Financial and Managerial Accounting, 8e
16-1
CHAPTER 16
PROCESS COSTING AND ANALYSIS
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
AA and
BTN
Conceptual objectives:
C1. Explain process operations and the
way they differ from job order
BTN 16-4
and explain their use in process
costing.
16-8, 16-9
16-4, 16-6,
16-7
activity and preparation of a process
cost summary using weighted
16-18, 16-19,
16-20, 16-27
16-16, 16-17,
16-4, 16-5,
16-7
2, 3, 5, 15,
16, 17, 18
16-1, 16-3
16-1, 16-2,
16-3
SP
AA 16-2, AA 16-3,
BTN 16-2, BTN 16-3,
C4. Describe accounting for production
activity and preparation of a process
cost summary using FIFO.
(Appendix 16A)
7
16-6, 16-9,
16-14, 16-15,
16-16, 16-21,
16-22
16-5, 16-7,
16-10, 16-11,
16-13, 16-18
16-5, 16-6,
16-7
Analytical objectives:
A1. Compare process costing and job
order costing.
16-2
16-3
SP
BTN 16-2
A2. Explain and illustrate a hybrid
costing system.
16-27
BTN 16-5
Procedural objectives:
P1. Record the flow of materials costs in
process costing.
16-23, 16-25
16-3, 16-14,
16-15, 16-19,
16-21, 16-25,
16-26
16-1,
GL 16-1
BTN 16-1, BTN 16-2,
BTN 16-4
16-26
GL 16-1
BTN 16-4
costs in process costing.
16-15, 16-19,
16-23, 16-25,
16-26
GL 16-1
Sold.
16-26
GL 16-1
Weighted Average versus FIFO
0:39
Process Costing Illustration
2:53
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
BTN refers to Beyond the Numbers
NTK refers to Need–to-Know videos
COV refers to Chapter Overview videos
GE refers to Guided Examples
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
o Connect also provides algorithmic versions for Quick Study, Exercises, and Problems.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
the video and audio functions for the Guided Examples are also available in the Connect Instructor Library and Exercise
Presentations. These are indicated in the Related Assignment Materials grid on page 1 in blue bold font.
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1, A1
16-1
Job Order vs. Process Costing Systems
0:46
C2
16-2
EUP – Direct Materials and Conversion
(Weighted Average)
3:11
16-3
Cost per EUP – Conversion, with Transfer
1:43
16-4
Overhead Rate and Costs
2:28
16-8
EUP – Direct Materials and Conversion (FIFO)
5:13
C4
16-9
Cost per EUP – Direct Materials and
Conversion (FIFO)
1:39
Concept Overview Videos
LO
Title
Time
C1
Explain process operations and the way they differ from job order operations.
Process Operations
1:55
C2
Define and compute equivalent units and explain their use in process costing.
Equivalent Units of Production
1:35
EUP for Materials and Conversion Costs
2:54
Financial and Managerial Accounting, 8e
16-3
Step 1: Determine Physical Flow of Units
0:57
Step 2: Compute Equivalent Units of Production
2:00
Step 3: Compute Cost per Equivalent Unit
1:07
Step 4: Assign and Reconcile Costs
3:03
Process Cost Summary
1:55
C4
Describe accounting for production activity and preparation of a process cost
FIFO Method of Process Costing
1:29
FIFO Method Step 1
1:18
FIFO Method Step 3
4:18
FIFO Method Step 4
0:32
A1
Compare process costing and job order costing.
Comparing Process and Job Order Costing Systems
1:24
Transferring Costs Across Departments
1:13
A2
Explain and illustrate a hybrid costing system.
Hybrid Costing System
2:30
P1
Record the flow of materials costs in process costing.
Flow of Costs in Process Operations
1:14
Accounting for Materials Costs
1:28
P2
Record the flow of labor costs in process costing.
Accounting for Labor Costs
1:16
Accounting for Labor Costs: Journal Entries
1:30
P3
Record the flow of factory overhead costs in process costing.
Accounting for Factory Overhead
1:20
Accounting for Factory Overhead: Journal Entries
0:58
Accounting for Transfers Across Departments
1:52
Accounting for Transfers to Finished Goods Inventory and Cost of Goods Sold
2:24
Synopsis of Chapter Revisions
NEW opener—Azucar Ice Cream and entrepreneurial assignment.
Revised discussion comparing process and job order costing systems.
Added cost flow graphic.
New margin graphic illustrating EUP.
Revised discussion of weighted-average versus FIFO method of process costing.
16-4
Chapter Outline
I. Process Operations⎯Also called process manufacturing or process production, is mass production
of products in a continuous flow of steps
A. Organization of Process Operations
1. Each process is identified as a separate production department, work station or work center
2. Each applies direct labor, overhead and direct materials to move the product toward
completion.
3. Final process or department in the series finishes the goods and makes then.
B. Comparing Process and Job Order Costing Systems
1. Both use direct materials, direct labor and overhead and aim to compute cost per unit.
2. Focus of job order operations is on the individual job. Features of job order systems:
3. Focus of process operations is on the process itself and on the standardized units produced.
Features of process production systems:
a. Repetitive operations
b. Uses separate work in process inventory accounts for each process
c. Measures unit cost at end of period by combining costs per equivalent unit
d. Object is a process or department
High standardization
C. Transferring Costs across Departments ⎯overall objective is to determine the total cost per unit of
a product or service.
1. In process costing, manufacturing costs are transferred across work in process inventor
accounts.
2. After production is complete, costs are accumulated and transferred from work in process
inventory account from the final department in the series to the finished goods inventory
account.
II. Equivalent Units of Production⎯used to determine the cost per unit processed by each department.
A. Equivalent Units of Production (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. EUP for Materials and Conversion Costs (Direct Labor and Factory Overhead)
16-5
1. Weighted Average method combines the units and costs across two periods when computing
equivalent units
2. FIFO method computes equivalent units based only on production activity of current period.
3. The objectives, concepts, and journal entries (not amounts) are the same for both methods.
Only the computation of EUP differ. Weighted Average Method is covered in the chapter
and FIFO method is covered in Appendix 16A.
III. Process Costing Illustration⎯a four-step process. Weighted Average Method.
A. Step 1: Determine Physical Flow of Units
1. Reconciles the physical units started in a period with physical units completed in that period.
2. The following totals should agree:
B. Step 2: Compute Equivalent Units of Production (EUP)
1. Must convert the physical units worked on to equivalent units based on the amount of each
input (direct materials, direct labor, and overhead) that has been used.
2. Under the Weighted Average method, the computation of equivalent units of production does
not separate the units in beginning inventory from those units started this period. Instead, the
units are treated as part of a large pool with an average cost per unit.
3. Equivalent Units⎯Direct Materials⎯add together the results of a two-step calculation:
4. Equivalent Units⎯Conversion Costs⎯add together the results of a two-step calculation:
a. Units completed and transferred out during the period X 100% (since the units have all
required labor and overhead).
b. Units in ending inventory X the percent of labor and overhead added during the period.
C. Step 3: Compute Cost per Equivalent Unit
16-6
D. Step 4: Assign and Reconcile Costs
1. Similar in concept to the reconciliation of the physical flow of units (except that dollars are
used instead of units).
2. The following totals should agree:
a. Cost of beginning inventory plus cost assigned to units started during the period (i.e.,
amounts debited to the Goods in Process Inventory during the period) equals total
costs to account for (see 3 below).
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 materials x the related equivalent cost per unit).
ii. Conversion cost assigned during the period (equivalent units in units completed for
Conversion Costs X the related equivalent cost per unit).
b. Cost assigned to ending work in process inventory equals:
E. Process Cost Summary
1. Primary managerial accounting report. Also called a production report.
2. A separate Process Cost Summary is prepared for each process or production department
a. Describes the cost charged to each department.
b. Determines the costs assigned to each department’s output.
3. Three sections:
IV. Accounting and Reporting for Process Accounting
A. 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 indirect costs and assigned
to overhead.
B. Accounting for Materials Costs
1. Record cost of materials acquired on credit for use in factory by debiting Raw Materials
Inventory and crediting Accounts Payable.
16-7
C. Accounting for Labor Costs
1. Assign costs of direct labor used in production by debiting each department’s separate Work
in Process Inventory account and crediting Factory Payroll Payable
2. Assign cost of indirect labor used by debiting Factory Overhead and crediting Factory
Payroll Payable
D. Accounting for Factory Overhead⎯Same steps as Job Order Costing, 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.
3. Determine the amount of overhead to apply to each department. Predetermined rate x actual
cost driver quantity.
4. Apply factory overhead costs to each department by debiting the department’s Work in
Process Inventory and crediting Factory Overhead.
E. Accounting for Transfers Across Production Departments
1. Units and costs are transferred out of one department’s Work in Process account and
transferred into the next processing department’s Work in Process account.
F. Accounting for Transfer to Finished Goods
V. Trends in Process Operations include the following:
Process Design; Just in Time Production; Robotics and Automation; Continuous Processing;
Services, Customer Orientation and Yield.
VI. 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 cost system.
2. Conversion costs (direct labor and factory overhead) are usually accounted for using a
process costing system.
B. A hybrid system of processes requires a hybrid costing system.
16-8
VII. Appendix 16A – 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 assignments are slightly different.
The key difference is in the treatment of beginning work in process inventory.
C. Step 1: Determine the physical flow of units.
D. Step 2: Compute Equivalent Units of Production (EUP)
1. Focus is on what was done during the period.
2. Equivalent Units⎯Direct Materials⎯add together the results of a three-step calculation:
a. Units in beginning inventory X the percent of materials added during the period.
b. Units started and completed during the period X 100% (since all materials were added
during the period).
c. Units in ending inventory X the percent of materials added during the period.
3. Equivalent Units⎯Conversion Costs⎯add together the results of a three-step calculation:
E. Step 3: Compute Cost per Equivalent Unit
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 and conversion costs.
F. Step 4: Assign and Reconcile Costs
1. Similar in concept to the reconciliation of the physical flow of units (except that dollars are
used instead of units).
2. The following totals should agree:
equals the costs accounted for (see 3 below).
16-9
3. Sources of amounts used in cost reconciliation:
a. Cost of the completed beginning inventory units equals beginning balance of the Work 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. Conversion costs assigned: (EU to complete beginning inventory for conversion
costs X equivalent cost per unit
b. Cost assigned to units started and completed during the
16–10
Chapter 16 Alternate Demo Problem
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:
Chapter 16 Solution: Alternate Demo Problem
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
Chapter 19 Solution: Alternate Demo Problem
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