Chapter 16 Process Costing and Analysis
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.
1, 2, 4, 15
16-1
16-1, 16-17,
16-18
CA, EC,
CIP, TTN,
TIA, GD
C2. Define and compute equivalent
units and explain their use in
process cost accounting.
6, 12
16-6, 16-7,
16-14
16-8, 16-9,
16-12, 16-20
16-2, 16-3,
16-4, 16-5,
16-7, 16-8,
16-9
RIA, HTR
C3. Describe accounting for
production activity and
preparation of a process cost
summary using weighted
average.
13, 14
16-10, 16-11,
16-12
16-15, 16-16,
16-22
16-2, 16-4,
16-5, 16-6,
16-8, 16-9
ED
C4. Describe accounting for
production activity and
preparation of a process cost
summary using FIFO.
(Appendix 16A)
16-9, 16-15
16-10, 16-11,
16-13, 16-16,
16-21
16-6, 16-7,
16-8, 16-9
Analytical objectives:
A1. Compare process cost
accounting and job order cost
accounting.
2, 5
16-13
16-1
CIP
A2. Explain and illustrate a hybrid
costing system.
16-8
16-19
ED
Procedural objectives:
P1. Record the flow of direct
materials costs in process cost
accounting.
3
16-2
16-1, 16-2,
16-6, 16-7,
16-14
16-1, 16-3
CIP, TIA
P2. Record the flow of direct
labor costs in process cost
accounting.
8, 9, 10
16-3
16-1, 16-3,
16-6, 16-7,
16-14
16-1, 16-3
CIP, TIA
P3. Record the flow of factory
overhead costs in process cost
accounting.
11
16-4
16-1, 16-4,
16-6, 16-7,
16-14
16-1, 16-3
TIA
P4. Record the transfer of
completed goods to Finished
Goods Inventory and cost of
Goods Sold.
16-5
16-5, 16-6,
16-7, 16-9,
16-11, 16-14
16-1, 16-4,
16-5, 16-6,
16-9
TIA
Chapter 16 Process Costing and Analysis
*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, 4, 14, and 16.
Additional Information on Related Assignment Material
Assignment materials that can be completed by students using:
Sage 50 and QuickBooks Pro 2013 templates – Problem 16-1A, 16-3A.
Excel templates – Problems 16-2A and 16-4A
McGraw-Hill’s Connect – All of the Quick Studies, all of the Exercises, and Problems in set A.
** The Serial Problem for Success Systems, which covers numerous learning objectives, can be
completed manually by students. (This serial problem, which began in chapter 1, continues in most of
the chapters. Even if previous segments were not assigned, students can begin the segment of the
serial problem that is included in this chapter. It is most readily solved if students use the Working
Papers that accompany the book.).
Synopsis of Chapter Revisions
• Three Twins Ice Cream: NEW opener with new entrepreneurial assignment
• Revised comparison of job order and process costing systems
• New comparison of reports produced from job order and process costing systems
• Added details for accounts used in the entry to record sales in process costing
• Added new process costing assignments
• Revisions to two learning objectives
PowerPoint® Show Slides
Chapter Learning Objective
C1
A1
P1
P2
P3
C2
C3
P4
A2
Chapter 16 Process Costing and Analysis
Chapter Outline
I. Process Operations⎯also called process manufacturing or process
production. Involves mass production of products in a sequence 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 in job order costing system is on the individual job or
batch. Features of job order manufacturing systems:
Custom orders
Heterogeneous products and services
Low production volume
High product flexibility
Low to medium standardization
3. Focus in process costing systems is on the process itself and
on the standardized units produced. Features of process
production systems:
a. Repetitive production
b. Homogeneous products and services
c. High production volume
d. Low product flexibility
e. High standardization
3. Company applies direct labor, overhead and possibly
additional direct materials to move the product toward
completion.
5. When output of one department becomes an input to another
6. We repeat these steps from department to department until the
process is complete.
7. Then accumulated costs are transferred from Goods In Process
Product is produced by mixing its active ingredient, molding it
into tablets and packaging the tablets.
Notes
Chapter 16 Process Costing and Analysis
Chapter Outline
1. Step One – main ingredient is ground into a powder.
2. Step Two – output of step one (the partially processed product
– the powder) is mixed with other materials, molded into
tablets, and then packaged.
II. Process Cost Accounting – overall objective is to determine the cost
per unit of a product. Focus is on the individual process or service. A
process cost accounting system assigns direct materials, direct labor and
overhead to specific processes. Total costs are then divided by the
2. Materials and labor that cannot be traced to a specific process
are indirect costs and assigned to overhead.
C. Accounting for Materials Costs
2. Record cost of materials acquired on credit for use in factory
by debiting Raw Materials Inventory and crediting Accounts
Payable.
and crediting Raw Materials Inventory.
4. Assign cost of indirect materials used by debiting Factory
C. Accounting for Labor Costs
1. Record payment of factory wages by debiting Factory Payroll
2. Assign costs of direct labor used in each department by
debiting the Goods in Process Inventory for each department
and crediting Factory Payroll.
Notes
Chapter 16 Process Costing and Analysis
Chapter Outline
3 Assign cost of indirect labor used by debiting Factory
Overhead and crediting Factory Payroll. Factory Payroll
should now have a zero balance.
D. Accounting for Factory Overhead – same procedures as in
chapters 14 and 15, except performed now for each individual
department or process.
1. Record overhead costs other than indirect materials and
3. Determine the amount of overhead that should be applied to
each department based on a variable such as direct labor hours
4. Different rates may be used for different production
departments.
5. Apply factory overhead costs to each department by debiting
6. Close the overapplied or underapplied balance, if any, to Cost
of Goods Sold or allocate among costs of goods sold, goods in
process, and finished goods inventories.
A. Accounting for Goods in Process
1. If a process has no beginning or no ending goods in process
inventory – unit cost of goods transferred out of the process
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.
2. If a process has beginning or ending inventory, then the total
cost assigned must be allocated to all completed and
incomplete units worked on during the period.
or EUP.
4. EUP refers to the number of units that could have been started
then used to compute the cost per equivalent unit and to assign
costs to Finished Goods and Goods in Process Inventory.
B. Differences Between Equivalent Units for Materials and that for
Labor and Overhead
Notes
Chapter 16 Process Costing and Analysis
Chapter Outline
Notes
IV. Process Costing Illustration – accounting for GenX includes four
steps including physical flow, equivalent units, cost per equivalent
unit and cost assignment reconciliation.
A. Step 1: Determine Physical Flow of Units
1. A reconciliation is a report that reconciles the physical units
started in a period with the physical units completed in that
period.
2. The following totals should agree:
a. Units in beginning goods in process inventory plus units
started during the period should equal the total number of
units to account for.
b. Units completed and transferred out during the period plus
units in ending goods in process inventory should equal
the total units accounted for.
B. Step 2: Compute Equivalent Units of Production (EUP)
1. Must compute equivalent units of production for direct
materials, direct labor and factory overhead for the month.
GenX uses the weighted average method.
a. For GenX, overhead is applied using direct labor as the
allocation base.
b. For GenX, equivalent units are the same for both labor
and overhead.
2. Equivalent Units⎯Direct Materials⎯are computed by
multiplying the number of physical units by the percentage of
completion for each input.
a. Units in beginning inventory times the percent of materials
added during the period.
b. Units started and completed during the period times 100%
(since all materials were added during the period).
c. Units in ending inventory times the percent of materials
added during the period.
3. Equivalent Units – Direct Labor and Factory Overhead – add
together the results of a three-step calculation:
a. Units in beginning inventory times the percent of labor
added during the period.
Chapter 16 Process Costing and Analysis
Chapter Outline
Notes
b. Units started and completed during the period times 100%
(since all labor was added during the period).
c. Units in ending inventory times the percent of labor added
during the period.
C. Step 3: Compute Cost per Equivalent Unit – under the weighted
average method, computation of EUP combines costs of beginning
goods in process inventory with costs incurred in the current
period.
1. Costs assigned to the department during the period divided by
the equivalent units of production in the current period equals
the cost per equivalent unit for the period.
2. Perform calculation separately for direct materials, direct
labor, and overhead.
3. Total cost per equivalent unit equals the sum of the three
individual costs per equivalent unit (direct materials, direct
labor, and factory overhead).
D. Step 4: Assign and Reconcile Costs
1. The EUP from step 2 and the cost per EUP from step 3 are
used in step 4 to assign costs to (a) units completed and
transferred to finished goods and (b) units that remain in
2. The following totals should agree: total costs assigned to units
completed and transferred plus costs of those in process
should equal the costs incurred by production.
3. Sources of amounts used in cost reconciliation:
a. Cost of beginning goods in process inventory equals
beginning balance of the Goods in Process Inventory plus
the following costs to complete the beginning inventory:
i. Direct material cost assigned during the period
unit).
ii. Direct labor cost assigned during the period (equivalent
times the related equivalent cost per unit).
iii. Factory overhead cost assigned during the period
(equivalent units to complete beginning inventory for
factory overhead times the related equivalent cost per
unit).
Chapter 16 Process Costing and Analysis
Chapter Outline
b. cost assigned to units started and completed during the
period equals units started and completed times total
equivalent cost per unit.
c. Cost assigned to ending inventory equals:
i. Direct material cost assigned during the period
(equivalent units in ending inventory for direct material
times the related equivalent cost per unit).
ii. Direct labor cost assigned during the period (equivalent
units in ending inventory for direct labor times the
related equivalent cost per unit).
iii. Factory overhead cost assigned during the period
(equivalent units in ending inventory for factory
or process.
3. Purposes:
a. Help managers control and monitor their departments.
b. Help factory managers evaluate department mangers’
performances.
c. Provide cost information for financial statements.
4. Three sections:
a. Total costs charged to department.
Sold.
5. The assigned costs are then added to show that the total costs
charged to the department are now assigned to units worked on
1. Record cost of units transferred out by debiting Finished
Goods Inventory and crediting the Goods in Process Inventory
of the transferring department. Cost of units transferred from
Goods in Process Inventory to Finished Goods Inventory is
called the cost of goods manufactured.
2. Beginning balance of Goods in Process Inventory plus costs
assigned (direct materials, direct labor, and applied overhead)
less cost of units transferred out equals ending balance of
and crediting Finished Goods Inventory.
Notes
Chapter 16 Process Costing and Analysis
Chapter Outline
A. Summary of Cost Flows⎯as shown in Exhibit 16.21, the flow of
costs reflects the flow of manufacturing activities and products in
the factory.
B. Trends in Process Operations – recent trends include:
1. Process design – management concerns with production
efficiency can lead companies to entirely reorganize production
processes.
2. Just-in-time production – companies are increasingly adopting
just-in-time techniques. Just-in-time inventory levels are
minimal. A finished Goods inventory account may not be
needed. Instead, cost of finished goods may be immediately
debited to the Cost of Goods Sold account.
3. Automation – advances in technology increasingly enable
companies to automate their production processes. This allows
them to reduce direct labor costs. Some companies focus on
4. Services – service-based businesses are increasingly prevalent.
Computing costs based on the process is simpler and more
VI. Decision Analysis: Hybrid Costing System
A. Contains features of both job order and process operations.
2. Conversion costs (direct labor and factory overhead) are
usually accounted for using a process costing system.
1. Assembly line costs may be compiled using a process cost
system.
2. Components added to 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. FIFO Method of Process Costing– Appendix 16A
A. FIFO method assigns costs to units assuming a first-in, first-out
but computation of equivalent units and cost assignment are
slightly different.
Notes
Chapter 16 Process Costing and Analysis
Chapter Outline
C. Accounting for a department’s activity for a period includes four
steps: (1) determine physical flow, (2) compute equivalent units,
(3) compute cost per equivalent units, and (4) determine cost
assignment and reconciliation.
D. Step 1: Determine Physical Flow of Units: – A physical flow
reconciliation reconciles (1) the physical units started in a period
with (2) the physical units completed in that period.
E. FIFO assumes that the units transferred to finished goods include
units from the beginning goods in process inventory.
F. Step 2: Compute Equivalent Units of Production – need to convert
the physical measure of units to an equivalent units based on how
much each input has been used.
1. Multiply the number of physical units by the percentage of
processing applied to those units in the current period.
2. FIFO method accounts for cost flow in a sequential manner
where the earliest costs are the first to flow out.
3. Must consider three distinct groups of units: (1) units in
beginning Goods in Process Inventory that were completed this
period, (2) units started and completed this period, and (3) units
in ending Goods in Process Inventory.
i. Beginning Goods in Process – we assume that production
first completes any units it had started in the prior period.
ii. Units Started and Completed This Period – after
completing any beginning goods in process, FIFO
assumes that production begins on newly started units.
These units have received 100% of materials, labor and
overhead.
iii. Ending Goods in Process – for each input (direct
materials, direct labor, and factory overhead), the
equivalent units for each of the unit groups listed above
divide by the equivalent units of production from step 2. The
FIFO method computes the cost per equivalent unit based solely
on the current period’s EUP and costs (the weighted average
method adds in the costs of the beginning goods in process
inventory).
Notes
Chapter 16 Process Costing and Analysis
Chapter Outline
H. Step 4: Assign and Reconcile Costs – the equivalent units
determined in step 2 and the cost per equivalent units computed in
step 3 are both used to assign costs (1) to units that the production
department completed and transferred to finished goods, and (2) to
units that remain in process at period-end.
I. Management verifies that the total costs assigned to units
transferred out and units still in process equal the total costs
incurred by production.
J. A final report is the process cost summary, which summarizes key
information to help managers control and monitor costs, help
upper management assess department manager’s performance, and
provide cost information for financial reporting.
Notes
Chapter 16 Process Costing and Analysis
Chapter 16 Alternate Demonstration Problem #1
The Malbim Company uses a process costing system. During July, 10,000
units were started in production; of these, 7,000 were completed and
transferred to the next department. Materials are added in the beginning of
the process. On July 31, the remaining 3,000 units were 20% complete with
regard to labor and overhead.
Required:
Calculate the equivalent units of
1. Direct Materials
2. Direct Labor and Factory Overhead
Chapter 16 Process Costing and Analysis
Solution: Chapter 16 Alternate Demonstration Problem #1
Direct
Materials
Direct Labor
and Factory
Overhead
Equivalent Units completed and
transferred out (100% x 7,000)
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
7,600