2. Chapter 11
Process Costing

3. Learning Objectives
Identify the types of firms or operations for which a process costing system is most suitable
Explain and calculate equivalent units
Describe the five steps in process costing
Demonstrate the weighted-average method of process costing

4. Learning Objectives Demonstrate the FIFO method of process costing
Analyze process costing with multiple departments
Prepare journal entries to record the flow of costs in a process costing system

5. Learning Objectives
Explain how process costing systems are implemented and enhanced in practice
Account for spoilage in process costing

6. Learning Objective One
Identify the types of firms or operations for which a process costing system is most suitable

7. Types of Businesses Using Process Costing
Chemicals
Oil refining
Textiles
Paints
Flour
Canneries
Rubber
Steel
Food processing

8. Characteristics of Process Costing
Direct Materials
Direct labor costs are usually small in comparison to other product
costs in process cost systems.
Factory Overhead
Dollar Amount
Direct Labor
Type of Product Cost

9. Characteristics of Process Costing
Direct Materials
Direct labor costs are usually small in comparison to other product
costs in process cost systems.
Conversion
Dollar Amount
Type of Product Cost
So, direct labor and factory overhead are often combined into one product cost called conversion.

10. Comparing Job Costing and Process Costing
Costs accumulated by the job.
Work in process has a job cost record for each job.
Many unique jobs.
Jobs built to customer order.
Process costing
Costs accumulated by department or process.
Work in process has a production report for each batch of products.
Homogenous products.
Units continuously produced for inventory in automated process.

11. Comparing Job Costing and Process Costing
Work in process contains individual jobs in a job cost system.
Direct Materials
Finished Goods
Work in Process
Direct Labor
Factory Overhead
Cost of Goods Sold

12. Comparing Job Costing and Process Costing
Work in process contains homogenous products in a process cost system.
Direct Materials
Direct Labor & Overhead (Conversion)
Finished Goods
Products
Cost of Goods Sold

13. Comparing Job Costing and Process Costing
Same objective: determine the cost of products
Same objective: determine the cost of products
Same Inventory accounts: raw materials, work in process, and finished goods
Same Inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method: predetermined rate times actual activity
Same overhead assignment method: predetermined rate times actual activity

14. Characteristics of Process Costing
Process costing accumulates costs by process or department and then assigns them to a large number of nearly identical products.
Similar processes
Continuous mass production
Homogeneous products
Unit cost =
Process costs Equivalent units produced

15. Learning Objective Two
Explain and calculate equivalent units

16. Equivalent Units Same objective: determine the cost of products
We must now deal with the concept of equivalent units.
Same objective: determine the cost of products
Equivalent units is a concept expressing partially complete units as a smaller number of fully complete units.
Same Inventory accounts: raw materials, work in process, and finished goods
Cost per equivalent unit =
Manufacturing costs for a period Equivalent units for the period
Same overhead assignment method: predetermined rate times actual activity

17. Two one-half filled cups are equivalent to one full cup.
Equivalent Units
Two one-half filled cups are equivalent to one full cup. + = 1
So, 10,000 units 70 percent complete are equivalent to 7,000 complete units.

18. Equivalent Units
During its first month of business, 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 month?
a. 10,000
b. 11,500
c. 13,500
d. 15,000

19. Equivalent Units
During its first month of business, 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 month?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units × .30) = 11,500 equivalent units

20. Cost per Equivalent Units
Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’ cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90

21. Cost per Equivalent Units
Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’ cost per equivalent 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

22. Learning Objective Three
Describe the five steps in process costing

23. Five Steps in Process Costs
Analyze the physical flow of physical units.
Calculate equivalent units of production for all manufacturing cost elements.
Determine total cost for each manufacturing cost element.
Compute cost per equivalent unit for each manufacturing cost element.
Assign the total manufacturing costs to units completed and units of work in process at the end of the period.
These five steps are the basis for the production cost report as we will see in the following examples.

24. Learning Objective Four
Demonstrate the weighted-average method of process costing

25. Weighted-Average Costing
The weighted average method . . .
Makes no distinction between work done in the prior period and work done in the current period.
Blends together units and costs in beginning inventory with units and costs in the current period.
Let’s look at an example using data from the Molding Department of Hsu Toy Company for the month of June.

26. Example for Weighted-Average Costing

27. Weighted-Average Costing
First let’s look at a flow chart showing the blending of units in beginning work in process inventory with units started during the month.

28. Step 1: Analyze the Physical Units Weighted-Average Costing
Beginning
Inventory 10,000 units
Ending Inventory 6,000 units
44,000 units completed
50,000 units in process
40,000 units started
Now let’s examine the five-step process.

29. Step 2: Calculate Equivalent Units Weighted-Average Costing

30. Step 2: Calculate Equivalent Units Weighted-Average Costing
Units completed and transferred are 100% complete for material, labor, and overhead.

31. Step 2: Calculate Equivalent Units Weighted-Average Costing
100% of 6,000 units
50% of 6,000 units
60% of 6,000 units

32. Step 2: Calculate Equivalent Units Weighted-Average Costing

33. Step 3: Determine Total Costs Weighted-Average Costing

34. Step 4: Calculate Unit Costs Weighted-Average Costing
$54,000 ÷ 50,000 equivalent units
$23,500 ÷ 47,000 equivalent units
$45,220 ÷ 47,600 equivalent units

35. Step 5: Assign Total Costs Weighted-Average Costing
44,000 equivalent $1.08
44,000 equivalent $0.50
44,000 equivalent $0.95

36. Step 5: Assign Total Costs Weighted-Average Costing
6,000 equivalent $1.08
3,000 equivalent $0.50
3,600 equivalent $0.95

37. Step 5: Assign Total Costs Weighted-Average Costing

38. Learning Objective Five
Demonstrate the FIFO method of process costing

39. First-In, First-Out (FIFO) Costing
Distinguishes between work done in the prior period and work done in the current period.
Assumes units in beginning work in process inventory are completed and transferred first.

40. FIFO Costing Advantages of FIFO costing
Managers can better identify and manage current period costs.
Inventory costs are more current as current period costs are assigned to units in process and units completed.

41. FIFO Costing
Let’s revisit the Molding Department of Hsu Toy company for the month of June. We will use the same data as before, but now we will use FIFO costing.

42. Example for FIFO Costing

43. FIFO Costing (continued)
First let’s look at a flow chart showing the flow of units in beginning work in process inventory and the flow of units started during the month.

44. Step 1: Analyze the Physical Units FIFO Costing
Beginning
Inventory 10,000 units
10,000 units
completed
44,000 units completed
40,000 units started
34,000 units
completed
Ending Inventory 6,000 units
Now let’s examine the five-step process.

45. Step 2: Calculate Equivalent Units FIFO Costing

46. Step 2: Calculate Equivalent Units FIFO Costing
All material added in prior period for units in beginning WIP
70% of 10,000 units
60% of 10,000 units

47. Step 2: Calculate Equivalent Units FIFO Costing
100% of material, labor, and overhead is incurred in June for units started and completed in June.

48. Step 2: Calculate Equivalent Units FIFO Costing
50% of 6,000 units
100% of 6,000 units
60% of 6,000 units

49. Step 2: Calculate Equivalent Units FIFO Costing

50. Step 3: Determine Total Costs FIFO Costing

51. Step 4: Calculate Unit Costs FIFO Costing
$43,600 ÷ 43,600 equivalent units
$44,000 ÷ 40,000 equivalent units
$22,440 ÷ 44,000 equivalent units

52. Step 5: Assign Total Costs FIFO Costing

53. Step 5: Assign Total Costs FIFO Costing
All material added in prior period for beginning WIP
7,000 equivalent $0.51
6,000 equivalent $1.00

54. Step 5: Assign Total Costs FIFO Costing
34,000 equivalent $1.10
34,000 equivalent $0.51
34,000 equivalent $1.00

55. Step 5: Assign Total Costs FIFO Costing
6,000 equivalent $1.10
3,000 equivalent $0.51
3,600 equivalent $1.00

56. Step 5: Assign Total Costs FIFO Costing

57. Which is Better: FIFO or Weighted-Average
FIFO costing results in a current period cost that can be used for performance evaluation.
If there is no beginning inventory (JIT) or if beginning inventory is small, FIFO and weighted-average produce the same results.

58. Learning Objective Six
Analyze process costing with multiple departments

59. Costs Transferred in from Prior Departments
Multiple departments in a process result in units and costs that are transferred from a prior department to the current department.
These transferred-in costs are treated exactly like a direct material that is added at the beginning of a production process.

60. Costs Transferred in from Prior Departments
Let’s revisit Hsu Toy Company with the addition of transferred-in units and costs. We will transfer units from the Molding Department to the Finishing Department.
The Finishing Department uses:
Conversion cost (a combination of labor and overhead).
The weighted-average method.

61. Costs Transferred in from Prior Departments

62. Costs Transferred in from Prior Departments (Step 1)

63. Costs Transferred in from Prior Departments (Step 2)
100% complete for material, conversion, and transferred-in units.

64. Costs Transferred in from Prior Departments (Step 2)
50% of 8,000 units
Transferred-in units are 100% complete

65. Costs Transferred in from Prior Departments (Step 2)

66. Costs Transferred in from Prior Departments (Step 3)

67. Costs Transferred in from Prior Departments (Step 4)
$25,000 ÷ 50,000 equivalent units
$145,570 ÷ 58,000 equivalent units
$54,000 ÷ 54,000 equivalent units

68. Costs Transferred in from Prior Departments (Step 5)
50,000 equivalent $0.50
50,000 equivalent $2.5099
50,000 equivalent $1.00

69. Costs Transferred in from Prior Departments (Step 5)
Rounding Error
0 equivalent $0.50
8,000 equivalent $2.5099
4,000 equivalent $1.00

70. Costs Transferred in from Prior Departments (Step 5)

71. Learning Objective Seven
Prepare journal entries to record the flow of costs in a process costing system

72. Direct Materials were Requisitioned and Used
Work-in-Process Inventory—Molding Dept. 44,000
Work-in-Process Inventory—Finishing Dept. 25,000
Materials Inventory ,000
To record direct materials costs added during June.

73. Direct Labor Incurred Work-in-Process Inventory—Molding Dept. 27,440
Work-in-Process Inventory—Finishing Dept. 23,500
Accrued Payroll ,940
To record direct labor costs incurred during June.

74. Factory Overhead Applied
Work-in-Process Inventory—Molding Dept. 43,600
Work-in-Process Inventory—Finishing Dept. 23,500
Factory Overhead Applied ,100
To record the application of factory overhead to departments.

75. Transferred-in Costs from the Molding Department
Work-in-Process Inventory—Finishing Dept. 111,320
Work-in-Process Inventory—Molding Dept ,320
To record the weighted-average method of the cost of goods completed in the molding department and transferred out to the finishing department.

76. Units Completed
Finished Goods Inventory ,490
Work-in-Process Inventory—Finishing Dept ,490
To record the weighted-average method of the cost of goods completed in the finishing department.

77. Learning Objective Nine
Account for spoilage in process costing

78. Spoilage in Process Costing
Normal Spoilage occurs under efficient operating conditions. These costs are absorbed by the good units produced.
Abnormal spoilage exceed expected losses under efficient operating conditions and is charged as a loss to operations in the period detected.

79. End of Chapter Eleven