Session – 4&5(a): Product Costing

(Process Costing)

Prof. M. Shameem Jawed

McGraw-Hill/Irwin
Comparison of Job-Order Costing and
Process Costing

Process
Process Job-order
Costing
Costing Costing

• Used for production of small,

identical, low cost items.
• Mass produced in automated
continuous production process.
• Costs cannot be directly traced to
each unit of product.
4-2
Comparison of Job-Order Costing and
Process Costing

Process
Process Job-order
Costing
Costing Costing

Typical process cost applications:

• Petrochemical refinery
• Paint manufacturer
• Paper mill

4-3
 Comparison of Job-Order Costing and
Process Costing

Job-order costing Process costing

Costs accumulated by the – Costs accumulated by
job. department or process.
Work in process has a job- – Work in process has a
cost sheet for each job. production report for each
Many unique, high-cost batch of products.
jobs. – A few identical, low-cost
Jobs built to customer products.
order. – Units continuously
produced for inventory in
automated process.
4-4
Differences Between Job-Order and Process
Costing
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
4-5
Differences Between Job-Order and Process
Costing
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
4-6
Process Cost Flows

4-7
Process Cost Flows

4-8
 Equivalent Units: A Key Concept

• Costs are accumulated for a period of time for

products in work-in-process inventory.
• Products in work-in-process inventory at the
beginning and end of the period are only
partially complete.
• Equivalent units is a concept expressing these
partially completed products as a smaller
number of fully completed products.
4-9
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.

4-10
 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

4-11
 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 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
4-12
 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. $2.40
c. $2.76
d. $2.90

4-13
 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
$27,600 ÷ 11,500 equivalent units
c. $2.40 = $2.40 per equivalent unit
d. $2.90

4-14
 Calculating and Using Equivalent Units of
Production
To calculate the direct materials and conversion costs per
equivalent unit for the period:

Materials
cost per Materials cost for the period
= Materials equivalent units for the
equivalent
unit period
Conversion
cost per Conversion cost for the period
equivalent =
Conversion equivalent units for the
unit period
4-15
Departmental Production Report

1. Analysis of 2. Calculation
physical flow of equivalent
of units. units.

Production
Report

3. Computation 4. Analysis of
of unit costs. total costs.

4-16
 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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 Let’s take three cases
• Case 1: Zero Beginning and Ending WIP
Inventory
• Case 2: Zero Beginning WIP but some Ending
WIP Inventory
• Case 3: With Some Beginning and Some
Ending WIP Inventory
 Case 1: Zero Beginning and Ending WIP
Inventory
• Physical Units for Jan 2018
– WIP, Jan 1: 0 units
– Started in Jan: 400 units
– Completed & Transferred out: 400 units
– WIP, Jan 31: 0 units

• Total Cost for Jan 2018

– DM cost added in Jan $32,000
– Conversion cost added during Jan $24,000

• What is the cost per unit?

Case 2: Zero Beginning WIP but some Ending
WIP Inventory
• Physical Units for Jan 2018
– WIP, Jan 1: 0 units
– Started in Jan: 400 units
– Completed & Transferred out: 175 units
– WIP, Jan 31***: 225 units

• Total Cost for Jan 2018

– DM cost added in Jan $32,000
– Conversion cost added during Jan $18,600
• ***Degree of completion:
– DM = 100%
– Conversion = 60%
–
• What is the cost per unit?
 Case 3: Both Beginning & Ending WIP Inventory
• Physical Units for Jan 2018
– WIP, Jan 1**: 100 units
– Started in Jan: 300 units
– Completed & Transferred out: 175 units
– WIP, Jan 31***: 225 units

• Total Cost for Jan 2018

– DM cost added in Jan $22,000
– Conversion cost added during Jan $11,600

• ***Degree of completion:
– DM = 100%
– Conversion = 60%

• **Value of B’WIP
• Direct Material (100% complete) $ 20,000
• Conversion (50% complete) $ 15,000

• What is the cost per unit?

 Case 3

Try this one…

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 4-23
Production Report Example
Analysis of Physical Flow of Units

4-24
Production Report Example
Calculation of Equivalent Units

50% of 10,000 units

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

4-25
Production Report Example
Calculation of Equivalent Units

100% of 10,000 units, all

material added at beginning

4-26
 Production Report Example
Computation of unit costs

$140,000 ÷ 50,000 equivalent units

$2.80 + $4.46
$200,700 ÷ 45,000 equivalent units
4-27
Production Report Example
Analysis of total costs

4-28
Production Report Example
Analysis of total costs

All costs
accounted for

4-29
 To sum up!
Analysis of
physical flow
of units.
Calculation
of equivalent
units.
Computation
of unit costs.

Analysis of
total costs.

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Let’s Solve few more problems…
End of Session - 4

3-32
 Session –5: Product Costing
(Process Costing)
FIFO Method & Operations Costing

PGP 2020-22
25 Feb. 2021

Prof. M. Shameem Jawed

McGraw-Hill/Irwin
Wt. Avg vs FIFO
 Operation Costing
Operation costing employs some aspects
of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

4-36
 Operation Costing
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.

4-37