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Chapter 20 - Process Costing
CHAPTER 20
PROCESS COSTING
Related Assignment Materials
20-15, 20-18
C3. Describe accounting for
production activity and
preparation of a process
costing summary using
weighted average
14 20-7, 20-12,
20-16, 20-18,
20-19, 20-20,
20-27
20-12, 20-13,
20-16, 20-17,
20-20
20-2, 20-3,
20-4, 20-5,
20-7
20-7
C4. Describe accounting for
production activity and
preparation of a process
costing summary using FIFO.
(Appendix 20A)
20-6, 20-9,
20-17, 20-21,
20-22
20-5, 20-7,
20-10, 20-11,
20-13, 20-18
20-5, 20-6,
20-7
Analytical objectives:
A1. Compare process cost
accounting and job order cost
accounting.
1, 4, 5 20-2 20-3 20-4
A2. Explain and illustrate a hybrid
costing system.
20-27 20-7
Procedural objectives:
P1. Record the flow of direct
materials costs in process cost
accounting.
5 20-23 20-3, 20-14,
20-15, 20-19,
20-21, 20-25,
20-26
20-1 20-4, 20-6
20-26
P3. Record the flow of factory
overhead costs in process cost
accounting.
11 20-25 20-3, 20-14,
20-15, 20-19,
20-23, 20-25,
20-26
20-1 20-6
Grid continues on the next page
20-1
Chapter 20 - Process Costing
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.
20-13, 20-26 20-11, 20-14,
20-18, 20-19,
20-24, 20-25,
20-26
20-1, 20-3,
20-4, 20-5,
20-7
20-6
*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
Problems 20-2A and 20-3A can be completed using EXCEL. . Problem 10-1A can be completed with
Sage 50 Software and QuickBooks. The Serial Problem for Success Systems starts in this chapter
and continues throughout many chapters of the text.
Synopsis of Chapter Revisions
Kar’s Nuts--New opener and entrepreneurial assignment.
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
remaining in ending work in process inventory
Added new exhibit showing the formula for computing equivalent units under the weighted-
average method
20-2
Chapter 20 - Process Costing
Moved discussion and illustration of journal entries to follow the main process costing
example
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
20-3
Chapter 20 - Process Costing
Chapter Outline
I. Process OperationsAlso called process manufacturing or process
production, is mass production of products in a continuous flow of steps
A. Comparing Job Order and Process Operations
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:
3. Focus of process operations is on the process itself and on the
standardized units produced. Features of process production
systems:
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
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
Notes
20-4
Chapter 20 - Process Costing
Chapter Outline
III. Computing and Using Equivalent Units of Production¾used 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
2. Equivalent units must then be separately determined for:
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.
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
Notes
20-5
1. Must convert the physical units worked on to equivalent units
based on the amount of each input (direct materials, direct labor,
and overhead) that has been used.
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:
a. Units completed during the period X 100% (since the units
have all required materials).
b. Units in ending inventory X % of materials added during the
period.
4. Equivalent UnitsConversion Costsadd together the results of a
two-step calculation:
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
during the period are combined and then divided by the
equivalent units of production (EUP) for conversion costs (from
step 2) to get the cost per equivalent unit for conversion costs for
the period.
D. Step 4: Cost Assignment and Reconciliation
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).
20-6
Chapter 20 - Process Costing
Chapter Outline
3. Sources of amounts used in cost reconciliation:
a. Cost assigned to units completed during the period equals:
i. Direct material cost assigned during the period (equivalent
units in units completed for direct materials x the related
1. Primary managerial accounting report. Also called a production
report.
2. A separate Process Cost Summary is prepared for each process or
production department
3. Purposes:
a. Help managers control and monitor departments.
4. Three sections:
a. Costs charged to production, including direct materials and
conversion costs incurred during the period as well as the cost
1. Materials and labor that can be traced to a specific process are
assigned to those processes as direct costs.
2. Materials and labor that cannot be traced to a specific process are
indirect costs and assigned to overhead.
Notes
20-7
Chapter 20 - Process Costing
Chapter Outline
B. Accounting for Materials Costs
1. Record cost of materials acquired on credit for use in factory by
debiting Raw Materials Inventory and crediting Accounts
Payable.
2. Assign costs of direct materials used in production by debiting
each department’s separate Work in Process Inventory account
and crediting Raw Materials Inventory.
3. Assign cost of indirect materials used by debiting Factory
1. Assign costs of direct labor used in production by debiting each
2. Assign cost of indirect labor used by debiting Factory Overhead
1. Record other factory overhead items incurred by debiting Factory
Overhead and crediting the related accounts.
2. Compute each department’s predetermined overhead rate. With
increasing automation, companies are more likely to use machine
hours to allocate the overhead costs.
3. Determine the amount of overhead to apply to each department.
(Predetermined rate x actual cost driver quantity.
4. Apply factory overhead costs to each department by debiting the
department’s Work in Process Inventory and crediting Factory
Overhead.
E. Accounting for Transfers Across Production Departments
1. Units and costs are transferred out of one department’s Work in
Process account and transferred into the next processing
department’s Work in Process account.
F. Transferring to Finished Goods Inventory and Cost of Goods Sold.
1. Record cost of completed units transferred out by debiting
Finished Goods Inventory and crediting the Work in Process
Inventory account of the final production department.
2. Record cost of goods sold by debiting Cost of Goods Sold and
crediting Finished Goods Inventory.
Notes
20-8
Chapter 20 - Process Costing
Chapter Outline
VI. Decision Analysis—Hybrid Costing System
A. Contains features of both job order and process operations
1. Materials Costs are often applied to specific jobs as in a job order
cost system.
2. Conversion costs (direct labor and factory overhead) are usually
accounted for using a process costing system.
B. A hybrid system of processes requires a hybrid costing system.
1. Assembly line costs may be compiled using process costing.
2. Customizing the product may use a job order system.
3. The total product cost will include the assembly line cost per unit
plus the cost of customizing the product.
VII. Appendix 20A – FIFO method of process costing
1. The following totals should agree:
a. Units in beginning inventory + units started during the period
1. Focus is on what was done during the period.
2. Equivalent UnitsDirect Materialsadd together the results of a
three-step calculation:
a. Units in beginning inventory X the percent of materials added
during the period.
b. Units started and completed during the period X 100% (since
all materials were added during the period).
c. Units in ending inventory X the percent of materials added
during the period.
3. Equivalent UnitsConversion Costsadd together the results of a
three-step calculation:
Notes
20-9
Chapter 20 - Process Costing
Chapter Outline
E. Step 3: Compute Cost per Equivalent Unit
1. Costs assigned to the department during the period divided by the
2. Perform calculation separately for direct materials and conversion
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:
a. Costs of beginning inventory plus costs incurred during the
3. Sources of amounts used in cost reconciliation:
a. Cost of the completed beginning inventory units equals
beginning balance of the Work in Process Inventory plus the
following costs to complete the beginning inventory:
Notes
20-10
Chapter 20 - Process Costing
Alternate Demo Problem Twenty
The Malbim Company uses a process costing system. Materials are added
at the beginning of the process. On July 1 there are 400 units in the
beginning inventory that are 100% complete as to materials. With regard to
labor and overhead, however, the units in beginning inventory (July 1) are
only 75% complete.
During July, 10,000 units were started in production; of these, 7,000 were
completed and transferred to the next department. On July 31, the
remaining 3,000 units were 20% complete with regard to labor and
overhead.
Required:
Using the Weighted Average method, calculate the equivalent units of
Direct Materials
Direct Labor and Factory Overhead
Using the FIFO method, calculate the equivalent units of
Direct Materials
Direct Labor and Factory Overhead
20-11
