Process Costing

I. Comparison of Job-order Costing and Process Costing

1. Similarities
a) Both systems have the same purpose –

b) Both systems have the same basic manufacturing accounts –

c) The flow of costs through the manufacturing accounts is basically the same.

2. Differences
Job-order Costing Process Costing

II. Process Cost Flows

1. Processing departments

- The activity performed in a processing department is performed uniformly on all of

the units passing through that department.
- The output of a processing department is homogeneous.

(1) Sequential pattern

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(2) Parallel pattern

2. Overview of cost flows

- A separate Work In Process account is maintained for each processing department.

- The completed production of the prior department is transferred to the subsequent
department for further processing.
- Materials, labor, and overhead costs can be added in any department.

3. Materials costs

4. Labor costs

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5. Overhead costs

6. Transfer between departments

7. Cost of goods manufactured and cost of goods sold

[Example] Exercise 4-1

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III. Equivalent Units of Production

1. Concept

Equivalent units of production = (# of partially completed units) × (% completion of those units)

2. Weighted-average Method
Equivalent units of = Units transferred to the next + Equivalent units in ending
production department or finished goods WIP inventory

(1) If WIP inventories are at different stages of completion in terms of materials cost and
conversion cost, two equivalent unit figures must be computed.

[Example] Smith Company reported the following activity in Department A for August:
Percentage completed

Units Materials Conversion

WIP, 8/1 300 40% 20%

Units started into production in August 6,000

Units completed and transferred out of 5,400

Department A during August

WIP, 8/31 900 60% 30%

(2) Treatment of beginning WIP inventory

IV. Product cost

1. Computation of equivalent units

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[Example] Smith Company computed equivalent units for Department A:

Units Equivalent Units

Units to be accounted for:

WIP, 8/1 300

Units started into production 6,000

Total units to be accounted for

Units accounted for as follows: Materials Conversion

Transferred to the next department 5,400

WIP, 8/31 900
Total units accounted for

2. Computation of costs per equivalent unit

[Example] Smith Company had the following cost information for Department A:
Materials cost Conversion cost
WIP, 8/1 $6,000 $3,600
Costs added to production in August $41,520 $47,430

Computation of cost per equivalent unit:

Total Cost Materials Conversion Whole Unit

Cost to be accounted for:

WIP, 8/1

Costs added to production

Total cost to be accounted for

Equivalent units

Cost per equivalent unit

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3. Cost reconciliation

[Example] Cost reconciliation for Department A of Smith Company:

Total Equivalent Units

Cost

Cost accounted for as follows: Materials Conversion

Transferred to the next department

WIP, 8/31
- Materials

- Conversion

Total cost accounted for

4. The overall process – see next page

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 Smith Company – Department A

Equivalent units
Units Equivalent Units
Units to be accounted for:

WIP, 8/1 300

Units started into production 6,000

Total units to be accounted for 6,300

Units accounted for as follows: Materials Conversion

Transferred to the next department 5,400 5,400 5,400

WIP, 8/31 900 540 270

Total units accounted for 6,300 5,940 5,670

Cost per Equivalent Unit

Total Cost Materials Conversion Whole Unit
Cost to be accounted for:

WIP, 8/1 $9,600 $6,000 $3,600

Costs added to production $88,950 $41,520 $47,430

Total cost to be accounted for $98,550 $47,520 $51,030

Equivalent units 5,940 5,670

Cost per equivalent unit $8 $9 $17

Cost Reconciliation
Total Cost Equivalent Units
Cost accounted for as follows: Materials Conversion

Transferred to the next department $91,800 5,400 5,400

(5,400 units × $17 per unit)

WIP, 8/31
- Materials @ $8 per unit $4,320 540

- Conversion @ $9 per unit $2,430 270

Total cost accounted for $98,550

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[Example] Problem 4-16

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[Example] Exercise 4-11

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[Exercise] In December, the blending department of SP Beverage Company paid
$50,000 salary to its front-line workers and $12,000 to production supervisors; the
blending department completed and transferred $85,000 inventory to the bottling
department. Please journalize the December transactions for the blending department.

One department in ABC Company has the following information about their work in
process inventory for January:
% completed
Units Materials Conversion
WIP, Jan 1 5,000 40% 80%
WIP, Jan 31 10,000 60% 70%

This department started 20,000 units into production during January. Please compute the
equivalent units of production for January using the weighted average method.

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[Key to Exercise]

In December, the blending department of SP Beverage Company paid $50,000 salary to

its front-line workers and $12,000 to production supervisors; the blending department
completed and transferred $85,000 inventory to the bottling department. Please journalize
the December transactions for the blending department.

1) Work In Process – blending 50,000

Manufacturing overhead 12,000
Cash 62,000

2) Work In Process – bottling 85,000

Work In Process – blending 85,000

One department in ABC Company has the following information about their work in
process inventory for January:
% completed
Units Materials Conversion
WIP, Jan 1 5,000 40% 80%
WIP, Jan 31 10,000 60% 70%

This department started 20,000 units into production during January. Please compute the
equivalent units of production for January using the weighted average method.

Equivalent units
Total units Material Conversion
Units transferred 15,000 15,000 15,000
out (i.e., 5000+20000-
10000)
WIP, Jan 31 10,000 6,000 7,000
(i.e., 10,000*60%) (i.e., 10,000*70%)
Total 21,000 22,000

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