Systems Design: Process Costing

Chapter 4
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 costs.
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.

4-2
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
having different production requirements are worked on
each period.
Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by
individual jobs.
Process costing systems compute unit costs by
department. Job-order costing systems compute unit
costs by job on the job cost sheet.

4-3
Comparing Job-Order and Process Costing
Direct
Materials

Direct Labor Work in Finished

Process Goods

Manufacturing Cost of
Overhead Goods
Sold

4-4
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

4-5
Process Cost Flows: The Flow of Raw
Materials (in T-account form)
Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B
•Direct
Materials

4-6
Process Cost Flows: The Flow of Labor
Costs (in T-account form)
Salaries and Work in Process
Wages Payable Department A
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor

4-7
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (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

4-8
Process Cost Flows: Transfers from
WIP-Dept. A to WIP-Dept. B (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

Department Department
A B

4-9
Process Cost Flows: Transfers from WIP-Dept.
B to Finished Goods (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

4-1
Equivalent Units – The Basic Idea

Two half completed products are

equivalent to one complete product.

+ = 1

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.

4-1
 Equivalent Units of Production
Weighted-Average Method
The weighted-average method . . .
1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.

4-1
 Compute and Apply Costs
The formula for computing the cost per
equivalent unit is:
Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit
Equivalent units of production

4-1
Operation Costing

Operation cost is a hybrid of job-order and

process costing because it possesses attributes
of both approaches

Operation costing is
commonly used when
batches of many different
products pass through the
same processing
department.

4-1
Five Requirements:
1. Calculate equivalent units (EU)
2. Calculate cost per unit (TC/EU)
3. Determine the cost of ending WIP
4. Determine the cost of the goods
transferred out (completed)
5. Prepare cost reconciliation statement
Assignment: Chapter-4
Glossary (pg. 163)
Foundational 15 (pg. 165); 4-13; 4-15; 4-18; 4A-9;
4A-10; 4A-15

4-1
End of Chapter 4

4-1