CHAPETER FOUR

4.1The Process and Operation or service costing methods

 A process costing is most commonly used in industries that produce essentially

homogeneous (i.e. uniform) products on a continuous basis.
 Firms producing distinct and unique products use job order costing where as firms
producing similar or identical units use process-costing system.
 Process costing system accumulate costs by department for a period of time, just as a job
order costing system accumulate costs by job, and the total cost then will be assigned to
the units produced during that period.
The Flow of Costs in Process-Costing System with Sequential Production Departments
1. As direct materials and direct labor are used in production department A, these costs are
added to the Work-in Process inventory account for Department A. Overhead is applied
using predetermined overhead rate. The POR is determined in the same way in job order
and process costing.
Work-in Process: Production Department A xxx
Raw Materials xxx
Wage Payable xxx
Manufacturing overhead applied xxx
2. When production department A completes its work on some units of product, these units
of product are transferred to production department B. The costs assigned to these goods
are transferred from the Work-in Process Inventory account for department A to work-in
Process inventory account in department B, the costs assigned to those partially
completed products are called transferred-in costs1.
Work-in Process: Production Department B xxx
Work-in Process: Production Department A xxx
3. Direct material and direct labor are used in production department B, and manufacturing
overhead is applied using POR.
Work-in Process: Production Department B xxx
Raw Materials xxx
Wages Payable xxx
1

Transferred-in costs are assigned to partially completed products that are transferred into one production
department from a prior department.
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 Manufacturing overhead applied xxx
4. Goods are completed in production department B and transferred to the finished goods
warehouse.
Finished-Goods xxx
Work-in Process: Production Department B xxx
5. Goods are sold
Cost of Goods Sold xxx
Finished-Goods xxxx
Cost Accumulation Methods in Process Costing System
o When a firm produces identical lots of goods repetitively, maintaining a separate job cost
sheet would be unnecessarily expensive. The aggregate cost and the unit cost can be
computed without a job cost sheet, thus saving the costs associated with producing such
records.
o Costs accumulate by department over a certain period and the unit cost can be found by
dividing the total cost to the units produced during that period. Process costing system fit
among others to, paint manufacturers, oil refineries, sugar refineries, and salt producers.
o In process costing system, manufacturing costs, direct material, direct labor, and
manufacturing overhead costs are accumulated in the same way as job order costing
system. However, the costs are accumulated by department over some period of time than
by individual jobs.
o The time period over which the cost is to be accumulated depends on the information
needs of the company. It can be a week, two weeks, but no longer than a month most
often. Cost accumulation is much simpler for a process costing system than for a job
order cost system.
Illustrating Process Costing
EXAPLE 1 ABC Company produce Bricks in to two departments molding and firing
department. Information related to company operation in march as follows :
A. Raw materials were issued for production: molding department birr 28,000 and firing
department birr 5,000.
B. Direct labor cost incurred ,molding department birr 18,000 and firing department birr
5,000

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 C. Manufacturing over head was applied ,molding department birr 24,000 and firing
department birr 37,000
D. Unfired and molded bricks were transferred from molding to firing department costed
birr 67,000
E. Finished bricks were transferred from firing department to whare house costed birr
108,000
F. Finished bricks were sold to customer .according to the company process costing system
the cost of finished bricks sold was birr 106,00
Required: the necessary journal entries

A. W/P in molding dep/t……………………… 28,000

R/m……………………………………………….. 28,000

W/P in firing dep/t ………………………………. 5,000

R/m…………………………………………………… 5,000
B W/P in molding dep/t ……………………………18,000
W/P in firing dep/t ………………………………. 5,000
Salary and wage payable …………………………………………61,000
C.W/P in molding dep/t ……………………………18,000
W/P in firing dep/t ………………………………. 37,00
MOH-applied …………………………………………61,000

D. W/P in firing dep/t ……………………………67,000

W/P in molding dep/t ………………………………. 67,00

E. F/G inv ………………………………………. 108,000

W/P firing dep/t ………………………………………….. 108,000

F. CGS ……………………………………………. 106,000

F/G inv ……………………………………………….. 106,000
Assumptions: ABC Manufacturing Company manufactures Products A. These components
are assembled in the Assembly Department, upon completion the units are completely
transferred to the Testing Department. The process-costing system for Product A has a single

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 direct cost category (direct materials) and a single indirect-cost category (conversion costs).
Direct materials are added at the beginning of the process in Assembly. Conversion costs are
added evenly during Assembly.
Case 1: Process costing with zero beginning and zero ending work in process inventory that
is all units are started and fully completed by the end of the accounting period.
Data for the Assembly Department for January 2017
Physical Units for January 2017
Work in Process, beginning inventory (January 1) 0 units
Started during January 400 units
Completed and transferred out during January 400 units
Work in Process, ending inventory (January 31) 0 units
Total Costs for January 2017
Direct materials costs added during January Br.32,000
Conversion costs added during January 24,000
Total Assembly Department costs added during January 56,000
Solution:
Direct Material costs per unit (32,000/400) Br. 80
Conversion costs per unit (24000/400) 60
Assembly Department costs per unit 140

Case 2: Process Costing with zero beginning but some ending work in process inventory
Data for the Assembly Department for February 2017
Physical Units for February 2017
Work in Process, beginning inventory (February 1) 0 units
Started during February 400 units
Completed and transferred out during February 175 units
Work in Process, ending inventory (February 28) 225 units
Total Costs for February 2017
Direct materials costs added during February Br.32,000
Conversion costs added during February 18,600
Total Assembly Department costs added during February 50,600
In addition, the Assembly Department estimates that the partially assembled units are on
averages 60% complete as to conversion costs.

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How should the company calculate the cost of fully assembled units in February 2017 and
the cost of partially assembled units still in process at the end of February 2017?
Steps;
 Summarize the flow of physical units of output.
 Compute output in terms of equivalent units.
 Compute equivalent unit costs.
 Summarize total costs to account for.
 Assign total costs to unit’s completed and to units in ending work in process.
Equivalent Units: A key Concept
 Material, labor and overhead costs are incurred at different rates in production process.
Direct material usually placed in production at one or more discreet points in the process.
In contrast, direct labor and manufacturing overhead, called conversion costs, and usually
are incurred continuously throughout the process.
 When an accounting period ends, the partially completed goods that remain in process
generally are at different stages of completion with respect to material and conversion
activity.
Example: Suppose there are 1000 physical units in process at the end of an accounting period.
Each of the physical units is 75% complete with respect to conversion. How much conversion
activity has been applied to these partially completed units?
Conversion activity occurs uniformly throughout the production process. Therefore, the amount
of conversion activity required to do 75% of the conversion on 1000 units is equivalent to the
amount of the conversion on 750 units. The number is computed as follows:
1000 partially completed physical units in process * 75% complete with respect to
Conversion = 750
Equivalent units = Number of partially completed units x Percentage completion
The term equivalent units is used in process costing to refer to the amount of manufacturing
activity that has been applied to a batch of physical units. The 1000 physical units in process
represent 750 equivalent units of conversion activity.
An equivalent unit is defined as the product of the number of partially completed units and the
percentage completion of those units. The equivalent units is the number of complete units that
could have been obtained from the materials and effort that went into the partially complete
units. The term equivalent unit is also used to measure the amount of direct materials represented

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by the partially completed goods. Since direct materials are incorporated at the beginning of the
production process, the 1000 physical units represent 1000 equivalent units of direct material
(1000 physical units * 100% complete with respect to direct materials).
Physical units and Equivalent units (Step 1&2)
Equivalent units is a derived amount of output units that takes the quantity of each input (factor
of production) in units completed or in work in process, and converts it into the amount of
completed output units that could be made with that quantity of input.
Equivalent Units
Flow of Production Physical Direct Conversion
Units Materials costs
Work in process, beginning 0
400
Started during current period
400
To account for
Completed and transferred out during current 175 175 175
225
period
225 225
Work in process, ending 400
225*100%; 225*60% 400 310
Accounted for
Work done in current period

Calculation of Product Costs (Steps 3, 4, and 5)

Total Direct Conversion
Production Materials Costs
Costs
(Step 3) Costs added during February divided by 50,600 Br.32,000/ Br.18,000/
equivalent units of work done incurrent period 400 310
Cost per equivalent unit Br. 80 Br. 60
(Step 4) Total costs to account for Br. 50,600
(Step 5) Assignment of costs:
Completed & transferred out (175 units) Br. 24,500 (175*800) (175*60)
Work in process, ending (225 units)
Direct Materials 18,000 225*80
Conversion costs 8,100 135*60
Total work in process 26,100

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 Total costs accounted for Br.50,600

Journal Entries
Work in Process- Assembly 32,000
Account Payable Control 32,000
(To record direct materials purchased and used in production)
Work in Process- Assembly 18,600
Various accounts 18,600
(To record Assembly department conversion costs)
Work in Process- Testing 24,500
Work in Process- Assembly 24,500
(To record cost of goods completed and transferred from Assembly to
Testing Department)
Case 3: Process costing with some beginning and some ending work in process inventory.
Data for the Assembly Department for March 2017
Physical Units for March 2017
Work in Process, beginning inventory (March 1) 225 units
Direct Materials (100% complete)
Conversion costs (60% complete)
Started during March 275 units
Completed and transferred out during March 400 units
Work in Process, ending inventory (March 31) 100 units
Direct Materials (100% complete)
Conversion costs (50% complete)
Total Costs for March 2017
Work in process, beginning inventory
Direct materials (225 equivalent units * Br. 80/unit) Br. 18,000
Conversion costs (135 equivalent units * Br.60/unit) 8,100 Br. 26,100
Direct materials costs added during March 19,800
Conversion costs added during March 16,380
Total costs to account for Br.62, 280

 Weighted-Average process costing method

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  This method calculates the equivalent unit cost of the work done to date
(regardless of the period in which it was done) and assigns this cost to equivalent
units completed and transferred out of the process and to equivalent units in
ending work in process inventory.
 The weighted average cost is the total of all costs entering in the work in process
account (regardless of whether it is from the beginning work in process or from
work started during the period) divided by total equivalent units of work done to
date.
Physical units and Equivalent units (Step 1&2)
Equivalent Units
Flow of Production Physical Direct Conversion
Units Materials costs
Work in process, beginning 225
Started during current period 275
To account for 500
Completed and transferred out during current
period 400 400 400
100
Work in process, ending
100*100%; 100*50% 100 50
500
Accounted for
Work done in current period 500 450

Calculation of Product Costs (Steps 3, 4, and 5)

Total Direct Conversion
Production Materials costs
Costs
(Step 3) Work in process, beginning Br.26,100 Br.18,000 Br.8,100
Costs added during the current period 36,180 19,800 16,380
Costs incurred to date divided by Br. 37,800/ Br. 24,480/
Equivalent units of work done to date 500 450
Br.75.60 Br.54.40
Cost per equivalent unit of work done
(Step 4) Total costs to account for Br.62,280
(Step 5) Assignment of Costs
52,000 (400*75.60) (400*54.40)
Completed and transferred out (400 units)
Work in process, ending (100 units) 100*75.60
7,560
Direct Materials 2,720 50*54.40
Conversion costs 10,280
Total work in process Br. 62,280
Total costs accounted for

Journal Entries
Work in Process- Assembly 19,800
Account Payable Control 19,800

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 (To record direct materials purchased and used in production)
Work in Process- Assembly 16,380
Various accounts 16,380
(To record Assembly department conversion costs)
Work in Process- Testing 52,000
Work in Process- Assembly 52,000
(To record cost of goods completed and transferred from Assembly to
Testing Department)
 First-in, First-out Method
 The FIFO process costing method assigns the cost of the previous period’s
equivalent units in beginning work-in process inventory to the first units
completed and transferred out of the process, and assigns the cost of equivalent
units worked on during the current period first to complete beginning inventory,
then to start and complete new units in ending work in process inventory.
 This method assigns that the earliest equivalent units in the work in process-
Assembly account are completed first.
 A distinct feature of the FIFO process-costing method is that work done on
beginning inventory before the current period is kept separate from work done in
the current period.
 Costs incurred in the current period and units produced in the current period are
used to calculate costs per equivalent unit of work done in the current period.
 In contrast equivalent unit and cost per equivalent unit calculations in the
weighted average method merge the units and costs in beginning inventory with
units and costs of work done in the current period.
Physical units and Equivalent units (Step 1&2)
Equivalent Units
Flow of Production Physical Direct Conversion
Units Materials costs
Work in process, beginning 225
Started during current period 275
To account for 500
Completed and transferred out during current
period
From beginning work in process
225*(100%-100%); 225*(100%-60%)
225 0 90
Started and Completed 175
175*100%, 175*100% 175 175
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Work in process, ending
100*100%; 100*50% 100 100 50
Accounted for 500 275 315
Work done in current period

Calculation of Product Costs (Steps 3, 4, and 5)

Total Direct Conversion
Production Materials costs
Costs
(Step 3) Work in process, beginning Br.26,100
Costs added current period 36,180 19,800/ 16,380/
Divided by equivalent units of work done in 275 315
current period
Costs per equivalent unit of work done in the Br. 72 Br. 52
current period
(Step 4) Total costs to account for Br.62,280
(Step 5) Assignment of Costs Br. 26,100 (400*75.60) (400*54.40)
Completed and transferred out (400 units) 0
Work in process, beginning (225 units) 4,680 0*72 90*52
Direct Materials added in current period 30,780
Conversion costs added in current period 21,700 175*72 175*52
Total from beginning inventory 52,480
Started and completed (175 units)
Total costs of units completed & transferred
7,200 100*72
Work in process, ending (100 units)
2,600 50*52
Direct Materials
9,800
Conversion costs
Br. 62,280
Total work in process, ending
Total costs accounted for

Work in Process- Testing 52,480

Work in Process- Assembly 52,480
(To record cost of goods completed and transferred from Assembly to
Testing Department)
Important points to note:
 The first physical units assumed to be completed and transferred out during the period are
the 225 units from the beginning work-in process inventory.
 Of the 275 physical units started, 175 are assumed to be completed. 400 physical units
were completed during March, the FIFO method assumes that the first 225 of these units
must have been started and completed during March.
 Ending work-in process inventory consists of 100 physical units-the 275 physical units
started minus the 175 of these physical units completed.
 Note that the physical units “to account for” equal the physical units “accounted for” (500
units)
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  The equivalent unit calculated for each cost category focus on the equivalent units of
work done in the current period only. Under the FIFO method, the work done in the
current period is assumed to first complete the 225 units in beginning work in process.
The equivalent unit’s works done in March on the beginning work-in process inventory
are computed by multiplying the 225 physical units by the percentage of work remaining
to be done to complete these units: 0% for direct materials, and 40% for conversion costs.

Total Transferred- DMs CCs

Production in cost
Costs

(Step 3)Work in process, beginning Br.51,600

Costs added current period 114,280 52,480/ 13,200/ 48,600/
Divided by equivalent units of 400 440 450
work done in current period
Costs per equivalent unit of work done Br.131.20 Br. 30 Br. 108
in the current period
(Step 4) Total costs to account for Br.165,880
(Step 5) Assignment of Costs
Completed and transferred out (440 units
Work in process, beginning (240 units) Br.51,600
Transferred-in costs added in current
Direct Materials added in current 0
Conversion costs added in current 0*131.20
7,200
Total from beginning inventory 240*30
9,720
Started and completed (200 units) 90*108
68,520
Total costs of units completed & 53,840
transferred 200*131.20 200*30 200*108
Work in process, ending (200 units)
122,360
Transferred-in costs
Direct Materials
26,240
Conversion costs 200*131.20
0
Total work in process, ending 0*30
17,280
Total costs accounted for 160*108
43,520
Br. 165,880

To record cost of goods completed and transferred from Testing to finished goods.
Finished Goods Control 122,360
Work-in Process: Testing 122,360

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