CHAPTER 3
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.
2. Job order cost and process cost systems are similar in that (a) both use the same three
manufacturing cost elements of direct materials, direct labor, and manufacturing overhead;
(b) both accumulate costs of raw materials by debiting Raw Materials Inventory, factory labor by
debiting Factory Labor, and manufacturing overhead costs by debiting Manufacturing Overhead;
and (c) both assign costs to the same accounts of Work in Process, Finished Goods Inventory,
and Cost of Goods Sold.
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
for the job during the period
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.
5. Materials, labor, and manufacturing overhead can be added in both the Machining and Assembly
Departments. When the Machining Department finishes its work, the cost of the partially
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
8. The basis for allocating the overhead costs to the production departments in an objective and
equitable manner is the activity that “drives” or causes the costs. A primary driver of overhead
costs in continuous manufacturing operations is machine time used, not direct labor. Thus,
machine hours are widely used in allocating manufacturing overhead costs. In the case of the
Tyler Company, the entry to allocate overhead is:
Work in Process—Machining …………………………………… XXXX
Work in Process—Assembly……………………………………. XXXX
Manufacturing Overhead …………………………………. 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
Finished Goods Inventory ……………………………………….. XXXX
Work in Process—Assembly ……………………………. XXXX
Cost of Goods Sold ……………………………………………….. XXXX
Finished Goods Inventory ……………………………….. 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
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
14. The two equivalent unit computations are as follows:
Equivalent Units
Conversion
Materials Costs
Units transferred out 6,000 6,000
Work in process, End
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.
b. Compute the equivalent units of production.
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
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
÷
Equivalent Units
=
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
Work in process, End
Materials………………………………………… $XXXX
Conversion costs …………………………….. XXXX XXXX
Total costs ……………………………………………. $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
Cost of work in process, Beg. …………………………….. $ 43,620
Costs incurred during production
Direct materials …………………………………………. $200,000
Conversion costs ……………………………………….. 150,000
Costs incurred …………………………………………………. $350,000
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
Started into production 4,500
Total units 7,000
Conversion
Materials Costs Total
COSTS
Unit costs
Costs during the period (a) $224,000 $169,620 $393,620
Equivalent units (b) 7,000 6,600
Cost Reconciliation Schedule
Costs accounted for
Transferred out (6,000 X $57.70) $346,200
Work in process, End.
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
methods are used to manufacture the product. At the same time, the product may have some
customized, individual features that require the use of a job order cost system.
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
Started and finished 3,500 100% 3,500
*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
Conversion costs: 80% complete ………………………………… 19,620
*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
Costs to complete beg. work in process
Conversion costs (500 X $32.609) 16,305
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.
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. Process Cost Flow.
1. The company can add materials, labor, and manufacturing overhead in
each production department.
2. The costs of units completed are transferred from one department to
another as those units move through the manufacturing process.
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.
b. Companies may use time tickets to determine the cost of factory
labor assignable to production departments. Since labor costs are
c. The objective in assigning overhead in a process cost system is to
allocate the overhead costs to the production departments on an
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
E. Equivalent Units.
1. Equivalent units of production measure the work done during the period,
expressed in fully completed units.
2. Companies use this measure to determine the cost per unit of
completed product.
3. Equivalent units of production are the sum of:
4. The weighted-average method is most commonly used to compute
equivalent units of production.
5. This method considers the degree of completion (weighting) of the units
completed and transferred out and the ending work in process.
MANAGEMENT INSIGHT
In recent years more companies have been remanufacturing a wide variety of
products including cell phones, car parts, and medical equipment. Rising
commodity prices and regulations requiring that certain electronic items be recycled
has fueled this trend.
In what ways might the relative composition (materials, labor, and overhead) of a
remanufactured product’s cost differ from that of a newly made product?
Answer: We would expect that the materials costs would be substantially
reduced since the bulk of the physical product is being reused. The
F. Production Cost Report.
1. In order to complete a production cost report, the company must perform
four steps:
a. Compute the physical unit flow.
2. The first step in completing a production cost report requires computing
physical unit flow.
a. The physical units are computed by adding the units started (or
transferred) into production during the period to the units in process
3. The second step in completing a production cost report requires computing
equivalent units of production.
a. Each processing department adds materials at the beginning of the
process, and incurs conversion costs uniformly during the process.
4. The third step in completing a production cost report requires computing
unit production costs.
a. Unit production costs are costs expressed in terms of equivalent units
of production.
b. When equivalent units of production are different for materials and
5. The fourth step in completing a production cost report requires preparing
a cost reconciliation schedule.
a. The company prepares a cost reconciliation schedule to assign total
costs to (1) units transferred out to the next department and (2)
ending work in process.
G. Preparing the Production Cost Report.
1. The production cost report contains both quantity and cost data for a
production department.
a. This report is an internal document for management that shows
production quantity and cost data for a production department.
b. There are four steps in preparing a production cost report:
(1) Prepare a physical unit schedule.
(2) Compute equivalent units.
c. Production cost reports provide a basis for evaluating the productivity
*H. Equivalent Units Under FIFO.
1. Under the FIFO method, companies compute equivalent units on a first–
in, first-out basis.
2. Companies assume that the beginning work in process is completed
before new work is started under the FIFO method.
3. Equivalent units are the sum of the work performed to:
a. Finish the units of beginning work in process inventory.
4. The units started and completed during the current period are the units
transferred out minus the units in beginning work in process.
6. As with the weighted-average method, once companies determine the
physical flow of units, they need to compute the equivalent units of
production.
a. When companies add materials at the beginning of the process, no
additional materials costs are required to complete the beginning
b. Equivalent units for materials are the sum of:
(1) Units started and finished.
c. Equivalent units for conversion costs are the sum of:
(1) Equivalent units to complete beginning work in process.
7. The unit production costs are based entirely on the production costs
incurred during the month. The costs in the beginning work in process
are ignored because they were incurred on work done in the preceding
month.
8. In preparing a cost reconciliation schedule under the FIFO method:
a. The cost of the beginning work in process is always assigned to the
9. The weighted-average method of computing equivalent units is simple to
understand and apply. It will be very similar to the FIFO method when
prices do not fluctuate significantly from period to period.
10. Conceptually, the FIFO method is superior to the weighted-average
method because it measures current performance using only costs
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Costs are assigned to each specific job in a process cost system.
True False
2. In a process cost system, total costs are determined at the end of a period of time, such
as a month.
True False
3. In a process cost system, the unit cost is total manufacturing costs divided by the
equivalent units produced during the period.
True False
4. 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.
True False
5. More materials requisitions are generally required in a process cost system than in a job
order cost system.
True False
6. Equivalent units of production equals units completed and transferred out + units in
beginning work in process.
True False
7. Two equivalent unit computations are necessary—one for materials and the other for
conversion costs.
True False
8. The first step in preparing a production cost report is to compute the equivalent units of
production.
True False
9. The cost reconciliation schedule shows that the total costs accounted for equal the total
costs to be accounted for.
True False
*10. Units in work in process at the beginning of the period are included in units “started and
completed” under the FIFO method.
True False
Multiple Choice
1. Which of the following is not a step in preparing a production cost report?
a. Prepare a cost reconciliation schedule.
b. Compute equivalent units of production.
c. Compute the physical unit flow.
d. Assign costs to particular jobs.
2. A department has no beginning work in process, has started 80,000 units and completed
50,000 units. Its ending work in process is 30,000 units, 60% complete as to conversion
costs and fully complete as to materials. Its equivalent units for conversion costs are
a. 50,000.
b. 80,000.
c. 68,000.
d. 44,000.
3. In process costing, the computation of unit production costs requires
a. the accumulation of material and conversion costs in work in process for each
department or process.
b. the computation of equivalent units for material and conversion costs.
c. both a and b.
d. neither a nor b.
4. Which of the following is not included in a production cost report?
a. Costs accounted for.
b. Entries to assign cost.
c. Units accounted for.
d. Units to be accounted for.
5. Unit costs for materials and conversion costs amount to $4 and $5 respectively. The
ending work in process costs for 8,000 units (100% complete as to material and 70%
complete as to conversion costs) amount to
a. $60,000.
b. $72,000.
c. $44,000.
d. $40,000.
ANSWERS TO QUIZ
True/False
1. False 6. False
Multiple Choice
1. d.