Chapter 4

Systems Design:
Process Costing
 Similarities Between Job-Order
and Process Costing

 Both systems assign material, labor and

overhead costs to products and they provide a
mechanism for computing unit product cost.
 Both systems use the same manufacturing
accounts, including Manufacturing Overhead,
Raw Materials, Work in Process, and Finished
Goods.
 The flow of costs through the manufacturing
accounts is basically the same in both systems.
 Differences Between Job-Order
and Process Costing
 Process costing is used when a single product is
produced on a continuing basis or for a long period of
time. Job-order costing is used when many different jobs
are worked on each period.
 Process costing systems accumulate costs by
department. Job-order costing systems accumulated
costs by individual jobs.
 Process costing systems use department production
reports to accumulate costs. Job-order costing systems
use job cost sheets to accumulate costs.
 Process costing systems compute unit costs by
department. Job-order costing systems compute unit
costs by job.
 Quick Check 

Process costing is used for products that are:

a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
 Quick Check 

Process costing is used for products that are:

a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
What is a Processing Department?
Any location in an organization where materials,
labor or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be
homogeneous.
 Comparing Job-Order
and Process Costing

Direct
Materials

Direct Labor Work in Finished

Proces Goods
s

Manufacturing Cost of
Overhead Goods
Sold
 Comparing Job-Order
and Process Costing

Costs are traced and

applied to individual
Direct jobs in a job-order
Materials cost system.

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
 Comparing Job-Order
and Process Costing

Costs are traced and

applied to departments
Direct in a process cost
Materials system.

Direct Labor Processing Finished

Department Goods

Manufacturing Cost of
Overhead Goods
Sold
 Learning Objective
LO1

To record the flow

of materials, labor, and
overhead through a
process costing system.
 T-Account and Journal Entry
Views of Cost Flows

For purposes of this example,

assume there are two
processing departments –
Departments A and B.
We will use T-accounts and
journal entries.
 Process Cost Flows
(in T-account form)
Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B
•Direct
Materials
 Process Cost Flows
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
 Process Cost Flows
(in T-account form)
Work in Process
Department A
Wages Payable
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor
 Process Cost Flows
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
W ork in Process - De pa rtme nt A XXXXX
W ork in Process - De pa rtme nt B XXXXX
Salarie s and W ages Payable XXXXX
To record direct labor costs.
 Process Cost Flows
(in T-account form)
Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
 Process Cost Flows
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
W ork in Process - De pa rtme nt A XXXXX
W ork in Process - De pa rtme nt B XXXXX
Manufa cturing Overhead XXXXX
To apply overhead to departments.
 Process Cost Flows
(in T-account form)

Work in Process Work in Process

Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labor Labor
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A
 Process Cost Flows
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
W ork in Process - De pa rtme nt B XXXXX
W ork in Process - De pa rtme nt A XXXXX
To record the transfer of goods from
Department A to Department B.
 Process Cost Flows
(in T-account form)

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
 Process Cost Flows
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Finishe d Goods XXXXX
W ork in Process - De pa rtme nt B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
 Process Cost Flows
(in T-account form)

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labor
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold

•Cost of
Goods
Sold
 Process Cost Flows
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.

Cost of Goods Sold XXXXX

Finishe d Goods XXXXX
To record cost of goods sold.
 Equivalent Units of Production
Equivalent units are the product of the number of
partially completed units and the percentage
of completion of those units.

We need to calculate equivalent units because a

department usually has some partially completed units
in its beginning and ending inventory.
Equivalent Units – The Basic Idea

Two half completed products are

equivalent to one completed product.

= 1

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.
 Quick Check 

For the current period, Jones started 15,000

units and completed 10,000 units, leaving
5,000 units in process that are 30 percent
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
 Quick Check 

For the current period, Jones started 15,000

units and completed 10,000 units, leaving
5,000 units in process that are 30 percent
complete. How many equivalent units of
production did Jones have for the period?
a. 10,000
10,000 units + (5,000 units × 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
 Learning Objective
LO2

To compute the
equivalent units of
production using the
weighted-average method.
 Calculating Equivalent Units

Equivalent units can be calculated two

ways:
The First-In, First-Out Method – FIFO is
covered in the appendix to this chapter.

The Weighted-Average Method – This

method will be covered in the main portion of the
chapter.
 Equivalent Units of Production
Weighted-Average Method
The weighted-average method . . .
• Makes no distinction between work done in prior or
current periods.
• Blends together units and costs from prior and
current periods.

Cost per Costs for the period

equivalent = Equivalent units of production
unit for the period
 Process Costing and Direct Labor
Direct
Materials Direct labor costs
may be small
in comparison to
Dollar Amount

Conversion other product

costs in process
Direct cost systems.
Labor

Type of Product Cost

 Process Costing and Direct Labor
Direct
Materials Direct labor costs
Conversion
may be small
in comparison to
Dollar Amount

other product
costs in process
cost systems.

Type of Product Cost

Direct labor and manufacturing overhead may be
combined into one product cost called conversion.
 Weighted-Average Example

Smith Company reported the following activity

in Department A for the month of June:

Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 Weighted-Average Example
The first step in calculating the equivalent units is to
identify the units completed and transferred out of
Department A in June (5,400 units)

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
 Weighted-Average Example

The second step is to identify the equivalent units of

production in ending work in process with respect
to materials for the month (540 units) and add this
to the 5,400 units fromMaterials
step one.Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540

Equivalent units of Production in

Department A during June 5,940
 Weighted-Average Example
The third step is to identify the equivalent units of
production in ending work in process with respect
to conversion for the month (270 units) and add
this to the 5,400 units from step one.
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
 Weighted-Average Example
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process

Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
 Weighted-Average Example

Materials 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

5,400 Units Completed

540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production
 Weighted-Average Example

Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

5,400 Units Completed

900 × 30%
270 Equivalent Units
5,670 Equivalent units
of production
Production Report – Weighted-Average

Production Report
A quantity schedule
showing the flow of units
Section 1 and the computation of
equivalent units.

A computation of
Section 2 cost per equivalent unit.

Section 3
 Production Report

Production Report

Section 1

Section 2
 Cost Reconciliation
section shows the
reconciliation of all cost
Section 3 flows into and out of the
department during the
period.
 Production Report Example

Assume that Double Diamond Skis uses the

weighted-average method of process costing
to determine unit costs in it Shaping and
Milling Department.
 Production Report Example

Work in process, May 1: 200 units

Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575

Production started during May 5,000 units

Production completed during May 4,800 units

Costs added to production in May

Materials cost $ 368,600
Conversion cost 350,900

Work in process, May 31 400 units

Materials: 40% complete
Conversion: 25% complete
 Learning Objective
LO3

To prepare a quantity
schedule using the
weighted-average method.
 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160

5,200 4,960
 Production Report Example

Step1: Prepare Quantity Schedule with Equivalent Units.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900
 Learning Objective
LO4

To compute the costs per

equivalent unit using the
weighted-average method.
 Step 2: Calculating the
Costs Per Equivalent Unit

To calculate the cost per equivalent

unit for the period:

Cost per Costs for the period

equivalent = Equivalent units of production
unit for the period
 Production Report Example
Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
W ork in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shaping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit
 Production Report Example
Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
W ork in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shaping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25

$378,200 ÷ 4,960 units = $76.25

 Production Report Example
Step 2: Compute the cost per equivalent unit.

Total
Cost Materials Conversion
Cost to be accounted for:
W ork in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shaping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900

Cost per equivalent unit $ 76.25 $ 72.75
Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 ÷ 4,900 units = $72.75

 Learning Objective
LO5

To prepare a cost
reconciliation using the
weighted-average method.
 Production Report Example
Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
 Production Report Example
Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

4,800 units @ $149.00
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
 Production Report Example
Step 3: Prepare a Cost Reconciliation

Total Equivalent Units

160 units @ $76.25
Cost Materials
100 units @ Conversion
$72.75
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 12,200 160
Conversion 7,275 100
Total work in process, May 31 19,475 All costs
Total cost accounted for $ 734,675 accounted for
Appendix 4A

FIFO Method
FIFO vs. Weighted-Average Method

The FIFO method (generally considered more

accurate that the weighted-average method)
differs from the weighted-average method in
two ways:
1. The computation of equivalent units.
2. The way in which the costs of beginning
inventory are treated in the cost
reconciliation report.
 Learning Objective
LO1

To compute the
equivalent units of
production using
the FIFO method.
 Equivalent Units – FIFO Method
Let’s revisit the Smith Company example.
Assume the following activity is reported in
Department A for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 Equivalent Units – FIFO Method

Step 1: Determine the number of units completed and

transferred out of Department A in June.

Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 Equivalent Units – FIFO Method
Step 2: Add the equivalent units of production in ending
work in process inventory (540 units for material and
270 units for conversion) to the units completed and
transferred our during June.
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
 Equivalent Units – FIFO Method
Step 3: Subtract the equivalent units in beginning work in process
inventory (120 units for materials and 60 units for conversion)
from the sum of the units completed and transferred out and
the equivalent units in ending work in process inventory.

Materials Conversion
Equivalent units or Production in
Department A during June 5,940 5,670
Equivalent units in beginning inventory
300 units × 40% 120
300 units × 20% 60
Equivalent units of Production in
Department A during June 5,820 5,610
 Equivalent Units – FIFO Method

Materials 6,000 Units Started

Beginning Ending
Work in Process 5,400 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

Material
Units completed and transferred out 5,400
Equivalent units in ending WIP inventory 540
Equivalent units in beginning WIP inventory (120)
Equivalent units of production 5,820
 Equivalent Units – FIFO Method

Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,400 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

Conversion
Units completed and transferred out 5,400
Equivalent units in ending WIP inventory 270
Equivalent units in beginning WIP inventory (60)
Equivalent units of production 5,610
Equivalent Units: Weighted Average vs. FIFO
As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the weighted-
average method to obtain the equivalent units of production under
the FIFO method.

Materials Conversion
Equivalent units - weighted average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units × 40% 120
300 units × 20% 60
Equivalent units - FIFO method 5,820 5,610
The Production Report - FIFO Method
Let’s revisit the Double Diamond Skis Shaping and Milling
Department for May to prepare our production report.
Work in process, May 1: 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575

Production started during May 5,000 units

Production completed during May 4,800 units

Costs added to production in May

Materials cost $ 368,600
Conversion cost 350,900

Work in process, May 31 400 units

Materials: 40% complete
Conversion: 25% complete
 Learning Objective
LO2

To prepare a
quantity schedule
using the FIFO
method.
The Production Report - FIFO Method
Step 1: Prepare the quantity schedule and compute
equivalent units.
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
 The Production Report - FIFO Method
Step 2: Calculate the equivalent units of material and conversion
that were transferred from beginning work in process to
the next department.
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
The Production Report - FIFO Method
Step 3: Determine the number of units started and
completed during the period.
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
The Production Report - FIFO Method
Step 4: Calculate the equivalent units of material and
conversion that are in ending work in process
inventory.
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
The Production Report - FIFO Method
Step 5: Calculate the total equivalent units for
materials and conversion.

Units to be accounted for:

Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
 Learning Objective
LO3

To compute the costs

per equivalent unit
using the FIFO method.
 Cost per Equivalent Unit
Notice that the costs of beginning work in process
inventory of $15,175, is not broken down by
materials and conversion components
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 368,600 $ 350,900

Equivalent units 4,960 4,900

Cost per equivalent unit $ 74.31 $ 71.61
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
 Cost per Equivalent Unit
We divide the costs added in the Shipping
and Milling Department by the number of
equivalent unit for materials.
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 368,600 $ 350,900

Equivalent units 4,850 4,900

Cost per equivalent unit $ 76.00 $ 71.61
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
 Cost per Equivalent Unit
We follow the same procedure for conversion
and add the two equivalent unit costs to get
the total cost per equivalent unit.
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 368,600 $ 350,900

Equivalent units 4,850 4,840

Cost per equivalent unit $ 76.00 $ 72.50
Total cost per equivalent unit = $76.00 + $72.50 = $148.50
 Learning Objective
LO4

To prepare a cost
reconciliation using
the FIFO method.
 Cost Reconciliation
Step 1: Calculate the total cost from beginning
inventory transferred to the next department.

Total Equivalent Units

Cost Materials Conversion
Work in process, May 1: $ 15,175
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31:

Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410
Total cost accounted for $ 734,675
 Cost Reconciliation
Step 2: Calculate the cost of units started and
completed during the period.
4,600 units × $148.50
Total Equivalent Units
Cost Materials Conversion
Work in process, May 1: $ 15,175
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31:

Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410
Total cost accounted for $ 734,675
 Cost Reconciliation
Step 3: Calculate the costs in ending working in process
inventory and the sum of the cost accounted for.

Total Equivalent Units

Cost Materials Conversion
Work in process, May 1: $ 15,175
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165

Started and completed in May 683,100 4,600 4,600

Work in process, May 31:

Materials (160 × $76.00) 12,160 160
Conversion (100 × $72.50) 7,250 100
Total 19,410
Total cost accounted for $ 734,675
All costs
accounted for
End of Chapter 4