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CHAPTER 4
SYSTEMS DESIGN: PROCESS COSTING
Key Terms and Concepts to Know
Differences between Job-Order Costing and Processing Costing:
Processing costing accumulates manufacturing costs (raw material, direct labor
and manufacturing overhead) by processing department.
Job-order costing accumulates manufacturing costs by job.
Process costing uses a work-in-process account for each department whereas joborder costing uses one work-in-process account for all jobs.
In process costing, the flow of costs through the work-in-process accounts follows
the flow of units being produced through the manufacturing departments. When
the units are completed in one department and transferred to the next
department, the costs incurred to date for those units are transferred to the next
departments work-in-process inventory account.
Production Report:
The Production Report replaces the Job Cost Sheet as the key document in
process costing.
A production report is prepared for each work-in-process account to assign the
total costs incurred to the units completed and transferred to the next department
(or finished goods inventory if they are ready for sale) and to the units remaining
in work-in-process in three major steps:
o first by analyzing the flow of units through the work-in-process account
o second by accumulating the costs added to work-in-process during the
period and the costs already present in the beginning balance in work-inprocess
o third by assigned the total costs in work-in-process to the units transferred
out and the units still in process.
Equivalent Units of Production Weighted Average Method:
At the end of most accounting periods, the balance in work-in-process inventory is
not zero. This means incomplete units are still in process and must be assigned
costs in proportion to how complete they are with respect to each of direct
materials, direct labor and manufacturing overhead.
To simplify the calculations, partially completed units are converted into equivalent
whole units for each type of cost. For example, if there are six units in process at
the end of the period and one-third of the direct materials needed for a complete
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unit has been added to each unit, then the six incomplete units are the equivalent
of two complete units of direct materials.
Units completed and transferred out are always 100% complete for all types of
costs.
Materials
Labor
Overhead
Total
Beginning balance
+ Costs added during the period
= Costs to be Accounted For
Step 1: Analyze the flow of physical units through the work-in-process inventory
account. Units to be Accounted For (inflows) must equal Units Accounted For
(outflows).
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Step 2: Calculate equivalent units only for Units Completed and Transferred Out
Journal Entries
The journal entries for process costing are the same as those for job-order costing
with one exception.
The entry to transfer cost from one work-in-process account to another is:
Work-in-process inventory second department debit
Work-in-process first department
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credit
Example #1:
Micro Labs Company produces house paint in two processing departments: the Mixing
Department which mixes the paint colors and the Finishing Department which puts the
paint in containers and labels them. The following information related to the companys
operation for October follows:
a) Raw materials were issued for use in production: Mixing department, $551,000,
and the Finishing department, $629,000.
b) Direct labor costs incurred: Mixing department $230,000, and Finishing
department $270,000.
c) Manufacturing overhead cost applied: Mixing department $665,000, and Finishing
department, $405,000.
d) The cost of the mixed paint transferred from the Mixing department to the
Finishing department was $1,850,000.
e) Paint that had been prepared for shipping was transferred from the Finishing
department to Finished Goods. Cost of the transferred paint was $3,200,000.
Required: Prepare journal entries to record items a) through e) above.
Solution #1:
a) Work in Process Mixing
Work in Process Finishing
Raw Materials
551,000
629,000
1,180,000
230,000
270,000
665,000
405,000
1,850,000
e) Finished Goods
Work in Process Finishing
3,200,000
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500,000
1,070,000
1,850,000
3,200,000
Example #2:
Micro Labs uses a processing costing system. The following data are available for the
mixing department for October. The department started 175,000 gallons into
production during the month.
Percent Complete
Conversion
Gallons
Materials
Costs
Work-in-process, October 1
30,000
65%
30%
Work-in-process, October 31
15,000
80%
40%
Required: Determine the equivalent units of production for the month.
Solution #2:
Work-in-process, October 1
Started into production
Units to be Accounted For
Gallons
30,000
175,000
205,000
190,000
15,000
205,000
Equivalent Units
Conversion
Materials
Cost
190,000
12,000
202,000
190,000
6,000
196,000
Example #3:
Micro Labs September 30th general ledger showed a balance of $634,500 in work-inprocess inventory. $206,500 of the balance was direct materials.
Required: Using the data and solutions from Examples #1 and #2, compute the cost
per equivalent unit for materials and conversion costs.
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Solution #3:
Beginning balance
Costs added during the period
Costs to be Accounted For
Total
$634,500
Materials
$206,500
1,446,000
$2,080,500
551,000
$757,500
$757,500
202,000
= $3.75
Conversion
Cost
$428,000
230,000
665,000
$1,323,000
$1,323,000
196,000
= $6.75
Example #4:
Micro Labs must assign the manufacturing costs in work-in-process inventory at the end
of October to the gallons finished and ready for sale and the gallons still in process at
October 31.
Required: Using the data and solutions from Examples #1, #2 and #3, compute the
balance in work-in-process inventory for the Mixing department and the cost
of gallons transferred to the Finishing department during October.
Solution #4:
Total
Completed and Transferred
$1,995,000
Work-in-process, October 31
Costs Accounted For
$85,500
$2,080,500
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Materials
190,000 x
$3.75 =
$712,500
12,000 x
$3.75 =
$45,000
$757,000
Conversion
Cost
190,000 x
$6.75 =
$1,282,500
6,000 x
$6.75 =
$40,500
$1,323,000
Practice Problems
Practice Problem #1
Steel Manufacturing Company uses a process cost system. The Molding Department
adds materials at the beginning of the process and conversion costs are incurred
uniformly throughout the process. Work in process on May 1 was 75% complete and
work in process on May 31 was 40% complete.
Required: Complete the Production Cost Report for the Molding Department for May.
STEEL MANUFACTURING COMPANY
Molding Department
Production Cost Report
For the Month Ended May 31, 2008
Physical
Units
16,000
50,000
66,000
Materials
Conversion
Costs
$41,000
$42,000
46,000
Total
250,000
198,000
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14. In
a)
b)
c)
d)
15. Binder Company has the following production information available for June:
Total materials costs
$ 80,000
Equivalent units of materials
10,000
Total conversion costs
$120,000
Equivalent units of conversion costs
20,000
What is the total manufacturing cost per unit?
a) $14.00
b) $6.67
c) $6.00
d) $8.00
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16,000
50,000
66,000
46,000
20,000
66,000
$41,000
157,000
$198,000
$42,000
93,000
$135,000
$3.00
$2.50
$138,000
60,000
$198,000
$115,000
20,000
$135,000
Total
$83,000
250,000
$333,000
46,000
20,000
66,000
Conversion
Costs
46,000
8,000
54,000
$253,000
80,000
$333,000
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Work in ProcessCooking
Work in ProcessPackaging
Raw Materials Inventory
40,000
21,000
Work in ProcessCooking
Work in ProcessPackaging
Salaries and Wages Payable
21,000
9,000
Work in ProcessCooking
Work in ProcessPackaging
Manufacturing Overhead
25,000
14,000
Work in ProcessPackaging
Work in ProcessCooking
50,000
b)
Cooking
$0
40,000
21,000
25,000
61,000
30,000
39,000
50,000
50,000
$36,000
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Packaging
$6,000
21,000
9,000
14,000
50,000
$100,000
7.
8.
9.
10.
True
False because process costing focuses on accumulating quantities and costs by
production department, not production jobs.
False because materials, labor and/or overhead may be added at any point
during the production process.
True
False because equivalent units is the sum of units completed and transferred
out plus equivalent units of ending work in process.
False because physical units are the actual units being produced whereas
equivalent units are an accounting convenience to eliminate partially completed
units when preparing the production report.
False because the production report shows quantity and cost data for a
particular production department.
True
True
False because the production report shows total manufacturing costs for a
particular production department.
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B
C
B
D
A
D
C
B
B
C
D
B
C
C
A
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