Chapter 4

Process Costing System

1
 Learning Objectives
Distinguish Process costing and Job –Costing
Record the flow of materials, labor, and

overhead through a process cost system.

Compute the equivalent units and cost per

equivalent unit( Primarily for WIP ending)

Assign costs to units completed and units in

process
 Process Costing System
 Is a costing method most commonly used in industries that

produce essentially homogeneous (i.E. Uniform) products in

mass on a continuous basis.
Each unit receives the same amounts of direct materials

costs, direct labor costs, and manufacturing overhead

Unit costs are computed by dividing total costs incurred by

the number of units of output from the production process

Similarities and differences between Job-Order and
Process Costing
 Similarities
Both systems assign( trace and allocate) material, labor, and

overhead costs assigned to products to compute unit costs.

Both systems use the same manufacturing accounts:


Raw Materials,

 Work in Process, and

 Finished Goods accounts .

The flow of costs is basically the same in both systems.

Differences
Process costing is used when a single identical product is
produced is mass on a continuing basis , where as Job-
order costing is used when many different jobs are worked
on each period.
Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by individual
jobs.
Process costing systems use department production reports
to accumulate costs. Job-order costing systems use job
sheets to accumulate costs.
Process costing systems compute unit costs by department.
Job-order costing systems compute unit costs by job.
Examples firms using process costing
Sugar factories
Food processing firms ,
Chemical processing firms
Soft drink and alcohol factories
Cement factory
 soaps manufacturing firms
Steel manufacturing firms
Paper manufacturing firms
Pharmaceutical firms

7
Cost Flow under Process –Costing

Assume a Coca-Cola Company with two subsequent

production departments
• Mixing Department
• Bottling Department

8
 Flow of cost under Job-Order
and Process Costing

Direct
Direct
Materials
Materials

Work in Finished
Finished
Direct
Direct Labor
Labor
Process Goods
Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
Cost flow under Job-Order Costing
Costs
Costs are
are traced
traced and
and
applied
applied to
to individual
individual
Direct
Direct jobs
jobs in
in aa job-order
job-order
Materials
Materials cost
cost system.
system.

Finished
Finished
Direct
Direct Labor
Labor Jobs
Jobs Goods
Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
Cost flow under Process Costing
Costs
Costs areare traced
traced and
and
applied
applied toto departments
departments
Direct
Direct in
in aa process
process cost
cost
Materials
Materials system.
system.

Processing
Processing Finished
Finished
Direct
Direct Labor
Labor
Department
Department Goods
Goods

Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
 Process Cost Flows-Material Cost
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Mixing Department XXXXX
Work in Process -Bottling Department XXXXX
Raw Materials XXXXX
To record the use of direct material.
Process Cost Flows- Direct Labor Cost
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Mixing Department XXXXX
Work in Process - Bottling Department XXXXX
Cash and Payable XXXXX
To record direct labor costs.
Process Cost Flows- Overhead cost allocated
(In journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Mixing Department XXXXX
Work in Process - Bottling Department XXXXX
Manufacturing Overhead- Control XXXXX
To apply overhead to departments.
Process Cost Flows- Transfer in Cost
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Bottling Department XXXXX
Work in Process - Mixing Department XXXXX
To record the transfer of goods from
Mixing Department to Bottling Department
 Process Costing- Storage
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Bottling Department XXXXX
To record the completion of goods
and their transfer from Botting Department
to finished goods inventory.
 Process Costing- Sales
(in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Cash/ Accounts Receivable XXXXX
Sales XXXXX
To record sales.

Cost of Goods Sold XXXXX

Finished Goods XXXXX
To record cost of goods sold.
 Process-Costing Assumptions

Direct Materials are added at the beginning of the

production process, or at the start of work

Conversion Costs are added evenly along the
production process
Five-Steps in Process-Costing Cost assignment

1. Summarize the flow of physical units of output

2. Compute output in terms of equivalent units
3. Compute cost per equivalent unit
4. Summarize total costs to account for

5. Assign total costs to units completed and to units

in ending Work-in-Process
Equivalent Units
is an expression of the amount of work done on units of output
that are partially completed at the end of the year.
Is the expression the partially completed units(WIP ending
units) in terms of fully completed units.
Equivalent units = Number of physical units × Percentage
of completion

For example
 if four physical units of product are 50 percent complete at the end
of the period, an equivalent of two units has been completed
 (2 equivalent units = 4 physical units × 50 percent).
If four desks manufacturing is 50 percent complete at year
end , an equivalent unit of two desks has been completed.

26
 Equivalent Units
 Equivalent units of production is a term applied to the
Work in process inventory at the end of the year
 Process costing requires partially completed units in
ending work-in-process inventory to be converted to the
equivalent completed units (called equivalent units).
 Equivalent units = Number of physical units ×
Percentage of completion
 Therefore,
 For completed units, the percent of completion is 100%
and hence, the equivalent units will be the same as the
physical units…..100% X physical unit= Physical unit
 For WIP ending, the percent of completion is is less than
100% and hence, the equivalent units will be less than the
physical units.
27
Equivalent Units – The Basic Idea
Two half-completed products are
equivalent to one complete product.

+ = 1

So,
So, 22 units
units 50%
50% complete
complete
are
are equivalent
equivalent toto 11 complete
complete units.
units.
 Illustrating Example -Process Costing
Assume Coca-Cola Chemical Company Produces Coke and
uses process costing system to account for its operation.
The soft drink is produced in two processing departments:
the Mixing Department and the Bottling Department.
The product is bottled in 300ml bottles.

29
 Part I: Mixing Department
In the Mixing Department, various ingredients are added
at the start of the process
 costs are accumulated in two pools, one for direct material
and another for all conversion costs.
Direct material is added at the beginning of the process
conversion costs are applied evenly through out the
process.
Data for the first month of operation (September) of the
Mixing Department is given below:

30
Case 1: Zero beginning and Zero ending work in
process inventory that is all units are started and
fully Completed by the end of the period.

Beginning work in process 0 units

Started during the month 1,000 units
Completed during the month 1,000 units
Direct material costs Br. 80,000
Conversion costs Br. 40,000
Ending work in process 0 units

31
 Solution - Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process
0 units
Units started in September 1000

Units to account for 1,000

Units Completed and transferred out 1000

Ending Work in process

0
Units accounted for
1,000

32
Step 2 : Compute output in terms of equivalent units for
DMC & CC
Equvalent unit
flow of physical
Flow of Production Units DMC CC

Units Completed and

transferred out 1000 units
(100%,100%)
1,000 1,000

Ending Work in process

0 unit 0 0

Work done current period

1,000units 1,000units

33
Step 3 &4 : flow of cost and Cost per Equivalent units
Production cost report Total
production
cost
DMC CC

Cost of beginning WIP Br 0 Br0 Br 0

Costs added this period 120,000 80,000 40,000

Cost to account for 120,000 80,000 40,000

Equivalent units(step-2) 1,000 1,000

cost per equivalent unit 80 40

34
Step 5 : Cost assignment to completed & transferred out
units and units of WIP ending
Production cost report Total
production
cost
DMC CC
Total Cost to account for Br 120,000
Cost Assignment :
To Completed& transferred out:

Direct material Cost

80,000 1000*80
Conversion cost 40,000
1,000*40
Total 120,000
To WIP ending:
0 1,000*0 1,000*0
Total cost accounted for 120,000 35
 Journal Entries- for production during September

1. Work in Process- Mixing 80,000

RM -Inventory 80,000
(To record direct materials used in production)
2. Work in Process- Mixing 40,000
Various accounts 18,600
(To record Mixing department conversion costs)

3. Work in Process- Bottling 120,000

Work in Process- Mixing 120,000
(To record transfer of completed units in mixing department
to bottling department)
36
 Case2: Zero beginning but some ending
work in process inventory
Data for the second month of operation (October) of the
Mixing Department is given below:
Beginning work in process 0 units
Started during the month 2,000 units
Completed during the month 800 units
Ending work in process (60% completed as to conversion
costs.) 1,200 units
Direct material costs Br. 160,000
Conversion costs Br. 91,200
Required: calculate the cost of fully completed
units(800) and the cost of partially completed units
still in process at the end of October(1200)?
37
Solution - Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process
0 units
Units started in October 2,000

Units to account for 2,000

Units Completed and transferred out 800 units

Ending Work in process

1,200

Units accounted for 2,000

38
Step 2 : Compute output in terms of equivalent units for DMC
& CC
Equvalent unit
flow of
Flow of Production physical Units DMC CC
Units Completed and transferred out
(100%,100%) 800 units
800 800

Ending Work in process

(100%,60%)
1,200 unit 1,200 720

Work done in current period

(b/c Beg WIP is zero)
2,000U 1,520U

39
Step 3 &4 : flow of cost and Cost per Equivalent units
Production cost report Total
production
cost DMC CC

Cost of beginning WIP Br 0 Br0 Br 0

Costs added this period 251,200 160,000 91,200

Cost to account for 251,200 160,000 91,200

Equivalent units(step-2) 2,000 1,520

cost per equivalent unit Br 80 Br 60

40
Step 5 : Cost assignment to completed & transferred out
units and units of WIP ending
Production cost report Total prod.
Cost DMC CC
Total Cost to account for Br 251,200
Cost Assignment :
To Completed& transferred out(800
units):
Direct material Cost 64,000 800*80
Conversion cost 48,000 800*60
Total Br.112,000
To WIP ending(1200 units):
Direct material Cost 96,000 1,200*80
Conversion cost 43200 720*60
Total Br.139,200
Total cost accounted for Br 251,200
41
 Journal Entries- for production during October

1. Work in Process- Mixing 160,000

RM -Inventory 160,000
(To record direct materials used in production)
2. Work in Process- Mixing 91,200
Various accounts 91,200
(To record Mixing department conversion costs)

3. Work in Process- Bottling 112,000

Work in Process- Mixing 112,000
(To record transfer units completed to bottling department)

42
 Case3: Process costing with some beginning and
some ending work in process inventory.
Data for the third month of operation (November) of the
Mixing Department is given below: Weighted Average
Method
Beginning work in process( from
October/Case2) ( CC 60% complete ) 1,200 units
Started during the month 1,000 units
Completed during the month 1,600 units
Ending work in process (50% completed as to
conversion costs.) 600units
Current Beg.
Cost month WIP(Case2)
Direct material costs Br. 69,000 Br. 96,000
Conversion costs 70,800 43,200
43
When both WIP beginning and ending have balances ,
there two methods of process costing accounting:
1. Weighted Average Method
2. FIFO Method

44
Weighted-Average -process costing method

 Makes no distinction between work done in

prior( beginning WIP) or current periods(started new)
 It combines units and costs from prior and current
periods
 Calculates the equivalent unit cost of the work done to
date regardless of the period in which it was done
 Thus, its assigns cost to equivalent units completed and
to equivalent units in ending work in process inventory.
.

45
Solution - Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process 1,200 units

Units started in September 1,000

Units to account for 2,200

Units Completed and transferred out 1600 units

Ending Work in process

600
Units accounted for
2,200
46
Step 2 : Compute output in terms of equivalent units for
DMC & CC
Equivalent Unit

flow of physical
Flow of Production Units DMC CC

Units completed & transferred

out(100%,100%) 1,600 1,600 1,600

Ending Work in
process(100%,50%) 600 600 300
Work done to
date(cumulative) 2,200U 1,900U

47
Step 3 &4 : flow of cost and Cost per Equivalent units
Production cost report Total
production
cost
DMC CC

Cost of beginning WIP Br 139,200 Br96,000 Br 43,200

Current period cost 139,800 69,000 70,800
Cost to account for 279,000 165,000 114,000
Equivalent units(step-2) 2,200 1,900

cost per equivalent unit 75 60

48
Step 5 : Cost assignment to completed units and to units of
WIP ending
Production cost report Total prod.
Cost DMC CC
Total Cost to account for Br 279,000
Cost Assignment :
To Completed& transferred out(800
units):
Direct material Cost 120,000 1600*75
Conversion cost 96,000 1600*60
Total 216,000
To WIP ending(1200 units):
Direct material Cost 45,000 600*75
Conversion cost 18,000 300*60
Total 63,000
Total cost accounted for Br 279,000
49
 Journal Entries- for production during November

1. Work in Process- Mixing 69,000

RM -Inventory 69,000
(To record direct materials used in production)
2. Work in Process- Mixing 70,800
Various accounts 70,800
(To record conversion costs incurred )

3. Work in Process- Bottling 216,000

Work in Process- Mixing 216,000
(To record transfer of completed units in mixing department
to bottling department)
50
 First-in, First-out Method
This method assumes that the earliest equivalent units in the
work in process account are completed first.
Work done in a prior period is kept separate from work done
current period
Similarly cost of beginning Work-in-Process is kept separate
from current period cost.
Equivalent unit is computed only for the work done in the
current period.
Costs per equivalent unit is also computed only for work
done in the current period by dividing costs incurred in the
current period by the current period equivalent unit
 In weighted average method, equivalent unit and cost per
equivalent unit merges the units and costs in beginning WIP
and costs of work done in the current period. 51
First-in, First-out Method cont…
Cost Assignment
Assigns the cost of beginning work-in process to completed
units
Assigns the cost of current period :
 First to cost to complete beginning WIP
 Next to completed units from new start
 Lastly to units of ending work in process

 Example: Assume the previous data of weighted average

method

52
 Case3: Process costing with some beginning and
some ending work in process inventory.
Data for the third month of operation (November) of the
Mixing Department is given below: FIFO Method

Beginning work in process( from

October/Case2) ( CC 60% complete ) 1,200 units
Started during the month 1,000 units
Completed during the month 1,600 units
Ending work in process (50% completed as
to conversion costs.) 600units
Current Beg.
Cost month WIP(Case2)
Direct material costs Br. 69,000 96,000
Conversion costs Br. 70,800 43,200
53
Solution - Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process
1,200 units
Units started in September 1,000

Units to account for 2,200

Units Completed and transferred out(1,600)
• From beginning WIP 1,200
• From new start 400

Ending Work in process

600
Units accounted for
2,200

54
Step 2 : Compute equivalent units for the work done in
the current month
flow of Equivalent unit
Flow of Production physical Units DMC CC

Units completed & transferred

out
• From Beg. WIP(0%,40%) 1,200 0 480
•From new start (100%,100%) 400 400 400
Ending Work in process
(100%,50%) 600 600 300

Work done only in the

current month 1,000U 1,180U

55
Step 3 &4 : flow of cost and Cost per Equivalent units for
the work done only in the current month
Production cost report Total
production
cost
DMC CC

Cost of beginning WIP Br 139,200 Br96,000 Br 43,200

Current period cost 139,800 69,000 70,800
Work done only in the current period
(Equivalent units(step-2)) 1,000 1,180

cost per equivalent unit 69 60

56
Step 5 : Cost assignment
Production cost report Total Cost DMC CC
Total Cost to account for Br 279,000
Cost Assignment :
To Completed& transferred
out(1600 units):
From Beginning WIP(1,200U)
 Cost carried forward 139,200 96,000 43,200
 Cost to complete them 28,800 0*69 480*60
From new start (400U) 51,600 400*69 400*60
Total 219,600
To WIP ending(600 units):
Direct material Cost 41,400 600*69
Conversion cost 18,000 300*60
Total 59,400
Total cost accounted for Br 279,000
57
 Journal Entries- for production during November

1. Work in Process- Mixing 69,000

RM -Inventory 69,000
(To record direct materials used in production)
2. Work in Process- Mixing 70,800
Various accounts 70,800
(To record Mixing department conversion costs)

3. Work in Process- Bottling 219,600

Work in Process- Mixing 219,600
(To record transfer of completed units in mixing department
to bottling department)
58
Transferred-in Costs-Bottling Department
Transferred-in Costs are costs incurred in previous
departments that are carried forward as the products cost
when it moves to a subsequent process in the production
cycle
Also called Previous Department Costs
Transferred-in costs are treated as if they are a separate
type of direct material added at the beginning of the
process .
However, they are called transferred-in costs, not direct
material costs.
Bottling Department
In the Bottling Department the product is bottled, labeled,
and placed in cartons
Costs are accumulated in the three cost pools
1. Transferred-in cost (mixing department cost)
2. Direct materials cost – bottling department and
3. Conversion cost - bottling department
Assumption- Bottling department
Direct material is added at the end of the process and
 WIP ending is zero percent complete as to DMC
Conversion costs are incurred evenly through-out the process.

60
Example –Bottling Department
Assume the following data for Coca-Cola Company during the
month of November in the Bottling department( Case 3)

Transferred in cost during the month(November):

 Weighted average method 216,000
 First-in, first-out method 219,600

61
Physical Unit and Percentage of completion
Physical units Transferred in DMC CC
costs
Beginning work in process 1,200 units 100% 0% 75%
complete complete complete
Transferred-in during the month 1,600 units
Completed during the month 2,000 units
Ending work in process 800 units 100% 0% 50%
complete complete complete

Cost
Beginning work in process cost :
Transferred in costs (1,200 x Br. 170) Br. 204,000
Direct material costs 0
Conversion costs 90,000
Transferred in cost during the month:
Weighted average 216,000
First-in, first-out 219,600
Direct material costs incurred during the month 60,000

Conversion costs incurred during the month 150,000

62
Solution - Weighted average method- Bottling Dept.
Step-1- Summery of flow of physical unit
Flow of Production flow of pysical Units
Beginning Work in process 1,200 units
Transferred-in during the month 1,600

Units to account for 2,800

Units Completed and become FG 2,000

Ending Work in process 800

Units accounted for 2,800

63
Step 2 : Compute equivalent units for the work done to
date

Equivalent unit
flow of
physical Transfer
Flow of Production Units in cost DMC CC

Units completed & become

FG(100%,100,100%) 2,000 2,000 2,000 2,000

Ending Work in process

(100%,0%, 50%) 800 800 0 400

Work done to date 2,800U 2,000U 2,400U

64
Step 3 &4 : cost summery and Cost per Equivalent units for
the work done to date
Production cost Total
report production Transfer in
cost cost DMC CC

Cost of beginning
WIP Br.294,000 Br.204,000 Br.0 Br.90,000

Current period cost 426,000 216,000 60,000 150,000

Cost to account for
(TC) 720,000 420,000 60,000 240,000
Work done to date (Equivalent
units(step-2)) 2,800U 2,000U 2,400U

cost per equivalent unit 150 30 100

65
Step 5 : Cost assignment
Production cost report Total prod. Transfer in DMC CC
Cost cost
Total Cost to account for Br 720,000
Cost Assignment :
To Completed ( FG) units
(2000):
Transfer in cost 300,000 2,000*150
DMC 60,000 2,000*30
Conversion cost 200,000 2000*100
Total 560,000
To WIP ending(800 units):
Transfer in cost 120,000 800*150
Direct material Cost 0 0*30
Conversion cost 40,000 400*100
Total 160,000
Total cost accounted for Br 720,000 66
 Journal Entries- for production during November
1. Work in Process- Bottling 216,000
Work in Process- Mixing 216,000
(To record transfer in during current period)
2. Work in Process- Bottling 60,000
RM -Inventory 60,000
(To record bottling department material costs)
3. Work in Process- Bottling 150,000
Various accounts 150,000
(To record bottling department conversion costs)
4. FG inventory - 560,000
Work in Process- Bottling 560,000
(To record completion and transfer to FG store)
67
Example – Cont….
Bottling Department and Fifo method

68
Solution - Step-1- Summery of flow of physical unit Fifo
method
Flow of Production flow of pysical Units
Beginning Work in process
1,200
Transfer in during the period 1,600

Units to account for 2,800

Units Completed ( FG) (2,000)
1,200
• From beginning WIP 800
• From transfer in during current period
Ending Work in process 800
Units accounted for 2,800

69
Step 2 : Compute equivalent units for the work done
only in the current period
Equivalent unit
flow of
physical Transfer
Flow of Production Units in cost DMC CC
Units completed
From Beg. WIP(0%,100,25%) 1,200 0 1,200 300
From current T. in (100%,100%,100%) 800 800 800 800
Ending Work in process
(100%,0%, 50%) 800 800 0 400

Work done only in the

current period 1,600U 2,000U 1,500U

70
Step 3 &4 : flow of cost and Cost per Equivalent units for
the work done only in the current month
Production cost report Total
production Transfer in
cost cost DMC CC

Cost of beginning WIP Br.294,000 Br.204,000 Br.0 Br.90,000

Current period cost 429,600 219,600 60,000 150,000

Work done in current period
Equivalent units(step-2)) 1,600U 2,000U 1,500U

cost per equivalent unit 137.25 30 100

71
Step 5 : Cost assignment to completed units and to units of WIP ending
Production cost report Total prod. Cost Transfer in cost DMC CC
Total Cost to account for
Br 723,600
Cost Assignment :
To Completed units (2000)
Cost in beg WIP Br.294,000 Br.204,000 Br.0 Br.90,000
Cost to complete Beg WIP
Transfer in cost 0 0*137.25
DMC 36,000 1,200*30
Conversion cost 30,000 300*100
Total cost of beg WIP 360,000
Cost of current T.in & completed 213,800 800*137.25 800*30 800*100
Total cost of Completed units 573,800
To WIP ending(800 units):
Transfer in cost
109,800 800*137.25
Direct material Cost
0 0*30
Conversion cost
40,000 400*100
Total 149,800
Total cost accounted for
Br 723,600 72
 Journal Entries- for production during November
1. Work in Process- Bottling 219,600
Work in Process- Mixing 219,600
(To record transfer in during current period)
2. Work in Process- Bottling 60,000
RM -Inventory 60,000
(To record bottling department material costs)
3. Work in Process- Bottling 150,000
Various accounts 150,000
(To record bottling department conversion costs)
4. FG inventory - 573,800
Work in Process- Bottling 573,800
(To record completion and transfer to FG store)
73
The End