5. Used for production of small,
identical, low-cost items.
Mass produced in automated
continuous production process.
Costs cannot be directly traced
to each unit of product.
Process Manufacturing
Operations
C1
6. Job Order Systems
Custom orders
Heterogeneous
products
Low production volume
High product flexibility
Low to medium
standardization
Process Systems
Repetitive operations
Homogeneous products
High production volume
Low product flexibility
High standardization
Comparing Job Order and
Process Production
A1
9. Same objective: to determine
the cost of products
Same inventory accounts: raw materials,
work in process, and finished goods
Same overhead assignment method:
predetermined rate times actual activity
Job and Process Costing
Similarities
A1
10. Job and Process Costing
Similarities and Differences
A1
Journal entries for
both job order and
process costing
are the identical
The difference
between job
order and
process costing
lies in how the
cost of goods
transferred to
finished goods
is determined.
11. A1 Job Order and Process
Costing Differences
Job order costing
The cost of goods
transferred to
finished goods is
equal to the sum of
all of the completed
jobs for that period
Process costing
The cost of goods
transferred to finished
goods equals the
number of completed
units times the cost
per equivalent unit
12. Costs are accumulated for a period of
time by process or department.
Unit cost is computed by dividing the
accumulated costs by the number of
equivalent units produced in the period.
Equivalent Units of Production
C2
13. Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
Two one-half full pitchers are
equivalent to one full pitcher.
+ =
Equivalent Units of Production
C2
14. For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
Question
C2
15. For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
10,000 units + (5,000 units × .30)
= 11,500 equivalent units
Question
C2
17. Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
C2
Question
18. Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
Question
C2
19. Equivalent units may be
different for material and labor
and overhead at different
stages of a process.
At completion of Stage 1 of the process, material
is 40% complete, but labor and overhead are only
25% complete.
Stage 1
40% of
Material
25% of
Labor and
Overhead
Equivalent Units
C2
20. Stage 2
25% of
Labor and
Overhead
60% of
Material
Stage 1
40% of
Material
25% of
Labor and
Overhead
+
+
=
=
100%
50%
Equivalent Units
C2
21. Stage 3
50% of
Labor and
Overhead
The process is now complete.
Stage 2
25% of
Labor and
Overhead
60% of
Material
Stage 1
40% of
Material
25% of
Labor and
Overhead
Equivalent Units
C2
22. GenX makes a
product called
Profen
Process Manufacturing
Operations GenX Example
C3
24. Let’s look at
actual units
processed and
actual costs
incurred for
GenX.
Accounting for GenX
C3
25. GenX Production Data for April
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct materials 100%
Percentage of completion - direct labor 40%
Units started in April 90,000
Units transferred from grinding to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct materials 100%
Percentage of completion - direct labor 25%
Accounting for GenX
C3
27. GenX uses a weighted average cost flow
system with the following four steps:
Determine physical flow of units.
Compute equivalent units of production.
Compute cost per equivalent unit.
Assign and reconcile costs.
Accounting for GenX
C5
28. GenX Physical Flow for April
Units to account for:
Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000
Units accounted for as:
Units transferred from grinding to mixing 100,000
Ending inventory 20,000
Total number of units 120,000
Determine Physical Flow of
Units
C5
29. GenX Physical Flow for April
Units to account for:
Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000
Units accounted for as:
Units transferred from grinding to mixing 100,000
Ending inventory 20,000
Total number of units 120,000
Determine Physical Flow of
Units
C5
These two amounts are
reconciled
30. GenX
Direct Materials Equivalent Units of Production for April
Units of Percentage Equivalent
Product of Completion Units
Equivalent units completed and
transferred out 100,000 100% 100,000
Ending goods in process 20,000 100% 20,000
Total units 120,000 120,000
Compute Equivalent
Units of Production - Materials
C5
31. GenX Direct Labor and Factory
Overhead Equivalent Units of Production for April
Units of Percentage Equivalent
Product of Completion Units
Equivalent units completed and
transferred out 100,000 100% 100,000
Ending goods in process 20,000 25% 5,000
Total units 120,000 105,000
Compute Equivalent
Units of Production – Direct
Labor and Factory Overhead
C5
32. Equivalent Units of Production for April
Direct Direct Factory
Materials Labor Overhead
Equivalent units completed and
tramsferred out 100,000 100,000 100,000
Equivalent units for ending
ending good in process 20,000 5,000 5,000
Equivalent units of production
for period 120,000 105,000 105,000
Compute Equivalent
Units of Production
C5
33. GenX
Cost Per Equivalent Unit for April
Direct Direct Factory
Materials Labor Overhead
Costs of beginning goods
in process inventory 3,300
$ 600
$ 720
$
Costs incurred this period 9,900 5,700 6,840
Total costs 13,200
$ 6,300
$ 7,560
$
÷ Equivalent units of
production ÷ 120,000 ÷ 105,000 ÷ 105,000
Cost per equivalent unit
of production = 0.11
$ = 0.06
$ = 0.072
$
Compute Cost Per Equivalent
Unit
C5
34. In the cost reconciliation, we will
account for all costs incurred
by assigning unit costs to the:
A. 100,000 units transferred out.
B. 20,000 units remaining in ending
inventory.
Cost Reconciliation
C5
38. Process
Cost
Summary
Process Cost Summary
Helps managers
control their
departments.
Provides cost
information for
financial
statements.
Shows the flow
of units and costs
through work in
process.
Helps factory
managers evaluate
department manager
performance.
C4
39. We will illustrate the process cost
summary for GenX in three sections:
Costs charged to production.
Equivalent unit of production and costs per
equivalent unit.
Cost assignment and reconciliation
Process Cost Summary
C4
44. Hybrid costing systems contain features
of both job order and process operations.
Job Order
Costing
Process
Costing
Hybrid Costing
Material costs are
accounted for using
a job order system.
Conversion costs are
accounted for using
a process system.
Hybrid Costing Systems
A2
45. Let’s look at the accounting
journal entries for a process
cost system. We’ll omit the
numbers so that we can focus
on accounts.
Process Costing
Typical Accounting Entries
C4
46. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Raw Materials Inventory XXXXX
Accounts Payable XXXXX
Acquired materials on credit for
use in the factory.
P1 Process Costing
Typical Accounting Entries
47. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Goods in Process Inventory XXXXX
Raw Materials Inventory XXXXX
To assign costs of direct material
used in production
P1 Process Costing
Typical Accounting Entries
48. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Factory Overhead XXXXX
Raw Materials Inventory XXXXX
To record indirect materials used
in April.
P3 Process Costing
Typical Accounting Entries
49. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Factory Payroll XXXXX
Cash XXXXX
To record factory wages for April.
P2 Process Costing
Typical Accounting Entries
50. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Goods in Process Inventory XXXXX
Factory Payroll XXXXX
To assign costs of direct labor
used in production
P1 Process Costing
Typical Accounting Entries
51. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Factory Overhead XXXXX
Factory Payroll XXXXX
To record indirect labor as
overhead.
P3 Process Costing
Typical Accounting Entries
52. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Factory Overhead XXXXX
Prepaid Insurance XXXXX
Accrued Utilities Payable XXXXX
Cash XXXXX
Accumulated Depreciation XXXXX
To record factory overhead items
incurred during April.
P3 Process Costing
Typical Accounting Entries
53. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Goods in Process Inventory XXXXX
Factory Overhead XXXXX
Allocated factory overhead costs to
production on the basis of direct
labor cost
P6 Process Costing
Typical Accounting Entries
54. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Finished Goods Inventory XXXXX
Goods in Process Inventory XXXXX
To record the transfer of completed
goods out of production.
P6 Process Costing
Typical Accounting Entries
55. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Cost of Goods Sold XXXXX
Finished Goods Inventory XXXXX
To record cost of goods sold
during April.
P6 Process Costing
Typical Accounting Entries
This chapter focuses on how to measure and account for costs in process operations. We explain process production, describe how to assign costs to processes, and compute cost per equivalent unit for a process.
Process costing is used to determine the unit costs of small, low-cost items. We could not justify the use of job order costing for such small items.
On the left you see characteristics of a job order system that you learned in the previous chapter. Compare the characteristics of a process costing system on the right with those of a job order system. In a job order system, the focus is on the job, while in a process system, the focus is on the process.
Recall that in a job order system we trace direct material costs and direct labor costs to jobs. Factory overhead is an indirect cost that we allocate to jobs using a predetermined overhead rate.
In a process cost system, we trace direct material costs and direct labor costs to the process. Factory overhead is an indirect cost that we allocate to the process using a predetermined overhead rate. Once the costs are properly accumulated in the process, we will divide these costs by the units processed to get the cost per unit for the period.
There are a great number of similarities between job order and process costing, so we will use many of the same concepts we learned in Chapter 15 as we study process costing.
All of the journal entries – for the acquisition and use of raw materials, the acquisition and use of labor, the incurring and allocation of fixed overhead, and the transfer of completed goods from goods in process to finished goods – are identical.
The difference lies in how to determine the cost of completed goods.
Direct material, direct labor, and factory overhead costs are accumulated for a process for a production period. Once the costs are properly accumulated in the process, we will divide these costs by the equivalent units processed to get the cost per unit for the period. The concept of equivalent units can cause some difficulty, so we will use several examples to illustrate its use in process cost systems.
Equivalent units is a term that refers to the number of units that would have been completed if all of the effort during a period had been applied only to the units started in that period. For example, four thousand units that are sixty percent complete would total two thousand four hundred equivalent units (sixty percent of four thousand is two thousand four hundred).
Take a few minutes to answer the following two questions. They deal with calculating and using equivalent units. Check your progress on these concepts before moving on.
Here is the first of your two questions.
.
The number of equivalent units is equal to the number of units completed plus the number of units remaining in ending goods in process times the completion percentage for those incomplete units.
Total production costs for a production period are divided by the equivalent units produced for the period to get the cost per unit.
Here is your second question.
Total production costs are divided by the equivalent units produced for the period to get the cost per unit.
If materials, labor and overhead are added at different rates in the process, the completion percentages will be different. Multiplying different percentages times the unfinished units will result in different equivalent units for materials, labor and overhead.
In this example, we see that material is added before labor and overhead, resulting in a higher completion percentage. This is not unusual as material must be present first before the work can begin. Think about baking cookies. All of the ingredients (materials) are present before the processing begins in the oven.
Once all of the labor and overhead are added to the materials in the process, the units are complete.
Let’s look at an example illustrating the flow of units and costs in a process system.
Direct materials and direct labor are traced to the processes. Factory overhead items are indirect and must be allocated to the process using a predetermined overhead rate.
Now let’s add numbers of units and dollars of costs to the example. We will examine the two processing departments in order of the production and cost flows, Grinding.first, and then Mixing.
Here we see the units processed and the completion percentages. Take a minute to become familiar with these numbers before moving on to the cost information. Process costing applications include lots of numbers and computations, so you may find yourself referring back to this given information as we work through the example.
The beginning inventory costs were incurred in March for the partially completed units left in ending inventory in Grinding. March’s ending inventory in Grinding becomes April’s beginning inventory. The current period’s costs were incurred in Grinding to complete the beginning inventory and to start additional units.
As with all situations involving inventory costs, we must choose a cost flow method. We will use the weighted average method for GenX,. Process cost applications can be overwhelming if we do not use a well-planned approach. The four-step procedure will enable us to solve a process cost application in manageable parts.
The beginning inventory of units plus the units started in April equal the total units to account for in the Grinding process for April. The total number of units is either completed and transferred to Mixing or is left partially completed in Grinding.
To convert units to equivalent units, we multiply by the appropriate percentage. Since the materials are added at the start of the period, the physical units ending goods in process have 100% of the materials attached to them.
Now that we have completed the equivalent units computations for material, we can move on to labor and overhead. We can compute equivalent units for labor and overhead at one time since both labor and overhead have the same completion percentages.
The equivalent units computation for material, labor, and overhead from the preceding computations are summarized in this table. Notice that the equivalent units for material differs from the equivalent units for labor and overhead because the completion percentages differed.
Costs for April are divided by the equivalent units for April to get the cost per equivalent unit.
Now that we have completed the computations for equivalent units and for costs per equivalent unit, we can use those results to compute the cost of the one hundred thousand units completed and transferred out and the cost of the partially completed units remaining in the process at the end of April.
We add the beginning inventory costs to the costs incurred for April to get the total costs to be accounted for in Grinding.
The cost of the units completed equal the cost of the 100,000 equivalent units of production for the direct materials, direct labor and factory overhead.
The ending inventory cost in Grinding is the sum of direct material, direct labor and factory overhead costs. The number of equivalent units for each product cost is multiplied by the respective unit cost. For example, the direct labor cost in ending inventory, three hundred dollars, is computed by multiplying five thousand equivalent units times 60 cents per unit. The total costs accounted for, twenty seven thousand sixty five dollars, is equal to the total costs to account for, twenty seven thousand sixty dollars.
The computations of equivalent units, unit costs, and cost assignments to units completed and transferred, and to units remaining in ending inventory are summarized in a report called the process cost summary. In addition to providing inventory costs for financial statements, this report helps managers evaluate performance and control department operations,.
The process cost summary has three parts: (1) costs charged to production; (2) computation of equivalent units and cost per equivalent unit; and (3) the cost assignment to unfinished units remaining in process and to units completed and transferred.
Costs charged to production for April include the costs in beginning inventory and the costs for direct material, direct labor, and factory overhead that are incurred in April.
The first portion of the Process Cost Summary summarizes the flow of units and the computation of equivalent units for each product cost. In the lower portion, you see the computation of cost per equivalent unit for each product cost for April.
Here we see the computation of the cost of the 100,000 units completed and transferred out.
The ending inventory cost is the sum of direct material, direct labor and factory overhead costs for the unfinished units. The number of equivalent units for each product cost is multiplied by the respective unit cost. For example, the factory overhead cost in ending inventory, three hundred sixty dollars, is computed by multiplying five thousand equivalent units times point zero seven two per unit. The total costs accounted for are twenty seven thousand sixty dollars, which is equal to the twenty seven thousand sixty dollars to account for.
Hybrid costing includes features of both job order and process costing. Material costs are traced directly as in job order costing, but conversion costs (labor and overhead) are accounted for in the same manner as used in process costing.
The following journal entries illustrate the recording process for a process cost system.
To record material purchased on account, we increase the raw materials inventory account with a debit entry and we increase accounts payable with a credit entry.
When direct material is used, we increase goods in process with a debit entry and decrease the raw materials inventory account with a credit entry.
When indirect materials are used, we charge the factory overhead account using a debit entry and decrease the raw materials inventory account with a credit entry.
When salaries and wages are paid, we record the amount in the factory payroll account with a debit entry and we reduce cash with a credit entry.
The portion of factory payroll that is classified as direct labor increases the goods in process inventory accounts which is accomplished with a debit entry.
The portion of factory payroll that is classified as indirect direct labor increases the factory overhead account, a debit entry.
Other actual costs for factory overhead items are recorded with a debit entry to the factory overhead account. Prepaid insurance is an asset account that is reduced with a credit as the insurance coverage is used. Accrued liabilities payable is a liability account that is increased with a credit. Cash is an asset account that is reduced with a credit indicating that cash has been paid. Accumulated depreciation is a contra asset account that is increased with a credit to reflect the adjusting entry for depreciation on factory buildings and equipment..
Factory overhead is applied to the process using a predetermined overhead rate, resulting in an increase in the goods in process inventory account.
Completed units are transferred from production to the finished goods inventory account. We record the increase in finished goods with a debit entry and we record the decrease in goods in process with a credit entry.
When the completed units are sold, we reduce the finished goods inventory account with a credit entry. Cost of goods sold is an expense account that is recorded with a debit entry.
Now that we have mastered the basic concepts of Process Cost Accounting, we are ready to move on to the next chapter.
