1. Systems Design: Process Costing
Chapter4
Systems Design: Process Costing

2. Types of Costing Systems Used to Determine Product Costs
Process Costing
Job-order Costing
Many units of a single, homogeneous product flow evenly through a continuous production process.
One unit of product is indistinguishable from any other unit of product..
Each unit of product is assigned the same average cost.
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill

3. Differences Between Job-Order and Process Costing
Job order costing
Many jobs are worked during the period.
Costs are accumulated by individual jobs.
Job cost sheet is the key document.
Unit cost computed by job.
Process costing
A single product is produced for a long period of time.
Costs are accumulated by departments.
Department production report is key document.
Unit costs are computed by department.

4. Sequential Processing Departments
Start
Basic raw materials
Processing Department 1
Processing costs
Processing Department 2
Partially completed goods
Processing costs
Processing Department 3
Partially completed goods
Processing costs
Finished Goods
Completed goods

5. Parallel Processing Departments
Start
Basic raw materials
Processing Department 1
Processing costs
Processing Department A
Processing Department 2
Partially completed goods
Processing costs
Processing Department 3
Partially completed goods
Processing costs
Finished Goods
Completed goods

6. Flow of Materials, Labor and Overhead Costs
Direct Material
Processing
Department
Finished Goods
Direct Labor
ManufacturingOverhead
Cost of Goods Sold

7. Flow of Materials, Labor and Overhead Costs
Work in Process Mixing Department
Raw Materials
Direct Material
Direct Material
Purchases
Indirect Material
Indirect Material
Manufacturing Overhead
Work in Process Finishing Department
Actual
Applied
Other Overhead

8. Flow of Materials, Labor and Overhead Costs
Work in Process Mixing Department
Wages Payable
Direct Material
Direct Labor
Direct Labor
Indirect Labor
Indirect Labor
Manufacturing Overhead
Work in Process Finishing Department
Actual
Applied
Direct Material
Other Overhead
Indirect Material

9. Flow of Materials, Labor and Overhead Costs
Work in Process Mixing Department
Wages Payable
Direct Material
Direct Labor
Direct Labor
Indirect Labor
Overhead Applied to Work in Process
Applied Overhead
Manufacturing Overhead
Work in Process Finishing Department
Actual
Applied
Direct Material
Other Overhead
Direct Labor
Indirect Material
Indirect Labor

10. Flow of Materials, Labor and Overhead Costs
Now, let’s transfer the partially completed goods from Mixing Department to Finishing Department.

11. Flow of Materials, Labor and Overhead Costs
Work in Process Mixing Department
Work in Process Finishing Department
Direct Material
Transferred to Finishing
Transferred from Mixing
Direct Material
Direct Labor
Direct Labor
Applied Overhead
Applied Overhead

12. Flow of Materials, Labor and Overhead Costs
The goods have been completed in the Finishing Department and will be transferred to Finished Goods Inventory when they are ready to be sold.

13. Flow of Materials, Labor and Overhead Costs
Work in Process Finishing Department
Finished Goods
Direct Material
Cost of Goods Manufactured
Cost of Goods Sold
Direct Labor
Applied Overhead
Transferred from Dept. A
Cost of Goods Sold

14. Materials, Labor, and Overhead Cost Entries

15. Flow of Materials, Labor and Overhead Costs

16. Flow of Materials, Labor and Overhead Costs

17. Flow of Materials, Labor and Overhead Costs

18. Flow of Materials, Labor and Overhead Costs

19. Flow of Materials, Labor and Overhead Costs

20. Equivalent Units of Production
Equivalent units are partially complete and are part of work in process inventory. It is the concept of expressing partially completed products as a smaller number of fully completed units. + =
Two one-half completed products are equivalent to one completed product. So, 10,000 units 70% complete are equivalent to 7,000 complete units.

21. Quick 
For the current period, Matrix 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 Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000

22. Quick 
For the current period, Matrix 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 Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units × .30) = 11,500 equivalent units

23. Equivalent Units of Production
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

24. Quick 
Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90

25. Quick 
Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s 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

26. Weighted Average Method
Under the weighted-average method equivalent units will always be calculated as follows:

27. Weighted Average Method
Matrix, Inc. reported the following activity in Mixing Department for the month of June:

28. Weighted Average Method
Equivalent units are calculated as follows:

29. Weighted Average Method
Equivalent units are calculated as follows:

30. Weighted Average Method
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Equivalent units are calculated as follows:

31. Weighted Average Method
Materials
6,000 Units Started
Beginning Work in Process 300 Units 40% Complete
Ending Work in Process 900 Units 60% Complete
5,100 Units Started and Completed
5,400 Units Completed
5,400 Units Completed
900 × 60%
540 Equivalent Units
5,940 Equivalent units of production

32. Weighted Average Method
Conversion
6,000 Units Started
Beginning Work in Process 300 Units 40% Complete
Ending Work in Process 900 Units 30% Complete
5,100 Units Started and Completed
5,400 Units Completed
900 × 30%
270 Equivalent Units
5,670 Equivalent units of production

33. Production Report Production Report Section 1 Section 2 Section 3
Quantity schedule with computation of equivalent units.
Section 1
A computation of cost per equivalent unit.
Section 2
A reconciliation of cost flows for the period.
Section 3

34. Production Report Example
Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.
Double Diamond uses the weighted average cost procedure.
Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

35. Production Report Example
Work in process, May 1: units
Materials: 50% complete $ 3,000
Conversion: 30% complete ,000
Units started into production in May: 5,000
Units completed and transferred out in May: 4,800
Costs added to production in May
Materials cost $ 74,000
Conversion cost ,000
Work in process, May 31: units
Materials % complete.
Conversion 25% complete.
Cost

36. Production Report Example
Step: Quantity Schedule with Equivalent Units

37. Production Report Example
Step: Quantity Schedule with Equivalent Units

38. Production Report Example
Section: Compute cost per equivalent unit

39. Production Report Example
Section: Compute cost per equivalent unit
$77,000 ÷ 4,960 units = $ (rounded)

40. Production Report Example
Section: Compute cost per equivalent unit
$71,000 ÷ 4,900 units = $ (rounded)

41. Production Report Example
Section : Cost Reconciliation

42. Production Report Example
Section : Cost Reconciliation
4,800 $30.014

43. Production Report Example
Section : Cost Reconciliation
160 $15.524
100 $14.49
All costs accounted for

44. End of Chapter 4