11ch17

17 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Process Costing
Chapter 17

Learning Objective 1
Identify the situations in which
process-costing systems
are appropriate.

Illustrating Process Costing
Direct Materials, Direct Labor
Indirect Manufacturing Costs
Department
A
Department
B
Finished Goods Cost of Goods Sold

Describe the five steps
in process costing.

Five Steps in Process Costing
Step 1: Summarize the flow of physical units of
output.
Step 2: Compute output in terms of equivalent units.
Step 3: Compute equivalent unit costs.
Step 4: Summarize total costs to account for.
Step 5: Assign total costs to units completed and to
units in ending work in process inventory.

Calculate equivalent units and
understand how to use them.

Physical Units (Step 1)
Physical units
Flow of Production
Work in process, beginning 0
Started during current period 35,000
To account for 35,000
Completed and transferred out
during current period 30,000
Work in process, ending (100%/20%) 5,000
Accounted for 35,000

Compute Equivalent Units
(Step 2)
Equivalent units
Direct Conversion
Flow of Production Materials Costs
Completed and
transferred out 30,000 30,000
Work in process,
ending 5,000 (100%) 1,000 (20%)
Current period work 35,000 31,000

Compute Equivalent Unit Costs
(Step 3)
Direct Conversion
Materials Costs
$84,050 $62,000
Equivalent units 35,000 31,000
Cost per equivalent unit $2.4014 $2.00
Total production costs are $146,050.

Summarize and Assign Total
Costs (Steps 4 and 5)
Step 4: Total costs to account for: $146,050
Step 5: Assign total costs:
Completed and transferred out
30,000 × $4.4014 $132,043
Work in process, ending (5,000 units)
Direct materials 5,000 × $2.4014 12,007
Conversion costs 1,000 × $2.00 2,000
Total $146,050

Prepare journal entries for
process-costing systems.

Journal Entries Example
Assume that Omaha, Inc. has two processing
departments – Assembly and Finishing.
Omaha, Inc., purchases direct materials as needed.
What is the journal entry for materials?
Work in Process, Assembly 84,050
Accounts Payable Control 84,050
To record direct materials purchased and used

What is the journal entry for conversion costs?
Various accounts 62,000
To record Assembly Department conversion costs
What is the journal entry to transfer completed
goods from Assembly to Finishing?

Work in Process, Finishing 132,043
To record cost of goods completed and transferred
from Assembly to Finishing during the period

Flow of Costs Example
Accounts Payable
84,050
Various Accounts
62,000
WIP Assembly
84,050 132,043
62,000
14,007
WIP Finishing
132,043

Use the weighted-average
method of process costing.

Work in process, beginning:
100% material
60% conversion costs 1,000
Units started in process 35,000 36,000
Units transferred out: 31,000
Units in ending inventory:
100% material
20% conversion costs 5,000 36,000

Compute Equivalent Units (Step 2)
Materials Conversion
Completed and transferred 31,000 31,000
Ending inventory 5,000 1,000
100% 20%

Compute Equivalent
Unit Costs (Step 3)
Beginning inventory $ 2,350 $ 5,200
Current costs 84,050 62,000
Total $86,400 $67,200
Cost per unit $2.40 $2.10

Work in process beginning inventory:
Materials $ 2,350
Conversion 5,200
Total beginning inventory $ 7,550
Current costs in Assembly Department:
Materials $ 84,050
Conversion 62,000
Costs to account for $153,600

This step distributes the department’s costs to units
transferred out: 31,000 units × $4.50 = $139,500
And to units in ending work in process inventory:
$12,000 + $2,100 = $14,100

Costs transferred out:
31,000 × ($2.40 + $2.10) $139,500
Costs in ending inventory:
Materials 5,000 × $2.40 12,000
Conversion 1,000 × $2.10 2,100
Total costs accounted for: $153,600

Journalizing: Weighted-Average
What are the journal entries in the
Assembly Department?
To record direct materials purchased and used
Various accounts 62,000
To record Assembly Department conversion costs

Journalizing: Weighted-Average
Work in Process, Finishing 139,500
To record cost of goods completed and transferred
from Assembly to Finishing during the period

Key T-Account:
Weighted-Average
Work in Process Inventory, Assembly
Beg. Inv. 7,550 Transferred
Materials 84,050 to Finishing
Conversion 62,000 139,500
Balance 14,100

Use the first-in, first-out (FIFO)
method of process costing.

Compute Equivalent
Units (Steps 1 and 2)
Completed and transferred:
From beginning inventory 0 400
Started and completed 30,000 30,000
Ending inventory 5,000 1,000
35,000 31,400
Quantity schedule (Step 1) is the same as
the weighted-average method.

Compute Equivalent
Units (Step 2)
Completed
and transferred: 31,000 31,000
Ending inventory 5,000 (100%) 1,000 (20%)
36,000 32,000
Beginning inventory 1,000 (100%) 600 (60%)

Compute Equivalent
Unit Costs (Step 3)
Current costs $84,050 $62,000
Cost per unit $2.40 $1.975

Work in process beginning inventory: $ 7,550
Current costs:
Material 84,050
Conversion 62,000
Total $153,600
Same as using weighted-average

From beginning inventory: $7,550
Conversion costs added:
1,000 × 40% × $1.975 790 $ 8,340
From current production:
30,000 × $4.375 131,250
Total $139,590

Work in process ending inventory:
Materials: 5,000 × $2.40 $12,000
Conversion:
5,000 × 20% × $1.975 1,975
Total $13,975

Costs transferred out $139,590
Cost in ending inventory $ 13,975
$153,565($35 rounding error)
An alternative approach:
Cost in ending inventory $ 13,975
Costs transferred out $139,625
+
=
–
=

Key T-Account: FIFO
Work in Process Inventory, Assembly
Beg. Inv. 7,550 Transferred
Materials 84,050 to Finishing
Conversion 62,000 139,625
Balance 13,975

Comparison of Weighted-
Average and FIFO Methods
Weighted
Average FIFO Difference
Costs of units
completed and
transferred out $139,500 $139,625 +$125
Work in process,
ending 14,100 13,975 –$125
Total costs
accounted for $153,600 $153,600 0

Incorporate standard costs
into a process-costing system.

Standard-Costing Method
of Process-Costing Example
Process-costing systems using standard costs
usually accumulate actual costs incurred
separately from the inventory accounts.
Assume that actual materials cost is $84,050
and standard materials cost is $84,250
What are the journal entries in the
Assembly Department?

Standard-Costing Method
of Process-Costing Example
Direct Materials Control 84,050
Work in Process 84,250
Direct Material Variances 200
Direct Materials Control 84,050
To record direct materials purchased and used in
production during the period and variances

Apply process-costing methods
to cases with transferred-in costs.

Transferred-In Costs
Weighted-Average Example
Finishing Department beginning WIP inventory:
4,000 units (60% materials) (25% conversion)
Ending work in process inventory:
2,000 units (100% materials) (40%) conversion)
31,000 units transferred-in from Assembly.

Beginning inventory 4,000
Units started in process 31,000
35,000
Units completed and transferred
to finished goods 33,000
Ending inventory 2,000
35,000

Compute Equivalent
Units (Step 2)
Equivalent units for transferred-in costs:
Transferred to finished goods 33,000
35,000
Inventory is 100% complete for the work
performed in the Assembly Department.

Compute Equivalent
Units (Step 2)
Equivalent units for direct materials costs:
Ending inventory (100%) 2,000
35,000

Compute Equivalent
Units (Step 2)
Equivalent units for conversion costs
(ending inventory 2,000):
Ending inventory (40%) 800
33,800

Compute Equivalent
Unit Costs (Step 3)
Assume the following costs in the
Finishing Department:
Work in process beginning inventory from:
Assembly Department $30,200
Direct materials 9,400
Conversion costs 8,000
Total cost in beginning inventory $47,600

Compute Equivalent
Unit Costs (Step 3)
Current costs in Finishing Department
are as follows:
Costs received from the
Assembly Department $139,500
Direct materials 9,780
Conversion 42,640
Total $191,920

Compute Equivalent
Unit Costs (Step 3)
(Transferred-in costs $30,200 + Costs transferred
in from the Assembly Department $139,500)
÷ 35,000 units $4.85
(Direct materials $9,400 + $9,780)
÷ 35,000 units $0.55
(Conversion costs $8,000 + $42,640)
÷ 33,800 units $1.50
Total unit cost $6.90

Total costs in beginning inventory $ 47,600
Current costs in Finishing Department 191,920
$239,520
Costs to account for: $47,600 + $ 191,920 = $239,520

Costs in work in process ending inventory:
Transferred-in costs: 2,000 × $4.85 $ 9,700
Direct materials: 2,000 × $0.55 1,100
Conversion: 2,000 × 40% × $1.50 1,200
Total cost in ending inventory $12,000

Costs to account for: $239,520
Costs transferred to finished goods inventory:
33,000 × $6.90 $227,700
Costs in ending work in process inventory:
$12,000 – $180 rounding error 11,820
Total $239,520

T-Account Finishing Department
Work in Process Inventory, Finishing
Beg. Inv. 47,600 Transferred to
Transferred-in 139,500 Finished Goods
Materials 9,780 227,700
Conversion 42,640
Balance 11,820

Transferred-In Costs
FIFO Method
The physical units (Step 1) is the same
as in weighted-average.
Beginning inventory 4,000
Units started in process 31,000
35,000
Units transferred to finished goods 33,000
35,000

FIFO (Step 2)
From beginning work in process 0
Started and completed 29,000
Work in process, ending (100%) 2,000
Total equivalent units 31,000

FIFO (Step 2)
Ending work in process inventory 2,000
Total 35,000
Beg. work in process inventory – 4,000
Equivalent units 31,000
Inventories are 100% complete for the work
performed in the Assembly Department.

FIFO (Step 2)
Equivalent units for materials costs:
From beginning work in process 1,600
Work in process, ending (100%) 2,000

FIFO (Step 2)
Equivalent units for material costs
(beginning inventory 4,000):
Ending inventory (100%) 2,000
Total 35,000
Beginning inventory (60%) –2,400

FIFO (Step 2)
Equivalent units for conversion costs:
From beginning work in process 3,000
Work in process, ending (40%) 800

FIFO (Step 2)
Equivalent units for conversion costs (beginning
inventory 4,000, ending inventory 2,000):
Ending inventory (40%) 800
Total 33,800
Beginning inventory (25%) –1,000

Compute Equivalent Unit Costs
FIFO (Step 3)
Cost per equivalent unit:
Transferred-in: $139,590 ÷ 31,000 $4.50
Direct materials: $9,780 ÷ 32,600 0.30
Conversion: $42,640 ÷ 32,800 1.30
Total unit cost $6.10

Costs FIFO (Steps 4 and 5)
Current costs in Finishing Department: $192,010
Work in process beginning inventory: 47,600
Costs to account for:(same as weighted-average) $239,610

Work in process ending inventory:
Transferred-in: 2,000 × $4.50 $ 9,000
Direct materials: 2,000 × $0.30 600
Conversion: 800 × $1.30 1,040
Total $10,640

From beginning inventory: $47,600
Direct materials added:
4,000 × 40% × $0.30 480
Conversion costs added:
4,000 × 75% × $1.30 3,900
Total $51,980

Total costs transferred out:
From beginning inventory $ 51,980
From current production: 29,000 × $6.10 176,900
Total $228,880

Total costs accounted for:
Transferred to finished goods:
$176,900 + $51,980 $228,880
Work in process ending inventory 10,640
Rounding error 90
Total $239,610

Work in process ending inventory – 10,640
Transferred to finished goods $228,970

End of Chapter 17

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