CHAPTER 20
PROCESS COST ACCOUNTING
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
20-1
20-2, 20-3,
20-4, 20-5,
20-6, 20-9
C2. Define equivalent units and
explain their use in process
cost accounting.
6, 12
20-6, 20-7,
20-14
20-2, 20-3,
20-4, 20-5,
20-7, 20-8,
20-9
20-1, 20-8
C3. Describe accounting for
production activity and
preparation of a process
costing summary using
weighted average
14
20-10, 20-11,
20-12
20-2, 20-4,
20-5, 20-6,
20-8, 20-9
20-7
C4. Describe accounting for
production activity and
preparation of a process
costing summary using FIFO.
(Appendix 20A)
20-9, 20-15
20-6, 20-7,
20-8, 20-9
Analytical objectives:
A1. Compare process cost
accounting and job order cost
accounting.
1, 4, 5
20-13
20-4
A2. Explain and illustrate a hybrid
costing system.
20-8
20-7
Procedural objectives:
P1. Record the flow of direct
materials costs in process cost
accounting.
5
20-2
20-1, 20-3
20-4, 20-6,
P2. Record the flow of direct
labor costs in process cost
accounting.
8, 9, 10
20-3
20-1, 20-3
20-4, 20-6,
P3. Record the flow of factory
overhead costs in process cost
accounting.
11
20-4
20-1, 20-3
20-6,
P4. Record the transfer of
completed goods to Finished
Goods Inventory and Cost of
Goods Sold.
20-5
20-1, 20-4,
20-5, 20-6
20-9
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
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.
Corresponding problems in set B also relate to learning objectives identified in grid on previous page.
Problems 20-2A and 20-4A can be completed using EXCEL. The Serial Problem for Success Systems
starts in this chapter and continues throughout many chapters of the text. It is most readily solved
manually if you use the working papers that accompany text.
Narrated PowerPoint Correlation Guide
Learning Objective
Slides
C1
2
A1
3-10
C2
11-27
C3
28-33
A2
35
P1
37
P2
38
P3
39
P4
40
C4
41-46
Synopsis of Chapter Revisions
• Three Twins Ice Cream: NEW opener with new entrepreneurial assignment
20-3
Chapter Outline
I. Process Operations⎯Also 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.
a. Custom orders
b. Heterogeneous products and services
c. Low production volume
d. High product flexibility
b. Homogeneous products and services
c. High production volume
d. Low product flexibility
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
Inventory.
1. Product is produced by mixing its active ingredient with other
materials, molding it into tablets, and then packaging the tablets.
cost per unit of a product or service.
A. Comparing Job Order and Process Cost Accounting Systems
1. Similar in that they both combine materials, labor and overhead
in the process of making products
dividend total costs for the job by the number of units in that
job.
Notes
20-4
Chapter Outline
b. Process costing measures unit costs at the end of a period by
dividing the total costs for that process by the number of units
passing through the process to determine the cost per
equivalent unit.
B. Direct and Indirect Costs
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
Payable.
2. Assign costs of direct materials used in production by debiting the
Goods in Process Inventory and crediting Raw Materials
Inventory.
Overhead and crediting Raw Materials Inventory.
D. Accounting for Labor Costs
crediting Cash.
2. Assign costs of direct labor used in production by debiting the
3. Assign cost of indirect labor used by debiting Factory Overhead
and crediting Factory Payroll. (Factory Payroll account should
E. Accounting for Factory Overhead⎯Same steps as in chapter 19,
except performed now for each individual department (or process).
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.
4. Apply factory overhead costs to each department by debiting the
Goods in Process Inventory and crediting Factory Overhead.
5. At the end of the period, close the overapplied or underapplied
balance, if immaterial in amount, to Cost of Goods Sold or if
in Process Inventory, and Finished Goods Inventory accounts.
Notes
Chapter Outline
III. Computing and Using Equivalent Units of Production⎯used to
determine the cost per unit processed by each department.
A. Accounting for Goods in Process
1. Simple if a department (or process) has no beginning or ending
goods in process inventory⎯unit cost of goods transferred out of
the department equals the total cost assigned to the process (direct
materials, direct labor, and factory overhead) divided by the total
number of units started and finished during the period.
process), but denominator must measure the entire production
activity of the process during the period.
c. 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. Differences Between Equivalent Units for Materials and Equivalent
c. Factory overhead (the same as direct labor if direct labor is
used to apply overhead).
A. Step 1: Determine Physical Flow of Units
1. Reconciles the physical units started in a period with physical
units completed in that period.
Notes
20-6
Chapter Outline
B. Step 2: Compute Equivalent Units of Production (EUP)
1. The focus is on what was done during the period.
a. Can be calculated using first-in, first-out basis (FIFO),
weighted average, or last-in, first-out basis (LIFO).
b. Text assumes Gen-X uses weighted average method. (The
based on the amount of each input (direct materials, direct labor,
and overhead) that has been used.
the units are treated as part of a large pool with an average cost
per unit
two-step calculation:
a. Units completed during the period times 100% (since the
units have all required materials).
5. Equivalent Units⎯Direct Labor and Factory Overhead⎯add
together the results of a two-step calculation:
C. Step 3: Compute Cost per Equivalent Unit
1. The total of the costs in the beginning inventory and the costs
D. Step 4: Cost Assignment and Reconciliation
i. Cost of beginning inventory plus cost assigned to units
account for. (see 3 below).
Notes
20-7
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 material times the
related equivalent cost per unit).
ii. Direct labor cost assigned during the period (equivalent
units in units completed for direct labor times the related
equivalent cost per unit).
iii. Factory overhead cost assigned during the period
(equivalent units in units completed for factory overhead
production department
3. Purposes:
a. Help managers control and monitor departments.
b. Helps factory managers evaluate department managers’
performance.
c. Provides cost information for financial statements.
4. Three sections:
d. Costs charged to production.
1. Record cost of units transferred out by debiting Finished Goods
Inventory and crediting Goods in Process Inventory.
costs through accounts reflects the flow of manufacturing activities
and products in the factory.
Notes
20-8
Chapter Outline
V. 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
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.
VI. Appendix 20A – FIFO method of process costing
A. The objectives, concepts, and journal entries (but not amounts) are the
same as for the weighted average method.
B. The computation of equivalent units of production and cost
units plus units started and completed) during the period plus
units in ending inventory equal units accounted for.
added during the period.
b. Units started and completed during the period times 100%
(since all materials were added during the period).
b. Units started and completed during the period times 100%
(since all labor and overhead was added during the period).
c. Units in ending inventory times the percent of labor and
overhead added during the period.
Notes
20-9
Chapter Outline
E. Step 3: Compute Cost per Equivalent Unit
cost per equivalent unit for the period.
2. Perform calculation separately for direct materials, direct labor,
F. Step 4: Cost Assignment and Reconciliation
1. Similar in concept to the reconciliation of the physical flow of
2. The following totals should agree:
a. Costs of beginning inventory plus costs incurred during the
period (i.e., amounts debited to the Goods in Process
Inventory during the period) equals total costs to account for.
b. Costs assigned to the completed beginning inventory units,
beginning balance of the Goods in Process Inventory plus the
following costs to complete the beginning inventory:
i. Direct material cost assigned: (EU to complete beginning
inventory for direct materials X the equivalent cost per
unit).
ii. Direct labor cost assigned: (EUs in ending inventory for
direct labor X equivalent cost per unit).
iii. Factory overhead cost assigned: (EU in ending inventory
for factory overhead X equivalent cost per unit).
Notes
20–10
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
Solution: Alternate Demo Problem Twenty
Weighted-average Method
Direct
Materials
Direct Labor
and Factory
Overhead
Units completed this period*
7,400
7,400
Equivalent units in ending inventory
3,000 units x 100%
3,000
3,000 units x 20%
_____
600
Total equivalent units
10,400
8,800
Solution: Alternate Demo Problem Twenty
FIFO Method
Direct
Materials
Direct Labor
and Factory
Overhead
Equivalent units needed to complete
beginning inventory:
400 units x 0%*
0
400 units x 25%
100
Units started and completed
7,000
7,000
Equivalent units in ending inventory
3,000 units x 100%
3,000
3,000 units x 20%
_____
600
Total equivalent units
10,000
7,700