MAC2023 - TOPIC 6: PROCESS COSTING

Cost Accounting
12th Edition, International Edition

PROCESS
COSTING
(PART 1)

TOPIC 6
(Chapter 4 – Hilton & Platt)
MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
List and explain the similarities
and important differences between
job-order and process costing
4-2
MAC2023 - TOPIC 6: PROCESS COSTING

Comparison of Job-Order Costing and

Process Costing (1 of 2)
Process
Process Job-Order
Costing
Costing Costing

 Used for production of small,

identical, low-cost items.
 Mass produced in automated
continuous production
processes.
 Costs cannot be directly traced to
each unit of product. 3
MAC2023 - TOPIC 6: PROCESS COSTING

Comparison of Job-Order Costing and

Process Costing (2 of 2)
Process
Process Job-Order
Costing
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill

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MAC2023 - TOPIC 6: PROCESS COSTING

Job-Order Costing vs. Process Costing

Job-order costing Process costing

 Costs accumulated by  Costs accumulated by
the job. department or process.
 Work in process has a  Work in process has a
job-cost sheet for each production report for each
job. batch of products.
 Many unique, high-cost  A few identical, low-cost
jobs. products.
 Jobs built to customer  Units continuously
order. produced for inventory in
automated process.

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MAC2023 - TOPIC 6: PROCESS COSTING

Differences Between Process and Job-

Order Costing (1 of 2)
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
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MAC2023 - TOPIC 6: PROCESS COSTING

Differences Between Process and Job-

Order Costing (2 of 2)
The work-in-process
account consists of
individual products in a
Direct Material
process-cost system.

Direct Labor Finished

& Overhead Products Goods
(Conversion)

When direct labor is a relatively small amount Cost of

compared to material and overhead, it is often Goods
combined with overhead. Sold
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MAC2023 - TOPIC 6: PROCESS COSTING

Similarities Between Job-Order and

Process Costing
1. Both systems assign material, labor, and overhead
costs to products and they provide a mechanism for
computing unit product costs.
2. Both systems use the same manufacturing accounts,
including Manufacturing Overhead, Raw Materials,
Work in Process, and Finished Goods.
3. The flow of costs through the manufacturing accounts is
basically the same in both systems.

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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Prepare journal entries to record
the flow of costs in a process-
costing system with sequential
production departments
MAC2023 - TOPIC 6: PROCESS COSTING

Process Cost Flows – Single Department

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MAC2023 - TOPIC 6: PROCESS COSTING

Journal Entry
Direct Material, Direct Labor, and
Overhead Applied

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MAC2023 - TOPIC 6: PROCESS COSTING

Process Cost Flows –Two Departments

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MAC2023 - TOPIC 6: PROCESS COSTING

Journal Entry
Dept. B – Transferred In Costs

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MAC2023 - TOPIC 6: PROCESS COSTING

Journal Entry
Dept. B – Direct Material, Direct Labor, and
Manufacturing Overhead

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MAC2023 - TOPIC 6: PROCESS COSTING

Journal Entry
Goods Completed

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MAC2023 - TOPIC 6: PROCESS COSTING

Journal Entry
Cost of Goods Sold

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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Prepare a table of equivalent units
under weighted-average process
costing
MAC2023 - TOPIC 6: PROCESS COSTING

Equivalent Units: A Key Concept

 By definition, units in work-in-process inventory

at both the beginning and end of the period are
only partially complete (finished units are
transferred out).
 Equivalent units is a concept expressing these
partially completed units.
 Equivalent units refers to the amount of
manufacturing activity that has been applied to a
batch of physical units.

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MAC2023 - TOPIC 6: PROCESS COSTING

Equivalent Units of Production

Equivalent units are the
product of the number
of partially completed
units and the
percentage completion
of those units.

These 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.

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MAC2023 - TOPIC 6: PROCESS COSTING

Equivalent Units Example

Two half completed products are

equivalent to one completed product.

+ = l

So, 10,000 units that are 70% complete

are equivalent to 7,000 complete units.

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MAC2023 - TOPIC 6: PROCESS COSTING

Equivalent Units Question 1

For the current period, Jones started 15,000

units and completed 10,000 units, leaving
5,000 units in process 30% complete. How
many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000

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MAC2023 - TOPIC 6: PROCESS COSTING

Equivalent Units Question 1 (Solved)

For the current period, Jones started 15,000

units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500 10,000 units + (5,000 units × .30)
= 11,500 equivalent units
c. 13,500
d. 15,000

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MAC2023 - TOPIC 6: PROCESS COSTING

Equivalent Units Question 2

Jones incurred $27,600 in production costs

for the 11,500 equivalent units. What was
Jones’s cost per equivalent unit for the
period?
a. $1.84
b. $2.76
c. $2.40
d. $2.90

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MAC2023 - TOPIC 6: PROCESS COSTING

Equivalent Units Question 2 (Solved)

Jones incurred $27,600 in production costs

for the 11,500 equivalent units. What was
Jones’s cost per equivalent unit for the
period?
a. $1.84
b. $2.76
$27,600 ÷ 11,500 equivalent units
c. $2.40
= $2.40 per equivalent unit
d. $2.90

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MAC2023 - TOPIC 6: PROCESS COSTING

Calculating and Using Equivalent Units

of Production
To calculate the direct materials and conversion
costs per equivalent unit for the period:

Materials Materials cost for the period

cost per
=
equivalent Materials equivalent units for
unit
the period
Conversion
cost per Conversion cost for the period
equivalent =
unit Conversion equivalent units for
the period
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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Use process costing in the first
production department
– Weighted Average Method
MAC2023 - TOPIC 6: PROCESS COSTING

Equivalent Units of Production –

Weighted-Average Method
 Process costing can be accomplished using the
weighted-average method or the FIFO method.
 The weighted-average method . . .
 Makes no distinction between work done in the prior
period and work done in the current period.
 Blends together units and costs from the prior period
and the current period.
 The FIFO method is a more complex method and is
rarely used in practice.

27
MAC2023 - TOPIC 6: PROCESS COSTING

Departmental Production Report

Analysis of
physical flow • 1
of units

Calculation
of equivalent • 2
units

Computation
of unit costs
•
3

Analysis of • 4
total costs

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example (1 of 2)

 MVP Sports Equipment Company makes baseball gloves in

two departments, Cutting and Stitching.
 MVP uses the weighted-average process costing.
 Material is added at the beginning of the Cutting
Department, while conversion is incurred uniformly
throughout the process.
 Using the following information for the month of March, let’s
prepare a production report for the Cutting Department.

29
MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example (2 of 2)

Work in process, March 1: 20,000 units Cost
Materials: 100% complete $ 50,000
Conversion: 10% complete 7,200

Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 units

Materials 100% complete
Conversion 50% complete

Costs incurred during March

Materials cost 90,000
Conversion costs:
Direct labor $ 86,000
Applied manufacturing overhead 107,500
Total conversion costs 193,500
Total costs to account for $ 340,700

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example –Units

Accounted For (Weighted Average)
① Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Equivalent

Units (Weighted Average)
② Calculation of Equivalent Units
Conversion Equivalent Units
Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000 50% of 10,000 units

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Beginning inventory % is not used in weighted-average method.

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example - Equivalent

Units (Weighted Average)
② Calculation of Equivalent Units

Conve rs ion Equivale nt Units

Phys ic al Pe rc e ntage Dire c t
Units Comple te Mate rial Conve rs ion

Work in proc e s s , Marc h 1 20,000 10%

Units s tarte d during Marc h 30,000 100% of 10,000 units, all
Total units to ac c ount for 50,000 material added at beginning

Units c omple te d and trans fe rre d 40,000 100% 40,000 40,000

Work in proc e s s , Marc h 31 10,000 50% 10,000 5,000
Total units ac c ounte d for 50,000
Total e quivale nt units 50,000 45,000

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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Compute the cost per equivalent
unit under the weighted-average
method of process costing

4-34
MAC2023 - TOPIC 6: PROCESS COSTING

Computation of Unit Costs (Weighted

Average)

Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units $2.80 + $4.46

$200,700 ÷ 45,000 equivalent units

35
MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Analyze the total production costs
for a department under the
weighted-average method of
process costing
MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Total Costs

(Weighted Average)

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Total Costs

(Weighted Average)
Analysis of total costs
Co s t o f g o o ds c o mple te d and trans fe rre d during Marc h
40,000 units × $7.26 pe r e quivale nt unit $ 290,400

Co s ts re maining in wo rk-in-pro c e s s o n Marc h 31

Dire c t Mate rial:
10,000 e quivale nt units × $2.80 pe r e quivale nt unit $ 28,000
Convers io n:
5,000 e quivale nt units × $4.46 pe r e quivale nt unit 22,300
To tal c o s t of Marc h 31 wo rk-in-proc e s s 50,300
To tal c o s ts ac c o unte d fo r $ 340,700

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Costs

Accounted For (Weighted Average)
Analysis of total costs
Cos t of goods c omple te d and trans fe rre d during Marc h
40,000 units × $7.26 pe r e quivale nt unit $ 290,400

Cos ts re maining in work-in-proc e s s on Marc h 31

Dire c t Mate rial:
10,000 e quivale nt units × $2.80 pe r e quivale nt unit $ 28,000
Convers io n:
5,000 equivale nt units × $4.46 pe r e quivalent unit 22,300
Total c os t of Marc h 31 work-in-proc e s s 50,300
All costs
Total c os ts ac c ounte d fo r $ 340,700
accounted for

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MAC2023 - TOPIC 6: PROCESS COSTING

Journal entry and WIP account – Cutting

Department (Weighted Average)

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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Prepare a departmental production
report under weighted-average
process costing

4-41
MAC2023 - TOPIC 6: PROCESS COSTING

MVP Sports Equipment Report - (Weighted MVP SPORTS EQUIPMENT COMPANY

Average) Production Report: Cutting Department

Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Direct
Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000

Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

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MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Analyze the total production costs
for a department under the FIFO
method of process costing
MAC2023 - TOPIC 6: PROCESS COSTING

First-in, First-Out (FIFO) Process-Costing

Method
 Assigns the cost of the previous accounting
period’s equivalent units in beginning work-in-
process inventory to the first units completed and
transferred out of the process.
 Assigns the cost of equivalent units worked on
during the current period first to complete
beginning inventory, next to started and
completed new units, and finally to units in
ending work-in-process inventory.

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MAC2023 - TOPIC 6: PROCESS COSTING

First-in, First-Out Process-Costing Method

 A distinctive feature of FIFO process-costing

method is that work done on beginning inventory
is kept separate from work done in the current
period.
 There is no blending of costs as we saw with the
weighted-average method.
 Let’s look at the same example in Weighted
average method, MVP Sports Equipment
Company

45
MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Units

Accounted For (FIFO)
① Analysis of Physical Flow of Units (same as WA)

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Equivalent

Units (FIFO)
② Calculation of Equivalent Units (method 1)
Co nve rs ion Equiva le nt Units
Phys ic al Pe rc e ntage Dire c t
Units Co mple te Ma te rial Conv e rs ion

Work in pro c e s s , Marc h 1 2 0,000 10%

Units s tarte d during Marc h 3 0,000
Total units to ac c ount for 5 0,000

Units c omple te d a nd tra ns fe rre d 40 ,0 00 100 % 40,0 00 4 0,0 00

Work in pro c e s s , Marc h 3 1 1 0,000 50% 10,0 00 5,0 00
Total units ac c ounte d for 5 0,000
Total e quivale nt units 50,0 00 4 5,0 00
Le s s : e quivale nt units re pre s e nte d
in Be g WIP 10% 20,0 00 2,0 00
Ne w E.U ac c omplis he d in Marc h o nly 30,0 00 4 3,0 00

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report Example – Equivalent

Units (FIFO)
② Calculation of Equivalent Units (Method 2)
Conve rs ion Equivale nt Units
Phys ic al Pe rc e ntage Dire c t
Units Comple te Mate rial Conve rs ion

Work in proc e s s , Marc h 1 20,000 10%

Units s tarte d during Marc h 30,000
Total units to ac c ount for 50,000
90% x 20000
Units c omple te d and trans fe rre d
From Be ginning WIP 20,000 10% - 18,000
Units s tarte d and c omple te d 20,000 100% 20,000 20,000
Work in proc e s s , Marc h 31 10,000 50% 10000 5000
Total units ac c ounte d for 50,000
Total e quivale nt units 30,000 43,000

Conversion Percentage Complete of Units started and completed always 100%

48
MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Compute the cost per equivalent
unit under the FIFO method of
process costing

4-49
MAC2023 - TOPIC 6: PROCESS COSTING

Computation of Unit Costs (FIFO)

Dire c t
Ma te rial Co nve rs ion Tota l
Wo rk in Proc e s s , Ma rc h 1 - - $ 5 7,20 0
Cos ts inc urre d during Ma rc h 9 0,00 0 19 3 ,50 0 2 8 3,50 0
Tota l c o s ts to a c c o unt fo r $ 9 0,00 0 $ 19 3 ,50 0 $ 3 4 0,70 0
Equivale nt units 3 0,00 0 4 3 ,00 0
Cos t pe r e quiv ale nt unit $ 3 .0 0 $ 4.5 0 $ 7.5 0

These costs were incurred during February. They are not

included in the unit-cost calculation in March.

50
MAC2023 - TOPIC 6: PROCESS COSTING

LEARNING OBJECTIVE
Analyze the total production costs
for a department under the FIFO
method of process costing
MAC2023 - TOPIC 6: PROCESS COSTING

Production Report – Total Costs (FIFO)

Analysis of total costs
Co s t o f g o o ds c o mple te d a nd tra ns fe rre d during Ma rc h:
Fro m Be g . WIP (tra ns fe rre d o ut firs t) $ 5 7 ,2 0 0
Co s t to c o mple te Be g . WIP:
Dire c t Ma te ria l:
0 e quiva le nt units x $ 3 .0 0 pe r e quiv a le nt unit $ -
Co nv e rs io n:
1 8 ,0 0 0 e quiv a le nt units x $ 4 .5 0 pe r e quiv a le nt unit 8 1 ,0 0 0 8 1 ,0 0 0
Co s ts s ta rte d a nd c o mple te d:
Dire c t Ma te ria l:
2 0 ,0 0 0 e quiv a le nt units x $ 3 .0 0 pe r e quiv a le nt unit $ 6 0 ,0 0 0
Co nv e rs io n:
2 0 ,0 0 0 e quiv a le nt units x $ 4 .5 0 pe r e quiv a le nt unit 9 0 ,0 0 0 1 5 0 ,0 0 0
To ta l Co s t o f g o o ds c o mple te d a nd tra ns fe rre d o ut $ 2 8 8 ,2 0 0

To ta l c o s t o f Ma rc h 3 1 wo rk-in-pro c e s s
Dire c t Ma te ria l:
1 0 ,0 0 0 e quiv a le nt units x $ 3 .0 0 pe r e quiv a le nt unit $ 3 0 ,0 0 0
Co nv e rs io n:
5 ,0 0 0 e quiv a le nt units x $ 4 .5 0 pe r e quiv a le nt unit 2 2 ,5 0 0
To ta l c o s t o f Ma rc h 3 1 wo rk-in-pro c e s s $ 5 2 ,5 0 0

To ta l c o s ts a c c o unte d fo r $ 3 4 0 ,7 0 0

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MAC2023 - TOPIC 6: PROCESS COSTING

Production Report – Total Costs (FIFO)

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MAC2023 - TOPIC 6: PROCESS COSTING

In-Class Exercise: Illustration Data

Our ultimate aim is to estimate the cost of Spritz (390,000 liters)

transferred into finished goods during April and the cost of any work in
process inventories (10,000 liters) for the Mixing and Finishing
Departments at the end of April.
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