how to implement the technique in process costing

1. PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Process Costing
Chapter 04
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 4-2
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 costs.
• 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.

3. 4-3
Differences Between Job-Order and
Process Costing
Process costing:
1. Is used when a single product is produced on a
continuing basis or for a long period of time. Job-order
costing is used when many different jobs having different
production requirements are worked on each period.
2. Systems accumulate costs by department. Job-order
costing systems accumulated costs by individual jobs.
3. Systems compute unit costs by department. Job-order
costing systems compute unit costs by job on the job cost
sheet.

4. 4-4
Processing Departments
Any unit in an organization where materials, labor,
or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one department
to another.

5. 4-5
Comparing Job-Order and Process
Costing
Finished
Goods
Cost of
Goods
Sold
Work in
Process
Direct
Materials
Direct Labor
Manufacturing
Overhead

6. 4-6
Comparing Job-Order and Process
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

7. 4-7
Comparing Job-Order and Process
Costing
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

8. 4-8
Raw Materials
Process Cost Flows: The Flow of Raw
Materials (in T-account form)
Work in Process
Department B
Work in Process
Department A
•Direct
Materials
•Direct
Materials
•Direct
Materials

9. 4-9
Process Cost Flows: The Flow of Labor
Costs (in T-account form)
Work in Process
Department B
Work in Process
Department A
Salaries and
Wages Payable
•Direct
Materials
•Direct
Materials
•Direct
Labor
•Direct
Labor •Direct
Labor

10. 4-10
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (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

11. 4-11
Process Cost Flows: Transfers from
WIP-Dept. A to WIP-Dept. B (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
Department
A
Department
B

12. 4-12
Finished Goods
Process Cost Flows: Transfers from WIP-Dept.
B to Finished Goods (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

13. 4-13
Finished Goods
Cost of Goods Sold
Process Cost Flows: Transfers from Finished
Goods to COGS (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
Sold
•Cost of
Goods
Sold
•Cost of
Goods
Manufactured

14. 4-14
Equivalent Units – The Basic Idea
Two half completed products are
equivalent to one complete product.
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
+ = 1

15. 4-15
Compute Equivalent Units of Production
1. The general equation :
a. Units in beginning work in process inventory +
Units started into production or transferred in
=
Units in ending work in process inventory +
Units completed and transferred out
b. Cost of beginning work in process inventory +
Costs added to production during the period
=
Cost of ending work in process inventory +
Cost of units transferred out

16. 4-16
Compute Equivalent Units of
Production
2. Equivalent units
= Number of partially completed units x Percentage
completion
• A department’s equivalent units :
(a separate calculation is made for each cost category in each processing
department)
3. Equivalent units of production :
= (Units transferred to the next department or to
finished goods) + (Equivalent units in ending work
in process inventory)

17. 4-17
Treatment of Direct Labor
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct
Materials
Type of Product Cost
Dollar
Amount
Direct
Labor
Manufacturing
Overhead

18. 4-18
Treatment of Direct Labor
Type of Product Cost
Dollar
Amount
Conversion
Direct labor and
manufacturing
overhead may be
combined into
one classification
of product
cost called
conversion costs.
Direct
Materials
Direct
Labor
Direct
Labor
Manufacturing
Overhead

19. 4-19

20. 4-20
Compute Equivalent Units of
Production
Percent Complete
Shaping and Milling Department Units Materials Conversion
Beginning work in process inventory . . . . . . .
Units started into production during May . . . .
Units completed during May and
transferred to the next department . . . . . . .
Ending work in process inventory . . . . . . . . . .
200
5,000
4,800
400
55%
100%*
40%
30%
100%*
25%
* We always assume that units transferred out of a department
are 100% complete with respect to the processing done in that
department.

21. 4-21
Compute Equivalent Units of
Production
Shaping and Milling Department Materials Conversion
Units transferred to the next department . . ……
Ending work in process inventory:
Materials: 400 units x 40% complete . . . . ….
Conversion: 400 units x 25% complete . . . ..
Equivalent units of production . . . . . . . . . . .. ….
4,800
160
4,960
4,800
100
4,900

22. 4-22
Compute Costs per equivalent unit
A separate calculation is made for each
cost category in each processing department
• Cost per equivalent unit
= (Cost of beginning work in process inventory
+ Cost added during the period)
: Equivalent units of production

23. 4-23
Compute Costs per equivalent unit
Shaping and Milling Department Data for May Operations
Beginning work in process inventory:
Units in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Completion with respect to materials . . . . . . . . . . . . . . . .
Completion with respect to conversion . . . . . . . . . . . . . . .
Costs in beginning work in process inventory:
Materials cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost in beginning work in process inventory . . . . . .
Units started into production during the period . . . . . . . . . .
Costs added during the period:
Materials cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost added during the period . . . . . . . . . . . . . . . . . . .
200 units
$ 9,600
5,575
$ 15,175
5,000 units
$ 368,600
350,900
$ 719,500
55%
30%

24. 4-24
Compute Costs per equivalent unit
Shaping and Milling Department Costs per Equivalent Unit
Materials Conversion
Cost of beginning work in process inventory . . . . . .
Costs added during the period . . . . . . . . . . . . . . . . . .
Total cost (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equivalent units of production
(see Table before) (b) . . . . . . . . . . . . . . . . . . . . . . . .
Cost per equivalent unit (a) : (b) . . . . . . . . . . . . . . . . .
$ 9,600
368,600
$ 378,200
4,960
$ 76.25
$ 5,575
350,900
$ 356,475
4,900
$ 72.75

25. 4-25
Applying Costs
Shaping and Milling Department Costs of Ending Work in Process
Inventory and the Units Transferred Out
Materials Conver
sion
Total
Ending work in process inventory:
Equivalent units of production
Materials: 400 units, 40% complete;
Conversion: 400 units, 25% complete) (a) . . . .
Cost per equivalent unit (b) . . . . . . . . . . . . . . . . . . .
Cost of ending work in process inventory (a) x (b)
Units completed and transferred out:
Units transferred to the next department (a) . .
Cost per equivalent unit (see above) (b) . . . . . . . .
Cost of units transferred out (a) x (b) . . . . . . . . . .
160
$ 76.25
$ 12,200
4,800
$ 76.25
$366,000
100
$ 72.75
$ 7,275
4,800
$ 72.75
$349,200
$19,475
$715,200

26. 4-26
Cost Reconciliation Report
Shaping and Milling Department Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory . . . . . . . . . . . . . . .
Costs added to production during the period . . . . . . . . . . . . . .
Total cost to be accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs accounted for as follows:
Cost of ending work in process inventory . . . . . . . . . . . . . . . . . .
Cost of units transferred out (see above) . . . . . . . . . . . . . . . . . . .
Total cost accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,175
719,500
$ 734,675
$ 19,475
715,200
$ 734,675

27. 4-27
Operation Costing
• Between these two extremes (job-order costing
and process costing) there are many hybrid
systems that include characteristics of both
job-order and process costing. One of these
hybrids is called operation costing.

28. 4-28
End of Chapter 04