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Chapter 4
Lecture Notes
Chapter theme: Managers need to assign costs to products
to facilitate external financial reporting and internal
I. Comparison of job-order and process costing
A. Similarities between job-order and process costing
iii. The flow of costs through the manufacturing
accounts is basically the same in both systems.
B. Differences between job-order and process costing
i. Process costing is used when a single product is
produced on a continuing basis or for a long period
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processed during the period. Job-order costing
systems accumulate costs by individual jobs.
Quick Check
−
process vs. job-order costing
II. Cost flows in process costing
A. Processing departments − An organizational unit
where materials, labor, or overhead costs are added to
the product.
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Learning Objective 1: Record the flow of materials,
labor, and overhead through a process costing system.
B. The flow of materials, labor, and overhead costs
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4-5
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in Process. When work in process is
completed, the costs are transferred to
Finished Goods. When finished goods are
sold, the costs are transferred to Cost of
Goods Sold.
ii. Nonetheless, there is a key fundamental
difference between process and job-order costing
systems.
2. Process costing systems trace and apply
manufacturing costs to departments.
a. A separate Work in Process account
is maintained for each processing
department.
iii. T-account and journal entry views of process
cost flows (For purposes of this example, assume
there are two processing departments—A and B).
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exception of the specific Work in Process account for
each department under process costing.
(1). Direct material costs are debited
to the appropriate departmental
Work in Process account
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b. In journal entry form:
(1). Debit the respective
departmental Work in Process
accounts. Credit Raw Materials.
2. The flow of labor costs.
a. In T-account form:
(1). Direct labor costs are debited to
the appropriate departmental
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b. In journal entry form:
(1). Debit the respective
departmental Work in Process
accounts. Credit Salaries and
Wages Payable.
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3. The flow of manufacturing overhead
costs.
a. In T-account form:
(1). Manufacturing overhead costs
are debited to the respective
departmental Work in Process
(1). Debit the appropriate
departmental Work in Process
accounts. Credit Manufacturing
Overhead.
4. The flow of manufacturing costs for
(1). The cost of direct materials,
direct labor, and manufacturing
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(2). The transferred-in costs from
Department A are added to the
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b. In journal entry form:
(1). Debit Work in Process −
5. The flow of manufacturing costs from the
final processing department to finished
goods.
a. In T-account form:
(1). Debit Finished Goods and credit
(1). Debit Finished Goods and credit
6. The flow of manufacturing costs from
Finished Goods to Cost of Goods Sold.
a. In T-account form:
III. Equivalent units of production
A. Equivalent units − are defined as the product of the
number of partially completed units and the percentage
completion of those units.
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partially completed units complicate the
determination of a department’s output for a given
period and the unit cost that should be assigned to
that output.
ii. Equivalent units − the basic idea.
1. Two half completed products are equivalent
Quick Check
−
calculating equivalent units
iii. Equivalent units can be calculated two ways.
1. The FIFO method is covered in the
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B. The weighted-average method of calculating
equivalent units
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i. Characteristics of the weighted-average method:
1. This method makes no distinction between
work done in the prior and current periods.
It blends together units and costs from the
ii. Treatment of direct labor
1. Direct labor costs are often small in
comparison to the other product costs in
process cost systems.
iii. An example of the weighted-average method
1. Assume that Smith Company’s Assembly
Department reported activity for June as
shown on this slide.
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3. The second step is to identify the equivalent
units of production in ending work in
process with respect to materials for the
Helpful Hint: Explain that there will most likely be
differences in the equivalent unit calculations between
materials and conversion costs, as materials are
usually added at the beginning of production, while
conversion costs are added during the period.
5. The equivalent units of production equals
the units completed and transferred out
(5,400 units) plus the equivalent units
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Helpful Hint: The treatment of beginning inventory
under the weighted-average method often puzzles
students, since work done in the prior periods is
included in the equivalent units. Explain that this is
called the weighted-average method precisely because
it averages together beginning inventory and work
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IV. Compute and apply costs
Learning Objective 3: Compute the cost per equivalent
unit using the weighted-average method.
A. Computing the cost per equivalent unit—weighted
average method
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1. The numerators for Smith Company
($124,740 for materials and $85,050 for
conversion) are computed as shown.
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B. Applying Costs—Weighted Average Method
Learning Objective 4: Assign costs to units using the
weighted-average method.
i. Computing the cost of ending work in process
inventory.
1. The first step is to record the equivalent
units of production in ending work in
process inventory (540 units for materials
and 270 units for conversion).
ii. Computing the cost of units transferred out.
1. The first step is to record the units
transferred out to the next department (5,400
units for materials and conversion).
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Learning Objective 5: Prepare a cost reconciliation
report.
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iii. Reconciling costs
1. Computing the costs to be accounted for:
a. The first step is to record the cost of
beginning work in process as shown
2. Computing the costs accounted for:
a. The first step is to record the
previously computed cost of ending
working process inventory ($15,390).
V. Operation costing
A. Operation costing is a hybrid of job-order and process
costing because it possesses attributes of both
approaches.
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(e.g., shoes made with expensive leather
would be charged accordingly, as would
shoes made with inexpensive synthetic
VI. Appendix 4A: FIFO method (slide 56: title slide)
A. FIFO vs. weighted-average method
i. The FIFO method (generally considered more
accurate than the weighted-average method) differs
from the weighted-average method in two ways:
B. Equivalent units − FIFO method
Learning Objective 6: Compute the equivalent units of
production using the FIFO method.
i. Let’s revisit the Smith Company example that was
used to illustrate the weighted-average method.
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