Process Costing

PROCESS COSTING
Learning Objective
To distinguish production
procedures that match
with process costing from
those that correspond
with job order costing.
LO1
Production of Goods and Services
and Costing Systems
Job Order Costing Process Costing

 Custom orders
 Repetitive operations
 Unique products
 Identical products
 Low production volume
 High production volume
 High product flexibility
 Low product flexibility
 Low to medium
standardization of labor  High standardization of
and material labor and material
Process 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.
Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill
Learning Objective
To account for the physical

flows and related cost
flows when using
process costing.
LO2
Tracking the Physical Flow and
Related Production Costs
The Work in Process

Direct account consists of
Materials individual jobs in
job costing.
Direct Finished
Jobs
Labor Goods
Factory Cost per

Overhead unit for
each job
The Work in Process

Direct account consists of
Materials specific processes in
process costing.
Finished
Processes
Goods
Direct Labor
and Factory Cost per
Overhead unit
(Conversion) processed
Same objective: to determine

the cost of products
Same inventory accounts: raw materials,

work in process, and finished goods
Same overhead assignment method:

predetermined rate times actual activity
Understanding Cost Flows
Direct
Materials
Work in
Indirect Process
Assembly
Work in
Finished
Process
Goods
Packaging
Conversion
Costs
Delivered
to
Labor Factory Customers
Overhead
Costs are accumulated for a period of time

by process or department.
Unit cost is computed by dividing the

accumulated costs by the number of
units produced in the period.
Costs are accumulated for a period of time

by process or department.
Unit cost is computed by dividing the

accumulated costs by the number of
units produced in the period.
If partially complete units remain in

process, we must use equivalent units
as the divisor to obtain unit costs.
Learning Objective
To demonstrate how to
calculate equivalent units.
LO3
Process Costing and
Equivalent Units
Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
Two one-half full pitchers are

equivalent to one full pitcher.
+ = 1
Process Costing and
Equivalent Units
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
Process Costing and
Equivalent Units
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
10,000 units + (5,000 units × .30)
b. 11,500 = 11,500 equivalent units
c. 1,500
d. 15,000
Learning Objective
To use the costs of resources

consumed to calculate the
cost per equivalent unit
of production.
LO4
Cost per Equivalent Unit
Cost per Product costs for the period

equivalent =
Equivalent units for the period
unit
Now assume that PencilCo incurred

$27,600 in production costs. What was
PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that PencilCo incurred

$27,600 in production costs. What was
PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40 $27,600 ÷ 11,500 equivalent units
c. $2.76 = $2.40 per equivalent unit
d. $2.90
Process Costing and
Equivalent Units
40% of
Material
Equivalent units may be
different for material and
Stage 1
conversion at different stages
of a process.
25% of
Conversion
At completion of Stage 1 of the process,

material is 40% complete, but conversion
is only 25% complete.
Process Costing and
Equivalent Units
40% of 60% of
Material + Material = 100%
Stage 1 Stage 2
25% of 25% of
Conversion + Conversion = 50%
Process Costing and
Equivalent Units
40% of 60% of
Material Material
Stage 1 Stage 2 Stage 3
25% of 25% of 50% of

Conversion Conversion Conversion
The process is now complete.

Process Costing
Owl Inc. uses

FIFO process
costing in its
Fabrication
Department where
a product called
Strata is made.
Process Costing
Owl Inc Fabrication Department Data For April

Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Ending Inventory:
Process Costing
Owl Inc Fabrication Department Data For April

Beginning Inventory:
Units started in April 90,000
Material
Units transferred fromisfabrication
added attothe
mixing 100,000
Endingbeginning
Inventory: of the process so
it isofalways
Units product 100% complete. 20,000
Physical Flow of Units
April Fabrication Department Physical Flow
Units to account for:

Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000
Units accounted for as:

Units transferred from Fabrication to Mixing 100,000
Ending inventory 20,000
Total number of units 120,000
Computing Equivalent
Units of Production
Fabrication Department
Direct Material Equivalent Units of Production - April
Units of Percent Added Equivalent

Product This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000
Units of Production
Since materials are added at the
beginning of the process, no additional
materials are necessary to complete the
beginning inventory.

Total units 120,000 90,000
Units of Production
100,000 units completed

and transferred.

Goods started and completed 70,000
} 100,000
100% 70,000
Total units 120,000 90,000
Units of Production
Conversion Equivalent Units of Production - April

Beginning goods in process 30,000 60% 18,000
Total units 120,000 93,000
Units of Production
Since conversion is 40 percent

complete in the beginning inventory,
60 percent of the work must be
completed
Fabrication in April.
Department

Beginning goods in process 30,000 60% 18,000
Total units 120,000 93,000
Units of Production

Beginning goods in process 30,000 100,000
60% 18,000
Goods started and completed 70,000
} Transferred
100% 70,000
Total units 120,000 93,000
Units of Production
Summary of Fabrication Department

Equivalent Units of Production - April
Direct
Activities during April Material Conversion
Units from beginning inventory
processed in current period 0 18,000
Units started and completed
in current period 70,000 70,000
Units in ending inventory at
end of current period 20,000 5,000
Equivalent units of production

for period 90,000 93,000
Process Costing and
Equivalent Units
April Work in Process Costs
Beginning work in process $ 22,380
Costs added in April:
Direct material 45,000
Conversion 55,800
Total costs to account for $ 123,180
Cost Per Equivalent Unit - April
Direct
Materials Conversion
Total cost of resource for
April $ 45,000 $ 55,800
Equivalent units of production

in April ÷ 90,000 ÷ 93,000
Cost per equivalent unit for

April = $ 0.50 = $ 0.60
Learning Objective
To use the cost per

equivalent unit to
assign costs to the
work completed
during the period.
LO5
Cost of Completed Units
Fabrication Department Work in Process

Cost Summary for April
Cost of completed units
From beginning work in process
April 1 balance $ 22,380
Costs to complete April 1 inventory
Direct material
Conversion
Started and completed
Total completed and transferred

Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Started and completed
Total completed and transferred

Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Started and completed (70,000 × $1.10) 77,000
Total completed and transferred (100,000 units) $ 110,180
$0.50 + $0.60 = $1.10

Learning Objective
To create a process costing

production report and
use the report for
decision making.
LO6
Tracking Costs Using a Process
Costing Production Report
We will account for all costs incurred

by assigning unit costs to the:
A. 100,000 units completed and
transferred.
B. 20,000 units remaining in ending
work in process inventory.
Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Cost of ending work in process
Direct material (20,000 × $0.50) $ 10,000
Conversion
Total cost accounted for
Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Cost of ending work in process
Direct material (20,000 × $0.50) $ 10,000
Conversion (5,000 × $0.60) 3,000 13,000
Total cost accounted for $ 123,180
Direct material $ 0
Conversion (18,000 × $0.60) 10,800 10,800
Cost of ending work in process All costs accounted for
Direct material (20,000 × $0.50) $ 10,000
Conversion (5,000 × $0.60) 3,000 13,000
Total cost accounted for $ 123,180
Ethics, Fraud, and
Corporate Governance
Overstating equivalent units of

resources in ending inventory will
understate cost of goods sold, and
thereby overstate income.
Equivalent units of production can be

overstated by inflating the application
of direct labor and overhead
(conversion costs) to work in process.
End of Chapter 18

Process Costing

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PROCESS COSTING

Job Order Costing Process Costing

Typical process cost applications:

To account for the physical

The Work in Process

Factory Cost per

The Work in Process

Same objective: to determine

Same inventory accounts: raw materials,

Same overhead assignment method:

Costs are accumulated for a period of time

Unit cost is computed by dividing the

Costs are accumulated for a period of time

Unit cost is computed by dividing the

If partially complete units remain in

Two one-half full pitchers are

For the current period, PencilCo started

For the current period, PencilCo started

To use the costs of resources

Cost per Product costs for the period

Now assume that PencilCo incurred

Now assume that PencilCo incurred

At completion of Stage 1 of the process,

Stage 1 Stage 2 Stage 3

25% of 25% of 50% of

The process is now complete.

Owl Inc. uses

Owl Inc Fabrication Department Data For April

Owl Inc Fabrication Department Data For April

April Fabrication Department Physical Flow

Units to account for:

Units accounted for as:

Units of Percent Added Equivalent

Units of Percent Added Equivalent

100,000 units completed

Units of Percent Added Equivalent

Units of Percent Added Equivalent

Since conversion is 40 percent

Units of Percent Added Equivalent

Units of Percent Added Equivalent

Summary of Fabrication Department

Equivalent units of production

Equivalent units of production

Cost per equivalent unit for

To use the cost per

Fabrication Department Work in Process

Fabrication Department Work in Process

Fabrication Department Work in Process

$0.50 + $0.60 = $1.10

To create a process costing

We will account for all costs incurred

Overstating equivalent units of

Equivalent units of production can be

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