Chapter 4

Process Costing and Hybrid

Product-Costing Systems

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 Learning Objective 4-1 – List and explain the similarities
and important differences between job-order and process
costing.

4-2

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 Comparison of Job-Order Costing and
Process Costing (1 of 2)
Process
Process Job-Order
Costing
Costing Costing

 Used for production of small,

identical, low-cost items.
 Mass produced in automated
continuous production
processes.
 Costs cannot be directly traced to
each unit of product.
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 Comparison of Job-Order Costing and
Process Costing (2 of 2)
Process
Process Job-Order
Costing
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill

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 Job-Order Costing vs. Process Costing

Job-order costing Process costing

Costs accumulated by Costs accumulated by
the job. department or process.
Work in process has a Work in process has a
job-cost sheet for each production report for each
job. batch of products.
Many unique, high-cost A few identical, low-cost
jobs. products.
Jobs built to customer Units continuously
order. produced for inventory in
automated process.

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 Differences Between Process and Job-
Order Costing (1 of 2)
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
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 Differences Between Process and Job-
Order Costing (2 of 2)
The work-in-process
account consists of
individual products in a
Direct Material
process-cost system.

Direct Labor Finished

& Overhead Products Goods
(Conversion)

When direct labor is a relatively small amount Cost of

compared to material and overhead, it is often Goods
combined with overhead. Sold
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Learning Objective 4-2 – Prepare journal entries to record
the flow of costs in a process-costing system with sequential
production departments.

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 Process Cost Flows – Single
Department

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 Journal Entry
Direct Material, Direct Labor, and
Overhead Applied

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 Process Cost Flows –Two Departments

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 Journal Entry
Dept. B – Transferred In Costs

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 Journal Entry
Dept. B – Direct Material, Direct
Labor, and Manufacturing Overhead

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 Journal Entry
Goods Completed

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 Journal Entry
Cost of Goods Sold

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Learning Objective 4-3 – Prepare a table of equivalent units
under weighted-average process costing.

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 Equivalent Units: A Key Concept
By definition, units in work-in-process inventory at
both the beginning and end of the period are only
partially complete (finished units are transferred
out).
Equivalent units is a concept expressing these
partially completed units.
Equivalent units refers to the amount of
manufacturing activity that has been applied to a
batch of physical units.

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 Equivalent Units Example

Two half completed products are

equivalent to one completed product.

+ = l

So, 10,000 units that are 70% complete

are equivalent to 7,000 complete units.

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 Equivalent Units Question 1

For the current period, Jones started 15,000

units and completed 10,000 units, leaving
5,000 units in process 30% complete. How
many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000

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 Equivalent Units Question 1 (Solved)

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
b. 11,500 10,000 units + (5,000 units × .30)
= 11,500 equivalent units
c. 13,500
d. 15,000

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 Equivalent Units Question 2

Jones incurred $27,600 in production costs

for the 11,500 equivalent units. What was
Jones’s cost per equivalent unit for the
period?
a. $1.84
b. $2.76
c. $2.40
d. $2.90

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 Equivalent Units Question 2
(Solved)

Jones incurred $27,600 in production costs

for the 11,500 equivalent units. What was
Jones’s cost per equivalent unit for the
period?
a. $1.84
b. $2.76
$27,600 ÷ 11,500 equivalent units
c. $2.40
= $2.40 per equivalent unit
d. $2.90

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 Calculating and Using Equivalent
Units of Production
To calculate the direct materials and conversion costs
per equivalent unit for the period:

Materials Materials cost for the period

cost per
=
equivalent Materials equivalent units for
unit
the period
Conversion
cost per Conversion cost for the period
equivalent =
unit Conversion equivalent units for
the period
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 Departmental Production Report

Analysis of Calculation
physical flow of equivalent
of units units

Production
Report

Computation Analysis of
of unit costs total costs

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 Equivalent Units of Production –
Weighted-Average Method
The weighted-average method . . .

Makes no distinction between work done in the prior

period and work done in the current period.
Blends together units and costs from the prior period
and the current period.
The FIFO method is a more complex method and is
rarely used in practice.

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 Production Report Example (1 of 2)

 MVP Sports Equipment Company makes baseball gloves in

two departments, Cutting and Stitching.
 MVP uses the weighted-average process costing.

 Material is added at the beginning of the Cutting

Department, while conversion is incurred uniformly
throughout the process.
 Using the following information for the month of March, let’s
prepare a production report for the Cutting Department.

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 Production Report Example (2 of 2)
Work in process, March 1: 20,000 units Cost
Materials: 100% complete $ 50,000
Conversion: 10% complete 7,200

Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units
Work in process, March 31: 10,000 units
Materials 100% complete
Conversion 50% complete

Costs incurred during March

Materials cost 90,000
Conversion costs:
Direct labor $ 86,000
Applied manufacturing overhead 107,500
Total conversion costs 193,500
Total costs to account for $ 340,700

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 Production Report Example – Units
Accounted For
① Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

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 Production Report Example –
Equivalent Units (1 of 2)
② Calculation of Equivalent Units
Conversion Equivalent Units
Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000 50% of 10,000 units

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Beginning inventory % is not used in weighted-average method.

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 Production Report Example -
Equivalent Units (2 of 2)
② Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
100% of 10,000 units, all
Total units to account for 50,000
material added at beginning
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

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 Learning Objective 4-4 – Compute the cost per
equivalent unit under the weighted-average method of
process costing.

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 Computation of Unit Costs

Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units $2.80 + $4.46

$200,700 ÷ 45,000 equivalent units
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 Learning Objective 4-5 – Analyze the total production costs
for a department under the weighted-average method of
process costing.

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 Production Report Example – Total
Costs (1 of 2)
Analysis of total costs
Co s t o f g o o ds c o mple te d and trans fe rre d during Marc h
40,000 units × $7.26 pe r e quivale nt unit $ 290,400

Co s ts re maining in wo rk-in-pro c e s s o n Marc h 31

Dire c t Mate rial:
10,000 e quivale nt units × $2.80 pe r e quivale nt unit $ 28,000
Convers io n:
5,000 e quivale nt units × $4.46 pe r e quivale nt unit 22,300
To tal c o s t of Marc h 31 wo rk-in-proc e s s 50,300
To tal c o s ts ac c o unte d fo r $ 340,700

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 Production Report Example – Total
Costs (2 of 2)
Analysis of total costs
Co s t o f g o o ds c o mple te d and trans fe rre d during Marc h
40,000 units × $7.26 pe r e quivale nt unit $ 290,400

Co s ts re maining in wo rk-in-pro c e s s o n Marc h 31

Dire c t Mate rial:
10,000 e quivale nt units × $2.80 pe r e quivale nt unit $ 28,000
Convers io n:
5,000 e quivale nt units × $4.46 pe r e quivale nt unit 22,300
To tal c o s t of Marc h 31 wo rk-in-proc e s s 50,300
To tal c o s ts ac c o unte d fo r $ 340,700

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 Production Report Example – Costs
Accounted For
Analysis of total costs
Cos t of goods c omple te d and trans fe rre d during Marc h
40,000 units × $7.26 pe r e quivale nt unit $ 290,400

Cos ts re maining in work-in-proc e s s on Marc h 31

Dire c t Mate rial:
10,000 e quivale nt units × $2.80 pe r e quivale nt unit $ 28,000
Co nvers io n:
5,000 equivale nt units × $4.46 pe r e quivale nt unit 22,300
Total c os t of Marc h 31 work-in-proc e s s 50,300
All costs
Total c os ts ac c ounte d fo r $ 340,700
accounted for

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Learning Objective 4-6 – Prepare a departmental production
report under weighted-average process costing.

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 MVP Sports Equipment Report Example
MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Direct
Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000

Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

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 Actual vs. Normal Costing

Manufacturing
Actual costs of overhead is applied
manufacturing overhead to Work-in-Process
are entered in Work-in- Inventory using a
Process Inventory predetermined
overhead rate

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 Departmental Production Report
Analysis of
physical flow
of units
Calculation
of equivalent
units
Computation
of unit costs

Analysis of
total costs

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 Learning Objective 4-7 – Describe how an operation costing
system accumulates and assigns the costs of direct-material and
conversion activity in a batch manufacturing process.

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 Operation Costing (1 of 2)
Operation costing employs some aspects
of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

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 Operation Costing (2 of 2)
Operation costing employs some aspects
of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Material costs are charged Conversion costs

to batches as in are assigned to batches
job-order costing. as in process costing.

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 End Chapter 4

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