Chapter 04 – Process Costing and Hybrid Product-Costing Systems
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CHAPTER 4
PROCESS COSTING AND HYBRID PRODUCT-COSTING SYSTEMS
Learning Objectives
2. Prepare journal entries to record the flow of costs in a process-costing system
with sequential production departments.
4. Compute the cost per equivalent unit under the weighted-average method of
process costing.
6. Prepare a departmental production report under weighted-average process
costing.
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Chapter Overview
I. Comparison of Job-Order Costing and Process Costing
A. Flow of costs
B. Differences between job-order and process costing
II. Equivalent Units: A Key Concept
A. Equivalent Units
1. Stage of completion of the work-in-process ending inventory
2. Equivalent-unit calculations
III. Illustration of Process-Costing
A. The departmental production report
B. Weighted-average method
C. Steps in preparing the departmental production report
2. Calculation of equivalent units
4. Analysis of total costs
IV. Other Issues in Process Costing
A. Actual versus normal costing
V. Hybrid Product-Costing Systems
A. Operation costing for batch manufacturing processes
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Key Lecture Concepts
I. Comparison of Job-Order Costing and Process Costing
• Both systems have similar objectives: accumulate total product costs and
assign those costs to each unit manufactured.
• With a process-costing system, a company works in a repetitive
production environment, manufacturing a large number of like units in a
• Cost accumulation: Costs in a job-order system are accumulated by job; in a
process-costing system, the costs are accumulated by department or
process.
• Flow of costs: The flow of costs through general ledger accounts is similar
in both systems: through Work in Process, to Finished Goods, to Cost of
Goods Sold. In a sequential production operation, each department
establishes its own Work-in-Process account. The cost transferred from
one department to the next is called transferred-in costs.
II. Equivalent Units: A Key Concept
• Equivalent units is a key concept in process costing. The term refers to
the amount of manufacturing activity that has been applied to a batch of
physical units after adjusting for the stage of completion.
➢ If a batch of goods has been completed, the number of physical
units and equivalent units will be the same.
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• Conversion costs are usually added continuously throughout the process
in text problems. Thus, if 100 units are 60% of the way through the
process, the company is said to have performed 60 equivalent units of
work during the period.
Teaching Tip: In the preceding example, emphasize to students that none of the
• Direct materials, in contrast, are usually added at discrete points in text
problems. When considering materials, determine at what point the
ending in-process units are and evaluate whether or not the materials
have been added.
• When computing the cost of a unit, we base the related calculations on
• Next, the direct material cost and conversion cost is divided by the proper
III. Illustration of Process-Costing
• Departmental production reports are completed to disclose equivalent
units and unit costs, along with the cost of completed production and the
cost of the ending work-in-process inventory.
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• The text focuses on the weighted-average method of process costing
because of the method’s popularity in practice.
➢ Under this approach, all units completed during a period are
assumed to be started and completed during that period.
• Production reports have several sections, which are prepared as follows:
➢ Step 1: Analyze the physical flow of units.
IV. Other Issues in Process Costing
• Actual versus normal costing: Either actual or applied overhead (i.e., actual
costing or normal costing) may be used with process costing. The use of
applied overhead smooths per-unit cost fluctuations attributable to
changes in production levels, as was the case in job-costing systems.
V. Hybrid Product-Costing Systems
• Some processes have elements of both the job-cost environment and the
process-cost environment, and companies turn to a third (hybrid) system
known as operation costing.
➢ One example involves the manufacture of fruit juice, with similar
conversion processes but different direct materials (e.g., artificial
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sweetener versus sugar).
Teaching Overview
Process costing can be introduced by first comparing it to job costing and discussing the
similar objective of each: efficient accumulation of costs and assignment of costs to
individual products. While reviewing the job-cost area, I ask students why it isn’t
possible to determine per-unit product cost with the following calculation:
Per-unit cost = Total production cost ÷ Total number of units
Students quickly respond that the units are different in size, shape, and other features. I
then ask if in process costing where, by definition, the units are like units, whether the
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Once the concept of equivalent units has been mastered, production reports progress
smoothly. Some time should be spent putting the report into a business context: what it
measures, how it tracks unit costs, how one department’s report links to that of the next
department, and how one month’s report links to that of the next month.
Links to the Text
Homework Grid
Item No.
Learning
Objectives
Completion
Time (min.)
Exercises:
4-15
1, 3
15
4-16
1, 3
20
4-17
1, 3
15
4-18
1, 3
15
4-19
1
30
4-20
1, 4
15
4-21
1, 4
15
4-22
4, 5
25
4-23
4, 5
25
4-24
7
45
Problems:
4-25
3, 4, 5
45
4-26
3, 4, 5
45
4-27
3, 4, 5
50
4-28
2, 3, 4, 5
40
4-29
2, 3, 4, 5
40
4-30
3, 4, 5
35
4-31
3, 4, 5, 6
50
4-8
4-32
2, 3, 4, 5
30
4-33
3, 4, 5
30
4-34
3, 4, 5, 6
50
4-35
2, 3, 4, 5, 6
45
4-36
7
35
4-37
7
40
4-38
7
45
Case:
4-39
3, 4, 5, 6
45