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CHAPTER 17
PROCESS COSTING
17-1 Industries using process costing in their manufacturing areas include chemical
17-2 Process costing systems separate costs into cost categories according to the timing of
when costs are introduced into the process. Often, only two cost classifications, direct materials
17-3 Equivalent units is a derived amount of output units that takes the quantity of each input
(factor of production) in units completed or in incomplete units in work in process and converts
17-4 The accuracy of the estimates of completion depends on the care and skill of the
17-5 The five key steps in process costing follow:
Step 1: Summarize the flow of physical units of output.
17-6 Three inventory methods associated with process costing are
weighted average.
17-7 The weighted-average process-costing method calculates the equivalent-unit cost of all
17-8 FIFO computations are distinctive because they assign the cost of the previous
17-2
17-9 FIFO should be called a modified or departmental FIFO method because the goods
17-11 The journal entries in process costing are basically similar to those made in job-costing
17-12 Standard-cost procedures are particularly appropriate to process-costing systems where
there are various combinations of materials and operations used to make a wide variety of similar
17-13 There are two reasons why the accountant should distinguish between transferred-in
costs and additional direct materials costs for a particular department:
17-14 No. Transferred-in costs or previous department costs are costs incurred in a previous
17-15 Materials are only one cost item. Other items (often included in a conversion costs pool)
A second factor is the amount of inventory on hand at the beginning or end of an
17-16 (25 min.) Equivalent units, zero beginning inventory.
Candid, Inc., is a manufacturer of digital cameras. It has two departments: assembly and testing.
In January 2014, the company incurred $800,000 on direct materials and $805,000 on conversion
costs, for a total manufacturing cost of $1,605,000.
Required:
1. Assume there was no beginning inventory of any kind on January 1, 2014. During January,
5,000 cameras were placed into production and all 5,000 were fully completed at the end of
the month. What is the unit cost of an assembled camera in January?
17-2
2. Assume that during February 5,000 cameras are placed into production. Further assume the
same total assembly costs for January are also incurred in February, but only 4,000 cameras
are fully completed at the end of the month. All direct materials have been added to the
remaining 1,000 cameras. However, on average, these remaining 1,000 cameras are only
60% complete as to conversion costs. (a) What are the equivalent units for direct materials
and conversion costs and their respective costs per equivalent unit for February? (b) What is
the unit cost of an assembled camera in February 2014?
3. Explain the difference in your answers to requirements 1 and 2.
SOLUTION
1. Direct materials cost per unit ($800,000 ÷ 5,000) $ 160.00
2a. Solution Exhibit 17-16A calculates the equivalent units of direct materials and conversion
2b. Direct materials cost per unit $ 160
3. The difference in the Assembly Department cost per unit calculated in requirements 1 and 2
arises because the costs incurred in January and February are the same but fewer equivalent units
SOLUTION EXHIBIT 17-16A
Summarize the Flow of Physical Units and Compute Output in Equivalent Units;
Assembly Department of Candid, Inc., for February 2014.
(Step 2)
(Step 1) Equivalent Units
Physical Direct Conversion
Flow of Production Units Materials Costs
Work in process, beginning (given) 0
Started during current period (given) 5 ,000
17-2
*Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
SOLUTION EXHIBIT 17-16B
Compute the Cost per Equivalent Unit,
Assembly Department of Candid, Inc., for February 2014.
Total
Production
Costs
Direct
Materials
Conversion
Costs
(Step 3) Costs added during February $1,605,000 $800,000 $805,000
Divide by equivalent units of work done
17-17 (20 min.) Journal entries (continuation of 17-16).
Refer to requirement 2 of Exercise 17-16.
Required:
Prepare summary journal entries for the use of direct materials and incurrence of conversion
costs. Also prepare a journal entry to transfer out the cost of goods completed. Show the postings
to the Work in Process account.
SOLUTION
Postings to the Work in Process––Assembly account follow.
17-2
Work in Process –– Assembly Department
Beginning inventory, Feb. 1 0 3. Transferred out to
17-18 (25 min.) Zero beginning inventory, materials introduced in middle of process.
Pilar Chemicals has a mixing department and a refining department. Its process-costing system
in the mixing department has two direct materials cost categories (chemical P and chemical Q)
and one conversion costs pool. The following data pertain to the mixing department for July
2014:
Chemical P is introduced at the start of operations in the mixing department, and chemical Q is
added when the product is three-fourths completed in the mixing department. Conversion costs
are added evenly during the process. The ending work in process in the mixing department is
two-thirds complete.
Required:
1. Compute the equivalent units in the mixing department for July 2014 for each cost category.
2. Compute (a) the cost of goods completed and transferred to the refining department during
July and (b) the cost of work in process as of July 31, 2014.
SOLUTION
17-2
Q, and conversion costs, and assigns these costs to units completed (and transferred out) and to
units in ending work in process.
SOLUTION EXHIBIT 17-18A
Summarize the Flow of Physical Units and Compute Output in Equivalent Units;
Mixing Department of Pilar Chemicals for July 2014.
(Step 1) (Step 2)
Equivalent Units
Physical Conversion
Flow of Production Units Chemical P Chemical Q Costs
Work in process, beginning (given) 0
Started during current period (given) 100 ,000
To account for 100 ,000
*Degree of completion in this department: Chemical P, 100%; Chemical Q, 0%; conversion costs, 66 2/3%.
SOLUTION EXHIBIT 17-18B
Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign
Costs to the Units Completed and Units in Ending Work-in-Process Inventory; Mixing
Department of Pilar Chemicals for July 2014.
Total
Production
Costs Chemical P Chemical Q
Conversion
Costs
(Step 3) Costs added during July $1 ,100,000 $600 ,000 $140 ,000 $360 ,000
Total costs to account for $1 ,100,000 $600 ,000 $140 ,000 $360 ,000
(Step 4) Costs added in current period $600,000 $140,000 $360,000
17-2
*Equivalent units completed and transferred out from Solution Exhibit 17-18A, Step 2.
†Equivalent units in ending work in process from Solution Exhibit 17-18A, Step 2.
17-19 (15 min.) Weighted-average method, equivalent units.
The assembly division of Fenton Watches, Inc., uses the weighted-average method of process
costing. Consider the following data for the month of May 2014:
aDegree of completion: direct materials, 90%; conversion costs, 40%.
bDegree of completion: direct materials, 60%; conversion costs, 30%.
Required:
Compute equivalent units for direct materials and conversion costs. Show physical units in the
first column of your schedule.
SOLUTION
Under the weighted-average method, equivalent units are calculated as the equivalent units of
SOLUTION EXHIBIT 17-19
Summarize the Flow of Physical Units and Compute Output in Equivalent Units;
Weighted-Average Method of Process Costing, Assembly Division of Fenton Watches, Inc., for
May 2014.
(Step 2)
(Step 1) Equivalent Units
Physical Direct Conversion
Flow of Production Units Materials Costs
Work in process beginning (given) 80
17-2
*Degree of completion in this department: direct materials, 60%; conversion costs, 30%.
17-20 (20 min.) Weighted-average method, assigning costs (continuation of 17-19).
Required:
For the data in Exercise 17-19, summarize the total costs to account for, calculate the cost per
equivalent unit for direct materials and conversion costs, and assign costs to the units completed
(and transferred out) and units in ending work in process.
SOLUTION
Solution Exhibit 17-20 summarizes total costs to account for, calculates cost per equivalent unit
of work done to date in the Assembly Division of Fenton Watches, Inc., and assigns costs to units
completed and to units in ending work-in-process inventory.
SOLUTION EXHIBIT 17-20
Total
Production
Costs
Direct
Materials
Conversion
Costs
(Step 3) Work in process, beginning (given) $ 584,400 $ 493,360 $ 91,040
(Step 4) Costs incurred to date $3,713,360 $1,483,040
Divide by equivalent units of work done to date
(Step 5) Assignment of costs:
*Equivalent units completed and transferred out from Solution Exhibit 17-19, Step 2.
† Equivalent units in work in process, ending from Solution Exhibit 17-19, Step 2.
17-21 (15 min.) FIFO method, equivalent units.
Refer to the information in Exercise 17-19. Suppose the assembly division at Fenton Watches,
Inc., uses the FIFO method of process costing instead of the weighted-average method.
Required:
17-2
Compute equivalent units for direct materials and conversion costs. Show physical units in the
first column of your schedule.
SOLUTION
Under the FIFO method, equivalent units are calculated as the equivalent units of work done in
costs.
SOLUTION EXHIBIT 17-21
Summarize the Flow of Physical Units and Compute Output in Equivalent Units;
FIFO Method of Process Costing, Assembly Division of Fenton Watches, Inc., for May 2014.
(Step 1)
(Step 2)
Equivalent Units
Flow of Production
Physical
Units
Direct
Materials
Conversion
Costs
Work in process, beginning (given)
Started during current period (given)
460 464
§Degree of completion in this department: direct materials, 90%; conversion costs, 40%.
17-22 (20 min.) FIFO method, assigning costs (continuation of 17-21).
Required:
For the data in Exercise 17-19, use the FIFO method to summarize the total costs to account for,
calculate the cost per equivalent unit for direct materials and conversion costs, and assign costs
to units completed (and transferred out) and to units in ending work in process.
SOLUTION
17-2
SOLUTION EXHIBIT 17-22
Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign
Costs to the Units Completed and Units in Ending Work-in-Process Inventory;
FIFO Method of Process Costing, Assembly Division of Fenton Watches, Inc., for May 2014.
Total
Production
Costs
Direct
Materials
Conversion
Costs
(Step 3) Work in process, beginning (given) $ 584,400 $ 493,360 $ 91,040
Costs added in current period (given) 4 , 612 , 000 3 , 220 , 000 1 , 392 , 000
Total costs to account for $5 , 196 , 400 $3 , 713 , 360 $1 , 483 , 040
$3,713,360 + $1,483,040
*Equivalent units used to complete beginning work in process from Solution Exhibit 17-21, Step 2.
†Equivalent units started and completed from Solution Exhibit 17-21, Step 2.
#Equivalent units in work in process, ending from Solution Exhibit 17-21, Step 2.
17-2
