Process Costing
Weeks 9 - 10
Job Order Cost System vs. Process Cost System
Costs are tracked through a
Costs are assigned to each
series of connected manufacturing
job.
processes or departments.
Products have unique Products are uniform or
characteristics. relatively homogeneous and
produced in a large volume.
Distinguish between
the flow of costs in
process costing and
job costing.
.
Job Costing
Direct materials Direct labor Overhead
Job 101 Job 102
Job 103
Costs are traced and
applied to individual
jobs in a job-order
Finished Cost of Goods
cost system. Sold
Goods
Process Costing
Direct materials Direct labor Overhead
Work in Process Work in Process
Assembly Finishing
Department Department
Costs are traced and
applied to
departments in a
Finished Cost of Goods
process cost system. Goods Sold
Process Costing Cost Flows
For purposes of this
example, assume there are
two processing departments
– Department A and
Department B.
We will use journal entries.
Process Costing Cost Flows
GENERAL JOURNAL Page 4
Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXX
Work in Process - Department B XXX
Raw Materials XXX
To record requisition of direct material.
Process Costing Cost Flows
GENERAL JOURNAL Page 5
Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXX
Work in Process - Department B XXX
Salaries and Wages Payable XXX
To record direct labor costs.
Process Costing Cost Flows
GENERAL JOURNAL Page 5
Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXX
Work in Process - Department B XXX
Manufacturing Overhead XXX
To apply overhead to departments.
Process Costing Cost Flows
GENERAL JOURNAL Page 4
Post.
Date Description Ref. Debit Credit
Work in Process - Department B XXX
Work in Process - Department A XXX
To record the transfer of goods from
Department A to Department B.
Process Costing Cost Flows
GENERAL JOURNAL Page 4
Post.
Date Description Ref. Debit Credit
Finished Goods XXX
Work in Process - Department B XXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
Process Costing Cost Flows
GENERAL JOURNAL Page 4
Post.
Date Description Ref. Debit Credit
Accounts Receivable XXX
Sales XXX
To record sales on account.
Cost of Goods Sold XXX
Finished Goods XXX
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 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 of Production
Two half completed products are
equivalent to one completed product
+ = 1
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
Equivalent Units of Production
For the current period, Marc started 25,000 units and completed
20,000 units, leaving 5,000 units in process 20 percent complete.
How many equivalent units of production did Jones have for the
period?
a. 20,000
b. 24,000 20,000 units + (5,000 units × 0.20)
c. 21,000 = 21,000 equivalent units
d. 25,000
Equivalent Units of Production
Equivalent units can be calculated two ways:
The Weighted-Average Method –
– combines
• beginning work in process
• current period production
The First In First Out Method –
– separates
• beginning work in process
• current period production
Equivalent Units of Production
Compute the equivalent
units of production using
the weighted-average
method.
Weighted-Average Example
Concord Textile Industries reported the following activity in
Cutting and Sewing Department for the month of April:
Percent Completed
Cutting and Finishing Department Units Materials Conversion
Beginning work in process 500 55% 30%
Units started into production in April 5,000
Units completed during April and 4,500 100% 100%
transferred to the next department
Ending working process 1,000 40% 25%
Weighted-Average Example
The first step is to identify the units completed and transferred out of
the Department in April (4,500 units)
The second step is to identify the equivalent units of production in ending
work in process with respect to materials and conversion costs for the
month.
Materials Conversion
Units completed and transferred
to the next department 4,500 4,500
Work in process, May 31:
1,000 units × 40% 400
1,000 units × 25% 250
Equivalent units of Production in
during the month of May 4,900 4,750
Compute the equivalent units
of production using the First
In First Out method.
First In First Out Example
Concord Textile Industries reported the following activity in
Cutting and Sewing Department for the month of April:
Percent Completed
Cutting and Sewing Department Units Materials Conversion
Beginning work in process 500 55% 30%
Units started into production in April 5,000
Units completed during April and 4,500 100% 100%
transferred to the next department
Ending working process 1,000 40% 25%
First In First Out Example
Step 1: Determine equivalent units needed to
complete beginning inventory
Materials Conversion
To complete beginning work in process:
Materials: 500 units × (100% - 55%) 225
Conversion: 500 units × (100% - 30%) 350
Ending w ork in process
Materials: 400 units × 40% complete 160
Conversion: 400 units × 25% complete 100
Equivalent units of production 385 450
First In First Out Example
Step 2: Determine units started and completed
during the period
Materials Conversion
To complete beginning work in process:
Materials: 500 units × (100% - 55%) 225
Conversion: 500 units × (100% - 30%) 350
Units started and completed during April 4,000 4,000
Ending w ork in process
Materials: 400 units × 40% complete 160
Conversion: 400 units × 25% complete 100
First In First Out Example
Step 3: Add the equivalent units in ending working in
process inventory.
Materials Conversion
To complete beginning work in process:
Materials: 500 units × (100% - 55%) 225
Conversion: 500 units × (100% - 30%) 350
Units started and completed during April 4,000 4,000
Ending work in process
Materials: 1,000 units × 40% complete 400
Conversion: 1,000 units × 25% complete 250
Equivalent units of production 4,600
Equivalent units of production 4,625 4,600
Assign costs to units
using the weighted
average method
Cost of Production Report
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, April 1 ₱13,850 ₱8,600 ₱5,250
Costs added in the Cutting
and Sewing Department ₱719,700 368,700 351,000
Total cost ₱733,550 ₱377,300 ₱356,250
Equivalent units 4,900 4,750
Cost per equivalent unit ₱77.00 ₱ 75.00
Total Cost per EUP ₱152.00
Cost of Production Report
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 400 250
Cost per equivalent unit ₱77.00 ₱75.00
Cost of ending work in process inventory ₱30,800.00 ₱18,750.00 ₱49,550.00
Units completed and transferred out:
Units transferred to the next department 4,500 4,500
Cost per equivalent unit ₱77.00 ₱75.00
Cost of units transferred out ₱346,500.00 ₱337,500.00 ₱684,000.00
Total Cost to be accounted for ₱733,550.00
Assign costs to units
using the First In
First Out method
First In First Out Example
Cost of Production Report for Cutting and Sewing
Department for the Month of April.
Beginning work in process: 500 units
Materials: 55% complete P 8,600
Conversion: 30% complete 5,250
P 13,850
Production started during April 5,000 units
Production completed during April 4,500 units
Costs added to production in April
Materials cost P 368,700
Conversion cost 351,000
Ending work in process: 1,000 units
Materials: 40% complete
Conversion: 25% complete
Cost of Production Report - FIFO
Total
Cost Materials Conversion
Costs added in the Cutting
and Sewinng Department ₱719,700 ₱368,700 ₱351,000
Equivalent units 4,625 4,600
Cost per equivalent unit ₱79.72 ₱76.30
Total cost per equivalent unit = P79.72 + P76.30 = P156.02
Cost of Production Report - FIFO
Compute the total cost of units transferred out.
Cutting and Sewing Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
Materials Conversion Total
Units transferred out:
Cost in beginning work in process (WIP) $ 8,600 $ 5,250 $ 13,850
Cost to complete beginning WIP:
Equivalent units to complete 225 350
Cost per equivalent unit ₱79.72 ₱76.30
Cost to complete beginning WIP ₱ 17,937.00 ₱26,705.00 ₱44,642.00
Cost of units started and completed in May
Units started and completed in May 4,000 4,000
Cost per equivalent unit ₱79.72 ₱76.30
Cost of units started and completed in May ₱318,880 ₱305,200 ₱624,080
Cost of units transferred out ₱682,572
Cost of Production Report
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 400 250
Cost per equivalent unit ₱79.72 ₱76.30
Cost of ending work in process inventory ₱31,888.00 ₱19,075.00 ₱50,963.00
Units completed and transferred out:
Units transferred to the next department 4,500 4,500
Cost of units transferred out ₱345,415.00 ₱337,172.00 ₱682,587.00
Total Cost to be accounted for ₱733,550.00
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