PROCESS COSTING IS COSTING METHOD BY DEPARTMENT

1. Chapter 4
Process Costing System
1

2. Learning Objectives
Distinguish Process costing and Job –Costing
Record the flow of materials, labor, and
overhead through a process cost system.
Compute the equivalent units and cost per
equivalent unit( Primarily for WIP ending)
Assign costs to units completed and units in
process

3. Process Costing System
 Is a costing method most commonly used in industries that
produce essentially homogeneous (i.E. Uniform) products in
mass on a continuous basis.
 Each unit receives the same amounts of direct materials
costs, direct labor costs, and manufacturing overhead
 Unit costs are computed by dividing total costs incurred by
the number of units of output from the production process

4. Similarities and differences between Job-Order and
Process Costing

5. Similarities
 Both systems assign( trace and allocate) material,
labor, and overhead costs assigned to products to
compute unit costs.
 Both systems use the same manufacturing accounts:
 Raw Materials,
 Work in Process, and
 Finished Goods accounts .
 The flow of costs is basically the same in both systems.

6. Differences
 Process costing is used when a single identical product is
produced is mass on a continuing basis , where as Job-
order costing is used when many different jobs are worked
on each period.
 Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by individual
jobs.
 Process costing systems use department production reports
to accumulate costs. Job-order costing systems use job
sheets to accumulate costs.
 Process costing systems compute unit costs by department.
Job-order costing systems compute unit costs by job.

7. 7
Examples firms using process costing
 Sugar factories
 Food processing firms ,
 Chemical processing firms
 Soft drink and alcohol factories
 Cement factory
 soaps manufacturing firms
 Steel manufacturing firms
 Paper manufacturing firms
 Pharmaceutical firms

8. 8
Cost Flow under Process –
Costing
Assume a Coca-Cola Company with two
subsequent production departments
• Mixing Department
• Bottling Department

9. Flow of cost under Job-Order
and Process Costing
Finished
Goods
Cost of
Goods
Sold
Work in
Process
Direct
Materials
Direct Labor
Manufacturing
Overhead

10. Cost flow under Job-Order Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing
Overhead
Jobs
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials

11. Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing
Overhead
Processing
Department
Costs are traced and
applied to departments
in a process cost
system.
Direct
Materials
Cost flow under Process Costing

12. Process Cost Flows-Material Cost
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Mixing Department XXXXX
Work in Process -Bottling Department XXXXX
Raw Materials XXXXX
To record the use of direct material.

13. Process Cost Flows- Direct Labor Cost
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Mixing Department XXXXX
Work in Process - Bottling Department XXXXX
Cash and Payable XXXXX
To record direct labor costs.

14. Process Cost Flows- Overhead cost allocated
(In journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Mixing Department XXXXX
Work in Process - Bottling Department XXXXX
Manufacturing Overhead- Control XXXXX
To apply overhead to departments.

15. Process Cost Flows- Transfer in Cost
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Bottling Department XXXXX
Work in Process - Mixing Department XXXXX
To record the transfer of goods from
Mixing Department to Bottling Department

16. Process Costing- Storage
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Bottling Department XXXXX
To record the completion of goods
and their transfer from Botting Department
to finished goods inventory.

17. Process Costing- Sales
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Cash/ Accounts Receivable XXXXX
Sales XXXXX
To record sales.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.

18. Process-Costing Assumptions
 Direct Materials are added at the beginning of the
production process, or at the start of work
 Conversion Costs are added evenly along the
production process

19. Five-Steps in Process-Costing Cost assignment
1. Summarize the flow of physical units of
output
2. Compute output in terms of equivalent units
3. Compute cost per equivalent unit
4. Summarize total costs to account for
5. Assign total costs to units completed and to
units in ending Work-in-Process

20. 26
Equivalent Units
 is an expression of the amount of work done on units of
output that are partially completed at the end of the year.
 Is the expression the partially completed units(WIP
ending units) in terms of fully completed units.
 Equivalent units = Number of physical units ×
Percentage of completion
 For example
 if four physical units of product are 50 percent complete at
the end of the period, an equivalent of two units has been
completed
 (2 equivalent units = 4 physical units × 50 percent).
 If four desks manufacturing is 50 percent complete at
year end , an equivalent unit of two desks has been
completed.

21. 27
Equivalent Units
 Equivalent units of production is a term applied to
the Work in process inventory at the end of the year
 Process costing requires partially completed units in
ending work-in-process inventory to be converted to
the equivalent completed units (called equivalent
units).
 Equivalent units = Number of physical units ×
Percentage of completion
 Therefore,
 For completed units, the percent of completion is
100% and hence, the equivalent units will be the
same as the physical units…..100% X physical unit=
Physical unit
 For WIP ending, the percent of completion is is less
than 100% and hence, the equivalent units will be
less than the physical units.

22. Equivalent Units – The Basic Idea
Two half-completed products are
equivalent to one complete product.
So, 2 units 50% complete
are equivalent to 1 complete units.
+ = 1

23. 29
Illustrating Example -Process Costing
 Assume Coca-Cola Chemical Company Produces Coke
and uses process costing system to account for its
operation.
 The soft drink is produced in two processing
departments: the Mixing Department and the Bottling
Department.
 The product is bottled in 300ml bottles.

24. 30
Part I: Mixing Department
 In the Mixing Department, various ingredients are
added at the start of the process
 costs are accumulated in two pools, one for direct
material and another for all conversion costs.
 Direct material is added at the beginning of the
process
 conversion costs are applied evenly through out the
process.
 Data for the first month of operation (September) of
the Mixing Department is given below:

25. 31
Case 1: Zero beginning and Zero ending work in
process inventory that is all units are started and
fully Completed by the end of the period.
 Beginning work in process 0 units
 Started during the month 1,000
units
 Completed during the month 1,000
units
 Direct material costs Br. 80,000
 Conversion costs Br. 40,000
 Ending work in process 0 units

26. 32
Solution - Step-1- Summery of flow of physical
unit
Flow of Production flow of pysical Units
Beginning Work in process
0 units
Units started in September 1000
Units to account for 1,000
Units Completed and transferred out 1000
Ending Work in process
0
Units accounted for
1,000

27. 33
Step 2 : Compute output in terms of equivalent units for
DMC & CC
Flow of Production
flow of physical
Units
Equvalent unit
DMC CC
Units Completed and
transferred out
(100%,100%)
1000 units
1,000 1,000
Ending Work in process
0 unit 0 0
Work done current period
1,000units 1,000units

28. 34
Step 3 &4 : flow of cost and Cost per Equivalent units
Production cost report Total
production
cost
DMC CC
Cost of beginning WIP Br 0 Br0 Br 0
Costs added this period 120,000 80,000 40,000
Cost to account for 120,000 80,000 40,000
Equivalent units(step-2) 1,000 1,000
cost per equivalent unit 80 40

29. 35
Step 5 : Cost assignment to completed & transferred out
units and units of WIP ending
Production cost report Total
production
cost
DMC CC
Total Cost to account for Br 120,000
Cost Assignment :
To Completed& transferred out:
Direct material Cost
80,000 1000*80
Conversion cost 40,000
1,000*40
Total 120,000
To WIP ending:
0 1,000*0 1,000*0
Total cost accounted for 120,000

30. 36
Journal Entries- for production during September
1. Work in Process- Mixing 80,000
RM -Inventory 80,000
(To record direct materials used in production)
2. Work in Process- Mixing 40,000
Various accounts 18,600
(To record Mixing department conversion costs)
3. Work in Process- Bottling 120,000
Work in Process- Mixing 120,000
(To record transfer of completed units in mixing
department to bottling department)

31. 37
Case2: Zero beginning but some ending
work in process inventory
 Data for the second month of operation (October) of
the Mixing Department is given below:
 Beginning work in process 0 units
 Started during the month 2,000 units
 Completed during the month 800 units
 Ending work in process (60% completed as to conversion
costs.) 1,200 units
 Direct material costs Br. 160,000
 Conversion costs Br. 91,200
Required: calculate the cost of fully completed
units(800) and the cost of partially completed units
still in process at the end of October(1200)?

32. 38
Solution - Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process
0 units
Units started in October 2,000
Units to account for 2,000
Units Completed and transferred out 800 units
Ending Work in process
1,200
Units accounted for 2,000

33. 39
Step 2 : Compute output in terms of equivalent units for DMC
& CC
Flow of Production
flow of
physical Units
Equvalent unit
DMC CC
Units Completed and transferred out
(100%,100%) 800 units
800 800
Ending Work in process
(100%,60%)
1,200 unit 1,200 720
Work done in current period
(b/c Beg WIP is zero)
2,000U 1,520U

34. 40
Step 3 &4 : flow of cost and Cost per Equivalent units
Production cost report Total
production
cost DMC CC
Cost of beginning WIP Br 0 Br0 Br 0
Costs added this period 251,200 160,000 91,200
Cost to account for 251,200 160,000 91,200
Equivalent units(step-2) 2,000 1,520
cost per equivalent unit Br 80 Br 60

35. 41
Step 5 : Cost assignment to completed & transferred out
units and units of WIP ending
Production cost report Total prod.
Cost DMC CC
Total Cost to account for Br 251,200
Cost Assignment :
To Completed& transferred out(800
units):
Direct material Cost 64,000 800*80
Conversion cost 48,000 800*60
Total Br.112,000
To WIP ending(1200 units):
Direct material Cost 96,000 1,200*80
Conversion cost 43200 720*60
Total Br.139,200
Total cost accounted for Br 251,200

36. 42
Journal Entries- for production during October
1. Work in Process- Mixing 160,000
RM -Inventory 160,000
(To record direct materials used in production)
2. Work in Process- Mixing 91,200
Various accounts 91,200
(To record Mixing department conversion costs)
3. Work in Process- Bottling 112,000
Work in Process- Mixing 112,000
(To record transfer units completed to bottling
department)

37. 43
Case3: Process costing with some beginning and
some ending work in process inventory.
 Data for the third month of operation (November) of
the Mixing Department is given below: Weighted
Average Method
Beginning work in process( from
October/Case2) ( CC 60% complete ) 1,200 units
Started during the month 1,000 units
Completed during the month 1,600 units
Ending work in process (50% completed as to
conversion costs.) 600units
Cost
Current
month
Beg.
WIP(Case2)
Direct material costs Br. 69,000 Br. 96,000
Conversion costs 70,800 43,200

38. 44
 When both WIP beginning and ending have balances
, there two methods of process costing accounting:
1. Weighted Average Method
2. FIFO Method

39. 45
Weighted-Average -process costing method
 Makes no distinction between work done in
prior( beginning WIP) or current periods(started new)
 It combines units and costs from prior and current
periods
 Calculates the equivalent unit cost of the work done to
date regardless of the period in which it was done
 Thus, its assigns cost to equivalent units completed and
to equivalent units in ending work in process inventory.
 .

40. 46
Solution - Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process 1,200 units
Units started in September 1,000
Units to account for 2,200
Units Completed and transferred out 1600 units
Ending Work in process
600
Units accounted for
2,200

41. 47
Step 2 : Compute output in terms of equivalent units for
DMC & CC
Flow of Production
flow of physical
Units
Equivalent Unit
DMC CC
Units completed & transferred
out(100%,100%) 1,600 1,600 1,600
Ending Work in
process(100%,50%) 600 600 300
Work done to
date(cumulative) 2,200U 1,900U

42. 48
Step 3 &4 : flow of cost and Cost per Equivalent units
Production cost report Total
production
cost
DMC CC
Cost of beginning WIP Br 139,200 Br96,000 Br 43,200
Current period cost 139,800 69,000 70,800
Cost to account for 279,000 165,000 114,000
Equivalent units(step-2) 2,200 1,900
cost per equivalent unit 75 60

43. 49
Step 5 : Cost assignment to completed units and to units of
WIP ending
Production cost report Total prod.
Cost DMC CC
Total Cost to account for Br 279,000
Cost Assignment :
To Completed& transferred out(800
units):
Direct material Cost 120,000 1600*75
Conversion cost 96,000 1600*60
Total 216,000
To WIP ending(1200 units):
Direct material Cost 45,000 600*75
Conversion cost 18,000 300*60
Total 63,000
Total cost accounted for Br 279,000

44. 50
Journal Entries- for production during November
1. Work in Process- Mixing 69,000
RM -Inventory 69,000
(To record direct materials used in production)
2. Work in Process- Mixing 70,800
Various accounts 70,800
(To record conversion costs incurred )
3. Work in Process- Bottling 216,000
Work in Process- Mixing 216,000
(To record transfer of completed units in mixing
department to bottling department)

45. 51
First-in, First-out Method
 This method assumes that the earliest equivalent units
in the work in process account are completed first.
 Work done in a prior period is kept separate from
work done current period
 Similarly cost of beginning Work-in-Process is kept
separate from current period cost.
 Equivalent unit is computed only for the work done in
the current period.
 Costs per equivalent unit is also computed only for
work done in the current period by dividing costs
incurred in the current period by the current period
equivalent unit
 In weighted average method, equivalent unit and cost
per equivalent unit merges the units and costs in

46. 52
First-in, First-out Method cont…
 Cost Assignment
 Assigns the cost of beginning work-in process to
completed units
 Assigns the cost of current period :
 First to cost to complete beginning WIP
 Next to completed units from new start
 Lastly to units of ending work in process
 Example: Assume the previous data of weighted average
method

47. 53
Case3: Process costing with some beginning and
some ending work in process inventory.
 Data for the third month of operation (November) of
the Mixing Department is given below: FIFO
Method
Beginning work in process( from
October/Case2) ( CC 60% complete ) 1,200 units
Started during the month 1,000 units
Completed during the month 1,600 units
Ending work in process (50% completed as
to conversion costs.) 600units
Cost
Current
month
Beg.
WIP(Case2)
Direct material costs Br. 69,000 96,000
Conversion costs Br. 70,800 43,200

48. 54
Solution - Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process
1,200 units
Units started in September 1,000
Units to account for 2,200
Units Completed and transferred out(1,600)
• From beginning WIP
• From new start
1,200
400
Ending Work in process
600
Units accounted for
2,200

49. 55
Step 2 : Compute equivalent units for the work done in
the current month
Flow of Production
flow of
physical Units
Equivalent unit
DMC CC
Units completed & transferred
out
• From Beg. WIP(0%,40%)
•From new start (100%,100%)
1,200
400
0
400
480
400
Ending Work in process
(100%,50%) 600 600 300
Work done only in the
current month 1,000U 1,180U

50. 56
Step 3 &4 : flow of cost and Cost per Equivalent units for
the work done only in the current month
Production cost report Total
production
cost
DMC CC
Cost of beginning WIP Br 139,200 Br96,000 Br 43,200
Current period cost 139,800 69,000 70,800
Work done only in the current period
(Equivalent units(step-2)) 1,000 1,180
cost per equivalent unit 69 60

51. 57
Step 5 : Cost assignment
Production cost report Total Cost DMC CC
Total Cost to account for Br 279,000
Cost Assignment :
To Completed& transferred
out(1600 units):
From Beginning WIP(1,200U)
 Cost carried forward 139,200 96,000 43,200
 Cost to complete them 28,800 0*69 480*60
From new start (400U) 51,600 400*69 400*60
Total 219,600
To WIP ending(600 units):
Direct material Cost 41,400 600*69
Conversion cost 18,000 300*60
Total 59,400
Total cost accounted for Br 279,000

52. 58
Journal Entries- for production during November
1. Work in Process- Mixing 69,000
RM -Inventory 69,000
(To record direct materials used in production)
2. Work in Process- Mixing 70,800
Various accounts 70,800
(To record Mixing department conversion costs)
3. Work in Process- Bottling 219,600
Work in Process- Mixing 219,600
(To record transfer of completed units in mixing
department to bottling department)

53. Transferred-in Costs-Bottling Department
 Transferred-in Costs are costs incurred in previous
departments that are carried forward as the products cost
when it moves to a subsequent process in the production
cycle
 Also called Previous Department Costs
 Transferred-in costs are treated as if they are a separate
type of direct material added at the beginning of the
process .
 However, they are called transferred-in costs, not direct
material costs.

54. 60
Bottling Department
 In the Bottling Department the product is bottled,
labeled, and placed in cartons
 Costs are accumulated in the three cost pools
1. Transferred-in cost (mixing department cost)
2. Direct materials cost – bottling department and
3. Conversion cost - bottling department
Assumption- Bottling department
 Direct material is added at the end of the process and
 WIP ending is zero percent complete as to DMC
 Conversion costs are incurred evenly through-out the
process.

55. 61
Example –Bottling Department
 Assume the following data for Coca-Cola Company
during the month of November in the Bottling
department( Case 3)
 Transferred in cost during the month(November):
 Weighted average method 216,000
 First-in, first-out method 219,600

56. 62
Physical Unit and Percentage of completion
Physical units Transferred in
costs
DMC CC
Beginning work in process 1,200 units 100%
complete
0%
complete
75%
complete
Transferred-in during the month 1,600 units
Completed during the month 2,000 units
Ending work in process 800 units 100%
complete
0%
complete
50%
complete
Cost
Beginning work in process cost :
Transferred in costs (1,200 x Br. 170) Br. 204,000
Direct material costs 0
Conversion costs 90,000
Transferred in cost during the month:
Weighted average 216,000
First-in, first-out 219,600
Direct material costs incurred during the month 60,000
Conversion costs incurred during the month 150,000

57. 63
Solution - Weighted average method- Bottling Dept.
Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process 1,200 units
Transferred-in during the month 1,600
Units to account for 2,800
Units Completed and become FG 2,000
Ending Work in process 800
Units accounted for 2,800

58. 64
Step 2 : Compute equivalent units for the work done to
date
Flow of Production
flow of
physical
Units
Equivalent unit
Transfer
in cost DMC CC
Units completed & become
FG(100%,100,100%) 2,000 2,000 2,000 2,000
Ending Work in process
(100%,0%, 50%) 800 800 0 400
Work done to date 2,800U 2,000U 2,400U

59. 65
Step 3 &4 : cost summery and Cost per Equivalent units for
the work done to date
Production cost
report
Total
production
cost
Transfer
in cost DMC CC
Cost of beginning
WIP Br.294,000 Br.204,000 Br.0 Br.90,000
Current period cost 426,000 216,000 60,000 150,000
Cost to account for
(TC) 720,000 420,000 60,000 240,000
Work done to date (Equivalent
units(step-2)) 2,800U 2,000U 2,400U
cost per equivalent unit 150 30 100

60. 66
Step 5 : Cost assignment
Production cost report Total prod.
Cost
Transfer in
cost
DMC CC
Total Cost to account for Br 720,000
Cost Assignment :
To Completed ( FG) units
(2000):
Transfer in cost 300,000 2,000*150
DMC 60,000 2,000*30
Conversion cost 200,000 2000*100
Total 560,000
To WIP ending(800 units):
Transfer in cost 120,000 800*150
Direct material Cost 0 0*30
Conversion cost 40,000 400*100
Total 160,000
Total cost accounted for Br 720,000

61. 67
Journal Entries- for production during November
1. Work in Process- Bottling 216,000
Work in Process- Mixing 216,000
(To record transfer in during current period)
2. Work in Process- Bottling 60,000
RM -Inventory 60,000
(To record bottling department material costs)
3. Work in Process- Bottling 150,000
Various accounts 150,000
(To record bottling department conversion costs)
4. FG inventory - 560,000
Work in Process- Bottling
560,000
(To record completion and transfer to FG store)

62. 68
Example – Cont….
Bottling Department and Fifo method

63. 69
Solution - Step-1- Summery of flow of physical unit Fifo
method
Flow of Production flow of pysical Units
Beginning Work in process
1,200
Transfer in during the period 1,600
Units to account for 2,800
Units Completed ( FG) (2,000)
• From beginning WIP
• From transfer in during current period
1,200
800
Ending Work in process 800
Units accounted for 2,800

64. 70
Step 2 : Compute equivalent units for the work done
only in the current period
Flow of Production
flow of
physical
Units
Equivalent unit
Transfer
in cost DMC CC
Units completed
From Beg. WIP(0%,100,25%)
From current T. in (100%,100%,100%)
1,200
800
0
800
1,200
800
300
800
Ending Work in process
(100%,0%, 50%) 800 800 0 400
Work done only in the
current period 1,600U 2,000U 1,500U

65. 71
Step 3 &4 : flow of cost and Cost per Equivalent units for
the work done only in the current month
Production cost report Total
production
cost
Transfer
in cost DMC CC
Cost of beginning WIP Br.294,000 Br.204,000 Br.0 Br.90,000
Current period cost 429,600 219,600 60,000 150,000
Work done in current period
Equivalent units(step-2)) 1,600U 2,000U 1,500U
cost per equivalent unit 137.25 30 100

66. 72
Step 5 : Cost assignment to completed units and to units of WIP ending
Production cost report Total prod. Cost Transfer in cost DMC CC
Total Cost to account for
Br 723,600
Cost Assignment :
To Completed units (2000)
Cost in beg WIP Br.294,000 Br.204,000 Br.0 Br.90,000
Cost to complete Beg WIP
Transfer in cost 0 0*137.25
DMC 36,000 1,200*30
Conversion cost 30,000 300*100
Total cost of beg WIP 360,000
Cost of current T.in & completed 213,800 800*137.25 800*30 800*100
Total cost of Completed units 573,800
To WIP ending(800 units):
Transfer in cost
109,800 800*137.25
Direct material Cost
0 0*30
Conversion cost
40,000 400*100
Total 149,800
Total cost accounted for
Br 723,600

67. 73
Journal Entries- for production during November
1. Work in Process- Bottling 219,600
Work in Process- Mixing 219,600
(To record transfer in during current period)
2. Work in Process- Bottling 60,000
RM -Inventory 60,000
(To record bottling department material costs)
3. Work in Process- Bottling 150,000
Various accounts 150,000
(To record bottling department conversion costs)
4. FG inventory - 573,800
Work in Process- Bottling
573,800
(To record completion and transfer to FG store)

68. The End