CHAPTER 3

Process Costing
Job-Costing and Process Costing:
Opposite Ends of a Continuum

Job-Costing Systems Process-Costing

Systems
Distinct, identifiable
units of a product Masses of identical
or service or similar units of a
product or service
Examples:
Custom-made Examples:
machines, Food,
Houses Chemical processing
Process-Costing
Process-costing is a system where the unit
cost of a product or service is obtained by
assigning total costs to many identical or
similar units
Each unit receives the same or similar
amounts of direct materials costs, direct
labor costs, and manufacturing overhead
Unit costs are computed by dividing total
costs incurred by the number of units of
output from the production process
Similarities between Job costing and
process costing
The same basic purpose: to assign material,
labor, and overhead cost to products
The same overhead assignment method:
predetermined rates time actual activity and
disposal of under/over-applied OH.
The same basic manufacturing accounts:
Manufacturing overhead, Raw materials,
Work in process, Finished Goods.
The flow of costs through the manufacturing
accounts is basically the same in both
systems.
Differences
Job Order Costing Process Costing
•Many unique, heterogeneous, •For production of small,
high cost jobs/products identical (homogenous), low cost
•Jobs built to customer order. products
Low production volume •Mass produced in automated
•High product flexibility continuous production process
•Costs are accumulated by job for inventory
•Unit costs = Cost of each job ÷ •Low product
units produced for the job flexibility(standardized)
•Job cost sheet is the key •Costs are accumulated by
document. department or process for a
period. Costs cannot be directly
traced to each unit of product.
•Unit costs = Total mfg cost ÷
units produced in the department
during the period.
•Department production report is
key document.
Process-Costing Assumptions
Direct Materials are added at the beginning
of the production process, or at the start of
work in a subsequent department down the
assembly line
Conversion Costs are added equally along the
production process
Five-Step Process-Costing Allocation
1. Summarize the flow of physical units of
output
2. Compute output in terms of equivalent units
3. Compute cost per equivalent unit
4. Summarize total costs to account for
5. Assign total costs to units completed and to
units in ending Work-in-Process
Process Costing- Three Cases
Zero beginning and zero ending WIP
inventory
Zero beginning and some ending WIP
inventory
Both some beginning and ending WIP
inventory
Case I- Zero Beginning and Zero Ending WIP
Inventory
Example 1
Product- DG-19
Two departments─ Assembly and Testing
Two cost categories─ DMs and Conversion cost
All DMs are added at the beginning to the process
in Assembly
Conversion costs are added evenly during assembly
The company uses actual costing
Data and Solution
 Data for the Assembly Department for January Year 4:

Physical units:
WIP-beginning (Jan. 1) ------------------------------ 0 units
Started during January ------------------------------- 400 units
Completed and transferred out during Jan. -------- 400 units
WIP-ending (Jan.31) --------------------------------- 0 units
Total Costs:
DM ---------------------------------------------------- $32,000
Conversion costs -------------------------------------- $24,000
$56,000
Required: How much is cost per unit?
Solution: DMs = $32,000/400 units = $80
CC = $24,000/400 units = $60
Assembly Dpt. Cost per unit $140
Case II: Zero Beginning and Some
Ending WIP Inventory
Data for the Assembly Department for February Year 4:
Physical units:
WIP-beginning (Feb. 1) -------------------------------- 0 units
Started during February ------------------------------- 400 units
Completed and transferred out during Feb. ------- 175
units
WIP-ending (Feb.29) --------------------------------- 225 units
Assume WIP (225 units) are 60% completed in terms of
CC.
Total Costs:
DM ----------------------------------------------------- $32,000
Conversion costs --------------------------------------- $18,600

$50,600
Equivalent Units
 A derived amount of output units that:
1. Takes the quantity of each input in units
completed and in unfinished units of work in
process and
2. converts the quantity of input into the
amount of completed output units that could
be produced with that quantity of input
 Are calculated separately for each input
(direct materials and conversion cost)
Steps 1 & 2 Illustrated
Steps 3, 4 & 5, Illustrated
General Ledger Cost Flows Illustrated
Case III: Process Costing with Beginning
and Ending WIP Inventory
Data for the Assembly Department for March Year 4:
Physical units:
WIP-beginning (March 1) -------------------------------- 225 units
DM(100% complete)
CC (60% complete)
Started during March ----------------------------------- 275 units
Completed and transferred out during March ------- 400 units
WIP-ending (March 31) ------------------------------- 100 units
DM(100% complete)
CC (50% complete)
Total Costs:
WIP-beginning (March 1):
DM(225×$80) ---------------- $18,000
CC(135×$60) ---------------- $8,100 $26,100
DMs ------------------------------------------------------ 19,800
CC --------------------------------------------------------- 16,380
Total cost to account for ---------------------------- $62,280
Weighted-Average
Process-Costing Method
Calculates cost per equivalent unit of all work
done to date (regardless of the accounting
period in which it was done)
Assigns this cost to equivalent units
completed & transferred out of the process,
and to incomplete units in still in-process
Weighted-Average
Process-Costing Method
Weighted-average costs is the total of all
costs in the Work-in-Process Account divided
by the total equivalent units of work done to
date
The beginning balance of the Work-in-Process
account (work done in a prior period) is
blended in with current period costs
Steps 1 & 2 Illustrated
Steps 3, 4 & 5 Illustrated
Result of the Process
 Two critical figures arise out of Step Five of
the cost allocation process:
1. The amount of the Journal Entry transferring
the allocated cost of units completed and
sent from Work-in-Process Inventory to
Finished Goods Inventory
2. The ending balance of the Work-in-Process
Inventory account that will appear on the
Balance Sheet
First-in, First-Out
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 start
and complete new units, and lastly to units
in ending work-in-process inventory
First-in, First-Out
Process-Costing Method
The beginning balance of the Work-in-Process
account (work done in a prior period) is kept
separate from current period costs
Steps 1 & 2, Illustrated
Steps 3, 4 & 5, Illustrated
Result of the Process (as before)
 Two critical figures arise out of Step Five of
the cost allocation process:
1. The amount of the Journal Entry transferring
the allocated cost of units completed and
sent from Work-in-Process Inventory to
Finished Goods Inventory
2. The ending balance of the Work-in-Process
Inventory account that will appear on the
Balance Sheet
Standard Costing and
Process Costing
Teams of design and process engineers,
operations personnel, and management
accountants work together to determine
separate standard costs per equivalent unit
on the basis of different technical processing
specifications for each product
Standard costs replace actual costs in
equivalent unit calculations
Standard Costing and
Process Costing
Standard cost per unit:
DMs --------------------------------- $74 per unit
CC ---------------------------------- 54 per unit
Total standard mfg costs $128 per unit
Data for the Assembly Department for March Year 4:
Physical units:
WIP-beginning (March 1) -------------------------------- 225 units
DM(100% complete)
CC (60% complete)
Started during March ------------------------------------- 275 units
Completed and transferred out during March ---------- 400 units
WIP-ending (March 31) ---------------------------------- 100 units
DM(100% complete)
CC (50% complete)
Total Costs:
WIP-beginning (March 1):
DM(225×$74) ---------------- $16,650
CC(135×$54) ---------------- $7,290 $23,940
DMs ------------------------------------------------------- 19,800
CC ---------------------------------------------------------- 16,380
Total cost to account for ------------------------------ $60,120
Steps 1 & 2, Illustrated
Steps 3, 4 & 5, Illustrated
General Ledger Cost Flows Illustrated
Transferred-in Costs
Are costs incurred in previous departments
that are carried forward as the products
cost when it moves to a subsequent process
in the production cycle
Also called Previous Department Costs
Journal entries are made to mirror the
progress in production from department to
department
Transferred-in costs are treated as if they
are a separate type of direct material added
at the beginning of the process
Transferred-in Costs
Data for the Testing Department for March Year 4:
Physical units:
WIP-beginning (March 1) -------------------------------- 240 units
TIC(100% complete)
DM(0% complete)
CC (62.5% complete)
Transferred-in ---------------------------------------------- 400 units
Completed and transferred out during March --------- 440 units
WIP-ending (March 31) --------------------------------- 200 units
TIC(100% complete)
DM(0% complete)
CC (80% complete)
Total Costs:
WIP-beginning (March 1):
TIC (240 units × $140) ------- $33,600
DM --------------------------- 0
CC (150 units ×$120) --------- 18,000 $51,600
Transferred-in cost:
Weighted average ----------------------------------- 52,000
FIFO ------------------------------------------------ 52,480
DMs ------------------------------------------------------- 13,200
CC ---------------------------------------------------------- 48,600
Steps 1 & 2, Illustrated (WA method)
Steps 3, 4 & 5, Illustrated (WA method)
Steps 1 & 2, Illustrated (FIFO Method)
Steps 3, 4 & 5, Illustrated (FIFO
Method)