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Chapter 18 - Process Costing
Financial and Managerial Accounting, 17/e 18-1
18 PROCESS COSTING
Chapter Summary
Costing systems provide information that is used for a large variety of business
decisions including planning production of goods and services, pricing products, and
controlling associated costs of production. Thus the choice of an appropriate costing
system is a key underlying foundation for good decision-making. Process costing is a
method for accumulating the direct and indirect costs of a production process and
averaging those costs over the identical units produced by that process. As discussed in
the previous chapter, job-order costing is shown to be a reasonable approach to assigning
manufacturing costs to distinct units of production such as buildings, batches of furniture,
financial audits, etc. When the units produced are all of a similar type, the complexity of
job costing is unnecessary and process cost systems are an efficient alternative.
Process costing serves two related purposes. First, it measures the cost of goods
manufactured on both a total and per-unit basis. This information is used in valuing
inventories and in recording the cost of goods sold. But process costing also provides
management with information about the per-unit cost of performing each step in the
production process. This information is useful in evaluating the efficiency of production
departments and often draws attention to potential cost savings.
Learning Objectives
1. Distinguish production procedures that match with process costing from those that
correspond with job order costing.
2. Account for the physical flows and related cost flows when using process costing.
3. Demonstrate how to calculate equivalent units.
4. Use the costs of resources consumed to calculate the cost per equivalent unit of
production.
5. Use the cost per equivalent unit to assign costs to the work completed during the
period.
6. Create a process costing production report and use the report for decision making.
Chapter 18 - Process Costing
Brief topical outline
A Production of goods and services and costing systems –
see Case in Point (page 807)
B Process costing – see Case in Point (page 807)
1 Tracking the physical flow and related production costs
a Understanding physical flows
b Understanding cost flows
c Accounting for material, labor, and applied overhead
d Costs flow from one process to the next
2 Process costing and equivalent units
3 Cost per equivalent unit – see Your Turn (page 812)
4 Tracking costs using a process costing production report
a Production cost report for process costing -
see Your Turn (page 817)
5 Evaluating departmental efficiency – see ethics, Fraud & Corporate
Governance (page 818)
C Concluding remarks
Topical coverage and suggested assignment
Homework Assignment
(To Be Completed Prior to Class)
Class
Meetings on
Chapter
Topical
Outline
Coverage
Discussion
Questions
Brief
Exercises
Exercises
Problems
Critical
Thinking
Cases
1
A - B
1, 2, 3
1, 2
1, 2
1
2
B
5, 6
3, 5
3, 5
3
3
B
12, 13
6, 7
8
5
3
4
B – C
15
9, 10
11, 12
8
Comments and observations
Teaching objectives for Chapter 18
In this chapter, the concepts of product costing is illustrated for a process cost accounting
systems. Our primary objectives in presenting a process cost accounting systems are to:
1 Distinguish between job order and process cost accounting systems in terms of the
circumstances that make a particular type of system appropriate.
2 Emphasize that in situations of continuous production of homogeneous products,
identifiable "jobs" do not exist. Therefore, manufacturing costs are accumulated by
time periods. In addition, costs generally are accumulated separately for each
Chapter 18 - Process Costing
Financial and Managerial Accounting, 17/e 18-3
production department or process to enable managers to evaluate the efficiency of
different departments.
3 Explain the use of a separate Work-in-Process Inventory account to accumulate
material, labor, and overhead costs for each process or processing department.
4 Explain the flow of costs through the Work-in-Process Inventory accounts.
5 Explain the meaning of equivalent units and demonstrate their use in determining unit
costs.
6 Briefly discuss how unit cost information is used to value inventories and cost of
goods sold, set selling prices, and evaluate departmental efficiency.
General comments
We find that the introduction of the "flow" of manufacturing costs in Chapter 16 greatly
enhances students' abilities to understand the determination and use of unit costs as
discussed in Chapter 18.
The FIFO approach is used exclusively and no mention is made of weighted average
costs. We utilize Exercise 4 or 7 to establish a solid understanding of equivalent units
before turning to the development of product costs. Problem 5 provides a comprehensive
review of the process costing system. It is reasonably similar to the new Demonstration
Problem and should pose no difficulty. Problem 2 has been included to emphasize the
simplifications offered by assuming that work-in-process inventories are negligible. This
assumption is justifiable in a just-in-time setting, and the problem nicely illustrates the
potential for simplification in system design.
An aside In some instances real-world cost accounting systems have become simpler
than our treatment suggests. Harley-Davidson no longer records direct labor as a separate
cost element. Direct labor costs are included with total plant overhead. Furthermore,
overhead is not added to inventory as in-process parts are produced. Instead, overhead is
applied only when a finished unit is completed.
Supplemental Exercises
Group Exercise
Visit websites for several large corporations. Based on the type of products
manufactured, decided whether job order costing or a process costing system would be
more appropriate for each company.
Chapter 18 - Process Costing
CHAPTER 18 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question in the space provided.
1 The beginning inventory of Department No. 3 was zero. During May, 2,500 units
were processed in the department at a cost of $5 per unit. All 2,500 of these units
were transferred to Department No. 4 in May at a total cost of $17,500. The unit
cost of goods transferred to Department No. 4 in May was:
a $5.00. b $6.00. c $7.00. d $1.00.
2 In a given department, the beginning inventory of 8,000 units was 60% complete
as to material, labor, and overhead. A total of 9,000 units were started and
completed during the period, and the ending inventory of 10,000 units was 40%
complete as to material, labor and overhead. The equivalent production for the
period in units is:
a 12,200. b 16,200. c 17,800. d 18,200.
3 Department A started 3,000 units in February. Department A completed and
transferred 3,100 units to Department B 3,100 in February. On February 28,
Department A had 300 units remaining in Work in Process. The number of units
in Work in Process on February 1 was:
a 6,300. b 400. c 100. d 0.
4 The assembly department has 750 units in work-in-process at the beginning of
November. By the end of November, it had completed and transferred 2,800 units
to the paint department. On November 30, there were 400 units remaining in
work-in-process. How many units were started in production in the assembly
department during November?
a 3,650. b 3,050. c 2,450. d 1,750.
Chapter 18 - Process Costing
Financial and Managerial Accounting, 17/e 18-5
CHAPTER 18 NAME #
10-MINUTE QUIZ B SECTION
WoW Chemical Company uses a process costing system with two departments: (a) a
Mixing Department, and (b) a Packing Department. During May, its first month of
operations, the company generated $180,000 in revenue by manufacturing and selling
800 cases of chemicals. Related manufactured costs are as follows:
Mixing Packing
Department Department
Direct materials .......................................................... $26,000 $ 1,000
Direct labor ................................................................ $8,000 $14,000
Manufacturing overhead ............................................ $12,000 $8,000
1 Refer to the above data. The unit cost of a case processed in the Mixing
Department in May was:
a $230.
b $57.50.
c $73.50.
d Some other amount.
2 Refer to the above data. The unit cost of a case incurred by the Packing
Department in May was:
a $73.50.
b $57.50.
c $28.75
d Some other amount.
3 Refer to the above data. The total cost of all cases transferred to finished goods
in May was:
a $74,200.
b $69,000.
c $63,600.
d Some other amount.
4 Refer to the above data. The gross profit (sales minus cost of goods sold) on
chemicals sold in May was:
a $64,000.
b $70,000.
c $111,000.
d Some other amount.
5 Refer to the above data. The unit cost of a case charged to cost of goods sold in
May was:
a $80.
b $65.50.
c $86.25.
d Some other amount.
Chapter 18 - Process Costing
CHAPTER 18 NAME #
10-MINUTE QUIZ C SECTION
Prize Mustard uses a process costing system with two departments: (a) a Mixing
Department, and (b) a Bottling Department. During May, Prize generated $120,000 in
revenue by producing 40,000 gallons (10,000 cases) of mustard. The company reduces
its work in process inventories to zero each month. Manufacturing costs for May are
as follows:
Mixing Bottling
Department Department
Direct materials .......................................................... $16,000 $6,000
Direct labor ................................................................ $5,600 $3,900
Manufacturing overhead ............................................ $11,400 $8,100
1 Refer to the above data. The unit cost per gallon of mustard processed by the
Mixing Department in May was $__________.
2 Refer to the above data. The unit cost per case of mustard incurred by the
Bottling Department in May was $__________.
3 Refer to the above data. The total cost of the 10,000 cases transferred to finished
goods in May was $__________.
4 Refer to the above data. Assume that 9,500 cases of mustard were sold in May.
The amount charged to cost of goods sold in May $__________.
5 Refer to the above data. Assume that $9,000 of finished goods were on hand at
May 1. Under the LIFO method of inventory valuation, finished goods inventory
at May 31 was $__________ if 9,500 cases of mustard were sold in May.
Chapter 18 - Process Costing
Financial and Managerial Accounting, 17/e 18-7
SOLUTIONS TO CHAPTER 18 10-MINUTE QUIZZES
QUIZ A QUIZ B
QUIZ C
1
($16,000 + $5,600 + $11,400)/40,000 gallons = $0.825
Chapter 18 - Process Costing
Assignment Guide to Chapter 18
Brief Exercises
Exercises
Problems
Cases
Net
1 – 10
1 – 15
1
2
3
4
5
6
7
8
1
2
3
4
Time estimate (in minutes)
< 15
< 15
40
40
25
30
25
40
30
40
30
20
25
30
Difficulty rating
E
E
M
M
M
S
E
M
M
S
S
M
E
M
Learning Objectives:
1, 2, 3
1, 13
√
1. Distinguish production procedures
that match with process costing
from those that correspond with job
order costing.
2. Account for the physical flows and
related cost flows when using
process costing.
4
1, 2, 3, 5, 6,
7, 8, 9, 10,
11, 12, 13,
14, 15
√
√
√
√
√
√
√
3. Demonstrate how to calculate
equivalent units.
5, 6, 7
1, 2, 3, 5, 6,
7, 8, 9, 10,
11, 12, 13,
14, 15
√
√
√
√
√
4. Use the costs of resources consumed
to calculate the cost per equivalent
unit of production.
6, 7
3, 5, 6, 7, 8,
9, 10, 11, 12,
14, 15
√
5. Use the cost per equivalent unit to
assign costs to the work completed
during the period.
8
3, 5, 6, 7, 8,
9, 10, 11, 12,
13, 14, 15
√
√
√
√
6. Create a process costing production
report and use the report for
decision making.
9, 10
1, 4, 13, 14,
15
√
