2. CHAPTER 3
Process Costing

3. Difference Between Job-Order and Process Costing Systems
Job-Order Costing
Each unique product or batch is considered a job for which cost information is needed
Necessary to trace manufacturing costs to specific jobs
When completed, cost of job is removed from Work in Process and included in Finished Goods

4. Difference Between Job-Order and Process Costing Systems
Large quantities produced of homogenous products
Average cost = total costs divided by total number of items produced
When completed, number of units completed times average cost determines cost to be moved from WIP to Finished Goods
Slide 3-4

5. Review 1
Which of the following characteristics are associated with a process costing system?
Heterogeneous products
Homogeneous products
Answer: b

6. Review 2
Which of the following characteristics are associated with a process costing system?
Continuous production
Discontinuous production
Answer: a
Slide 3-6

7. Review 3
Which of the following characteristics are associated with a process costing system?
Costs are traced to jobs
Costs are traced to processing departments
Answer: b
Slide 3-7

8. Type of Costing Used

9. Review 4
An example of a business requiring a process costing system would be a(n):
Custom cabinet shop
Antique furniture restorer
Soap manufacturer
Automobile repair shop
Answer: c
A soap manufacturer produces many identical units

10. Job-Order Costing System

11. Process Costing System

12. Cost Flows through Departments
Manufacturing operations typically pass through two or more departments
Costs are accumulated in each department
Easy to identify when materials are added
Harder to identify when labor and overhead are added
-Often grouped together as conversion costs
-Assumed to be added evenly
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

13. Review 5 The costs in a process costing system are traced to:
Specific jobs
Specific customers
Specific company administrators
Specific production departments
Answer: d
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

14. Cost Flows through Accounts
Direct Material
Suppose that $142,000 of direct materials are used
Journal entry:
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

15. Cost Flows through Accounts
Direct Labor
Suppose that $62,200 of direct labor costs are incurred
Journal entry:
Slide 3-15
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

16. Cost Flows through Accounts
Manufacturing Overhead
Suppose manufacturing overhead is applied at a rate of $3 per direct labor dollar
Journal entry:
Slide 3-16
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

17. Cost Flows through Accounts
Transferred-in Cost
When a department completes its work, the items are transferred to the next department
Related costs are transferred as well
Suppose the Mixing Department completed units with a cost of $360,000
Slide 3-17
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

18. Flow of Costs Between Processing Departments
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

19. Calculating Unit Cost Equivalent Units
Partially completed units are converted to a comparable number of completed units, called equivalent units
e.g. 100 units that are 50% complete are equivalent to 50 complete units (100 x 50%)
Equivalent units may be different for material and conversion costs if materials and conversion costs enter production at different times.
Learning objective 2: Discuss the concept of an equivalent unit

20. Equivalent Units – Material and Conversion Costs
Learning objective 2: Discuss the concept of an equivalent unit

21. Exercise 1 Beginning Work in Process 500 units
% complete = 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete = 85% materials, 50% conversion
Calculate equivalent units for materials
Learning objective 2: Discuss the concept of an equivalent unit

22. Exercise 2 Beginning Work in Process 500 units Units started: 2,300
% complete: 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete: 85% materials, 50% conversion
Calculate equivalent units conversion
Slide 3-22
Learning objective 2: Discuss the concept of an equivalent unit

23. Calculating Unit Cost Cost Per Equivalent Unit
The average unit cost is referred to as cost per equivalent unit
Learning objective 3: Calculate the cost per equivalent unit

24. Calculating Cost per Equivalent Unit
Mixing Department
Beginning Work in Process: 10,000 gallons that are 80% complete
-Direct material costs = $18,000
-Direct labor =$7,80
-Overhead = $23,400
70,000 gallons started, 60,000 gallons completed
-Direct material costs = $142,000
-Direct labor cost = $62,200
- Overhead cost = $186,600
Slide 3-24
Learning objective 3: Calculate the cost per equivalent unit

25. Cost per EU – Mixing Department
Slide 3-25
Learning objective 3: Calculate the cost per equivalent unit

26. Exercise 3 Equivalent units(EU): Costs in beginning Work in Process
Materials =2,650EU, conversion=2,755EU
Costs in beginning Work in Process
Materials = $3,180, conversion = $3,306
Costs incurred:
Materials = $18,020, conversion = $13,224
Calculate materials cost/equivalent unit
Slide 3-26
Learning objective 3: Calculate the cost per equivalent unit

27. Exercise 4 Equivalent units (EU): Costs in beginning Work in Process
Materials = 2,650EU, conversion = 2,755EU
Costs in beginning Work in Process
Materials = $3,180, conversion = $3,306
Costs incurred:
Materials = $18,020, conversion = $13,224
Calculate conversion cost/equivalent unit
Slide 3-27
Learning objective 3: Calculate the cost per equivalent unit

28. Costs Transferred Out
60,000 gallons completed by the Mixing Department
Unit cost is $6 per gallon
$360,000 (60,000 X $6) of cost transferred to the Packaging Department
Slide 3-28
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

29. Ending Work in Process Slide 3-29
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

30. Summary of Cost Activity – Mixing Department
Slide 3-30
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

31. Production Cost Report
Reconciliation of Units
Learning objective 5: Describe a production cost report

32. Production Cost Report
Reconciliation of Costs
Learning objective 5: Describe a production cost report

33. Basic Steps in Process Costing
Step 1: Account for the number of physical units
Step 2: Calculate the cost per equivalent unit for materials, labor, and overhead
Step 3: Assign cost to items completed and items in ending Work in Process
Step 4: Account for the amount of product cost
Learning objective 5: Describe a production cost report

34. Dealing with Transferred-In Cost
Packaging Department summary:
Beginning Work in Process 15,000 gallons 50% through packaging operation Costs in WIP: materials $10,500, labor $4,500, $9,000 overhead, $92,250 transferred in
Units transferred in 60,000 gallons with $360,000 transferred in cost Costs added: Materials $49,500, labor $27,900, $55,800 overhead
Ending Work in Process 5,000 gallons 40% through packaging operation
Learning objective 5: Describe a production cost report

35. Production Cost Report – Packaging Department
Slide 3-35
Learning objective 5: Describe a production cost report

36. Production Cost Report – Packaging Department
Slide 3-36
Learning objective 5: Describe a production cost report

37. Production Cost Report – Packaging Department
Slide 3-37
Learning objective 5: Describe a production cost report

38. Process Costing and Incremental Analysis
A company has no beginning or ending Work in Process
Assume materials and labor variable, manufacturing overhead fixed
Cost summary:
Learning objective 5: Describe a production cost report

39. Process Costing and Incremental Analysis
Decreasing price to $2.90 will increase demand to 275,000 units
$2.90 is less than equivalent cost per unit
Incremental analysis: profit will increase
Slide 3-39
Learning objective 5: Describe a production cost report

40. You Get What You Measure

41. Copyright
© 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.