CHAPTER 21
PROCESS COSTING
LEARNING OBJECTIVES
1. DISCUSS THE USES OF A PROCESS COST SYSTEM
AND HOW IT COMPARES TO A JOB ORDER SYSTEM.
2. EXPLAIN THE FLOW OF COSTS IN A PROCESS
COST SYSTEM AND THE JOURNAL ENTRIES TO
ASSIGN MANUFACTURING COSTS.
3. COMPUTE EQUIVALENT UNITS.
4. COMPLETE THE FOUR STEPS TO PREPARE A
PRODUCTION COST REPORT.
*5. COMPUTE EQUIVALENT UNITS USING THE FIFO
METHOD.
CHAPTER REVIEW
Process Cost Systems
1. (L.O. 1) Process cost systems are used to apply costs to similar products that are mass
produced in a continuous fashion, such as the production of ice cream, steel or soft drinks. In
comparison, costs in a job order cost system are assigned to a specific job, such as the
construction of a customized home, the making of a motion picture, or the manufacturing of a
specialized machine.
3. The major differences between a job order cost system and a process cost system are as follows:
Job Order Process
Feature Cost System Cost System
Work in process One for each job One for each process
accounts
Documents used Job cost sheets Production cost reports
Process Cost Flow
4. (L.O. 2) In the Tyler Company example in the text book, manufacturing consists of two
processes: machining and assembly. In the Machining Department, the raw materials are shaped,
honed, and drilled. In the Assembly Department, the parts are assembled and packaged.
Assigning Manufacturing Costs
6. All raw materials issued for production are a materials cost to the producing department. Materials
requisition slips may be used in a process cost system, but fewer requisitions are generally
required than in a job order cost system, because the materials are used for processes rather
than for specific jobs. In the case of the Tyler Company, the entry to record the materials used is:
Work in Process—Machining …………………………………… XXXX
Work in Process—Assembly……………………………………. XXXX
Raw Materials Inventory ………………………………….. XXXX
7. Time tickets may be used in determining the cost of labor assignable to the production
departments. The labor cost chargeable to a process can be obtained from the payroll register or
departmental payroll summaries. All labor costs incurred within a producing department are a cost
of processing the raw materials. In the case of the Tyler Company, the entry to assign the labor
costs is:
Work in Process—Machining …………………………………… XXXX
Work in Process—Assembly……………………………………. XXXX
Factory Labor ………………………………………………… XXXX
9. At the end of the period, the following transfer entries are needed for the Tyler Company to
transfer units to the Assembly department from the Machining department; to transfer from the
Assembly department to Finished Goods; and, to transfer from Finished Goods to Cost of Goods
Sold:
Work in Process—Assembly……………………………………. XXXX
Work in Process—Machining …………………………... XXXX
Equivalent Units
10. (L.O. 3) A major step in process cost accounting is the calculation of equivalent units. Equivalent
units of production measure the work done during the period, expressed in fully completed
units. This concept is used to determine the cost per unit of completed product.
11. The formula to compute equivalent units of production under the weighted-average method is as
follows:
12. The method of computing equivalent units here is referred to as the weighted-average method. It
considers the degree of completion (weighting) of the units completed and transferred out and the
units in ending work in process. A lesser used method, called the FIFO method, is discussed in
the appendix to this chapter.
13. To illustrate the computation of equivalent units using the weighted-average method, assume that
materials are entered at the beginning of the process, conversion costs include both labor and
overhead costs, and the following information is provided for the Processing Department of Silva
Company:
Percentage Complete
Physical Units Materials Conversion Costs
Work in process, Beg. 2,500 100% 80%
Started into production 4,500
Production Cost Report
15. (L.O. 4) A production cost report is the key document used by management to understand the
activities in a department because it shows the production quantity and cost data related to that
department. In order to be ready to complete a production cost report, the company must perform
four steps:
a. Compute the physical unit flow.
16. The computation of physical units involves:
a. adding the units started (or transferred) into production during the period to the units in
process at the beginning of the period to determine the total units to be accounted for; and
b. accounting for these units by determining the output for the period⎯which consists of units
transferred out during the period and units in process at the end of the period.
17. In computing unit costs, production costs are expressed in terms of equivalent units of production.
When equivalent units are different for materials and conversion costs, the formulas for computing
unit costs are as follows:
Total Materials
Cost
÷
Equivalent Units
of Materials
=
Unit Materials
Cost
÷
=
18. The cost reconciliation schedule shows that the total costs accounted for equal the total costs
to be accounted for as follows:
Costs to be accounted for
Transferred out …………………………………… $XXXX
19. Assume the Processing Department of Silva Company has the following additional cost
information:
Work in process, Beg.
Direct materials: 100% complete ………………….. $ 24,000
Conversion costs: 80% complete …………………. 19,620
20. Silva Company’s Processing Department Production Cost Report at the end of the period is as
follows:
Processing Department
Production Cost Report
For the Period Ended
Equivalent Units
Physical Conversion
Units Materials Costs
QUANTITIES
Units to be accounted for
Work in process, Beg. 2,500
Conversion
Materials Costs Total
COSTS
Unit costs
Costs during the period (a) $224,000 $169,620 $393,620
Cost Reconciliation Schedule
Costs accounted for
Transferred out (6,000 X $57.70) $346,200
Work in process, End.
Materials (1,000 X $32.00) $32,000
Operations Costing
21. Companies often use a combination of a process cost and a job order cost system, called
operations costing. Operations costing is similar to process costing in that standardized
Equivalent Units Using the FIFO Method
*22. (L.O. 5) To illustrate the computation of equivalent units using the FIFO method, assume that
materials are entered at the beginning of the process and the following information is provided for
the Processing Department of Silva Company:
Percentage Complete
Physical Units Materials Conversion Costs
Work in process, Beg. 2,500 100% 80%
Started into production 4,500
*23. The equivalent units for material costs of the Processing Department under the FIFO method are
computed as follows:
Processing Department
Work Added Equivalent
Production Data Physical Units This Period Units
Work in process, Beg. 2,500 0
*24. The equivalent units for conversion costs of the Processing Department under the FIFO method
are computed as follows:
Processing Department
Work Added Equivalent
Production Data Physical Units This Period Units
Work in process, Beg. 2,500 20% 500
Started and completed 3,500 100% 3,500
Production Cost Report Using the FIFO Method
*25. Assume the Processing Department of Silva Company has the following additional cost
information:
Work in process, Beg.
Direct materials: 100% complete ………………………………… $ 24,000
Costs incurred during the production
Direct materials ………………………………………………………… $200,000
*26. Silva Company’s Processing Department Production Cost Report at the end of the period using
the FIFO method is as follows:
Processing Department
Production Cost Report
For the Period Ended
Equivalent Units
Physical Conversion
Units Materials Costs
QUANTITIES
Units to be accounted for
Work in process, Beg. 2,500
Started into production 4,500
Conversion
Materials Costs Total
COSTS
Unit costs
Costs during the period (a) $200,000 $150,000 $350,000
Equivalent units (b) 4,500 4,600
Cost Reconciliation Schedule
Costs accounted for
Transferred out
Work in process, $ 43,620
LECTURE OUTLINE
A. Uses of Process Cost Systems.
1. Process cost systems are used to apply costs to similar products that
are mass-produced in a continuous fashion.
B. Similarities and Differences Between Job Order Cost and Process Cost
Systems.
1. In a process cost system, costs are tracked through a series of connected
manufacturing processes or departments, rather than by individual jobs
as in a job order cost system.
2. Companies use process cost systems when they produce a large volume
of relatively homogeneous products.
3. Job order cost and process cost systems are similar in three ways:
a. Both systems track the same manufacturing cost elements—direct
materials, direct labor, and manufacturing overhead.
4. There are four main differences between the two cost systems:
a. In a job order cost system, only one work in process account is used
while separate accounts are maintained for each department or
manufacturing process in a process cost system.
b. In a job order cost system, costs are charged to individual jobs and
summarized in a job cost sheet; in a process cost system, costs are
summarized in a production cost report for each department.
c. Costs are totaled at the completion of a job in a job cost system but
at the end of a time period (i.e. a month or year) in a process cost
system.
C. Process Cost Flow.
1. The company can add materials, labor, and manufacturing overhead in
each production department.
D. Assigning Manufacturing Costs.
1. The accumulation of the costs of materials, labor, and manufacturing
overhead is the same in a process cost system as in a job order cost
system.
a. All raw materials issued for production are a materials cost to the
producing department. A process cost system may use materials
requisition slips, but fewer requisitions are generally required than
in a job order system, because the materials are used for processes
rather than specific jobs.
4. The entry to record units completed and transferred to the warehouse is
a debit to Finished Goods Inventory and a credit to Work in Process.
MANAGEMENT INSIGHT
Some companies continue to assign manufacturing overhead on the basis of
direct labor despite the fact that there is no cause-and-effect relationship between
labor and overhead. In such cases, the overhead rates may be misleading.
What is the result if a company uses the wrong “cost driver” to assign manufac–
turing overhead?
Answer: Incorrect application of manufacturing overhead will result in some