11th edition

1. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
11th
Edition
Chapter 4

2. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Chapter Four
Systems Design:
Process Costing

3. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Similarities Between Job-Order and Process
Costing
• Both systems assign material, labor and
overhead costs to products and they provide a
mechanism for computing unit product cost.
• Both systems use the same manufacturing
accounts, including Manufacturing Overhead,
Raw Materials, Work in Process, and Finished
Goods.
• The flow of costs through the manufacturing
accounts is basically the same in both systems.
• Both systems assign material, labor and
overhead costs to products and they provide a
mechanism for computing unit product cost.
• Both systems use the same manufacturing
accounts, including Manufacturing Overhead,
Raw Materials, Work in Process, and Finished
Goods.
• The flow of costs through the manufacturing
accounts is basically the same in both systems.

4. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Differences Between Job-Order and Process
Costing
• Process costing is used when a single product is produced onProcess costing is used when a single product is produced on
a continuing basis or for a long period of time. Job-ordera continuing basis or for a long period of time. Job-order
costing is used when many different jobs are worked on eachcosting is used when many different jobs are worked on each
period.period.
• Process costing systems accumulate costs by department.Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by individualJob-order costing systems accumulated costs by individual
jobs.jobs.
• Process costing systems use department production reports toProcess costing systems use department production reports to
accumulate costs. Job-order costing systems use job costaccumulate costs. Job-order costing systems use job cost
sheets to accumulate costs.sheets to accumulate costs.
• Process costing systems compute unit costs by department.Process costing systems compute unit costs by department.
Job-order costing systems compute unit costs by job.Job-order costing systems compute unit costs by job.
• Process costing is used when a single product is produced onProcess costing is used when a single product is produced on
a continuing basis or for a long period of time. Job-ordera continuing basis or for a long period of time. Job-order
costing is used when many different jobs are worked on eachcosting is used when many different jobs are worked on each
period.period.
• Process costing systems accumulate costs by department.Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by individualJob-order costing systems accumulated costs by individual
jobs.jobs.
• Process costing systems use department production reports toProcess costing systems use department production reports to
accumulate costs. Job-order costing systems use job costaccumulate costs. Job-order costing systems use job cost
sheets to accumulate costs.sheets to accumulate costs.
• Process costing systems compute unit costs by department.Process costing systems compute unit costs by department.
Job-order costing systems compute unit costs by job.Job-order costing systems compute unit costs by job.

5. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check 

6. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check 

7. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
What is a Processing Department?
Any location in an organization where materials,
labor or overhead are added to the product.
The activities performed in a processingThe activities performed in a processing
department aredepartment are performed uniformlyperformed uniformly on allon all
units of production. Furthermore, the output ofunits of production. Furthermore, the output of
a processing department must bea processing department must be
homogeneoushomogeneous..

8. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Sequential vs. Parallel Processing
Sequential processing means that unitsSequential processing means that units
flow in a sequence from oneflow in a sequence from one
department to another.department to another.
Sequential processing means that unitsSequential processing means that units
flow in a sequence from oneflow in a sequence from one
department to another.department to another.
Parallel processing is used whenParallel processing is used when
after a point, some units go throughafter a point, some units go through
different processing departmentsdifferent processing departments
than others. For example, athan others. For example, a
petroleum refinery separates crudepetroleum refinery separates crude
oil into products like gasoline, jetoil into products like gasoline, jet
fuel, and heating oil.fuel, and heating oil.
Parallel processing is used whenParallel processing is used when
after a point, some units go throughafter a point, some units go through
different processing departmentsdifferent processing departments
than others. For example, athan others. For example, a
petroleum refinery separates crudepetroleum refinery separates crude
oil into products like gasoline, jetoil into products like gasoline, jet
fuel, and heating oil.fuel, and heating oil.

9. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Comparing Job-Order
and Process Costing
Finished
Goods
Finished
Goods
Cost of
Goods
Sold
Cost of
Goods
Sold
Work in
Process
Direct
Materials
Direct
Materials
Direct LaborDirect Labor
Manufacturing
Overhead
Manufacturing
Overhead

10. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Comparing Job-Order
and Process Costing
Finished
Goods
Finished
Goods
Cost of
Goods
Sold
Cost of
Goods
Sold
Direct LaborDirect Labor
Manufacturing
Overhead
Manufacturing
Overhead
JobsJobs
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
Direct
Materials

11. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Comparing Job-Order
and Process Costing
Finished
Goods
Finished
Goods
Cost of
Goods
Sold
Cost of
Goods
Sold
Direct LaborDirect Labor
Manufacturing
Overhead
Manufacturing
Overhead
Processing
Department
Processing
Department
Costs are traced and
applied to departments
in a process cost
system.
Costs are traced and
applied to departments
in a process cost
system.
Direct
Materials
Direct
Materials

12. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
T-Account and Journal Entry Views of Cost Flows
For purposes of this example,
assume there are two
processing departments –
Departments A and B.
We will use T-accounts and
journal entries.

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Raw Materials
Process Cost Flows
(in T-account form)
Work in Process
Department B
Work in Process
Department A
•Direct
Materials
•Direct
Materials
•Direct
Materials

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

15. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Cost Flows
(in T-account form)
Work in Process
Department B
Work in Process
Department A
Wages Payable
•Direct
Materials
•Direct
Materials
•Direct
Labor
•Direct
Labor •Direct
Labor

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Process Costing
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.

17. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Cost Flows
(in T-account form)
Work in Process
Department B
Work in Process
Department A
Manufacturing
Overhead
•Overhead
Applied to
Work in
Process
•Applied
Overhead
•Applied
Overhead
•Direct
Labor
•Direct
Materials
•Direct
Labor
•Direct
Materials
•Actual
Overhead

18. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing
(In journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.

19. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Cost Flows
(in T-account form)
Work in Process
Department B
Work in Process
Department A
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Direct
Materials
•Direct
Labor
•Applied
Overhead
Transferred
to Dept. B
•Transferred
from Dept. A

20. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.

21. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Finished Goods
Process Cost Flows
(in T-account form)
Work in Process
Department B
•Cost of
Goods
Manufactured
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
•Cost of
Goods
Manufactured

22. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.

23. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Finished Goods
Cost of Goods Sold
Process Cost Flows
(in journal entry form)
Work in Process
Department B
•Cost of
Goods
Manufactured
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
•Cost of
Goods
Sold
•Cost of
Goods
Sold
•Cost of
Goods
Manufactured

24. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.

25. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units of Production
Equivalent units are the product of the number of
partially completed units and the percentage
completion of those units.
We need to calculate equivalent units because a
department usually has some partially completed units
in its beginning and ending inventory.

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Equivalent Units – The Basic Idea
Two half completed products are
equivalent to one completed product.
Two half completed products are
equivalent to one completed product.
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
+ = 1

27. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check 

28. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units × 0.30)
= 11,500 equivalent units
Quick Check 

29. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Calculating Equivalent Units
Equivalent units can be calculated twoEquivalent units can be calculated two
ways:ways:
The First-In, First-Out Method –The First-In, First-Out Method – FIFO isFIFO is
covered in the appendix to this chapter.covered in the appendix to this chapter.
The Weighted-Average Method –The Weighted-Average Method – ThisThis
method will be covered in the main portion of themethod will be covered in the main portion of the
chapter.chapter.
Equivalent units can be calculated twoEquivalent units can be calculated two
ways:ways:
The First-In, First-Out Method –The First-In, First-Out Method – FIFO isFIFO is
covered in the appendix to this chapter.covered in the appendix to this chapter.
The Weighted-Average Method –The Weighted-Average Method – ThisThis
method will be covered in the main portion of themethod will be covered in the main portion of the
chapter.chapter.

30. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units of Production
Weighted-Average Method
Cost per
equivalent
unit
=
Costs for the period
Equivalent units of production
for the period
The weighted-average method . . .
•Makes no distinction between work done in prior or
current periods.
•Blends together units and costs from prior and
current periods.

31. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing and Direct Labor
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct
Materials
Type of Product Cost
DollarAmount
Direct
Labor
Conversion

32. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Process Costing and Direct Labor
Type of Product Cost
DollarAmount
Conversion
Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may be
combined into one product cost calledcombined into one product cost called conversionconversion..
Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may be
combined into one product cost calledcombined into one product cost called conversionconversion..
Direct
Materials Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.

33. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Weighted-Average Example
Smith Company reported the following activity in
Department A for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400
of Department A during June
Work in process, June 30 900 60% 30%

34. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The first step in calculating the equivalent units is
to identify the units completed and transferred
out of Department A in June (5,400 units)
Weighted-Average Example
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400

35. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The second step is to identify the equivalent units of
production in ending work in process with respect to
materials for the month (540 units) and add this to the
5,400 units from step one.
Weighted-Average Example
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
Equivalent units of Production in
Department A during June 5,940

36. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Weighted-Average Example
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
The third step is to identify the equivalent units of
production in ending work in process with respect to
conversion for the month (270 units) and add this to the
5,400 units from step one.

37. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Weighted-Average Example

38. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Beginning
Work in Process
300 Units
40% Complete
Ending
Work in Process
900 Units
60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Started
and Completed
Weighted-Average Example
MaterialsMaterials
5,400 Units Completed
540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production

39. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
6,000 Units Started
5,400 Units Completed
5,100 Units Started
and Completed
270 Equivalent Units
900 × 30%
5,670 Equivalent units
of production
Beginning
Work in Process
300 Units
20% Complete
Ending
Work in Process
900 Units
30% Complete
Weighted-Average Example
ConversionConversion

40. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Production Report – Weighted-Average
A computation ofA computation of
cost per equivalent unit.cost per equivalent unit.
A computation ofA computation of
cost per equivalent unit.cost per equivalent unit.
Section 1
Section 2
Section 3
Production Report
A quantity scheduleA quantity schedule
showing the flow of unitsshowing the flow of units
and the computation ofand the computation of
equivalent units.equivalent units.
A quantity scheduleA quantity schedule
showing the flow of unitsshowing the flow of units
and the computation ofand the computation of
equivalent units.equivalent units.

41. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Production Report
 Cost Reconciliation
section shows the
reconciliation of all cost
flows into and out of the
department during the
period.
 Cost Reconciliation
section shows the
reconciliation of all cost
flows into and out of the
department during the
period.
Section 1
Section 2
Section 3
Production Report

42. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Assume that Double Diamond Skis uses the
weighted-average method of process costing to
determine unit costs in it Shaping and Milling
Department.
Assume that Double Diamond Skis uses the
weighted-average method of process costing to
determine unit costs in it Shaping and Milling
Department.
Production Report Example

43. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575
Production started during May 5,000 units
Production completed during May 4,800 units
Costs added to production in May
Materials cost $ 368,600
Conversion cost 350,900
Work in process, May 31 400 units
Materials: 40% complete
Conversion: 25% complete
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575
Production started during May 5,000 units
Production completed during May 4,800 units
Costs added to production in May
Materials cost $ 368,600
Conversion cost 350,900
Work in process, May 31 400 units
Materials: 40% complete
Conversion: 25% complete
Production Report Example

44. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Step1: Prepare Quantity Schedule with Equivalent Units.
Production Report Example
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400

45. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Production Report Example
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
5,200 4,960
Step1: Prepare Quantity Schedule with Equivalent Units.

46. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Production Report Example
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900
Step1: Prepare Quantity Schedule with Equivalent Units.

47. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Step 2: Calculating the Costs Per Equivalent
Unit
To calculate the cost per equivalent
unit for the period:
Cost per
equivalent
unit
=
Costs for the period
Equivalent units of production
for the period

48. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Step 2: Compute the cost per equivalent unit.
Production Report Example
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$ 9,600$ 5,575$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit

49. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$ 9,600$ 5,575$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.25$
Production Report Example
Step 2: Compute the cost per equivalent unit.
$378,200 ÷ 4,960 units = $76.25

50. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$ 9,600$ 5,575$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.25$ 72.75$
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
Production Report Example
$356,475 ÷ 4,900 units = $72.75$356,475 ÷ 4,900 units = $72.75
Step 2: Compute the cost per equivalent unit.

51. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Step 3: Prepare a Cost Reconciliation
Production Report Example
Total Equivalent Units
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for

52. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Total Equivalent Units
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 715,200$ 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
4,800 units @ $149.00
Production Report Example
Step 3: Prepare a Cost Reconciliation

53. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Total Equivalent Units
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 715,200$ 4,800 4,800
Work in process, May 31:
Materials 12,200 160
Conversion 7,275 100
Total work in process, May 31 19,475
Total cost accounted for 734,675$
Production Report Example
160 units @ $76.25
Step 3: Prepare a Cost Reconciliation
All costs
accounted for
100 units @ $72.75

54. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Operation Costing
Operation costing is aOperation costing is a hybridhybrid of job-orderof job-order
and process costing because itand process costing because it
possesses attributes of both approaches.possesses attributes of both approaches.
Operation costing is aOperation costing is a hybridhybrid of job-orderof job-order
and process costing because itand process costing because it
possesses attributes of both approaches.possesses attributes of both approaches.
Conversion costs
assigned to batches
as in process costing.
Conversion costs
assigned to batches
as in process costing.
Material Costs charged
to batches as in
job-order costing.
Material Costs charged
to batches as in
job-order costing.
Job-order
Costing
Process
Costing
Operation Costing
(Products produced in batches)

55. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
FIFO Method
Appendix 4A

56. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more
accurate that the weighted-average method)
differs from the weighted-average method in
two ways:
1.1. The computation of equivalent units.The computation of equivalent units.
2.2. The way in which the costs of beginningThe way in which the costs of beginning
inventory are treated in the costinventory are treated in the cost
reconciliation report.reconciliation report.
1.1. The computation of equivalent units.The computation of equivalent units.
2.2. The way in which the costs of beginningThe way in which the costs of beginning
inventory are treated in the costinventory are treated in the cost
reconciliation report.reconciliation report.

57. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Assume the following
activity is reported in Department A for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400
of Department A during June
Work in process, June 30 900 60% 30%

58. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – FIFO Method
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400
of Department A during June
Work in process, June 30 900 60% 30%
Step 1Step 1: Determine the number of units completed and
transferred out of Department A in June.

59. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – FIFO Method
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
Step 2Step 2: Add the equivalent units of production in ending
work in process inventory (540 units for material and 270
units for conversion) to the units completed and transferred
our during June.

60. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units – FIFO Method
Materials Conversion
Equivalent units or Production in
Department A during June 5,940 5,670
Equivalent units in beginning inventory
300 units × 40% 120
300 units × 20% 60
Equivalent units of Production in
Department A during June 5,820 5,610
Step 3Step 3: Subtract the equivalent units in beginning work in process
inventory (120 units for materials and 60 units for conversion) from the
sum of the units completed and transferred out and the equivalent
units in ending work in process inventory.

61. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Beginning
Work in Process
300 Units
40% Complete
EndingEnding
Work in ProcessWork in Process
900 Units900 Units
60% Complete60% Complete
6,000 Units Started
5,400 Units Started
and Completed
Equivalent Units – FIFO Method
MaterialsMaterials
Material
Units completed and transferred out 5,400
Equivalent units in ending WIP inventory 540
Equivalent units in beginning WIP inventory (120)
Equivalent units of production 5,820

62. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
6,000 Units Started
5,400 Units Started
and Completed
Beginning
Work in Process
300 Units
20% Complete
Ending
Work in Process
900 Units
30% Complete
Equivalent Units – FIFO Method
ConversionConversion
Conversion
Units completed and transferred out 5,400
Equivalent units in ending WIP inventory 270
Equivalent units in beginning WIP inventory (60)
Equivalent units of production 5,610

63. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equivalent Units: Weighted Average vs. FIFO
Materials Conversion
Equivalent units - weighted average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units × 40% 120
300 units × 20% 60
Equivalent units - FIFO method 5,820 5,610
As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the weighted-
average method to obtain the equivalent units of production under
the FIFO method.
As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the weighted-
average method to obtain the equivalent units of production under
the FIFO method.

64. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Let’s revisit the Double Diamond Skis Shaping and Milling
Department for the Month of May to prepare our production report.
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575
$15, 175
Production started during May 5,000 units
Production completed during May 4,800 units
Costs added to production in May
Materials cost $ 368,600
Conversion cost 350,900
Work in process, May 31 400 units
Materials: 40% complete
Conversion: 25% complete
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575
$15, 175
Production started during May 5,000 units
Production completed during May 4,800 units
Costs added to production in May
Materials cost $ 368,600
Conversion cost 350,900
Work in process, May 31 400 units
Materials: 40% complete
Conversion: 25% complete

65. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Step 1Step 1: Prepare the quantity schedule and compute
equivalent units.
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840

66. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Step 2Step 2: Calculate the equivalent units of material and conversion
that were transferred from beginning work in process to the next
department.
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840

67. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
Step 3Step 3: Determine the number of units started and
completed during the period.

68. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
Step 4Step 4: Calculate the equivalent units of material and
conversion that are in ending work in process inventory.

69. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Production Report - FIFO Method
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
Step 5Step 5: Calculate the total equivalent units for
materials and conversion.

70. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost per Equivalent Unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 368,600$ 350,900$
Equivalent units 4,960 4,900
Cost per equivalent unit 74.31$ 71.61$
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
Notice that the costs of beginning work in process
inventory of $15,175, is notnot broken down by
materials and conversion components

71. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost per Equivalent Unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 368,600$ 350,900$
Equivalent units 4,850 4,900
Cost per equivalent unit 76.00$ 71.61$
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
We divide the costs added in the Shipping and
Milling Department by the number of equivalent
unit for materials.

72. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost per Equivalent Unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 368,600$ 350,900$
Equivalent units 4,850 4,840
Cost per equivalent unit 76.00$ 72.50$
Total cost per equivalent unit = $76.00 + $72.50 = $148.50
We follow the same procedure for conversion and
add the two equivalent unit costs to get the total cost
per equivalent unit.

73. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost Reconciliation
Total Equivalent Units
Cost Materials Conversion
Work in process, May 1: 15,175$
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165
Started and completed in May 683,100 4,600 4,600
Work in process, May 31:
Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410
Total cost accounted for 734,675$
Step 1Step 1: Calculate the total cost from beginning
inventory transferred to the next department.

74. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Cost Reconciliation
Total Equivalent Units
Cost Materials Conversion
Work in process, May 1: 15,175$
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165
Started and completed in May 683,100 4,600 4,600
Work in process, May 31:
Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410
Total cost accounted for 734,675$
4,600 units × $148.50
Step 2Step 2: Calculate the cost of units started and
completed during the period.

75. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Total Equivalent Units
Cost Materials Conversion
Work in process, May 1: 15,175$
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165
Started and completed in May 683,100 4,600 4,600
Work in process, May 31:
Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410
Total cost accounted for 734,675$
Cost Reconciliation
All costs
accounted for
Step 3Step 3: Calculate the costs in ending working in process
inventory and the sum of the cost accounted for.

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End of Chapter 4