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LearningObjectives
After studying Chapter 3, you will be able to:
Differentiate among job and process cost systems.
Understand the basic characteristics of modi�ied and hybrid
cost systems.
Recognize the fundamental aspects of a job cost system.
Describe the cost elements and cost �lows in a process cost
system.
Compute the equivalent units of production and unit costs using
FIFO.
Prepare and use cost of production reports.
Explain the impact that JIT inventory systems have on process
cost accounting.
3 Process Costing
djedzure/iStock/Thinkstock

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Compute the equivalent units of production and unit costs using
the weighted average
method.
WhereThere’saWill,There’saWayofCosting
When Stan Stein, an attorney, founded U Will It, he envisioned
an enterprise involving the mass
production of routine wills with standard wording and little
variation. Because he kept his fees
low and had clever advertising, his �irst two years were very
successful. Stein was preparing wills
for clients throughout Ohio.
Periodically, Stein was approached by clients who wished to
have more specialized and complex
wills prepared. Stein was reluctant to accept these jobs because
his practice was near full capacity.
Moreover, because these specialized wills required considerable
research, client conferences, and
other demands made by the clients, Stein did not feel his current
practice was amenable to the
preparation of specialized wills. Therefore, he would routinely
turn down these requests.
One day, Stein decided to invest his growing pro�its into a new
venture that would be oriented to
preparing specialized wills. One of Stein’s many concerns was

how he would determine the costs
of these customized jobs. He knew that the process costing
system used for his current �irm
would not be suitable for his new venture.
This chapter discusses how to determine the costs of products
produced in a process cost environment
as well as products produced in a job cost environment.
Although we focus on manufactured products,
the concepts presented are applicable in service organizations,
as was just indicated in the above
vignette.
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3.1OverviewofJobandProcessCosting
A job cost system identi�ies costs with individual jobs or
products. A separate tracking of costs is
associated with each job or product. The costs accumulated for
a job in process can be determined at
any point in time by referring to the job order cost sheet.
A processcostsystem identi�ies costs with individual
departments for an interval of time, such as one
month. Costs are not charged to speci�ic units or orders as
work is performed, but unit costs are based
on costs incurred during a time period and on the volume of
output during the same period. The unit
cost of a �inal product will be the sum of all costs allocated to
the product by each department that

worked on it.
Several other characteristics distinguish job costing from
process costing, as discussed below. Figure 3.1
at the end of this section summarizes these differences.
Figure3.1:Comparisonofjobcostingandprocesscosting
Environment
Job costing is most appropriate in environments where jobs or
products are different from one another.
These jobs use different types or amounts of materials, labor,
and overhead. Examples include building
construction, defense contracting, consulting engagements, and
printing shops.
Process costing is most appropriate in an environment where
products are mass produced or result
from continuous processing. Each unit going through the same
process is identical to other units.
Examples include candy, soft drinks, clothing, chemicals, and
most processed foods. In addition,
individual operations can be suitable for process costing if
every product passing through the operation
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has the same work performed on it. For instance, various models
of televisions and DVD players on an

assembly line may have the same operations performed during
the assembly process.
In a job cost environment, sales orders usually precede
production. Production is for a speci�ic order. In
a process cost environment, however, production usually
precedes sales. Goods are produced for
anticipated sales.
Materials,Labor,andOverheadCosts
A process cost environment will generally use materials that are
standard. In a job cost setting, materials
requirements are often unique to each job, and sometimes even
the types of materials needed are
unknown. Hence, process cost companies usually have larger
inventories of materials.
Tasks in a process cost environment are generally routine. Less-
skilled labor is usually needed than in a
job cost environment, where workers need to perform a greater
variety of tasks because of the different
types of jobs. Automation is found more often in process cost
settings. Therefore, the proportion of
overhead cost in the total product cost will generally be higher
than for job cost settings.
FocalPointforCostAccumulation
In process cost systems, we identify materials, labor, and
overhead costs with speci�ic departments or
operating centers. This differs from job cost systems, which
identify costs with speci�ic batches or
customer orders. In this chapter, the term department will be
used as a generic term and will cover the
traditional concepts of department, operating or work center,

operation, task, activity center, and
responsibility center. As a result of charging costs to
departments, few detailed records are needed with
process costing.
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3.2Modi�iedandHybridSystems
Classifying an accounting system as a job cost or process cost
system is often not easy. This is especially
true when companies have a wide variety of products and
processes. Modi�ications and adaptations are
made to the accounting system to meet the needs of speci�ic
situations. These result in systems we
categorize as modi�ied cost systems and hybrid cost systems.
A modi�ied cost system has one or more elements of cost using
job costing, while the other cost
elements use process costing. For example, a manufacturer of
shoes will make different sizes and styles
and use different grades of leather. However, the operations of
cutting and sewing the leather and
attaching the heels and soles are essentially the same for each
shoe. Consequently, the manufacturer can
group the shoes by sizes, styles, and grades of leather, and treat
the costing of materials using job
costing. Then, the labor and factory overhead costs for the
operations can use a process cost system.
A hybridcostsystem exists where one type of cost system (job

costing or process costing) is used for
one phase of the production process, and another system is used
for a subsequent phase. For example,
in manufacturing cars, the various parts, subassemblies,
engines, transmissions, and so forth may be
produced where a job cost system is used. In assembly, every
car, regardless of model, has the same
assembly operations performed. Therefore, the labor and factory
overhead costs of the assembly
operations may be accounted for using a process cost system.
Hybrid cost systems can involve various
sequences of job and process costing, depending on the
particular production process.
Operation costing is a term often used to refer to modi�ied or
hybrid cost systems. Except in the
simplest of cases, pure job costing or process costing does not
exist. There is usually some modi�ication.
Managers need to understand their own organization’s cost
system in order to evaluate the cost
information generated by that system. The remainder of this
chapter provides detailed discussions of job
cost and process cost systems.
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3.3TheJobCostSystem
The job cost system accumulates separately the costs of
materials, labor, and overhead for each job,
whether a job of one unit or a job of many units. Every job is

assigned a number, which is used for
accumulating the costs of that job. Daily, weekly, or monthly
cost summaries for each job are generated.
These summaries are referred to as job,work, or
productionorders. The �ile of production orders in
process constitutes a subsidiary ledger in support of the work in
process account in the general ledger.
Whereas a job cost system accumulates costs by jobs, a process
cost system accumulates costs by
departments. This, and other differences, changes the approach
to determining unit costs in a process
cost environment. However, as outlined in the remaining
sections of this chapter, many of the product
cost concepts of Chapter 2 apply as well to process costing.
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3.4TheCostElementsinaProcessCostSystem
The cost elements in a process cost system depend on whether
the organization is a manufacturing or
service organization. A manufacturer typically has more
detailed costs; therefore, we focus on
manufacturing �irms in the following sections. We will discuss
the two major elements of manufacturing
costs in a process cost system: materials and conversion costs.
Materials
Materials are requisitioned for use in a speci�ic department,

and the materials costs are accumulated by
the department for a speci�ic time period. Although materials
can be added in any department, they are
often issued from the storeroom to the �irst operating
department in the process. The concept of
accounting for materials costs does not depend on whether
materials are added in the �irst department
or in subsequent departments. Distinguishing between direct
materials and indirect materials is not
considered critical to obtain accurate unit costs.
Two major differences in accumulating materials costs between
the job cost system and the process cost
system should be noted. Materials costs are identi�ied �irst
with departments and then assigned to
individual units in a process cost system. Materials costs bypass
departments and are charged directly to
speci�ic jobs in a job cost system. In process costing, materials
costs are accumulated for a period of time
and averaged over all units receiving materials during the
period. This averaging of costs is broader in a
process cost system than in a job cost system, where costs
would be averaged only over the batch of
units comprising a particular job.
ConversionCosts
Labor and overhead costs are incurred to convert materials into
a �inished product; hence, labor and
overhead costs are called conversion costs. Because labor and
overhead often enter the process at the
same time, we combine them for illustrations throughout the
chapter. This assumes that overhead is
applied to production using direct labor hours or dollars. Where
another cost driver is used, we
separate the two cost elements.

Labor cost is measured monthly, by department, and without
identifying speci�ic orders. Labor time
tickets may be used for payroll accounting, but are not needed
to measure the time to complete a single
order because each unit of product in a process cost setting is
presumed to take the same amount of
time. Like materials, little emphasis is placed on distinguishing
precisely between direct labor and
indirect labor.
Overhead costs are accumulated by department. Typically, we
record them in a departmental overhead
control ledger by type of cost (e.g., depreciation, utilities).
Overhead costs are charged to production
through predetermined overhead rates for each department. In
most of our illustrations, overhead
appears to be actual overhead. However, the costs represent
charges based on predetermined overhead
rates under a normal cost system. Since normal costing was
discussed in Chapter 2, we will not repeat
the coverage here. We assume that overhead is accumulated and
applied using departmental rates.
CostFlows
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In a process system, a product may �low through several
operations before completion. For example,

production of cellular phones may start in a fabricating
operation, as shown in Figure 3.2.
Both the physical units and costs will be identi�ied for the
fabricating operation over a period of time,
such as a month. When the inner components of the phones are
completed in the fabricating operation,
the units with their costs are transferred by automated guided
vehicles to the next operation—in this
case, the molding operation where the casings are formed.
Additional costs will be incurred and
accounted for in the molding operation. At the completion of
the molding operation, the units and
accumulated costs of preceding operations will be transferred to
the last operation in this example, the
�inishing operation.
Figure3.2:Flowofunitsandcostsinaprocessmanufacturing
system
Because costs need to be identi�ied with departments, a process
cost system normally involves
accounting transfers between departmental work in process
inventory accounts. Each department has
its own work in process account; when goods are completed in
one department, their costs are
transferred to the work in process account of the next
department.
In some types of operations, a subassembly may be produced on
a separate production line for addition
to the product at a later stage. For example, assume that the
main production line for computer
keyboards extends from Department A (Fabricating) to
Department C (Finishing). A subassembly line,
consisting of Departments W (Forming) and X (Soldering), uses

numerically controlled machines to
produce a component that converts physical measures like
velocity and pressure into digital form. These
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components are brought into the main line in Department C. A
diagram showing the �low of units and
costs for this example appears in Figure 3.3.
Figure3.3:Flowofunitsandcostsforsubassemblycomponents
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3.5TheEquivalentUnitConcept
A primary goal of any cost accounting system is to identify
product costs for determining ending
inventories of work in process and �inished goods and for
establishing the cost of goods sold amount.
Costs are attached to units in inventories whether the units are
wholly or partially completed. The
mechanism for tracing costs to units is a unit cost.
UnitCosts

When calculating unit costs, we typically think of a formula
similar to the following:
Applying this formula to the typical process cost situation is
complicated by two major factors: (1) the
stage of completion of units in work in process inventories, and
(2) the different points in time that
materials and conversion costs enter a departmental process. We
will discuss point (2) in more detail
later in the chapter.
The number of units completed is not a good measure for
determining an appropriate unit cost when
there are partially completed units in beginning or ending
inventories. Consequently, an equivalent unit
must be identi�ied. Equivalentunits represent the theoretical
number of units that could have been
produced had the resources been applied to units that were
started and completed during the period.
We can also think of equivalent units as representing the actual
work done on the physical units. For
instance, two physical units 50% complete represent the
equivalent of one unit 100% complete.
FlowofPhysicalUnits
For each department, the �low of physical units can be viewed
as follows:
Units in beginning work in process inventory + Units of product
started during the period =
Units completed and transferred out + Units in ending work in
process inventory

This relationship among physical units is also shown in Figure
3.4. As diagrammed, the number of units
started and completed during the period can be computed two
ways:
Units completed and transferred out – Units in beginning work
in process inventory =
Units started and completed
or
Units of product started during the period – Units in ending
work in process inventory =
Units started and completed
Knowing where all units are in a production process is an
important starting point for calculating unit
costs. Figure 3.4 represents the location and �low of physical
units through a production process for a
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given time period.
Figure3.4:Relationshipamongphysicalunitswithina
department
StageofCompletion

In a process cost system, the units in the beginning and ending
inventories are usually at different stages
of completion. The stage of completion is the average
percentage of work completed on a unit of
product at any point in time. For a department, it is useful to
identify three distinct groupings of products
when computing equivalent units:
1. Partially completed units in the beginning inventory that are
completed during the current
period. The work to complete these units is represented by
100% less the stage of completion
when the period started. We generally assume a �irst-in, �irst-
out �low, which will be explained in
more detail later in this chapter.
2. Units started and completed during the period. The work
completed is represented by 100%.
3. Partially completed units at the end of the period. The work
completed is represented by the
percentage of completion at the end of the period.
When all three of these groups are summed, the result is
equivalent units of output for this time period
—the work done by the workers in this department. This is the
number of units that could have been
produced if all production were started and completed during
the period, assuming no beginning or
ending work in process inventories.
For example, the Norwich Post Of�ice has a sorting
department. On March 1, 15,000 units were in
process and were 60% completed. During March, the department
started work on 200,000 units. On

March 31, 20,000 units were in process and were 30%
completed. From our �low of physical units
formula, we calculate the number of units completed as follows:
Units in beginning inventory 15,000
+ Units started during period 200,000
− Units in ending inventory (20,000)
Units completed and transferred 195,000
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Next, we compute the units started and completed using both
methods described previously:
− Units in beginning inventory (15,000)
Units started and completed 180,000
or
Units started during period 200,000
– Units in ending inventory (20,000)

We now have the three groups of units and their stages of
completion, which are necessary to �ind the
number of equivalent units. The calculation for the equivalent
units of output for the period is as follows:
Current period work to complete beginning inventory [15,000 ×
(100% − 60%)] 6,000
+ Units started and completed (180,000 units × 100%) 180,000
+ Current period work in ending inventory (20,000 units ×
30%) 6,000
Equivalent units of output (work done during the period)
192,000
TimingofInputs
Materials, labor, and overhead are the inputs to the production
process. These inputs may enter at
different points during the process. The most common situation
is for materials to enter at the beginning
of a departmental process and for labor and overhead to be
added continuously throughout the process.
Consequently, it is possible for some units in process to have all
of their materials added but only part of
the labor and overhead. In other processes, the materials may be
added continuously or at the end of
the process. For our purposes, unless otherwise stated, presume
that materials are added at the
beginning of the process, and labor and overhead enter the
process together and are added
continuously or evenly throughout the process.
To calculate unit costs when inputs have different timing for

entering a process, we need to calculate the
equivalent units for each cost input. Therefore, one equivalent
unit computation is for materials; another
computation is for conversion costs. The computational steps
developed in the next section will show
how separate equivalent units quantities are used to establish
unit costs.
ComputationalSteps
Tracing physical units to a department and accounting for those
units are generally clerical functions.
Likewise, the identi�ication of the costs charged to a
department is a relatively simple function. However,
distributing the costs to work completed and ending inventories
requires an understanding of several
steps. These steps are:
1. Determine �low of physical units.
2. Calculate equivalent units.
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3. Compute unit costs.
4. Distribute total costs to units.
5. Reconcile the costs.
The last step checks whether the four previous steps were
completed accurately. This step veri�ies that
the total costs distributed to the units equal the total costs

charged to the department. Each of these
steps will be presented in detail as part of developing a cost of
production report.
We assume a �irst-in,�irst-out(FIFO)costmethod in progressing
through the �ive computational steps.
The beginning inventory is completed before new units are
completed. Costs incurred �low in the same
manner. Most companies using process costing use the FIFO
cost method. Another frequently used
method, the weighted average cost method, is discussed later in
this chapter.
Under FIFO, the older units and costs are transferred out �irst,
and the more current units and costs are
transferred out next. Only the most recent costs are held as
ending inventory. With the FIFO cost method,
the equivalent units of output are literally the units that could
have been completed if all efforts during
the period were devoted to starting and completing units,
allowing no partially completed units. Usually,
however, some units will be in a stage of partial completion at
both the beginning and at the end of the
month. The beginning work in process units are completed
during the month, and a start has been made
on the units in ending work in process.
To illustrate the computational steps, consider the current plant
of Shirts Unlimited. Sweatshirts are
produced in three departments: Cutting, Sewing, and Finishing.
Our illustration will focus on the Cutting
Department. All cloth material enters production at the
beginning of the Cutting Department operations.
The cloth is cut there. Both materials and conversion costs are
incurred in the Cutting Department. Its
activity for May is summarized as follows:

Workinprocess,May1:
Units 4,000
Stage of completion:
Materials 100%
Conversion costs 40%
Costs:
Materials $400,000
Conversion costs 80,000
Beginning inventory total cost $480,000
Units started 12,000
Current period costs:
Materials $1,200,000
Conversion costs 650,000
Total costs added $1,850,000
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Workinprocess,May31:
Units 2,000
Materials 100%
Conversion costs 30%
Step1:DetermineFlowofPhysicalUnits. Determining the �low of
physical units for a department
involves identifying the units in the beginning inventory, the
units started and completed during the
period, and the units in the ending inventory. These are whole
units; stage of completion is not an issue
here. For the Cutting Department of Shirts Unlimited, we have:
Units in beginning work in process 4,000
Units started and completed: (12,000 – 2,000 or 14,000 – 4,000)
10,000
Units in ending work in process 2,000
Total units 16,000
Step2:CalculateEquivalentUnits. Equivalent units are computed
by multiplying physical units by the
percentage of work completed on them. For our example, using
the units started and completed method,

we have the following calculations:
Materials Conversion
Current period work to complete beginning inventory:
4,000 × (100% − 100%) 0
4,000 × (100% − 40%) 2,400
Units started and completed in May:
10,000 × 100% 10,000 10,000
May’s work in ending inventory:
2,000 × 100% 2,000
2,000 × 30% 600
Equivalent units (work done during May) 12,000 13,000
Note that in deriving the 2,400 equivalent units to complete the
beginning inventory for conversion
costs, we multiply the 4,000 physical units by 60% (100% –
40%) because the units were already 40%
complete and another 60% of work is needed in the current
period to complete those units.
Step3:ComputeUnitCosts. We begin this step by itemizing the
costs for which the Cutting Department
will be held accountable.
Materials Conversion Total
Beginning inventory $400,000 $80,000 $480,000

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Materials Conversion Total
May’s costs 1,200,000 650,000 1,850,000
Total costs $1,600,000 $730,000 $2,330,000
The unit costs for materials and conversion costs are calculated
from the current month’s costs and
equivalent units. Last month’s costs and equivalent units of
work are included in the beginning inventory
amount and will be treated separately. Using May’s costs and
the equivalent units from above, the costs
for May are divided by the equivalent units for May to obtain
unit costs:
UnitCostsforMay:
Unit cost for materials = $1,200,000 / 12,000 = $100
Unit cost for conversion = $650,000 / 13,000 = $50
The beginning work in process cost provides useful information
for managers. These dollars represent
costs from the prior period—in this case, the previous month.
Thus, unit cost information about the
beginning inventory is obtained by dividing the beginning
inventory costs by the prior period work (i.e.,

equivalent units) in the beginning inventory:
April’sUnitCostsinMay’sBeginningInventory:
Unit cost for materials = $400,000 / 4,000 = $100
These unit costs are identical to those for the current period,
although such a case will not occur very
often.
Step4:DistributeTotalCoststoUnits. We next show the
distribution of costs to units using the unit
costs and equivalent units derived earlier.
CostsAccountedfor: Materials Conversion Total
Completed and transferred to Sewing:
WorkinProcess,May1:
Prior period costs $400,000 $80,000 $480,000
May:
Equivalent units 0 2,400
Times costs per unit $100 $50
Costs $0 $120,000 $120,000
Completed cost of beginning inventory $400,000 $200,000
$600,000

StartedandCompleted:
Units 10,000 10,000
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CostsAccountedfor: Materials Conversion Total
Times cost per unit $100 $50
Costs $1,000,000 $500,000 $1,500,000
Total cost of completed and transferred units $1,400,000
$700,000 $2,100,000
WorkinProcess,May31:
Equivalent units 2,000 600
Times cost per unit $100 $50
Costs $200,000 $30,000 $230,000
Total costs accounted for $1,600,000 $730,000 $2,330,000
Note the sequence of computations. First, the old costs in the
beginning work in process are listed. Then,
we compute the cost to complete the beginning work in process
in the current period. Next, we calculate

the costs associated with units started and completed. The sum
of all of these costs is the cost of goods
completed and transferred out. This is also called the cost of
goods manufactured. Finally, we determine
the costs of the work done on the units still in process on May
31.
Often the unit cost calculations result in the need to round to
some decimal place. The more decimal
places used, the less the rounding error in total dollars assigned
to units completed and units in ending
inventory. If rounding errors occur, it is customary to adjust the
costs assigned to units completed to
compensate for the rounding error.
Step5:ReconciletheCosts. This �inal step in the computational
process is really a check to ensure that
all department costs are charged to units completed and units in
the ending inventory. As shown in Step
3, the total costs charged to the Cutting Department are
$2,330,000. After distributing the costs to the
units completed and units in the ending inventory, the sum
should also equal $2,330,000. This is
con�irmed by the total costs accounted for in Step 4. This
check shows that materials and conversion
costs charged to the department have indeed been distributed to
all units.
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3.6CostofProductionReport
The �ive computational steps provide all of the calculations
needed to prepare a cost of production
report for May. This report, which presents information about
units, costs charged to the department,
and how the costs are accounted for, is shown in Figure 3.5.
Figure3.5:CostofproductionreportforCuttingDepartment
(FIFOmethod)
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In T-account form, the transactions re�lected in the cost of
production report would be summarized as
shown in Figure 3.6.
Figure3.6:FlowofcostfromCuttingDepartmenttoSewingDepartme
nt
We use the same procedures to determine costs for subsequent
departments in the processing
operation. In departments after the �irst, however, unit costs
must be combined with the accumulated
costs of work done in earlier departments. For example, if
operations cover 10 departments,
Department 10 would obtain a unit cost for the total work done
in all preceding nine departments and
calculate a unit cost for its own work.
Management’sUseofCostofProductionReports

Internal accounting reports often serve only to attach dollars to
the events about which managers
already know. For example, managers know about volumes,
inef�iciencies, and scrap, but they do not
know the costs related to them. However, the information
provided by a cost of production report can be
used by managers in several different ways.
When unit costs for materials and conversion costs change from
one period to the next, a manager
should ask why. Why is a materials price higher or lower? What
causes conversion costs to change? The
manager has to �ind the answers to ensure that the numbers
reported represent reality and are
accurate. Sometimes managers intuitively know the numbers are
either correct or incorrect because of
their experiences.
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Cost of production reports for several periods in succession can
show trends. Here certain questions
arise. Are inventories bouncing around, or are they stable?
Why? Why are unit costs steadily moving up,
or why are they erratic? Are we changing the mix of workers as
re�lected in labor cost changes? These
and many other questions help managers understand their
working environment and the company’s
focus much better.

EthicalConsiderations
As with all �inancial reports, production reports can easily be
manipulated. Estimating the stage of
completion of the work in process is an area particularly
susceptible to manipulation by production
managers. These estimates are very subjective. Two reasons
explain why managers might be motivated
to overestimate the stage of completion. First is pressure to
meet production quotas of units or
equivalent units produced. A second reason relates to
minimizing unit costs. A higher estimate for the
degree of completion of the work in process inventory results in
a greater number of equivalent units of
output for the period. This, in turn, generates a lower cost per
equivalent unit. Notice, however, that any
overestimate in one period results in an opposite impact in the
following period. Management
accountants, nevertheless, need to be aware that temptations to
overestimate the stage of completion
may exist.
ContemporaryPractice3.1:ProcessCostingataConsumerPackaged
GoodsCompany
A journal article describes process costing at a consumer
packaged goods company as follows:
“Production volume that’s in process at the end of the reporting
period is estimated based on the
standard cost per unit multiplied by a percentage-complete
standard. A study is conducted
periodically that analyzes the level of work-in-process over
time. Results indicate that work-in-
process tends to be, on average, 75% complete. The company
uses this percentage (75%) of the

inputs placed into production for the period as the volume
standard to apply to work-in-process
inventory for reporting purposes.”
Source:Dosch,J.,&Wilson,J.(2010,August).Processcostingandma
nagementaccountingintoday’sbusinessenvironment.Strategic
Finance,37–43.
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3.7Simpli�icationsofJITandAutomation
For companies adopting a just-in-time (JIT) philosophy, the
expectation is to reduce or eliminate
inventories. If a company implements JIT throughout its
operations, the �inal departments in the process
�inish the products just in time to be shipped; parts,
components, and subassemblies are manufactured
just in time to meet the �inal department’s needs; and so on,
back through the process. Even in the
beginning, materials are received just in time to enter the
appropriate department.
JIT can signi�icantly simplify accounting for a process cost
system. Partially completed units within each
department will be kept as low as possible. Thus, little
difference exists between units completed and
work done during the period. Consequently, the costs incurred
during the period are largely tied to
goods completed. As a result, unit costs are more accurate in a
JIT environment because they are less

in�luenced by stage of completion estimates. This is true of
automated factories as a whole, since they
tend to have fairly uniform amounts of beginning and ending
work in process inventories. Thus, work
done during the period will be approximately equal to the
number of units completed during the period.
In addition, little need exists to transfer costs from one
department to the next. The costs of the period
can be recorded directly to the cost of goods sold account.
Process costs per unit can still be computed,
but on a daily or weekly basis. The unit costs will be calculated
using units produced, rather than
equivalent units. Further aspects of JIT product costing are
discussed in Chapter 4.
In JIT factories, certain departments remain idle until their
outputs are needed by the next department.
This may cause a particular department to appear inef�icient in
one period and very ef�icient in another.
Therefore, evaluations of managers and costs in JIT plants need
to consider the �low of production and
who controls decisions of what and when to produce.
Many managers believe that a system truly operating under JIT
will have no inventories and, therefore,
no need for a process cost system. Because the process �low
time is not zero, some items are always in
production in a partially completed stage. Process costing
becomes greatly simpli�ied in such a setting,
but it is not eliminated.
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3.8WeightedAverageCostMethod
An alternative to the �irst-in, �irst-out cost method for
calculating equivalent units is the weighted
averagecostmethod. This method averages the beginning work
in process inventory (last period’s
costs) and the current production (this period’s costs). The
method assumes that the started and
completed units for the period are the units completed and
transferred out (regardless of when the units
were started). In computing unit costs, equivalent units are
calculated as the sum of (1) the units
completed during the period, and (2) the ending work in process
inventory multiplied by its stage of
completion. Whereas the equivalent units for the FIFO unit cost
represent only work done during the
current period, equivalent units for the weighted average
method represent all units completed during
this period (including work already done in the beginning work
in process) plus any work done on
ending work in process units.
The weighted average cost method is easier and simpler than
FIFO because it does not require tracking
the costs in the beginning inventory separately from those costs
added during the current period. It is
justi�ied on the basis of convenience and simplicity. One can
argue that a process which produces
identical or similar units should generate the same unit costs
from one month to the next. In addition, if
beginning and ending inventories do not differ signi�icantly
from period to period, the costs per unit are
relatively stable. However, the weighted average method

commingles costs and production efforts of two
time periods. The resulting product costs do not match
production management’s measures of inputs
and outputs. Thus, many managers view the extra effort for
FIFO as worthwhile.
WeightedAverageComputationalSteps
We apply the same computational steps to the weighted average
cost method that we used for the FIFO
cost method. A slight difference occurs in the “Costs Accounted
for” section of the cost of production
report. In this section, costs are distributed to units completed
and units in the ending inventory. The
weighted average cost method will usually have different unit
costs from FIFO.
We continue the example of Shirts Unlimited that we explored
earlier in the chapter. For the Cutting
Department, we prepared the cost of production report using the
FIFO cost method. Now, we apply the
weighted average cost method to the data.
Step1:DetermineFlowofPhysicalUnits. Determining the �low of
physical units for a department is
the same as for the FIFO method:
Units in beginning work in process 4,000
Units started and completed: (12,000 – 2,000 or 14,000 – 4,000)
10,000
Units in ending work in process 2,000
Total units 16,000

Step2:CalculateEquivalentUnits. The weighted average method
computes unit costs by aggregating
costs to date (for the completed units and ending work in
process) and dividing these by work done to
date. Thus, to obtain the equivalent units of work done to date
on the completed units and ending work
in process, we need only consider the 14,000 units completed
(4,000 + 10,000) and the 2,000 units in
ending work in process. For our example, we would have the
following calculation:
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Materials ConversionMaterials Conversion
Units completed: 14,000 × 100% 14,000 14,000
Ending inventory:
2,000 × 100% 2,000
2,000 × 30% 600
Equivalent units of work done to date 16,000 14,600
Step3:ComputeUnitCosts. The unit costs for materials and
conversion costs are calculated from the
total costs and the equivalent units. The costs for which the
Cutting Department will be held accountable
are:

CostsChargedtoDept. Materials Conversion Total
Beginning inventory $400,000 $80,000 $480,000
Current month 1,200,000 650,000 1,850,000
Total costs $1,600,000 $730,000 $2,330,000
We calculate unit costs by using the equivalent units from
above and dividing them into the total costs:
UnitCostsforMay:
Unit cost for materials = $1,600,000 / 16,000 = $100
These unit costs are identical to those calculated using the FIFO
cost method because April’s unit costs
were the same as those for May. Usually, some difference will
occur in the numbers, but generally not a
signi�icant one.
Step4:DistributeTotalCoststoUnits. The distribution of costs
using the unit costs from Step 3 is as
follows:
CostsChargedtoDept. Materials Conversion Total
CompletedandtransferredtoSewing:
Units 14,000 14,000
Multiplied by cost per unit $100 $50

Costs $1,400,000 $700,000 $2,100,000
Workinprocess,May31:
Equivalent units 2,000 600
Multiplied by cost per unit $100 $50
Costs $200,000 $30,000 $230,000
Total costs accounted for $1,600,000 $730,000 $2,330,000
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Step5:ReconciletheCosts. As shown in Step 3, the total costs
charged to the Cutting Department are
$2,330,000. After distributing the costs to the units completed
and units in the ending inventory, the sum
of that distribution should equal $2,330,000. This is con�irmed
by the total costs accounted for in Step 4.
CostofProductionReport
The �ive computational steps provide all of the calculations
needed to prepare a cost of production
report for May. The report prepared under the weighted average
cost method appears in Figure 3.7.
Figure3.7:CostofproductionreportforCuttingDepartment
(weightedaveragemethod)

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Summary & Resources
ChapterSummary
In a job cost environment, costs are identi�ied with speci�ic
batches or customer orders. In a process cost
environment, products are continuously manufactured through a
series of departments. Physical units
and costs are identi�ied with the departments. Unit costs are
used in tracing the costs through the
various departments and to the �inished goods inventory
account.
Because manufacturing situations will vary from one company
to another, modi�ications and adaptations
to the cost accounting system must be made. Modi�ied and
hybrid cost systems are common. A modi�ied
cost system will have some elements of cost using job costs and
other elements of cost using process
costs. A hybrid cost system will have one department on a job
cost basis and another department on a
process cost basis.
Unit costs in a process cost system are computed by dividing
the appropriate current costs by the related
equivalent units. The inventory costing method used is the
�irst-in, �irst-out method. This assumes the
beginning inventory is completed before new units are

completed. Costs incurred are assumed to �low in
the same manner. The cost of production report summarizes the
costs charged to departments and how
the costs are distributed between completed units and ending
work in process.
Changes taking place in the manufacturing environment have an
impact on a process cost system. Some
changes, such as JIT, can simplify the calculation of unit costs.
KeyTerms
costofproductionreport
A report that presents information about units, costs charged to
the department, and how the costs
are accounted for.
equivalentunits
The theoretical number of units that could have been produced
had the resources been applied to
units that were started and completed during the period.
�irst-in,�irst-out(FIFO)costmethod
A process costing method that presumes the beginning inventory
is completed before new units are
completed.
hybridcostsystem
One type of cost system is used for one phase of the production
process, and another system is used
for a subsequent phase.
jobcostsystem
A cost system that separately tracks costs associated with each
job or product.

joborder
A cost summary for each job.
just-in-time(JIT)philosophy
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An inventory management approach that seeks to minimize or
eliminate inventories.
modi�iedcostsystem
A cost system that has one or more elements of cost using job
costing, while the other cost elements
use process costing.
operationcosting
Usage of a modi�ied or hybrid cost system.
processcostsystem
Identi�ication of costs with individual departments for an
interval of time; unit costs of a �inal product
are the sum of all costs assigned to the product by each
department that worked on it.
productionorder
stageofcompletion
Average percentage of work completed on a unit of product at
any point in time.

weightedaveragecostmethod
A process costing method that averages the costs of the
beginning work in process inventory and the
current production.
workorder
ProblemforReview
Irene Carol Fisheries raises cutthroat trout for local restaurants
and uses a FIFO process cost system.
The �ish represent materials. The process involves three ponds:
raising, growing, and fattening.
Fingerlings are grown after hatching in the raising pond. At a
speci�ied point, the �ingerlings are moved
to the growing pond, where they mature. After maturing, the
�ish are transferred to the fattening pond.
The growing pond had 5,000 �ingerlings on April 1 that were
10% complete for the growing pond.
During the month, an additional 30,000 �ingerlings were put
into the pond. By the end of April, 28,000
�ish had been moved to the fattening pond. The �ingerlings
remaining in the growing pond were 30%
complete.
Questions:
1. Determine the equivalent units for �ingerlings.
2. Determine the equivalent units for conversion costs.

Solution
:
1. Equivalent units for �ingerlings:
Physical�low:
Beginning inventory 5,000
Add units started during month 30,000
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Available 35,000
Minus units completed (28,000)

Ending inventory 7,000
Startedandcompleted:
Units completed 28,000
Minus beginning inventory (5,000)
or
Units started 30,000
Minus ending inventory (7,000)
Equivalentunitsfor�ingerlings:
To complete beginning inventory: 5,000 × (100% − 100%) 0
Units started and completed: 23,000 × 100% 23,000

Ending inventory: 7,000 × 100% 7,000
Equivalent units 30,000
2. Equivalent units for conversion costs:
To complete beginning inventory: 5,000 × (100% − 10%) 4,500
Units started and complete: 23,000 × 100% 23,000
Ending inventory: 7,000 × 30% 2,100
Equivalent units 29,600
QuestionsforReviewandDiscussion
1. Distinguish between a job cost system and a process cost
system as to the timing of sales versus
production.
2. What is the focal point for cost accumulation in a process
cost system?
3. Distinguish between a modi�ied cost system and a hybrid
cost system.
4. What is the purpose of a job, work, or production order?
5. List the �ive computational steps necessary to account for

costs in a process cost system.
6. Explain how equivalent units are computed under the FIFO
method of process costing.
7. How are the unit costs computed under the FIFO method of
process costing?
8. Why are equivalent units for materials usually different from
equivalent units for conversion
costs?
9. What accounting report is the major document for a process
cost system?
10. How can one check to ensure that cost distribution to
completed units and ending inventory has
been done properly?
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11. How can management use a cost of production report?

12. Which aspect of determining unit costs in a process cost
system is particularly susceptible to
manipulation by production managers?
13. Explain how a just-in-time environment can simplify a
process cost system.
14. What is the distinction between equivalent units under the
FIFO method and equivalent units
under the weighted average method?
15. Under what circumstances will both FIFO and weighted
average yield the same equivalent units?
16. On a cost of production report, the costs of units completed
and transferred out are treated one
way under the FIFO method and a different way under the
weighted average method. Explain
this difference.
Exercises
3-1.PhysicalFlow. Rolnick’s Protective Coating Service
specializes in providing protective coating for
eyeglasses. The company’s work in process inventory in
Operation 1 on July 1 was 2,500 units. During
July, 72,000 units were completed in Operation 1 and

transferred to Operation 2. The ending work in
process inventory in Operation 1 was 3,500 units.
Questions:
1. Compute the number of units started during July.
2. Compute the number of units started and completed.
3. Why is the stage of completion for the work in process
inventories irrelevant for these
computations?
3-2.CostsofFinishedUnitsandWorkin Process. Henry’s Dry
Cleaners uses a FIFO process cost
system. Its work in process on December 1 consisted of 8,000
garments, which were 20% complete;
$12,800 in processing costs were incurred last month for these
garments.
During December, 82,000 garments were started and 78,000
were completed. Processing costs during
December amounted to $245,225. The ending work in process
was 80% complete.
Question:

Determine the cost of the �inished garments and the cost of the
ending work in process.
3-3.CostofCompletedUnits. Blair Products of Wellington, New
Zealand, produces a kiwi fruit drink
and uses a FIFO process cost system. The units and equivalent
units (in liters), as well as unit costs, for
the Initial Mix Department are as follows:
Materials Conversion
Equivalent units in beginning work in process 6,000 1,200
Units started and completed 40,000 40,000
Equivalent units in ending work in process 3,000 1,800
Unit costs NZ$0.10 NZ$0.20
Questions:
1. Compute the current period costs for:

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a. Materials.
b. Conversion costs.
2. If the beginning work in process inventory was valued at
NZ$12,600, what would be the cost of
units completed?
3-4.ConversionCosts. The Fabrication Department is the �irst
stage of Hiller Company’s production
process. Conversion costs in beginning work in process for this
department were 70% complete, and in
the ending work in process they were 40% complete. Hiller
Company uses a FIFO process cost system.
Conversion costs data in the Fabrication Department for January
are as follows:
Units ConversionCosts

Work in process at January 1 28,000 $ 51,000
Units started and costs incurred during January 153,000
$293,000
Units completed and transferred to next department during
January 131,000
Questions:
1. What was the conversion cost of work in process in the
Fabrication Department at January 31?
2. What were the conversion costs per equivalent unit last
month and this month, respectively?
3-5.DistributionofTotalCostandEthics. There were 5,000 units in
process in the Cutting Department
of Grossman & Marcus, Inc., at the beginning of February.
These units had materials and conversion
costs of $48,000 and were 60% complete for conversion costs.
Materials are added at the beginning of
the process. During February, 60,000 units were started. The
ending inventory for the month totaled
8,000 units, 25% complete for conversion costs. The unit cost
calculation shows $4 for materials and $8

for conversion costs. A FIFO process cost system is used.
Questions:
1. Compute the cost of units completed and transferred to the
next department.
2. Compute the cost of units in the ending inventory for the
month.
3. Why might the production manager wish to in�late the
estimate of the degree of completion of
the ending inventory from 25% to 50%? Support your answer
with computations.
3-6.UnitCostsinaBank. Chittenden Bank of Columbus, Ohio,
processes checks in its Check Clearing
Department. No materials costs are incurred in this department.
On June 1, 4,000 checks in process were
25% complete with an associated processing cost of $200.
During June, 100,000 checks were started in
process. By the end of June, 70,000 checks had been started and
completed. The direct processing costs
in June amounted to $18,000. On June 30, the checks in process
were one-third complete.

Question:
Assuming a FIFO process cost system, calculate equivalent
units and the unit cost of work done during
June.
3-7.CostDistribution. Koniver Products manufactures a vitamin
product and uses a FIFO process cost
system. On July 1, it had 8,000 units in process that were 25%
complete for conversion costs. Materials (a
coating) are added at the end of the process. The cost of the
beginning work in process was $1,800. July
conversion costs were $36,000, and the materials costs were
$17,000. Koniver Products started and
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completed 60,000 units in July. The work in process inventory
on July 31 of 10,000 units was 60%

complete.
Questions:
1. What was the total cost of work transferred to the �inished
goods inventory in July?
2. Determine the cost of work in process inventory on July 31.
3-8.EquivalentUnits—FIFO and Weighted Average. Schroeder’s
Photo Lab began the month with
6,000 items in inventory, which averaged 50% complete for
materials and 40% complete for conversion
costs. At the end of the month, there were 7,000 items in
inventory, which averaged 60% complete for
materials and 30% complete for conversion costs. During the
month, 65,000 items were completed.
Questions:
1. Using the FIFO method, determine the appropriate numbers
of equivalent units needed to
compute unit costs for materials and for conversion costs.
2. Using the weighted average method, determine the
appropriate numbers of equivalent units

needed to compute unit costs for materials and for conversion
costs.
3-9.ConversionCosts—WeightedAverageCostMethod. Abe’s
Vineyards grows grapes; after sorting
and crating them, it sells the crates of grapes to Madelyn’s
Winery. On December 1, Abe’s Vineyards had
10,000 pounds of grapes that were 40% complete for conversion
costs. The conversion costs in the
beginning work in process inventory were $20,000. In
December, 150,000 pounds of grapes were
started in process. Conversion costs in December amounted to
$790,000. On December 31, 20,000
pounds of grapes were 40% complete for conversion costs. A
weighted average process cost system is
used.
Questions:
1. Compute the equivalent units (pounds).
2. Determine the conversion costs per pound.
3-10.CostDistribution—WeightedAverageCostMethod. Amy
Dee’s Beef Processing Company (“Let
us meat your needs”) had work in process at the beginning and

end of the year as follows:
PercentageofCompletion
DirectMaterials ProcessingCosts
January 1 – 3,000 pounds 40% 10%
December 31 – 2,000 pounds 80% 40%
The company completed 41,000 pounds of �inished products
during the year. Costs incurred during the
year were: direct materials, $242,600; processing costs,
$456,200. Work in process at January 1 was
carried at a cost of $16,600 (direct materials, $13,000;
processing costs, $8,900).
Questions:
1. Compute the cost of ending work in process using the
weighted average method.
2. Compute the cost of �inished products using the weighted
average method.

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3-11. Total Costs—FIFO and Weighted Average. Le�kove, Inc.
manufactures staplers. Materials are
added at the beginning of the process; conversion costs are
incurred uniformly. Beginning work in
process consisted of 6,000 staplers. These units were 65%
complete. During the period, the company
began working on an additional 87,000 staplers, and �inished
the period with 9,000 staplers that were
30% complete in ending work in process.
Costs attached to beginning inventory were $7,500 for materials
and $9,500 for conversion costs. Costs
added during the period were $74,000 for materials and $22,000
for conversion.
Questions:
1. Compute the cost of �inished products and the cost of ending

work in process using the FIFO
method.
2. Compute the cost of �inished products and the cost of ending
work in process using the
weighted-average method.
3-12.UnitCosts—FIFOandWeightedAverage. Craig’s Diaper
Service, located in a medium-sized city in
California, is the lone remaining company that cleans cloth
diapers in that city. The company currently
uses a FIFO method of process costing and has arrived at a unit
cost of $0.65. Harold Solomon, the
owner, wonders what the unit cost would be with the weighted
average method. He has obtained the
following information from his accountant:
Equivalent units for the weighted average method 4,780
Equivalent units for FIFO method 5,000
Costs in beginning work in process $800
Question:

Compute the unit cost for the weighted average method.
Problems
3-13.CostofProductionReport. McKemie Robotics, a subsidiary
of U.S.-based Kutner Robotics located
in Dublin, Ireland, manufactures a small robot that looks like a
leprechaun and can be moved by remote
control. It can be used as a novelty to serve food and drinks to
guests; and, with a special attachment, it
can vacuum the carpet.
The materials are all added at the beginning of the Assembly
Operation (the �irst operation). Labor and
overhead are added during the month. Data for the month of
July in the Assembly Operation are as
follows:
Units
Work in process, July 1 35,000
Units started in process 250,000
Costs(inU.S.Dollars)

Work in process, July 1:
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Units
Materials $240,000
Labor and overhead 80,000
July costs:
Materials $3,500,000
Labor and overhead 1,457,280
The inventory of work in process on July 1 was complete as to

materials but only 25% complete as to
labor and overhead. On July 31, the inventory consisted of
20,000 units that were 40% complete with
respect to labor and overhead.
Question:
Using FIFO, prepare a cost of production report for the
Assembly Operation for the month of July.
3-14.CostofProductionReport and Ethics. The Lipseyville
Municipality uses a FIFO process cost
system to compute water puri�ication costs. All materials
(chemicals) are added at the beginning of the
puri�ication process. Data for the month of May are given as
follows (units are kiloliters of water):
Units
Work in process, May 1 5,000
Units started in process 120,000
Costs

Work in process, May 1:
Materials $15,000
May’s costs:
Materials $360,000
The beginning work in process was 20% complete for labor and
overhead. During the month, 115,000
units were completed, and 10,000 units that were 20% complete
as to labor and overhead were in
process at May 31.
Questions:
1. Prepare a cost of production report for the month of May.
2. Explain how management might use this cost of production
report.

3. What might motivate the production manager to in�late the
estimate of the degree of completion
of the ending work in process from 20% to 40%? Support your
answer with computations.
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3-15.ExplanationsAboutaCostofProductionReport. Daniel S.
Tryker’s Painting Service receives a
continuous �low of clear light bulbs from various
manufacturers who want their bulbs painted—typically
yellow or black. A partial production report, using FIFO, for the
month of May is as follows for
Department 1 (units are packages of eight bulbs):
PhysicalUnits:
Work in process, May 1 (40% complete) 500

Started and completed 1,700
Work in process, May 31 (50% complete) 300
Total units 2,500
CostsChargedtoDepartment:
Work in process, May 1 $ 800.00
Production costs, May 9,020.00
Total costs charged $9,820.00
CostsAccountedfor:
Transferred to Department 2:
Work in process, May 1 $ 800.00
Cost to complete work in process, May 1 1,258.60
Started and completed 7,132.09

$9,190.69
Work in process, May 31 629.30
Total costs accounted for $9,819.99*
*Difference caused by rounding.
Questions:
1. Explain what the above partial cost of production report
shows about the quantity �low and the
cost �low.
2. Explain why equivalent units are preferred to total units
produced in determining costs of units
completed and units in ending inventory.
3. What additional information can this report give a manager?
4. Calculate how many units were completed during the month
of May.
3-16.CostofProductionReport—SeveralMonths. David Jared
Industries is a bottling company that
purchases orange juice from growers in Florida and bottles the

juice in one-gallon plastic containers for
sale to grocery stores. Only in its second year of operations, the
company’s accounting system is evolving
and has not been fully formalized. A chief accountant, Alan
Neal, has been hired to bring order to the
paper shuf�ling. In the process, Neal has gathered data to
prepare FIFO cost of production reports for
Activity Center A for the �irst three months of the current
�iscal year (April, May, and June). This
information is as follows:
April May June
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April May June
Gallons:

Beginning inventory 10,000 ? ?
Started in production 80,000 65,000 70,000
Completed 70,000 60,000 ?
Ending inventory ? ? 20,000
Beginning inventory 60% 30% 70%
Ending inventory 30% 70% 40%
Cost data:
Beginning inventory:
Materials $ 10,000 ? ?
Conversion costs 20,000 ? ?
Current period:
Materials $ 80,000 $ 66,000 $ 70,000

Conversion costs 170,000 142,000 156,000
Materials (orange juice) are added at the beginning of Activity
Center A. Conversion costs �low uniformly
throughout the process.
Questions:
1. Compute the physical �lows of units (gallons) for each of the
three months.
2. Prepare a cost of production report for each of the three
months. Round unit costs to four
decimal places and total dollars to the nearest dollar.
3. Analyze the cost of production reports for each month, and
comment on production stability and
unit costs for materials and conversion costs.
3-17.AnalysisofaWorkinProcessAccount. Garber Pharmaceutical
Company manufactures a tablet
for allergy sufferers and uses a FIFO process cost system. All
ingredients are added at the beginning of
the Blending Operation. Conversion costs �low uniformly

throughout the process. Tableting and Coating
are operations downstream from Blending. Information on the
Blending Operation for October is as
follows:
WorkinProcess–BlendingOperation
October 1, balance (100,000 units, 40% complete
for conversion costs)
$ 151,760 Completed and
transferred to Tableting:
Direct materials added (1,000,000 units) $1,310,000 Units
– ?
Direct labor costs ? Costs
– ?
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WorkinProcess–BlendingOperation
Factory overhead (applied at 180% of direct labor
cost)
$396,000
October 31, balance (200,000 units, 70% complete
for conversion costs)
?
The October 1 balance consists of the following cost elements:
Direct materials $128,000
Direct labor 8,800
Factory overhead 14,960
Total costs $151,760

Questions:
1. Compute the amount of direct labor cost for the period.
2. Calculate the unit costs for direct materials, direct labor, and
factory overhead for the current
month (October). Direct labor and factory overhead should be
separate; do not combine them
into one �igure.
3. Calculate the unit costs for direct materials, direct labor, and
factory overhead in the inventory at
the beginning of October.
4. Compare the unit costs computed in Parts (2) and (3). Explain
what information this comparison
gives to a manager.
3-18.WorkinProcessCosts—FIFOandWeightedAverage. The
following data pertain to the Claims
Processing Department of Smilgoff Insurance Company, which
does not incur any direct materials costs:

Units (claims) 3,200
Conversion costs (10% complete) $6,900
Units (claims) started in May 13,500
May’s conversion costs $285,000
Units (claims) 1,900
Stage of completion for conversion costs 60%
Questions:
1. Using the FIFO method, compute the cost of the May 31 work
in process.
2. Using the weighted average method, compute the cost of the
May 31 work in process.
3-19.FinishedGoodsandWorkinProcessCosts—
WeightedAverage. The following information is
available for the Assembly Department of Lerman Enterprises
for August:

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Units CostsUnits Costs
Work in process, August 1 (70% complete) 5,000
Direct materials $ 6,000
Direct labor 3,000
Manufacturing overhead 4,000
Total work in process, August 1 $13,000
Started in production during August 20,000
Costs added:

Direct labor 8,000
Manufacturing overhead 10,000
Total costs added during August $47,000
Work in process, August 31 (80% complete) 3,000
Materials are added at the beginning of the process.
Questions:
1. Compute the total cost of goods transferred out using the
2. Compute the total cost of ending work in process using the
3-20.WorkinProcess—FIFOandWeightedAverage. The Division
of Corporate Taxation processes
corporate tax returns for a state located in the northeastern
United States. Processing costs for this
agency were 70% complete as to the beginning work in process
and 60% complete as to the ending

work in process. Information on processing costs for the month
of August is as follows:
NumberofReturns ProcessingCosts
Work in process at August 1 8,000 $ 95,000
Returns started and costs incurred during August 45,000
$666,000
Returns completed during August 49,000
Questions:
1. Using the FIFO method, what amount of processing cost was
in work in process at August 31?
2. Using the weighted average method, what amount of
processing cost was in work in process at
August 31?
3-21. Cost of Finished Units—FIFO and Weighted Average. The
Department of Motor Vehicles
processes auto tag applications. All materials costs (i.e., tags)
are completed when processing begins. The

following information was obtained by the controller, Arthur
Kurtz, for October:
The October 1 work in process had 5,000 applications (40%
completed) and the following costs:
11/14/2019 Print
Direct labor 16,880
Overhead 31,400
During October, 11,000 applications were completed, and the
following costs were incurred:

Direct labor 95,775
Overhead 159,925
On October 31, there were 2,400 partially processed
applications on hand (80% completed).
Questions:
1. Using the FIFO method, determine the cost of completed
applications.
2. Using the weighted average method, determine the cost of
completed applications.
Case:WyncotePipelines
Wyncote Pipelines, Inc., is a liquid petroleum pipeline
transportation company. The line running
from Corpus Christi to Kansas City is a 30-inch, high-pressure
line that moves product at an
average of 8 miles per hour. A �illed line contains 28 million
barrels of product, which travel an
average of 192 miles per day. The line speed can be increased
safely to about 280 miles per day
or slowed to almost a stop. The line can be �illed to capacity or

be partially empty. Over certain
segments, the line moves faster than elsewhere as more product
is placed in and taken out. The
line carries various products, including crude oil of varying
weights, home heating oil, and
numerous other petroleum products.
As a transportation company, Wyncote Pipelines does not own
the products transported.
Instead, it is paid a fee for its services based on moving 10,000
barrels (420,000 gallons) of
product one mile. The variable cost of running the line is for the
30 pumping stations along the
line: the higher the traf�ic, the higher the fuel cost for
pumping. The other cost of running the
line is overhead cost, which relates to line maintenance. One
unit is considered to be moving
10,000 barrels of product one mile.
On April 1, the Corpus Christi to Kansas City line had 1.44
million units in process (18 million
barrels that were to be transported an average of 800 miles),
which were 60% complete.
During the month, the line completed 12 million units of
delivered product and had ending

units in process of two million units (20 million barrels to be
transported 1,000 miles) that
were 40% complete. The beginning units in transit had
accumulated costs of $8,800,000, of
which $2,400,000 were variable costs. During the month, the
Corpus Christi to Kansas City line
had $33,420,800 in variable costs and $81,168,800 in �ixed
costs. The completed deliveries
were billed at $134,400,000 for services.
Questions:
11/14/2019 Print
1. What is the nature of the costs incurred as to direct materials,
direct labor, and variable
or �ixed overhead?
2. Why should this application be considered for a modi�ied

process cost system?
3. Compute the equivalent units of production for the Corpus
Christi to Kansas City line.
(Round to four places, if needed.)
4. Compute a cost per unit of output for variable and �ixed
costs.
5. What were the pro�its before administrative expenses and
taxes during April?
6. What were the costs of the units in transit on April 30?
Busioness Plan – Detailed Elements
EXECUTIVE SUMMARY
Write this section last.
I suggest that you make it two pages or fewer.
Include everything that you would cover in a five-minute
interview.
Explain the fundamentals of the proposed business: What will
your products and services be? Who will your customers be?

Who are the owners? What do you think the future holds for
your business and your industry?
Make it enthusiastic, professional, complete, and concise.
2.0 THE ENTERPRISE
2.1 General Organization Description
What SE will you be in? What will you do?
Include Vision, Mission, Values.
Vision: that goal that you may never accomplish, a bold
statement about why you are in business;
Mission Statement: Many companies have a brief mission
statement, usually in 30 words or fewer, explaining their
guiding principles. If you want to draft a mission statement, this
is a good place to put it in the plan;
Business Philosophy / Values: What is important to you in
business?
2.2 Business Overview
Industry / Sector

Describe your industry or sector. Is it a growth industry or
sector? What changes do you foresee in the industry or sector,
short term and long term? How will your organization be poised
to take advantage of them?
Products / Services
Describe in depth your products or services (technical
specifications, drawings, photos, sales brochures, and other
bulky items belong in Appendices).
What factors will give you competitive advantages or
disadvantages? Examples include level of quality or unique or
proprietary features.
.
Features and Benefits
List all of your major products or services.
For each product or service:
· Describe the most important features. What is special about it?

· Describe the benefits. That is, what will the product or service
do for the customer?
Note the difference between features and benefits, and think
about them. For example, a house that gives shelter and lasts a
long time is made with certain materials and to a certain design;
those are its features. Its benefits include pride of ownership,
financial security, providing for the family, and inclusion in a
neighborhood. You build features into your product so that you
can sell the benefits.
What after-sale services will you give (if applicable)? Some
examples are delivery, warranty, service contracts, support,
follow-up, and refund policy.
Pricing
Explain your method or methods of setting prices. Even when
you may not be charging the customer, you still need to
determine a dollar value for your serices.
For most small businesses, having the lowest price is not a good
policy. It robs you of needed profit margin; customers may not
care as much about price as you think; and large competitors

can under price you anyway. Usually you will do better to have
average prices and compete on quality and service.
Does your pricing strategy fit with what was revealed in your
competitive analysis?
Compare your prices with those of the competition. Are they
higher, lower, the same? Why?
How important is price as a competitive factor? Do your
intended customers really make their purchase decisions mostly
on price? Do your funders fund you based upon the value of
your services?
Distribution Channels
If you are selling a product or serice, How do you sell your
products or services?
Retail
Direct (mail order, Web, catalog)
Wholesale
Your own sales force
Agents

Independent representatives
Bid on contracts
If you are providing a service, how will you deliver it? Will
you deliver directly or get other organizations to deliver it?
2.3 Target Clients / Customers
Identify your targeted customers, their characteristics, and their
geographic locations, otherwise known as their demographics.
The description will be completely different depending on
whether you plan to sell (or deliver the product / service) to
other businesses or directly to consumers. If you sell a
consumer product, but sell it through a channel of distributors,
wholesalers, other social enterprises, and retailers, you must
carefully analyze both the end consumer and the middle
businesses to which you sell.
You may have more than one customer group. Identify the most
important groups. Then, for each customer group, construct
what is called a demographic profile:
· Age
· Gender
· Location

· Income level
· Social class and occupation
· Education
· Other (specific to your industry)
For business customers, the demographic factors might be:
· Industry (or portion of an industry)
· Location
· Size of firm
· Quality, technology, and price preferences
2.4 Competition

What products & services and companies & social enterprises
will compete with you?
List your major competitors: (Names and addresses)
Will they compete with you across the board, or just for certain
products, certain customers, or in certain locations?
Will you have important indirect competitors? (For example,
showers for homeless may compete with housing for homeless,
although they are different types of businesses.)
How will your products or services compare with the
competition?
Use a Competitive Analysis tool to compare your social
enterprise with your two most important competitors. Write a
short paragraph stating your competitive advantages and
disadvantages.
2.5 Niche
Now that you have systematically analyzed your industry /
sector, your product, your customers, and the competition, you
should have a clear picture of where your social enterprise fits
into the world. In one short paragraph, define your niche, your

unique corner of the market
2.6 Economics
Facts about your industry:
· What is the total size of your market?
· What percent share of the market will you have? (This is
important only if you think you will be a major factor in the
market.)
· Current demand in target market.
· Trends in target market—growth trends, trends in consumer
preferences, and trends in product development.
· Growth potential and opportunity for a business of your size.
· What barriers to entry do you face in entering this market with
your new social enterprise? Some typical barriers are:
· High capital costs
· High production costs

· High marketing costs
· Consumer acceptance and brand recognition
· Training and skills
· Unique technology and patents
· Unions
· Shipping costs
· Tariff barriers and quotas
· And of course, how will you overcome the barriers?
· How could the following affect your social enterprise?
· Change in technology
· Change in government regulations
· Change in the economy
· Change in your industry

3.0 IMPLEMENTATION
3.1 Marketing Approach
In your marketing plan, be as specific as possible; give
statistics, numbers, and sources. The marketing plan will be the
basis, later on, of the all-important service (or sales) projection.
Outline a marketing strategy that is consistent with your niche.
Promotion
How will you get the word out to customers?
Advertising: What media, why, and how often? Why this mix
and not some other?
Have you identified low-cost methods to get the most out of
your promotional budget?
Will you use methods other than paid advertising, such as trade
shows, catalogs, dealer incentives, word of mouth (how will you
stimulate it?), and network of friends or professionals?
What image do you want to project? How do you want

customers to see you?
In addition to advertising, what plans do you have for graphic
image support? This includes things like logo design, cards and
letterhead, brochures, signage, and interior design (if customers
come to your place of business).
Should you have a system to identify repeat customers and then
systematically contact them?
Promotional Budget
How much will you spend on the items listed above?
Before startup? (These numbers will go into your startup
budget.)
Ongoing? (These numbers will go into your operating plan
budget
3.2 Location and Facilities
What qualities do you need in each location? Describe the type

of location you’ll have.
Physical requirements:
· Amount of space
· Type of building
· Zoning
· Power and other utilities
Access:
Is it important that your location be convenient to transportation
or to suppliers?
Do you need easy walk-in access?
What are your requirements for parking and proximity to
freeway, airports, railroads, and shipping centers?
SUPPORT FACILITIES
Probably you do not have a precise location picked out yet. This
is the time to think about what you want and need in a location.
Many startups run successfully from home for a while.

Here, analyze your location criteria as they will affect your
customers.
Is your location important to your customers? If yes, how?
If customers come to your place of business:
Is it convenient? Parking? Interior spaces? Not out of the way?
Is it consistent with your image?
Is it what customers want and expect?
Where is the competition located? Is it better for you to be near
them (like car dealers or fast food restaurants) or distant (like
convenience food stores)?
3.3 Major Goals and Objectives:
Goals are destinations—where you want your business to be.
Objectives are progress markers along the way to goal
achievement. For example, a goal might be to have a healthy,
successful social enterprise that is a leader in customer service
and that has a loyal customer following. Objectives might be

annual sales targets and some specific measures of customer
satisfaction.
Describe your most important social enterprise strengths and
core competencies. What factors will make the social enterprise
succeed? What do you think your major competitive strengths
will be?
3.4 Implementation Schedule
Explain the daily operation of the business, its location,
equipment, people, processes, and surrounding environment.
Production
How and where are your products or services produced?
Explain your methods of:
· Production techniques and costs
· Quality control
· Customer service
· Inventory control
· Product development

When will the major activities happen, like opening, serving
first customers, growing to x level, etc (include date).
4. ORGANIZATION AND LEADERSHIP
4.1 Personnel
Who will manage the business on a day-to-day basis? What
experience does that person bring to the business? What special
or distinctive competencies? Is there a plan for continuation of
the business if this person is lost or incapacitated?
If you’ll have more than 10 employees, create an organizational
chart showing the management hierarchy and who is responsible
for key functions.
Include position descriptions for key employees. If you are
seeking loans or investors, include resumes of owners and key
employees.
· Number of employees
· Type of labor (skilled, unskilled, and professional)
· Where and how will you find the right employees?
· Quality of existing staff

· Pay structure
· Training methods and requirements
· Who does which tasks?
· Do you have schedules and written procedures prepared?
· Have you drafted job descriptions for employees? If not, take
time to write some. They really help internal communications
with employees.
For certain functions, will you use contract workers in addition
to employees?
4.2 Board of Directors:
A board of directors is a group of people who jointly supervise
the activities of the organization. Board members meet
periodically to discuss and vote on the affairs of the
organization. At a minimum, an annual meeting must occur with
all board members present. Additional meetings are likely to
take place throughout the year so board members can discuss
and make other necessary decisions. Board memberships are not
set up to be permanent positions; most organizations have terms
set up for board members, which typically fall between two and
five years.

Indicate how many members will be on your board, and what
type of skills and abilities they should have (this will help you
recruit them)4.3 Professional and Advisory Support
Wich of the following you will need? Name them and explain
why.
· Management advisory board
· Attorney
· Accountant
· Insurance agent
· Banker
· Consultant or consultants
· Mentors and key advisors
5.0 INVESTMENT CONSIDERATIONS5.1 Legal & Regulatory
Describe the following:

· Licensing and bonding requirements
· Permits
· Health, workplace, or environmental regulations
· Special regulations covering your industry or profession
· Zoning or building code requirements
· Insurance coverage
Trademarks, copyrights, or patents (pending, existing, or
purchased)
5.2 Economic Impact:
What is the impact on the economy that you foresee your SE
will have? How will you measure it?
5.3 Community Impact:
What is the impact on the community that you foresee your SE

will have? How will you measure it?
5.4 Significant Investment to Date
if there have been any investments already made in the
business, list them here. They could be in facilities,
development of the plan, performing an initial study, etc.
6.0 FUND DEVELOPMENT
6.1 Public and Private Support Revenue Assumptions
Baased upon your research on what are the most likely sources
of funding for your SE, in this section you need to outline what
the sources are, indicating:
· Source considered, and why
· What % of the budget do you consider that the source will
cover. Keep in mind not to have an extremen dependency on a
funding source (more than 33%), and think “balanced
portfolio.”
6.2 Fund Development Target and Strategies
Once you have identified the sources, in this section you will
discuss the strategies to reach out to these funding sources.
This may include: social media, direct mail, phone calls, grant
applications, personal relationships, fundraising events, etc.
6.3 Grant writing plans
If one of your strategies is to apply for private and / or piublic

grants, how do you plant to fund these efforts? You may need
an expert grant-writer, would you hire one (or more) full-time,
or part-time, woild you contract per grant written?
6.4 Earned Income
If you are considering earned income to generate revenue, in
this section you will describe the earned income strategies,
indicating what portio of the revenue portfolio they would
cover.
7.0 FINANCIAL SUMMARY
7.1 Operating Assumptions
You will have many startup expenses before you even begin
operating your business. It’s important to estimate these
expenses accurately and then to plan where you will get
sufficient capital. This is a research project, and the more
thorough your research efforts, the less chance that you will
leave out important expenses or underestimate them.
Even with the best of research, however, opening a new
business has a way of costing more than you anticipate. There
are two ways to make allowances for surprise expenses. The
first is to add a little “padding” to each item in the budget. The
problem with that approach, however, is that it destroys the
accuracy of your carefully wrought plan. The second approach
is to add a separate line item, called contingencies, to account
for the unforeseeable. This is the approach we recommend.

It is recommended as a rule of thumb that contingencies should
equal at least 20 percent of the total of all other start-up
expenses.
Explain your research and how you arrived at your forecasts of
expenses. Give sources, amounts, and terms of proposed loans.
Also explain in detail how much will be contributed by each
investor and what percent ownership each will have.
7.2 Three-year budget
In here you will make projections for both revenue and expenses
for the first three years of the SE. Use the template provided
for this purpose, and present your estimations to the best of
your abilities based upon your operating assumptions, and the
research that you have made.7.3 Three-year Profit and Loss
Projection (Optional /Bonus Points)
For the purposes of this project, the financial plan consists of a
36-months (3 years) profit and loss projection only. Typical
plans also include a three-year cash-flow projection, a projected
balance sheet, and a break-even calculation. Together they
constitute a reasonable estimate of your social enterprise's
financial future. More important, the processof thinking through
the financial plan will improve your insight into the inner
financial workings of your social enterprise.

Many business owners think of the three-years profit and loss
projection as the centerpiece of their plan. This is where you
put it all together in numbers and get an idea of what it will
take to make a profit and be successful.
Your sales projections will come from a sales forecast in which
you forecast sales, cost of goods sold, expenses, and profit.
Profit projections should be accompanied by a narrative
explaining the major assumptions used to estimate social
enterprise income and expenses.
Research Notes: Keep careful notes on your research and
assumptions, so that you can explain them later if necessary,
and also so that you can go back to your sources when it’s time
to revise your plan.
7.4 Four-Year Revenue Projection (Optional /Bonus Points)
The 12-month projection is the heart of your financial plan. The
Four-Year Profit projection is for those who want to carry their
forecasts beyond the first year.
Of course, keep notes of your key assumptions, especially about
things that you expect will change dramatically after the first
year.
7.5 Projected Cash Flow (Optional /Bonus Points)

If the profit projection is the heart of your business plan, cash
flow is the blood. Businesses fail because they cannot pay their
bills. Every part of your business plan is important, but none of
it means a thing if you run out of cash.
The point of this worksheet is to plan how much you need
before startup, for preliminary expenses, operating expenses,
and reserves. You should keep updating it and using it
afterward. It will enable you to foresee shortages in time to do
something about them—perhaps cut expenses, or perhaps
negotiate a loan. But foremost, you shouldn’t be taken by
surprise.
There is no great trick to preparing it: The cash-flow projection
is just a forward look at your checking account.
For each item, determine when you actually expect to receive
cash (for sales) or when you will actually have to write a check
(for expense items).
You should track essential operating data, which is not
necessarily part of cash flow but allows you to track items that
have a heavy impact on cash flow, such as sales and inventory
purchases.

You should also track cash outlays prior to opening in a pre-
startup column. You should have already researched those for
your startup expenses plan.
Your cash flow will show you whether your working capital is
adequate. Clearly, if your projected cash balance ever goes
negative, you will need more start-up capital. This plan will
also predict just when and how much you will need to borrow.
Explain your major assumptions, especially those that make the
cash flow differ from the Profit and Loss Projection. For
example, if you make a sale in month one, when do you actually
collect the cash? When you buy inventory or materials, do you
pay in advance, upon delivery, or much later? How will this
affect cash flow?
Are some expenses payable in advance? When?
Are there irregular expenses, such as quarterly tax payments,
maintenance and repairs, or seasonal inventory buildup, that
should be budgeted?
Loan payments, equipment purchases, and owner's draws
usually do not show on profit and loss statements but definitely
do take cash out. Be sure to include them.

And of course, depreciation does not appear in the cash flow at
all because you never write a check for it.
7.6 Opening Day Balance Sheet (Optional /Bonus Points)
A balance sheet is one of the fundamental financial reports that
any business needs for reporting and financial management. A
balance sheet shows what items of value are held by the social
enterprise (assets), and what its debts are (liabilities). When
liabilities are subtracted from assets, the remainder is owners’
equity.
Use a startup expenses and capitalization spreadsheet as a guide
to preparing a balance sheet as of opening day. Then detail how
you calculated the account balances on your opening day
balance sheet
.
Optional: Some people want to add a projected balance sheet
showing the estimated financial position of the social enterprise
at the end of the first year. This is especially useful when
selling your proposal to investors.
7.7 Break-Even Analysis (Optional /Bonus Points)
A break-even analysis predicts the sales volume, at a given
price, required to recover total costs. In other words, it’s the
sales level that is the dividing line between operating at a loss

and operating at a profit.
Expressed as a formula, break-even is:
Break-Even Sales =
Fixed Costs
1- Variable Costs
(Where fixed costs are expresssed in dollars, but variable costs
are expressed as a percent of total sales.) Include all
assumptions upon which your break-even calculation is based.
7.8 Sensitivity Analysis / Risk Assessment (Optional /Bonus
Points)
In this section you use financial projections to demonstrate that
you have thought about the severals risks that your business
could face. Some risks could be: market can’t respond as you
proojected and this may affect sales, it may take you longer to
start selling your products that planned, you don’t accomplish
the target market share as planned. First, you need to choose
which factor (s) you consider may impact your business, then
you create financial projections under various scenarios.

For example, if you think that your projection if the market
share may be affected by other potential competitors’ moves,
you may create three financial scenarios: the worst case, the
likely, and the best case. The projections that you have created
already may be considered the “likely” scenario, a reduction of
the market share in half the worst, and a market share 50%
above plan the best. Explain why you made your assumptions
and create financial scenarios for each.
10/10
11/14/2019 Print
LearningObjectives
After studying Chapter 4, you will be able to:
Explain the interrelationships among cost drivers, activities,

and products in an activity-
based cost system, and describe the system’s key components
and cost �lows.
Distinguish between the two stages of cost allocation in an
activity-based cost system,
and apply activity-based costing in a manufacturing setting.
Understand how activity-based costing is extended to
nonmanufacturing settings.
Relate activity-based management to activity-based costing.
Describe the key elements of a just-in-time cost system.
4 Activity-Based Costing and Just-In-TimeCosting
houdre/iStock/Thinkstock
11/14/2019 Print

Testing...Testing
Cortell Laboratories was formed in 1993 and began its
operations in testing various electrical
characteristics of integrated circuits sent to it by manufacturers
on the west coast. Cortell focused
on a strategy of providing quicker turnaround times than had
been offered by manufacturers’
labs or other outside labs. The strategy was successful and was
marketed well. Within 10 years,
Cortell had annual revenues of over $30 million. Pro�it and
cash �low, also highly positive, allowed
Cortell to self-fund all expansion.
In 2010, Cortell began offering tests for transformers. Within
one year, transformer testing was so
successful that the lab was now running on three full shifts. In
the midst of all this success, Harriet
Cortell, the company president, is now faced with a dilemma.
The marketing manager, Kitty Cohen,
has come to her and argued that testing transformers is much
more pro�itable than testing
integrated circuits, and therefore, the lab should concentrate

more of its resources on marketing
and performing transformer tests. To support her argument,
Cohen compiled costs and pro�it
margins for each testing service. These �igures showed that
transformer testing was over 40%
more pro�itable than testing integrated circuits. Cortell looked
at the overhead allocated to the
two types of tests and could hardly believe that each test was
assigned the same amount of
overhead per test. She knew that testing transformers involved
more job orders and required
more setups than testing integrated circuits. “Our costing
system is not re�lecting the complexity of
these tests,” claimed Cortell.
Several months earlier, Cortell had heard about an activity-
based cost approach for assigning
overhead costs. She immediately contacted the controller,
Charlie Kaplan, and asked him to do an
activity-based cost analysis.
Two major forces have combined to put great pressure on
managerial accountants like Charlie Kaplan to
provide improved cost information about their �irms’ products
and services. These are global

competition and automation in the workplace.
1. Globalcompetitiveness. Most companies in nearly every
industry face increased competition
from direct competitors, whether from across the street or
halfway around the world. Whether
the technology is old (making iron and steel) or new (making
smart televisions), the needs for
accurate and relevant product cost data have grown
dramatically. Competitiveness also means
knowing the costs of product quality, reliable delivery, and
waste (unproductive effort). Cost
control takes on new meaning if a competitor can sell an item at
a price that is 10% lower than
another company’s production cost and still make money on the
sale. Increasingly, companies
are realizing that traditional volume-based cost systems are not
using the “right” variables or
collecting cost data in enough detail.
2. Automationoftheworkplace. Dramatic changes in production
have also taken place. Another
“industrial revolution” is what some people have called it.
Computer power has introduced
concepts like computer-aided design (CAD), computer-aided

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