1. Chapter 17

2. Sequential Processing Departments

3. T-Account Model of Process Costing Flows

4. Process Costing and Direct Labor
Direct Materials
Direct labor costs may be small in comparison to other product
costs in process cost systems.
Mfg. Ovhd.
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

5. Process Costing and Direct Labor
Direct Materials
Direct labor costs may be small in comparison to other product
costs in process cost systems.
Conversion
Dollar Amount
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.
Type of Product Cost
Direct labor and manufacturing overhead is combined into one product cost called conversion.

6. Production Report Example
Global Defense uses process costing to determine unit costs in its Assembly Department.
Upon completion, units are transferred to the Testing Department.
Direct materials are added at the beginning of the assembly process. Conversion costs are added evenly during assembly.

7. Process Diagram - Assembly
Conversion costs added evenly during process
Assembly Department
Transfer
Testing Department
Direct materials added at beginning of process

8. January 2009 Assembly Department - No Beginning/No Ending Inventory
Work in process, January 1: units
Materials: $ 0
Conversion:
Production started during January: units
Production completed during January: units
Costs added to production in January
Materials cost $ 32,000
Conversion cost ,000
Work in process, January units
Manufacturing Costs in Ending Inventory: ?
Manufacturing Costs transferred out in January: ?

9. February 2009 Assembly Department - No Beginning/Some Ending Inventory
Work in process, February 1: units
Materials: $ 0
Conversion:
Production started during February: units
Production completed during February: units
Costs added to production in February
Materials cost $ 32,000
Conversion cost ,600
Work in process, February units
Materials % complete
Conversion % complete
Manufacturing Costs in Ending Inventory: ?
Manufacturing Costs transferred out in February: ?

10. Equivalent Units of Production
Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.

11. Equivalent Units of Production
Two half completed products are equivalent to one completed product. + = 1
So, 10,000 units 70 percent complete are equivalent to 7,000 complete units.

12. Quick Check 
For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process that were 30 percent complete for conversion costs. How many equivalent units of production did Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000

13. Calculating and Using Equivalent Units of Production
To calculate the cost per equivalent unit for the period:
Cost per equivalent unit
Costs for the period Equivalent units of production for the period =

14. Quick Check 
Now assume that Jones incurred $27,600 in conversion costs for the 11,500 equivalent units of production. What was Jones’ conversion cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90

15. Quick Check 
Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit

16. March 2009 Assembly Department - Some Beginning/Some Ending Inventory
Work in process, March 1: units
Materials: % complete $ 18,000
Conversion: % complete ,100
Production started during March: units
Production completed during March: units
Costs added to production in March:
Materials cost $ 19,800
Conversion cost ,380
Work in process, March 31: units
Materials % complete
Conversion % complete
Manufacturing Costs in Ending Inventory: ?
Manufacturing Costs transferred out in March: ?

18. March 2009 Testing Department with Transferred-in Costs – W.A.Method
Work in process, March 1: units
Transferred-in % complete $ 33,600
Materials: % complete
Conversion: % complete ,000
Transferred-in during March: units
Production completed during March: units
Costs added to production in March:
Transferred-in cost $ 52,000
Materials cost ,200
Conversion cost ,600
Work in process, March 31: units
Transferred-in % complete
Materials % complete
Conversion % complete
Manufacturing Costs in Ending Inventory: ?
Manufacturing Costs transferred out in March: ?

19. March 2009 Testing Department with Transferred-in Costs – FIFO Method
Work in process, March 1: units
Transferred-in % complete $ 33,600
Materials: % complete
Conversion: % complete ,000
Transferred-in during March: units
Production completed during March: units
Costs added to production in March:
Transferred-in cost $ 52,480
Materials cost ,200
Conversion cost ,600
Work in process, March 31: units
Transferred-in % complete
Materials % complete
Conversion % complete
Manufacturing Costs in Ending Inventory: ?
Manufacturing Costs transferred out in March: ?