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337
chapter
17(3)
Process Cost Systems
______________________________________________
OPENING COMMENTS
In this chapter, you need to consider which method(s) of process costing you will choose to cover in your
class. When the FIFO method is presented in the chapter (Objectives 2 and 3), the manufacturing
department adds materials at the beginning of production and conversion costs evenly throughout
production. This requires two sets of equivalent unit calculations. When the average cost method is
computations related to process costing.
The average cost method will still allow you to communicate the concept of equivalent units. If you want
to take a more conceptual approach, you could choose to only cover the average cost method and keep the
calculations more streamlined. If you want to dig into process costing more fully, the FIFO method may
After studying the chapter, your students should be able to:
1. Describe process cost systems.
2. Prepare a cost of production report.
3. Journalize entries for transactions using a process cost system.
4. Describe and illustrate the analysis of unit cost changes between periods.
Chapter 17(3) Process Cost Systems 338
5. Compare lean manufacturing with traditional manufacturing processing.
ADM: Describe and illustrate the use of a cost of production report in evaluating a company’s
performance.
KEY TERMS
cost of production report
cost per equivalent unit
equivalent units of production
first-in, first-out (FIFO) method
lean manufacturing
manufacturing cells
process cost system
process manufacturer
whole units
STUDENT FAQS
Why is it necessary to know the four steps of producing a cost of production report?
What does equivalent units of production (EUP) mean, and why is it necessary for it to be correct?
Started and completed under “units to be assigned cost” gives me problems every time. Do you have
a suggestion to eliminate my problem?
Why does the complement of the percentage in beginning inventory have to be used to calculate EUP
when the percent of completed has to be used for the ending?
Why in lean manufacturing a more efficient approach to manufacturing?
Why do we do a material and conversion EUP only? Shouldn’t conversion be made into Direct Labor
and Factory Overhead to be more accurate?
OBJECTIVE 1
Describe process cost systems.
SYNOPSIS
A process manufacturer produces products that are homogeneous; they use a cost system called process
costing. This system records the costs of each department or process. Process costing is similar to job
costing in that each records and summarizes product costs, allocates overhead, uses perpetual inventory,
and provides useful information for decision making. The example in the chapter, using ice cream, adds
all materials at the beginning of the process. There are two departments: Mixing and Packaging. Labor
and overhead costs occur in each department. When the Mixing Department is done with the product, its
costs are transferred to the Packaging Department along with the product. When the Packaging
Department completes its process, the product costs are transferred to finished goods. The cost flows in
Chapter 17(3) Process Cost Systems 339
the process cost system are similar to the physical flow of goods. As shown in Exhibit 4, each department
has a separate overhead account. The overhead is applied to work in process by debiting each
department’s factory overhead account and crediting each department’s Work in Process. When the
product is transferred, Work in Process—Mixing Department is credited and Work in Process—
Packaging Department is debited. Lastly, the Packaging Department transfers the product to finished
goods. Finished Goods is debited for the amount transferred, and Work in Process—Packaging
Department is credited.
Key Terms and Definitions
Process Cost System—A type of cost system that accumulates costs for each of the various
departments within a manufacturing facility.
Process Manufacturer—A manufacturer that uses large machines to process a continuous flow
of raw materials through various stages of completion into a finished state.
Relevant Check Up Corner and Exhibits
Exhibit 1—Examples of Process Cost and Job Order Companies
Exhibit 2—Process Cost and Job Order Cost Systems
Exhibit 3—Physical Flows for a Process Manufacturer
Exhibit 4—Cost Flows for a Process Manufacturer—Frozen Delight
SUGGESTED APPROACH
Transparency Masters (TMs) 17(3)-1 through 17(3)-3 explain the types of manufacturers that use job
order and process costing, as well as the similarities and differences in these two systems. Ask your
students to give examples of companies that would use job order costing and companies that would use
process costing. As an alternative, ask your students whether a soft drink bottler would use a process or
job order system.
Because costs are accumulated by department in a process cost system, each department has its own work
in process account. Use TM 17(3)-4 to explain the flow of costs through the departmental work in process
accounts. Exhibit 4 in the text presents another illustration to reinforce the cost flows for a process
manufacturer.
As you cover these illustrations, emphasize that there are separate work in process and factory overhead
accounts for each department. This allows the manufacturer to accumulate product costs by department.
Also stress that costs transferred out of one department become the costs transferred in to the next
department.
Chapter 17(3) Process Cost Systems 340
OBJECTIVE 2
Prepare a cost of production report.
SYNOPSIS
In a process system, the cost of units transferred out of each department must be determined along with
the cost of any partially completed units remaining in the department. These costs are reported in a cost of
are complete. Equivalent units of production are the portion of whole units that are complete with respect
to materials or conversion. The materials costs are 100% complete because all the materials are added at
the beginning. The conversion cost are 40% complete, and the equivalent units are all units in process
multiplied by 40%. The equivalent units are computed in Exhibit 7. Cost must be converted for both
for the Mixing Department.
Key Terms and Definitions
Cost of Production Report—A report prepared periodically by a processing department,
summarizing (1) the units for which the department is accountable and the disposition of those
units and (2) the costs incurred by the department and the allocation of those costs between
completed and partially completed units.
completed production.
Equivalent Units of Production—The portion of whole units that are complete with respect to
materials or conversion costs.
First-In, First-Out (FIFO) Method—The method of inventory costing based on the assumption
that the costs of merchandise sold should be charged against revenue in the order in which the
costs were incurred.
Relevant Check Up Corner and Exhibits
Exhibit 5—July Units to Be Costed—Mixing Department
Exhibit 6—Direct Materials Equivalent Units
Exhibit 7—Conversion Equivalent Units
Check Up Corner 17(3)-1 – Equivalent Units
Check Up Corner 17(3)-2 – Cost per Equivalent Unit
Chapter 17(3) Process Cost Systems 341
SUGGESTED APPROACH
one unit of product as follows:
Cost to Make One Unit in One Department = Department’s Cost for the Month
Number of Units Produced During the Month
demonstration problem in TM 17(3)-5 to prepare a cost of production report for Advanced Technologies’
assembly department. Refer your students to Exhibit 8 in the text as a model for this report. You may
want to review the major sections of the cost of production report prior to assigning this activity.
LECTURE AID—Equivalent Units
The following scenario relates equivalent units to a common student dilemma.
Assume that you are taking four classes this term, and all four classes require a five-page paper. Of
course, when will these papers be due? (I’ve never had a class that didn’t immediately respond with the
Assume that you write four pages on the first paper and run out of information. Then you write three
pages on the next paper and stop to watch a TV show. Next, you write two pages on the third paper before
you get too bored to continue. So you switch to the last paper and write one page before you fall asleep at
the keyboard. If you worked on one paper until it was finished and then started another paper, how many
Emphasize that there are two equivalent units in this example. Two finished papers could have been
written with the same effort used to do partial work on four papers.
DEMONSTRATION PROBLEM—Process Costing, FIFO Method
The text presents the calculation of product costs under FIFO process costing as a four-step process. Use
Chapter 17(3) Process Cost Systems 342
Advanced Technologies produces notebook computers in three departments: assembly, testing, and
assembly process.
Assume that the assembly department of Advanced Technologies began April with 800 units in its work
in process inventory. Assembly on these units was three-fourths complete at the beginning of the month.
During the month, 3,000 units were started in the assembly department. At the end of the month, 300 of
The costs associated with production in assembly during April were as follows:
Cost of units in beginning work in process inventory $228,000
Cost of materials used in April 630,000
STEP 1: Determine the units to be assigned costs. Instruct students to begin by determining the total
number of units worked on in the assembly department during April plus the number of units in each of
the following three categories:
Beginning Work in Process Inventory
Units Started and Completed During the Month
Ending Work in Process Inventory
process inventory.
STEP 2: Calculate equivalent units of production. Since all materials are added by the assembly
department at the beginning of production, and conversion costs are added evenly throughout production,
equivalent units must be calculated separately for materials and conversion costs. Remind students that
Chapter 17(3) Process Cost Systems 343
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No. of Whole Units Amount of Work Put into the Units during the Month
(expressed as a fraction or a percentage)
Material equivalent units for Advanced Technologies’ assembly department would be calculated as
follows:
% Materials
Whole Units Added in April Equivalent Units
Beginning WIP Inventory 800 0 0
Units Started and Completed 2,700 100% 2,700
Ending WIP Inventory 300 100% 300
3,000
Conversion equivalent units for Advanced Technologies’ assembly department would be calculated as
follows:
% Conversion
Whole Units Added in April Equivalent Units
Beginning WIP Inventory 800 1/4 200
Units Started and Completed 2,700 100% 2,700
Ending WIP Inventory 300 2/3 200
3,100
STEP 3: Determine the cost per equivalent unit. In order to determine the total cost to produce a unit, a
manufacturer must compute the materials cost and the conversion cost (labor and overhead) in a
completed unit. This amount is the cost per equivalent unit. The formula for this calculation is:
Costs Incurred During the Month
Cost per Equivalent Unit Equivalent Units Produced During the Month
For Advanced Technologies, cost per equivalent unit must be calculated separately for materials and
conversion costs since these resources are added at different rates in the manufacturing process (materials
Materials and conversion costs per equivalent unit are calculated as follows:
$630,000
Materials Cost/Equivalent Unit = $210
3,000 equiv. units
$527,000
Conversion Cost/Equivalent Unit $170
3,100 equiv. units
Chapter 17(3) Process Cost Systems 344
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
STEP 4: Allocate costs to transferred and partially completed units. After calculating the cost per
equivalent unit for materials and conversion costs, the cost of units completed and those still in process
must be determined. Stress that students will have the most success if they calculate the cost separately
for each category of units on the equivalent units’ schedule. The beginning work in process and started
and completed categories represent units that have been completed in assembly and transferred on to the
testing department. The ending work in process represents the units that have not been completed.
The cost assigned to the units that were in beginning work in process is:
Direct Materials Conversion Cost Total Cost
Beginning WIP Balance $228,000
Cost to Complete:
Equivalent Units for April 0 200
Cost per Equivalent Unit $210 $170
0 34,000 34,000
Cost of April 1 WIP
transferred to testing $262,000
Direct Materials Conversion Cost Total Cost
Started and Completed:
Equivalent Units 2,700 2,700
Cost per Equivalent Unit $210 $170
Cost of Units Started & $567,000 $459,000 $1,026,000
Completed in April
Objective 3.
WIP Inventory—Testing Department 1,288,000
WIP Inventory—Assembly Department 1,288,000
Direct Materials Conversion Cost Total Cost
Ending WIP Inventory:
Equivalent Units 300 200
Cost per Equivalent Unit $210 $170
Total Cost of Ending WIP $63,000 $34,000 $97,000
Chapter 17(3) Process Cost Systems 345
CLASS DISCUSSION—Process Costing
In the previous Demonstration Problem, all materials were introduced at the beginning of the production
process. Ask your students for other examples of materials that would be added at the start of production.
Additional ideas include soup broth for soup making, alumina for aluminum smelting, crude oil for
gasoline refining, or pulp for papermaking. Next ask your students for materials that would not be added
In the Advanced Technologies problem, all conversion costs were incurred evenly throughout the
production process. Ask your students for an example of an overhead cost that would not be incurred
evenly. One example would be energy costs. Frequently, the energy component is not used at exactly the
same rate throughout processing. Therefore, some companies separate the energy cost from conversion
costs and account for it separately.
FIFO Method
The textbook illustrates process costing for the first department in a manufacturing process. End of
chapter problems also ask students to calculate product costs for departments that are second or third in
the manufacturing flow. Emphasize that all departments that receive units from prior departments also
receive costs that are “transferred in” from those departments. Transferred in costs can be treated in the
TM 17(3)-6 presents information to calculate and assign costs to units in Advanced Technology’s testing
department for the month of April. The four-step solution to this problem is provided on TMs 17(3)-7
through 17(3)-11. Allow your students the opportunity to practice FIFO process costing by working in
groups. Since most students struggle with this topic, the time for group work is well spent.
OBJECTIVE 3
SYNOPSIS
Next, journal transactions are discussed as these product transfers need to be journalized. Materials are
purchased and the materials account is debited and Accounts Payable is credited. As the direct materials
are requisitioned, work in process accounts are debited and Materials is credited. When indirect materials
are requisitioned or other indirect expenses are recognized, factory overhead accounts are debited and
