5 Compute equivalents units.

26. Equivalent Units
Illustration: Part-time students take 60% of the classes of a full- time student during the year. To compute the number of full-time equivalent students per year, you would make the following computation.
Illustration 21-7
Cost of instruction per full-time equivalent student =
Total cost of instruction $9,000,000
Number of full-time equivalent students ÷ ,500
$ ,000
LO 5 Compute equivalents units.

27. Equivalent Units Weighted Average Method
Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process.
Beginning work in process not part of computation of equivalent units.
Illustration 21-8
LO 5 Compute equivalents units.

28. Equivalent Units Weighted Average Method
Illustration: The output of Kori Company’s Packaging Department during the period consists of 10,000 units completed and transferred out, and 5,000 units in ending work in process which are 70% completed.
Calculate the equivalent units of production.
Completed units 10,000
Work in process equivalent units (5,000 x 70%) ,500
13,500
LO 5 Compute equivalents units.

29. Equivalent Units Refinements on the Weighted-Average Method
Illustration: Kellogg Company has produced Eggo® Waffles since Three departments produce these waffles: Mixing, Baking, and Freezing/Packaging. The Mixing Department combines dry ingredients, including flour, salt, and baking powder, with liquid ingredients, including eggs and vegetable oil, to make waffle batter.
Illustration 21-9 [on next slide] provides information related to the Mixing Department at the end of June.
LO 5 Compute equivalents units.

30. Equivalent Units Refinements on the Weighted-Average Method
Illustration: Information related to the Mixing Department at the end of June.
Illustration 21-9
LO 5 Compute equivalents units.

31. Equivalent Units Conversion costs are labor costs plus overhead costs.
Illustration 21-10
Conversion costs are labor costs plus overhead costs.
Beginning work in process is not part of the equivalent-units-of-production formula.
LO 5 Compute equivalents units.

32. Equivalent Units LO 5 Compute equivalents units. Illustration 21-11
Refined Equivalent Units of Production Formula
LO 5 Compute equivalents units.

33. Equivalent Units Question
The Mixing Department’s output during the period consists of 20,000 units completed and transferred out, and 5,000 units in ending work in process 60% complete as to materials and conversions costs. Beginning inventory is 1,000 units, 40% complete as to materials and conversion costs. The equivalent units of production are:
a. 22,600 b. 23,000
c. 24,000 d. 25,000
LO 5 Compute equivalents units.

35. >
DO IT!
The fabricating department has the following production and cost data for the current month.
Beginning Units Ending
Work in Process Transferred Out Work in Process
–0– 15, ,000
Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs. Compute the equivalent units of production for (a) materials and (b) conversion costs.
LO 5 Compute equivalents units.

36. >
DO IT!
The fabricating department has the following production and cost data for the current month.
Beginning Units Ending
Work in Process Transferred Out Work in Process
–0– 15, ,000
Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out 15,000
Ending work in process units ,000
25,000
LO 5 Compute equivalents units.

37. >
DO IT!
The fabricating department has the following production and cost data for the current month.
Beginning Units Ending
Work in Process Transferred Out Work in Process
–0– 15, ,000
Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out 15,000
Equivalent unit in ending WIP (10,000 x 30%) ,000
18,000
LO 5 Compute equivalents units.

38. Production Cost Report
A production cost report is the
Key document used to understand activities.
Shows Production Quantity and Cost data for each department.
Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
LO 6 Explain the four steps necessary to prepare a production cost report.

39. Production Cost Report
Illustration 21-12
Flow of costs in making
Eggo® Waffles
LO 6 Explain the four steps necessary to prepare a production cost report.

40. Production Cost Report
Illustration 21-13
Unit and cost data—Mixing Department
LO 6 Explain the four steps necessary to prepare a production cost report.

41. Production Cost Report
Compute the Physical Unit Flow (Step 1)
Physical units - actual units to be accounted for during a period, irrespective of any work performed.
Total units to be accounted for - units started (or transferred) into production during the period + units in production at beginning of period.
Total units accounted for - units transferred out during period + units in process at end of period.
LO 6 Explain the four steps necessary to prepare a production cost report.

42. Production Cost Report
Compute the Physical Unit Flow (Step 1)
Illustration 21-14
LO 6 Explain the four steps necessary to prepare a production cost report.

43. Production Cost Report
Compute Equivalent Units of Production (Step 2)
Mixing Department
Department adds materials at beginning of process and
Incurs conversion costs uniformly during the process.
Illustration 21-15
LO 6 Explain the four steps necessary to prepare a production cost report.

44. Production Cost Report
Compute Unit Production Costs (Step 3)
Costs expressed in terms of equivalent units of production.
When equivalent units of production are different for materials and for conversion costs, three unit costs are computed:
Materials
Conversion
Total Manufacturing
LO 6 Explain the four steps necessary to prepare a production cost report.

45. Production Cost Report
Compute Unit Production Costs (Step 3)
Compute total materials cost related to Eggo® Waffles:
Illustration 21-16
Work in process, June 1
Direct materials costs $ 50,000
Cost added to production during June
Direct material cost ,000
Total material costs $450,000
Illustration 21-17
LO 6

46. Production Cost Report
Compute Unit Production Costs (Step 3)
Compute total conversion costs related to Eggo® Waffles:
Work in process, June 1
Conversion costs $ 35,000
Costs added to production during June
Conversion costs ,000
Total conversion costs $205,000
Illustration 21-18
Illustration 21-19
LO 6

47. Production Cost Report
Compute Unit Production Costs (Step 3)
Illustration 21-19
Compute total manufacturing costs per unit:
Illustration 21-20
LO 6 Explain the four steps necessary to prepare a production cost report.

48. Production Cost Report
Prepare a Cost Reconciliation Schedule (Step 4)
Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as follows.
Illustration 21-21
Costs to be accounted for
Work in process, June 1 $ 85,000
Started into production 570,000
Total costs $655,000
LO 6 Explain the four steps necessary to prepare a production cost report.

49. Production Cost Report
Prepare a Cost Reconciliation Schedule (Step 4)
Illustration 21-22
LO 6 Explain the four steps necessary to prepare a production cost report.

50. Prepare the Production Cost Report
Illustration 21-23
Prepare the Production Cost Report
LO 7

51. Production Cost Report
Question
Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is:
a. $45,000.
b. $55,000.
c. $75,000.
d. $100,000.
LO 7 Prepare a production cost report.

52. >
DO IT!
In March, Rodayo Manufacturing had the following unit production costs: materials $6 and conversion costs $9. On March 1, it had zero work in process. During March, Rodayo transferred out 12,000 units. As of March 31, 800 units that were 25% complete as to conversion costs and 100% complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process.
Costs transferred out (12,000 x $15) $180,000
Work in process, March 31
Materials (800 x $6) $4,800
Conversion costs (200 x $9) 1,800
Total costs $186,600
LO 7 Prepare a production cost report.

53. Production Cost Report
Costing Systems – Final Comments
Companies often use a combination of a process cost and a job order cost system.
Called operations costing, this hybrid system is similar to process costing in its assumption that standardized methods are used to manufacture the product.
At the same time, the product may have some customized, individual features that require the use of a job order cost system.
LO 7 Prepare a production cost report.

54. Contemporary Developments
Just-In-Time Processing
A processing system that is dedicated to having the right products or parts as they are needed.
Objective: To eliminate all manufacturing inventories to make funds and space available for more productive purposes.
Elements of JIT: Dependable suppliers; Multi-skilled workforce; Total quality control system.
Benefits of JIT: Reduced inventory; Enhanced product quality; Reduced rework and storage costs; Savings from improved flow of goods.
LO 8 Explain just-in-time (JIT) processing.

55. Contemporary Developments
Illustration 21-24
Just-in-time processing
LO 8 Explain just-in-time (JIT) processing.

56. Contemporary Developments
Activity-Based Costing
An overhead cost allocation system that focuses on activities performed in producing a product.
ABC System: More that one basis of allocating activity costs to products is needed.
Assumptions of ABC: All overhead costs related to the activity
must be driven by the cost driver used to assign costs to products.
should respond proportionally to changes in the activity level of the cost driver.
LO 9 Explain activity-based costing (ABC).

57. Contemporary Developments
Activity-Based Costing
Illustration 21-25
Activities and cost drivers in ABC
LO 9 Explain activity-based costing (ABC).

59. APPENDIX 21A Traditional Costing versus ABC
Production and Cost Data
Illustration: Atlas Company produces two abdominal-training products, the Ab Bench and the Ab Coaster. The Ab Bench is a high- volume item totaling 25,000 units annually. The Ab Coaster is a low- volume item totaling only 5,000 units per year. Each product requires one hour of direct labor for completion. Therefore, total annual direct labor hours are 30,000 (25, ,000). Expected annual manufacturing overhead costs are $900,000. The predetermined overhead rate is $30 ($900,000 ÷ 30,000) per direct labor hour. The direct materials cost per unit is $40 for the Ab Bench and $30 for the Ab Coaster. The direct labor cost is $12 per unit for each product.
LO 10 Apply activity-based costing to specific company data.

60. APPENDIX 21A Traditional Costing versus ABC
Unit Costs Under Traditional Costing
Illustration 21A-1
LO 10 Apply activity-based costing to specific company data.

61. APPENDIX 21A Traditional Costing versus ABC
Unit Costs Under ABC
Determining Overhead Rates Under ABC
Atlas Company’s expected annual overhead costs of $900,000 relate to three activities—machine setups, machining, and inspections.
Illustration 21A-2
LO 10 Apply activity-based costing to specific company data.

62. APPENDIX 21A Traditional Costing versus ABC
Unit Costs Under ABC
Assigning Overhead Cost to Products Under ABC
Because of its low volume, the Ab Coaster requires more setups
and inspections than the Ab Bench. The expected number of cost drivers for each product is as follows.
Illustration 21A-3
LO 10 Apply activity-based costing to specific company data.

63. APPENDIX 21A Traditional Costing versus ABC
Assigning Overhead Cost to Products Under ABC
Illustration 21A-3
Assignment of overhead costs to products follows.
Illustration 21A-4

64. APPENDIX 21A Traditional Costing versus ABC
Assigning Overhead Cost to Products Under ABC
The data shows that under ABC, overhead costs are shifted from the high-volume product (Ab Bench) to the low-volume product (Ab Coaster). This shift results in more accurate costing for two reasons.
Low-volume products often require more special handling, such as more machine setups and inspections, than high- volume products.
Assigning overhead using ABC will usually increase the cost per unit for low-volume products as compared to a traditional overhead allocation.
LO 10 Apply activity-based costing to specific company data.

65. APPENDIX 21A Traditional Costing versus ABC
Comparing Unit Costs
Illustration 21A-5
The comparison shows that unit costs under traditional costing have been significantly distorted.
LO 10 Apply activity-based costing to specific company data.

66. APPENDIX 21A Traditional Costing versus ABC
Benefits of ABC
The primary benefit of ABC is more accurate product costing. Here’s why:
ABC leads to more cost pools being used to assign overhead costs to products.
ABC leads to enhanced control over overhead costs.
ABC leads to better management decisions.
LO 10 Apply activity-based costing to specific company data.

67. APPENDIX 21A Traditional Costing versus ABC
Limitations of ABC
ABC systems often provide better product cost data than traditional volume-based systems, there are limitations:
ABC can be expensive to use.
Some arbitrary allocations continue.
LO 10 Apply activity-based costing to specific company data.

68. Copyright
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