Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20-1
CHAPTER 20
PROCESS COSTING
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Explain process operations and
2, 3, 5, 15,
20-1, 20-3
20-1, 20-2,
SP
20-2, 20-3,
C2. Define equivalent units and
explain their use in process
costing.
6, 12
20-4, 20-5,
20-8, 20-10,
20-11, 20-18
20-4, 20-6,
20-8, 20-9
20-2, 20-3,
20-4, 20-6,
20-7
20-1, 20-8
C3. Describe accounting for
production activity and
preparation of a process cost
summary using weighted
average
13, 14
20-7, 20-12,
20-18, 20-19,
20-20, 20-27
20-12, 20-13,
20-16, 20-17,
20-20
20-2, 20-3,
20-4, 20-5,
20-7, ES
20-7
C4. Describe accounting for
production activity and
preparation of a process cost
summary using FIFO.
(Appendix 20A)
7
20-6, 20-9,
20-14, 20-15,
20-16, 20-17,
20-21, 20-22
20-5, 20-7,
20-10, 20-11,
20-13, 20-18
20-5, 20-6,
20-7
Analytical objectives:
A1. Compare process costing and
job order costing.
20-2
20-3
20-4
A2. Explain and illustrate a hybrid
costing system.
20-27
20-7
Procedural objectives:
P1. Record the flow of materials
costs in process costing.
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20-3, 20-14,
20-15, 20-19,
20-21, 20-25,
20-26
20-1,
GL 20-1
20-4, 20-6
P2. Record the flow of labor costs
in process costing.
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20-26
20-3, 20-14,
20-15, 20-19,
20-22, 20-25,
20-1,
GL 20-1
20-4, 20-6
P3. Record the flow of factory
overhead costs in process
costing.
20-25
20-3, 20-14,
20-15, 20-19,
20-23, 20-25,
20-26
20-1,
GL 20-1
20-6
Grid continues on the next page
the way they differ from job
order operations.
16, 17
20-3
20-4, 20-5,
20-6, 20-9
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20-2
Related Assignment Materials
Student Learning Objectives
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
P4. Record the transfer of goods
20-13, 20-17,
20-11, 20-14,
20-1, 20-3,
20-6
Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises
and Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and
Problems. It allows instructors to monitor, promote, and assess student learning. It can be used in
practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing.
Connect Insight is available through Connect titles.
The Serial Problem (SP) for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
20-26
GL 20-1
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20-3
Synopsis of Chapter Revisions
NEW opener—Stance and entrepreneurial assignment.
Revised exhibit on cost flows in job order and process costing systems.
Revised exhibit on production data and physical flow of units.
Added transfer to finished goods and updated ending balance to WIP T-account for second process.
New section on using process cost summary for decisions.
Added discussion of raw materials Yield to trends section.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20-4
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
2. Except for the first department or process, each receives the
3. Last department produces the finished goods that are ready for
sale and the accumulated costs are transferred to Finished Goods
Inventory.
B. Comparing Process and Job Order Costing Systems
1. Both manufacturers and service companies can use job order and
process production systems.
2. Focus of job order operations is on the individual job or batch.
Features of job order systems:
a. Custom orders
b. Heterogeneous products and services
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. Homogeneous products and services
C. Transferring Costs across Departments ⎯overall objective is to
determine the total cost per unit of a product or service.
Key difference between Job Order and Process Costing Systems
2. Differ in terms of measuring unit costs
a. Job order measures cost per unit upon completion of a job by
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20-5
Chapter Outline
III. 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)
1. The addition of direct material costs at the beginning of a process
(i.e., which steps involve the addition of direct material) may not
2. Equivalent units must then be separately determined for:
a. Direct materials.
b. Conversion Costs (direct labor and overhead)
C. Weighted Average vs. FIFO
1. Weighted Average method combines the units and costs across
two period when computing equivalent units
3. The objectives, concepts, and journal entries (not amounts) are
the same for both methods. Only the computation of EUP differ.
IV. 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:
a. Units in beginning inventory + units started during the period
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20-6
Chapter Outline
B. Step 2: Compute Equivalent Units of Production (EUP)
1. Must convert the physical units worked on to equivalent units
2. Under the Weighted Average method, the computation of
equivalent units of production does not separate the units in
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
overhead added during the period.
C. Step 3: Compute Cost per Equivalent Unit
1. Cost per Equivalent Unit for Direct Materials⎯The materials
2. Cost per Equivalent Unit for Conversion Costs⎯The conversion
costs in the beginning inventory and the conversion costs added
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:
i. Cost of beginning inventory plus cost assigned to units
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
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).
E. Process Cost Summary
2. A separate Process Cost Summary is prepared for each process or
production department
3. Purposes:
a. Help managers control and monitor departments.
4. Three sections:
d. Costs charged to production, including direct materials and
V. Accounting and Reporting for Process Accounting
A. Direct and Indirect Costs
1. Materials and labor that can be traced to a specific process are
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20-8
Chapter Outline
B. Accounting for Materials Costs
1. Record cost of materials acquired on credit for use in factory by
2. Assign costs of direct materials used in production by debiting
3. Assign cost of indirect materials used by debiting Factory
C. Accounting for Labor Costs
1. Assign costs of direct labor used in production by debiting each
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.
E. Accounting for Transfers Across Production Departments
1. Units and costs are transferred out of one department’s Work in
department’s Work in Process account.
F. Accounting for Transfer to Finished Goods
1. Record cost of completed units transferred out by debiting
G. Accounting for Transfer to Cost of Goods Sold
1. Record cost of goods sold by debiting Cost of Goods Sold and
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20-9
Chapter Outline
VI. Trends in Process Operations include the following:
Process Design; Just in Time Production; Automation; Continuous
Processing; Services, Customer Orientation and Yield.
VII. Decision Analysis—Hybrid Costing System
A. Contains features of both job order and process operations
2. Conversion costs (direct labor and factory overhead) are usually
B. A hybrid system of processes requires a hybrid costing system.
1. Assembly line costs may be compiled using process costing.
3. The total product cost will include the assembly line cost per unit plus
the cost of customizing the product.
VIII. Appendix 20A – 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.
1. The following totals should agree:
a. Units in beginning inventory + units started during the period
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
3. Equivalent Units⎯Conversion Costs⎯add together the results of
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20–10
Chapter Outline
E. Step 3: Compute Cost per Equivalent Unit
1. Costs assigned to the department during the period divided by the
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:
a. Costs of beginning inventory plus costs incurred during the
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
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20–11
Chapter 20 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:
Using the Weighted Average method, calculate the equivalent units of
Direct Materials
Direct Labor and Factory Overhead
Using the FIFO method, calculate the equivalent units of
Direct Materials
Direct Labor and Factory Overhead
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
20–12
Chapter 20 Solution: Alternate Demo Problem
Weighted-average Method
Direct
Materials
Direct Labor
and Factory
Overhead
Units completed this period*
7,400
7,400
Chapter 20 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%
Units started and completed
7,000
7,000
3,000
7,700
3,000
8,800