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CHAPTER 16
PROCESS COSTING AND ANALYSIS
Related Assignment Materials
Student Learning Objectives Discussion
Questions
Quick
Studies*
Exercises* Problems* Beyond the
Numbers
Conceptual objectives:
C1. Explain process operations and
the way they differ from job
order operations.
2, 3, 15,16 16-1, 16-3 16-1, 16-2,
16-3
16-2, 16-3,
16-4, 16-5,
16-6, 16-9
C2. Define equivalent units and
explain their use in process
cost accounting.
6, 12 16-4, 16-5,
16-8, 16-10,
16-11, 16-14,
16-15, 16-18
16-4, 16-6,
16-8, 16-9
16-2, 16-3,
16-4, 16-6,
16-7
16-1, 16-8
C3. Describe accounting for
14 16-7, 16-12,
16-12, 16-13,
16-2, 16-3,
16-7
(Appendix 16A)
Analytical objectives:
A1. Compare process cost
accounting and job order cost
accounting.
1, 4, 5 16-2 16-3 16-4
A2. Explain and illustrate a hybrid
costing system.
16-27 16-7
Procedural objectives:
P1. Record the flow of direct
materials costs in process cost
accounting.
5 16-23 16-3, 16-14,
16-15, 16-19,
16-21, 16-25,
16-26
16-1 16-4, 16-6
P2. Record the flow of direct
labor costs in process cost
accounting.
8, 9, 10 16-24 16-3, 16-14,
16-15, 16-19,
16-22, 16-25,
16-26
16-1 16-4, 16-6
16-1
Related Assignment Materials
Student Learning Objectives Discussion
Questions
Quick
Studies*
Exercises* Problems* Beyond the
Numbers
Conceptual objectives:
P4. Record the transfer of
completed goods to Finished
Goods Inventory and Cost of
Goods Sold.
16-13, 16-26 16-11, 16-14,
16-18, 16-19,
16-24, 16-25,
16-26
16-1, 16-3,
16-4, 16-5,
16-7
16-6
*See additional information below that pertains to these quick studies, exercises and problems.
Note: A Comprehensive Problem is also included that provides a review of chapters 2, 5, 18, and 20.
Additional Information on Related Assignment Material
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be used
in practice, homework, or exam mode.
Kar’s Nuts--New opener and entrepreneurial assignment.
New title, “Process Costing”
Revised examples and end of chapter assignments to focus on conversion costs
Added journal entries for transfers of costs across departments
Added discussion of multiple work in process inventory accounts used in process costing
Use the term Work in Process instead of Goods in Process
Revised discussion of differences between job order and process costing
Revised discussion the organization of process operations
Revised discussion of job order and process cost systems
Revised exhibit on process operations to show fewer processes and a simpler product
Revised discussion on the computation of equivalent units
Added exhibit on computing equivalent units
Added discussion of conversion costs per unit to discussion on computing equivalent units
Added a section differentiating the weighted-average and FIFO methods of process costing
Modified manufacturing facility exhibit to show two processes
Added new exhibit on production (units) data, showing units transferred out and units
remaining in ending work in process inventory
Added new exhibit showing the formula for computing equivalent units under the weighted-
average method
Moved discussion and illustration of journal entries to follow the main process costing
example
16-2
Revised discussion of the four-step process of applying process costing
Revised the process costing summary report to focus on direct materials and conversion
costs
Revised the journal entry examples to show two Work in Process Inventory accounts
Revised the journal entry examples to eliminate the Factory Payroll account
Moved discussion of continuous materials processing and process costing for service
companies to “trends” section
Added discussion of Volkswagen’s use of robotics in process operations
Added Comprehensive Need-to-Know, weighted-average method with two processes
Added Comprehensive Need-to-Know, FIFO method with two processes
Added Comprehensive Need-to-Know, journal entries for process costing
Added new exhibits showing transfer of units and costs across departments, using T-
accounts
Added discussion of differences between FIFO and weighted-average approaches to computing
equivalent units
16-3
Chapter Outline
1. Both manufacturers and service companies can use job order and
process production systems.
2. Focus of job order operations is on the individual job or batch.
Features of job order systems:
a. Custom orders
b. Heterogeneous products and services
c. Low production volume
d. High product flexibility
e. Low to medium standardization
3. Focus of process operations is on the process itself and on the
standardized units produced. Features of process production
systems:
a. Repetitive operations
b. Homogeneous products and services
c. High production volume
d. Low product flexibility
e. High standardization
B. Organization of Process Operations
1. Each process is identified as a separate production department,
work station or work center
2. Except for the first department or process, each receives the
output (i.e., partially processed product) and the costs associated
with the output of the prior department.
3. Last department produces the finished goods that are ready for
sale and the accumulated costs are transferred to Finished Goods
1. Similar in that they both combine materials, labor and overhead
in the process of making products
2. Differ in terms of measuring unit costs
a. Job order measures cost per unit upon completion of a job by
dividing total costs for the job by the number of units in that
Notes
16-4
Chapter Outline
III. Computing and Using Equivalent Units of Productionused to
determine the cost per unit processed by each department.
A. Equivalent Units of Production (EUP) are the number of units that
could have been started and completed given the costs incurred
during the period. For example, 100 units that are 60% processed had
the same costs that would be incurred to both start and finish 60 units.
B. EUP for Direct Materials and Conversion Costs (Direct Labor and
Factory Overhead)
1. The addition of direct material costs at the beginning of a process
(i.e., which steps involve the addition of direct material) may not
correspond to the addition of direct labor and overhead costs
during the process (i.e., which steps involve direct labor and
overhead used continuously throughout the period).
2. Equivalent units must then be separately determined for:
a. Direct materials.
b. Conversion Costs (direct labor and overhead)
C. Weighted Average Method vs. FIFO method differences
1. Weighted Average method combines the units and costs across
two period when computing equivalent units
2. FIFO method computes equivalent units based only on production
activity of current period.
3. The objectives, concepts, and journal entries (not amounts) are
the same for both methods. Only the computation of EUP differ.
Weighted Average Method is covered in the chapter and FIFO
method is covered in Appendix 16A
IV. Process Costing Illustrationa four-step process. Weighted Average
Method
A. Step 1: Determine Physical Flow of Units
1. Reconciles the physical units started in a period with physical
units completed in that period.
2. The following totals should agree:
a. Units in beginning inventory + units started during the period
= the number of units to account for.
Notes
16-5
Chapter Outline
B. Step 2: Compute Equivalent Units of Production (EUP)
1. Must convert the physical units worked on to equivalent units
2. Under the Weighted Average method, the computation of
equivalent units of production does not separate the units in
beginning inventory from those units started this period. Instead,
the units are treated as part of a large pool with an average cost
per unit
3. Equivalent UnitsDirect Materialsadd together the results of a
two-step calculation:
4. Equivalent UnitsConversion Costsadd together the results of
a two-step calculation:
a. Units completed during the period X 100% (since the units
have all required labor and overhead).
b. Units in ending inventory X the percent of labor and
overhead added during the period.
C. Step 3: Compute Cost per Equivalent Unit
1. Cost per Equivalent Unit for Direct MaterialsThe materials
costs in the beginning inventory and the direct materials costs
added during the period are combined and then divided by the
equivalent units of production (EUP) for direct materials (from
step 2) to get the cost per equivalent unit for direct materials for
the period.
2. Cost per Equivalent Unit for Conversion CostsThe conversion
costs in the beginning inventory and the conversion costs added
1. Similar in concept to the reconciliation of the physical flow of
units (except that dollars are used instead of units).
2. The following totals should agree:
i. Cost of beginning inventory plus cost assigned to units
started during the period (i.e., amounts debited to the
Goods in Process Inventory during the period) equals total
costs to account for. (see 3 below).
Notes
16-6
