Chapter 7:

Process Costing

MA. Le Hoang Oanh

Types of Costing Systems Used to
Determine Product Costs

Process Job-order
Costing Costing

✦ Many units of a single, homogeneous product

flow evenly through a continuous production
process.
✦ One unit of product is indistinguishable from any
other unit of product.
✦ Each unit of product is assigned the same
average cost.
Types of Costing Systems Used to
Determine Product Costs

Process
Process Job-order
Job-order
Costing
Costing Costing
Costing

Typical process cost applications:

v Petrochemical refinery
v Paint manufacturer
v Paper mill
Differences Between Job-Order and
Process Costing

Job order costing Process costing

§ Many jobs are worked A single product is
during the period. produced for a long
period of time.
§ Costs are accumulated
by individual jobs. Costs are accumulated
by departments.
§ Job cost sheet is the
key document. Department production
report is key document.
§ Unit cost computed by
job. Unit costs are computed
by department.
Process Costing

Direct
Materials Direct labour costs
may be small
Dollar Amount

Manufacturing in comparison to
Overhead other product
costs in process
Direct cost systems.
labour

Type of Product Cost

Process Costing
Direct
Materials Direct labour costs
Conversion may be small
in comparison to
Dollar Amount

other product
costs in process
cost systems.

Type of Product Cost

So, direct labour and manufacturing overhead are often

combined into one product cost called conversion.
Comparing Job-Order and Process
Costing

Direct
Materials

Direct Labour Work in Finished

Progress Goods

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.

Finished
Direct Labour 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 Labour Processing Finished

Department Goods

Manufacturing Cost of
Overhead Goods
Sold
Process Cost Flows in normal cost system

Let’s look at cost flows in a

process cost system with
Departments A and B. We
will use T-accounts and start
with materials.
Process Cost Flows
Work in Progress
Raw Materials Department A
•Purchases •Direct •Direct
Materials Materials
•Indirect
Materials

Manufacturing Work in Progress

Overhead Department B
Actual Applied •Direct
•Other Materials
Overhead
•Indirect
Materials
Process Cost Flows

Next let’s add labor and

manufacturing overhead to
the process cost flows. Are
you with me?
Process Cost Flows
Work in Progress
Wages Payable Department A
•Direct
•Direct Materials
labour •Direct
•Indirect labour
labour

Manufacturing Work in Progress

Overhead Department B
Actual Applied •Direct
•Other Materials
Overhead
•Direct
•Indirect
labour
Materials
•Indirect
labour
Process Cost Flows
Work in Progress
Wages Payable Department A
•Direct
•Direct Materials
labour •Direct
•Indirect labour
labour •Applied
Overhead
Manufacturing Work in Progress
Overhead Department B
Actual Applied •Direct
•Other •Overhead Materials
Overhead Applied to
•Direct
•Indirect Work in
labour
Materials Progress
•Indirect •Applied
labour Overhead
Process Cost Flows

Next, transfer work from

Department A to
Department B.
Process Cost Flows

Work in Progress Work in Progress

Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
labour labour
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A
Process Cost Flows

Now let’s complete the

goods in Department B and
sell them.
Process Cost Flows

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

•Cost of
Goods
Sold
Process Costing

§ The Numerator - Production Costs

§ Accumulate costs by department
§ Accumulate costs by product
§ Direct material from material requisitions
§ Direct labor from time sheets and wage rates
§ Overhead
• Predetermined application rates

Unit Cost = Production Costs

Production Quantity
 Process Costing

§ The Denominator – Production Quantity

§ Complicated by work in process
§ Convert partially completed units to equivalent whole
units

Unit Cost = Production Costs

Production Quantity
Equivalent Units of Production

Equivalent units are partially complete and are part of

work in progress stock. Partially completed products
are expressed in terms of a smaller number of fully
completed units.
Equivalent Units of Production

Two half completed products are

equivalent to one completed product.

+ =
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
Calculating and Using Equivalent Units
of Production
For a company does not have beginning WIP

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
Equivalent Units

For the current period, Jones started 15,000

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

Now assume that Jones incurred £27,600 in

production costs for the 11,500 equivalent units of
production. What was Jones’ cost per equivalent unit
for the period?
a. £1.84
£………. ÷ ……… equivalent units
b. £2.40
= £………. per equivalent unit
c. £2.76
d. £2.90
Equivalent Units & sharing costs

For a company has beginning WIP

To calculate the cost per

equivalent unit for the period:

Weighted Average FIFO approach

Approach

§ Complicated by work in process

§ Units started last period and completed this period
§ Units started this period and not completed
Equivalent Units & sharing costs

Direct material
added at the beginning, during, and/or at the end of
process
Direct labor
added throughout the process
Overhead
added throughout the process
• based on direct labor
• based on other, multiple cost drivers
Equivalent Units & sharing costs

Two Process Costing Methods

Weighted Average Method

§ combines
• beginning work in process
• current period production
FIFO Method
§ separates
• beginning work in process
• current period production
Equivalent Units & sharing costs –
Weighted average method
The weighted average method . . .
§ Makes no distinction between work done in prior and
current period.
§ Blends together units and costs from prior period and
current period.

Let’s see how this works!

Equivalent Units & sharing costs –
Weighted average method
Weighted Average Approach

Cost per Beginning WIP + Costs incurred in the period

EU = Equivalent units of production
for the period (under WA)

Beginning WIP + Costs incurred in the period

=
Complete Units + Equivalents units of Ending WIP

Cost of complete Complete units * Cost per EU

=
units (cost of FG)

Cost of Ending EU of Ending WIP * Cost per EU

=
WIP
Equivalent Units & sharing costs –
Weighted average method

100% Material 100% Material;

60% conversion 70% conversion

Jan Feb March

EU by WA method (for Conversion cost)

Production Report

Shows the flow Provides cost

of units and costs information for
through work in financial
progress statements

Production
Report

Becomes the
job cost sheet Helps managers
in process control their
costing departments
Production Report

Production Report
ŒA 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
Ž A reconciliation of cost
flows for the period,
Section 1 including:
❖Total cost for units
completed and
Section 2 transferred from the
processing department.
❖Total cost for partially
completed units
Section 3 remaining in work in
progress.
Production Report Example - WA

§ Double Diamond Skis uses process costing to

determine unit costs in its Shaping and Milling
Department.
§ Double Diamond uses the weighted average
cost procedure.
§ Using the following information for the month of
May, let’s prepare a production report for
Shaping and Milling.
Production Report Example - WA
Percent Completed
Units Materials Conversion
Work in progress, May 1 200 50% 30%

Units started into production in June 5,000

Units completed and transferred out 4,800

of Department A during May

Work in progress, May 31 400 40% 25%

Material cost Conversion cost

WIP, May 1 $3,000 $1,000
Costs added to production in May $73,880 $70,050
Production Report Example - WA
Production Report Example - WA
Production Report Example - WA

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for:
Work in progress, 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 progress, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900
Production Report Example - WA
Section 2: Compute cost per equivalent unit
Cost Materials Conversion
Cost to be accounted for:
Work in progress, May 1 $ 4,000 $ 3,000 $ 1,000
Costs added in the Shipping
and Milling Department 143,930 73,880 70,050
Total cost $ 147,930 $ 76,880 $ 71,050

Equivalent units 4,960 4,900

Cost per equivalent unit £ 30.000 £ 15.500 £ 14.500

$76,880 ÷ 4,960 EU = $15.5/EU

£71,050 ÷ 4,900 EU = $14.5/EU

Production Report Example - WA

Section 3: Cost Reconciliation (Cost assignment)

Cost accounted for as follows:
Transferred out during May ($30 x 4,800) 144,000
Work in progress, May 31:
DM ($15.5 x 160) 2,480
Conversion ($14.5 x 100) 1,450 $ 3,930
Total cost accounted for 147,930
Equivalent Units – Weighted average method

Materials 5,000 Units Started

Beginning Ending
Work in Progress 4,600 Units Started Work in Progress
200 Units and Completed 400 Units
50% Complete 40% Complete

4,800 Units Completed

160 Equivalent Units 400 × 40%
4,960 Equivalent units
of production
Equivalent Units – Weighted average method

Conversion 5,000 Units Started

Beginning Ending
Work in Progress 4,600 Units Started Work in Progress
200 Units and Completed 400 Units
30% Complete 25% Complete

4,800 Units Completed

100 Equivalent Units 400 × 25%
4,900 Equivalent units
of production
Process Costing Methods

Weighted Average
Beginning WIP 100%
Started and finished 100%
Ending WIP THE % completed
FIFO DIFFERENCE
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed
Equivalent Units & sharing costs – FIFO method

100% Material 100% Material;

60% conversion 70% conversion

Jan Feb March

EU by FIFO method (for conversion cost)

Equivalent Units & sharing costs – FIFO method
Cost per Costs incurred in the period
Equivalent unit = Equivalent units
Costs incurred in the period
=
EU to Units started & EU of
complete Beg + complete in the + ending WIP
WIP period
Costs of Beg WIP EU to
Beg WIP Cost per
& complete in the = + complete x
($) EU
period Beg WIP
Costs of units
Units started & complete Cost per
started & complete = x
in the period EU
in the period

Ending WIP ($) = EU of ending WIP x Cost per EU

47
Production Report Example - FIFO
Percent Completed
Units Materials Conversion
Work in progress, May 1 200 50% 30%

Units started into production in June 5,000

Units completed and transferred out 4,800

of Department A during May

Work in progress, May 31 400 40% 25%

Material cost Conversion cost

WIP, May 1 $3,000 $1,000
Costs added to production in May $73,872 $69,696
Production Report Example - FIFO
Production Report Example - FIFO
Production Report Example - Fifo

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for:
Work in progress, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Work in process, May 1 completed 200 100 140
Started & completed 4,600 4,600 4,600
Work in progress, May 31 400 160 100

Total units 5,200 4,860 4,840

Production Report Example - Fifo

Section 2: Compute cost per equivalent unit

Total
Cost Materials Conversion
Cost to be accounted for:
Work in progress, May 1 $ 4,000 $ 3,000 $ 1,000
Costs added in the Shipping
and Milling Department 143,568 73,872 69,696
Total cost $ 147,568 $ 76,872 $ 70,696

Equivalent units 4,860 4,840

Cost per equivalent unit £ 29.600 £ 15.200 $ 14.400

$73,872 ÷ 4,860 EU = $15.2/EU

Production Report Example - Fifo
Section 3: Cost Reconciliation
Cost accounted for as follows:
Transferred out during May
Work in progress, May 1: $ 4,000
Cost in May to complete Beg WIP
DM (100 x $15.2) 1,520.00
Coversion (140 x $14.4) 2,016

Costs of Beg WIP & complete in the period 7,536.00

Cost of units started & completed
($29.6 x 4,600) 136,160.00
Total cost transferred 143,696.00
Work in progress, May 31
DM (160 x $15.2) 2,432.00
Conversion (100 x 14.4) 1,440.00 3,872.00
Total cost accounted for 147,568.00
Process Costing
Typical Accounting Entries

Let’s look at the accounting

journal entries for a process
cost system. We’ll omit the
numbers so that we can focus
on concepts.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Creditors XXXXX
To record the purchase of material.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Creditors XXXXX
To record the purchase of material.

Work in Progress - Department A XXXXX

Work in Progress - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Progress - Department A XXXXX
Work in Progress - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labour costs.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Progress - Department A XXXXX
Work in Progress - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Progress - Department B XXXXX
Work in Progress - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Progress - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods stock.
Process Costing
Typical Accounting Entries

GENERAL JOURNAL Page 4

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

Cost of Goods Sold XXXXX

Finished Goods XXXXX
To record cost of goods sold.
LOSS
NORMAL LOSS
A loss which is expected during a process
It will not be allocated any costs
The total process cost will be spread over the expected output
units
ABNORMAL LOSS
§ Is an extra loss
§ A loss which is unexpected from the operations due to the
actual loss is greater than normal or expected loss
§ Every unit of abnormal loss is valued at the same amount of a
unit of good output
§ The costs of abnormal loss will be written off (debited) to the IS
LOSS
Smith Company reported the following activity in Department A for the
month of June:
Percent Completed
Units Materials Conversion
Work in progress, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,092

of Department A during June
Normal loss 108
Abnormal loss 200
Work in progress, June 30 900 60% 30%

Beg WIP ($)

- Direct material $ 6,119
- Conversion costs $ 3,920
Normal loss: sold at $5/ unit as craps.
Costs incurred in the period:
Direct material: $ 118,621
Conversion costs: $ 81,130
SERVICE COST APPORTIONMENT
DIRECT METHOD

Direct method

Reapportion the costs of each service cost centre to

functional departments (production, selling &
administration dept)
Cost of service apportioned
cost centre A
Functional
Cost of service apportioned dept
cost centre B
(production,
apportioned selling &
Cost of service
cost centre C administration
dept)
 DIRECT METHOD OF REAPPORTIONMENT

For example: Apportionment of service cost centre costs

You now have further information about the use that assembly
and finishing make of stores and maintenance:
Assembly Finishing Store Main
Number of stores requisitions 100 30 5 20
Maintenance call outs per annum 30 20 10 4

Assembly Finishing Stores Maintenance Total

$ $ $ $ $
OH cost 83,900 47,450 46,600 43,550 221,500

Apportion the service centre costs to the production cost centres

2nd STAGE – REAPPORTIONMENT OF SERVICE
COST CENTRE COSTS
Assembly Finishing Stores Maintenance
Total
$ $ $ $ $

Stores (requisition)

Maintenance (call outs)

STEP DOWN METHOD OF REAPPORTIONMENT

Step down method

Step 1 all of the other centres

Reapportion one of to (production & service)
service cost centre’s which make use of its
overhead service

Step 2
the production
Reapportion the overheads
to departments only
of the remaining service
(the other service cost
cost centre
centre is ignored)
STEP DOWN METHOD OF REAPPORTIONMENT

has higher overhead

costs
Service Compared
Carries out a bigger
cost centre with
proportion of work for other
other(s) service cost centre

Reapportioned first
STEP DOWN METHOD OF REAPPORTIONMENT

Cost of
service
cost
centre A

Cost of
service
cost centre
B
Cost of
service
cost
centre C
Production Production Production
cost centre X cost centre Y cost centre Z
STEP DOWN METHOD OF REAPPORTIONMENT
A company has 2 production depts & 2 service depts (store &
maintenance). The following information about activity in a recent
costing period is available
Production dept Store dept Maintenance
1 2 dept
Overhead costs $10,030 $8,970 $10,000 $8,000
Value of material req $30,000 $50,000 - $20,000
Maintenance hrs used 8,000 1,000 1,000 -

Required
Using the information given below, apportion the service dept overhead
costs using the step down method of apportionment, starting with the
stores department.
STEP DOWN METHOD OF REAPPORTIONMENT
Production depts Store dept Maintenance
1 2 dept
$ $ $ $
Overhead costs
Apportion stores

Apportion maintenance
Homework

Step-down method: E4B.3

Direct method: E4B.4
WAM: P4.13
FIFO: P4A.10
End of Chapter 7

I’m ready to process

some leisure time.