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Chapter 18—Process Costing
Financial and Managerial Accounting, 18e 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
18-2 Instructor’s Resource Manual
Brief Topical Outline
A. Production of goods and services and costing systems—see International
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 and Pathways Connection (page 818)
C. Concluding remarks
Topical Coverage and Suggested Assignment
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
*Homework assignment (to be completed prior to class)
Chapter 18—Process Costing
Financial and Managerial Accounting, 18e 18-3
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 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.
Chapter 18—Process Costing
18-4 Instructor’s Resource Manual
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 5 or 7 to establish a solid understanding of equivalent
units before turning to the development of product costs. Problem 7 provides a
comprehensive review of the process costing system. 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, decide whether job order costing or a process costing system would be
more appropriate for each company. Be sure to include an explanation to support each
conclusion.
Chapter 18—Process Costing
Financial and Managerial Accounting, 18e 18-5
CHAPTER 18 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question.
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
18-6 Instructor’s Resource Manual
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
Financial and Managerial Accounting, 18e 18-7
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
18-8 Instructor’s Resource Manual
SOLUTIONS TO CHAPTER 18 10-MINUTE QUIZZES
QUIZ A
1 C
QUIZ B
QUIZ C
Chapter 18—Process Costing
Financial and Managerial Accounting, 18e 18-9
Assignment Guide to Chapter 18
Brief
Exercises
Exercises
Problems
Cases
Net
Item Number
1 – 10
1 – 15
1
2
3
4
5
6
7
8
1
2
4
3
Time estimate (in minutes)
< 15
< 15
20
20
30
30
35
35
50
50
30
20
30
25
Difficulty rating
E
E
E
E
M
M
M
M
S
S
S
M
M
E
Learning Objectives:
1, 2
1, 13
1. Distinguish production
procedures that match with
process costing from those that
correspond with job order
costing.
Chapter 18—Process Costing
18-10 Instructor’s Resource Manual
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
