CHapter 3

CHAPTER 3
Process Costing
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
A
Problems
B
Problems
1. Understand who uses

process cost systems.
1, 2
2. Explain the similarities

and differences between
job order cost and
process cost systems.
2, 3, 4, 5
3. Explain the flow of costs

in a process cost system.
3A
3B
4. Make the journal entries

to assign manufacturing
costs in a process
cost system.
6, 7
1, 2, 3
2, 4
3A
3B
5. Compute equivalent
units.
10, 11, 12,

13
5, 10
3, 5, 6, 7, 8, 1A, 2A, 4A,

9, 10, 11, 13, 5A, 6A
14, 15, 16,
1B, 2B, 4B,

5B, 6B
6. Explain the four steps

necessary to prepare
a production cost report.
8, 9, 14, 15,
18
4, 6, 7, 8,
9
3, 5, 6, 7, 8, 1A, 2A, 4A,

9, 10, 11, 13, 5A
14, 15, 16,
17, 18, 19
1B, 2B, 4B,

5B
7. Prepare a production
cost report.
16, 17, 19,

20
7, 12, 13
1A, 2A, 4A,

5A, 6A
1B, 2B, 4B,

5B, 6B
16, 17, 18,

19, 20
7A
7B
*8. Compute equivalent units

using the FIFO method.
21, 22
11, 12, 13
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix*to
the chapter.
3-1
ASSIGNMENT CHARACTERISTICS TABLE

Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Complete four steps necessary to prepare a production

cost report.
Simple
3040
2A

cost report.
Simple
3040
3A
Journalize transactions.
Moderate
2030
4A
Assign costs and prepare production cost report.
Moderate
2030
5A
Determine equivalent units and unit costs and

assign costs.
Moderate
2030
6A
Compute equivalent units and complete production

cost report.
Moderate
1525
Determine equivalent units and unit costs and assign

costs for processes; prepare production cost report.
Moderate
3040
*7A*
1B

cost report.
Simple
3040
2B

cost report.
Simple
3040
3B
Journalize transactions.
Moderate
2030
4B
Assign costs and prepare production cost report.
Moderate
2030
5B
Determine equivalent units and unit costs and

assign costs.
Moderate
2030
6B
Compute equivalent units and complete production

cost report.
Moderate
1525
*7B
Determine equivalent units and unit costs and assign

costs for processes; prepare production cost report.
Moderate
3040
3-2
3-3
Q3-16
Q3-17
Q3-19
*7. Prepare a production cost report.
Broadening Your Perspective
*8. Compute equivalent units using the

FIFO method.
Q3-8
Q3-10
Q3-11
Q3-6
Q3-6
Real-World
Focus
Exploring
the Web
Q3-16
Q3-20
Q3-9
Q3-4
Q3-5
E3-1
E3-1
Knowledge Comprehension
Q3-1
Q3-2
Q3-2
Q3-3
*6. Explain the four steps necessary

to prepare a production cost report.
*1. Understand who uses process cost

systems.
*2. Explain the similarities and differences
between job order cost and process
cost systems.
*3. Explain the flow of costs in a process
cost system.
*4. Make the journal entries to assign
manufacturing costs in a process
cost system.
*5. Compute equivalent units.
Study Objective
E3-3
P3-3B
P3-3A
BE3-3
Q3-7
E3-2
BE3-1
E3-4
BE3-2
E3-10
Q3-12
E3-11
Q3-13
E3-13
BE3-5
E3-14
BE3-10
E3-15
E3-3
E3-16
E3-5
E3-17
E3-6
E3-18
E3-7
E3-19
E3-8
P3-1A
E3-9
E3-7
Q3-14
E3-8
Q3-15
E3-9
Q3-18
E3-10
BE3-4
E3-11
BE3-6
E3-13
BE3-7
E3-14
BE3-8
E3-15
BE3-9
E3-16
E3-3
E3-17
E3-5
E3-18
E3-6
P3-4A
E3-7
P3-5A
E3-12
P3-6A
E3-13
P3-1B
P3-1A
P3-2B
P3-2A
BE3-13
Q3-21
E3-16
Q3-22
E3-17
BE3-11
E3-18
BE3-12
All About You
Application
E3-19
E3-20
P3-7A
P3-7B
P3-4B
P3-5B
P3-6B
E3-19
P3-1A
P3-2A
P3-4A
P3-5A
P3-1B
P3-2B
P3-4B
P3-5B
P3-2A
P3-4A
P3-5A
P3-6A
P3-1B
P3-2B
P3-4B
P3-5B
P3-6B
P3-3A
P3-3B
Synthesis
Managerial Analysis Decision Making

Across the
Decision Making
Organization
Across the
Real-World Focus
Organization
Communication
P3-1A
P3-2A
P3-1B
P3-2B
P3-1A
P3-2A
P3-1B
P3-2B
P3-3A
P3-3B
P3-3A
P3-3B
Analysis
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Ethics
Case
Evaluation
BLOOMS TAXONOMY TABLE
STUDY OBJECTIVES
1.
UNDERSTAND WHO USES PROCESS COST SYSTEMS.
2.
EXPLAIN THE SIMILARITIES AND DIFFERENCES

BETWEEN JOB ORDER COST AND PROCESS COST
SYSTEMS.
3.
EXPLAIN THE FLOW OF COSTS IN A PROCESS

COST SYSTEM.
4.
MAKE THE JOURNAL ENTRIES TO ASSIGN MANUFACTURING COSTS IN A PROCESS COST SYSTEM.
5.
COMPUTE EQUIVALENT UNITS.
6.
EXPLAIN THE FOUR STEPS NECESSARY TO PREPARE A PRODUCTION COST REPORT.
7.
PREPARE A PRODUCTION COST REPORT.
*8.
COMPUTE EQUIVALENT UNITS USING THE FIFO

METHOD.
3-4
CHAPTER REVIEW
Process Manufacturing and Accounting
1.
(S.O. 1) Process cost systems are used to apply costs to similar products that are mass
produced in a continuous fashion, such as the production of ice cream, steel or soft drinks. In
comparison, costs in a job order cost system are assigned to a specific job, such as the
construction of a customized home, the making of a motion picture, or the manufacturing of a
specialized machine.
2.
(S.O. 2) Job order cost and process cost systems are similar in that (a) both use the same three
manufacturing cost elements of direct materials, direct labor, and manufacturing overhead; (b)
both accumulate costs of raw materials by debiting Raw Materials Inventory, factory labor by
debiting Factory Labor, and manufacturing overhead costs by debiting Manufacturing Overhead;
and (c) both flow costs to the same accounts of Work in Process, Finished Goods Inventory, and
Cost of Goods Sold.
3.
The major differences between a job order cost system and a process cost system are as follows:
Job Order
Cost System
One for each job
Process
Cost System
One for each process
Documents used
Job cost sheets
Production cost reports
Determination of
total manufacturing
costs
Each job
Each period
Unit-cost
computations
Cost of each job

Units produced
for the job
Total manufacturing costs

Equivalent Units produced
during the period
Feature
Work in process
accounts
Process Cost Flow

4.
(S.O. 3) In the Tyler Company example in the text book, manufacturing consists of two
processes: machining and assembly. In the Machining Department, the raw materials are shaped,
honed, and drilled. In the Assembly Department, the parts are assembled and packaged.
5.
Materials, labor, and manufacturing overhead can be added in both the Machining and Assembly
Departments. When the Machining Department finishes its work, the partially completed units are
transferred to the Assembly Department. In the Assembly Department, the goods are finished and
are then transferred to the finished goods inventory. Upon sale, the goods are removed from the
finished goods inventory.
3-5
Assignment of Manufacturing Costs

6.
(S.O. 4) All raw materials issued for production are a materials cost to the producing department.
Materials requisition slips may be used in a process cost system, but fewer requisitions are
generally required than in a job order cost system, because the materials are used for processes
rather than for specific jobs. The entry to record the materials used is:
Work in ProcessMachining ..................................................
Work in ProcessAssembly ...................................................
Raw Materials Inventory.................................................
7.
XXXX
XXXX
XXXX
The basis for allocating the overhead costs to the production departments in an objective and
equitable manner is the activity that drives or causes the costs. A primary driver of overhead
costs in continuous manufacturing operations is machine time used, not direct labor. Thus,
machine hours are widely used in allocating manufacturing overhead costs. The entry to allocate
overhead is:
Manufacturing Overhead................................................
9.
XXXX
Time tickets may be used in determining the cost of labor assignable to the production
departments. The labor cost chargeable to a process can be obtained from the payroll register or
departmental payroll summaries. All labor costs incurred within a producing department are a cost
of processing the raw materials. The entry to assign the labor costs is:
Factory Labor....................................................................
8.
XXXX
XXXX
XXXX
XXXX
XXXX
At the end of the period, the following transfer entries are needed:
Work in ProcessMachining ........................................
XXXX
Finished Goods Inventory ........................................................

Work in ProcessAssembly .........................................
XXXX
Cost of Goods Sold....................................................................

Finished Goods Inventory ..............................................
XXXX
XXXX
XXXX
XXXX
Equivalent Units
10.
(S.O. 5) A major step in process cost accounting is the calculation of equivalent units. Equivalent
units of production measure the work done during the period, expressed in fully completed
units. This concept is used to determine the cost per unit of completed product.
3-6
11.
The formula to compute equivalent units of production under the weighted average method is as
follows:
Units Completed and
+
Transferred Out
Equivalent Units of
Ending Work in
Process
Equivalent Units of
Production
12.
The method of computing equivalent units here is referred to as the weighted-average method. It
considers the degree of completion (weighting) of the units completed and transferred out and the
ending work in process. A lesser used method, called the FIFO method, is discussed in the
appendix to this chapter.
13.
To illustrate the computation of equivalent units using the weighted-average method, assume that
materials are entered at the beginning of the process and the following information is provided for
the Processing Department of the Silva Company:
Work in process, Beg.

Started into production
Total units
Units transferred out
Work in process, End.
Total units
14.
Percentage Complete
Materials
Conversion Costs
100%
80%
Physical Units
2,500
4,500
7,000
6,000
1,000
7,000
100%
60%
The two equivalent unit computations are as follows:

Equivalent Units
Conversion
Materials
Costs
6,000
6,000

Work in process, End
1,000 X 100%
1,000 X 60%
Total equivalent units
1,000
7,000
600
6,600
Production Cost Report

15.
(S.O. 6) A production cost report is the key document used by management to understand the
activities in a department because it shows the production quantity and cost data related to that
department. In order to be ready to complete a production cost report, the company must perform
four steps:
a. Compute the physical unit flow.
b. Compute the equivalent units of production.
c. Compute unit production costs.
d. Prepare a cost reconciliation schedule.
3-7
16.
The computation of physical units involves:

a. adding the units started (or transferred) into production during the period to the units in
process at the beginning of the period to determine the total units to be accounted for; and
b. accounting for these units by determining the output for the periodwhich consists of units
transferred out during the period and units in process at the end of the period.
In the example above, the total units to be accounted for and the units accounted for are both
equal to 7,000 units for the Silva Company.
17.
In computing unit costs, production costs are expressed in terms of equivalent units of production.
When equivalent units are different for materials and conversion costs, the formulas for computing
unit costs are as follows:
Total Materials
Cost
18.
Equivalent Units
of Materials
Unit Materials
Cost
Total Conversion
Costs
Equivalent Units
of Conversion Costs
Unit Conversion
Cost
Unit Materials
Cost
Unit Conversion
Cost
Total Manufacturing
Cost per Unit
The cost reconciliation schedule shows that the total costs accounted for equal the total costs
to be accounted for as follows:
Costs to be accounted for
Transferred out ..................................................
Materials.........................................................
Conversion costs..........................................
Total costs..............................................................
19.
$XXXX
$XXXX
XXXX
XXXX
$XXXX
(S.O. 7) Assume the Processing Department of the Silva Company has the following additional
cost information:
Direct materials: 100% complete.............................
Conversion costs: 80% complete ............................
Cost of work in process, Beg............................................
$ 24,000
19,620
$ 43,620
Costs incurred during production

Direct materials ...........................................................
Conversion costs ........................................................
Costs incurred......................................................................
$200,000
150,000
$350,000
3-8
20.
The Silva Companys Processing Department Production Cost Report at the end of the period is
as follows:
Processing Department
For the Period Ended
Physical
Units
QUANTITIES
Units to be accounted for
Total units
Units accounted for
Transferred out
Total units
Equivalent Units
Conversion
Materials
Costs
2,500
4,500
7,000
6,000
1,000
7,000
6,000
1,000
7,000
Materials
COSTS
Unit costs
Costs during the period
Equivalent units
Unit costs [(a) (b)]
(a) $224,000
(b)
7,000
$32.00
6,000
600 (1,000 X 60%)
6,600
Conversion
Costs
$169,620
6,600
$25.70

Total costs
Total
$393,620
$57.70
$ 43,620
350,000
$393,620
Cost Reconciliation Schedule

Costs accounted for
Transferred out (6,000 X $57.70)
Materials (1,000 X $32.00)
Conversion costs (600 X $25.70)
Total costs
$346,200
$32,000
15,420
47,420
$393,620
Operations Costing
21.
Companies often use a combination of a process cost and a job order cost system, called
operations costing. Operations costing is similar to process costing in that standardized
methods are used to manufacture the product. At the same time, the product may have some
customized, individual features that require the use of a job order cost system.
3-9
Equivalent Units Using the FIFO Method

*22. (S.O. 8) To illustrate the computation of equivalent units using the FIFO method, assume that
materials are entered at the beginning of the process and the following information is provided for
the Processing Department of the Silva Company:

Total units
Total units
Physical Units
2,500
4,500
7,000
6,000
1,000
7,000
Percentage Complete
Materials
Conversion Costs
100%
80%
100%
60%
*23. The equivalent units for material costs of the Processing Department under the FIFO method are
computed as follows:
Production Data
Started and finished
Total
Work Added
Physical Units
This Period
2,500
0
3,500
100%
1,000
100%
7,000
Equivalent
Units
3,500
1,000
4,500
*24. The equivalent units for conversion costs of the Processing Department under the FIFO method
are computed as follows:
Production Data
Started and completed
Total
Work Added
Physical Units
This Period
2,500
20%
3,500
100%
1,000
60%
7,000
Equivalent
Units
500
3,500
600
4,600
Production Cost Report Using the FIFO Method

*25. Assume the Processing Department of the Silva Company has the following additional cost
information:
Direct materials: 100% complete................................................
Conversion costs: 80% complete ...............................................
Cost of work in process, Beg.........................................................
$ 24,000
19,620
$ 43,620
Costs incurred during the production

Direct materials ..............................................................................
Conversion costs ...........................................................................
Costs incurred...................................................................................
$200,000
150,000
$350,000
3-10
*26. The Silva Companys Processing Department Production Cost Report at the end of the period
using the FIFO method is as follows:
For the Period Ended
Physical
Units
QUANTITIES
Total units
Units accounted for
Completed and transferred out
Started and completed
Total units
Equivalent Units
Conversion
Materials
Costs
2,500
4,500
7,000
2,500
3,500
1,000
7,000
0
3,500
1,000
4,500
Materials
COSTS
Unit costs
Costs during the period
Equivalent units
Unit costs [(a)/(b)]
(a)
(b)
$200,000
4,500
$44.444

Total costs
500
3,500
600
4,600
Conversion
Costs
$150,000
4,600
$ 32.609
Total
$350,000
$77.053
$ 43,620
350,000
$393,620

Costs accounted for
Transferred out
Work in process,
Costs to complete beg. work in process
Total costs
$ 43,620
16,305
59,925
Units started and completed (3,500 X $77.053)

Total costs transferred out
Materials (1,000 X $44.444)
Total costs
269,686
329,611
$44,444
19,565
64,009
$393,620
3-11
LECTURE OUTLINE
A.
Uses of Process Cost Systems.

1. Process cost systems are used to apply costs to similar products that
are mass-produced in a continuous fashion.
2. Once production begins, it continues until the finished product emerges,
and each unit of finished product is like every other unit.
B.
Similarities and Differences Between Job Order Cost and Process Cost
Systems.
1. In a process cost system, costs are tracked through a series of connected
manufacturing processes or departments, rather than by individual jobs
as in a job order cost system.
2. Companies use process cost systems when they produce a large volume
of relatively homogeneous products.
3. Job order cost and process cost systems are similar in three ways:
a.
Both systems track the same manufacturing cost elementsdirect

materials, direct labor, and manufacturing overhead.
b.
Costs are accumulated in the same accountsRaw Materials Inventory, Factory Labor, and Manufacturing Overhead.
c.
Accumulated costs are assigned to the same accountsWork in

Process, Finished Goods Inventory, and Cost of Goods Sold.
4. There are four main differences between the two cost systems:
a.
In a job order cost system, only one work in process account is used
while separate accounts are maintained for each department or
manufacturing process in a process cost system.
3-12
b.
In a job order cost system, costs are charged to individual jobs and
summarized in a job cost sheet; in a process cost system, costs are
summarized in a production cost report for each department.
c.
Costs are totaled at the completion of a job in a job cost system but
at the end of a time period (i.e. a month or year) in a process cost
system.
d.
In a job cost system, the unit cost is the total cost per job by the units
produced. In a process cost system, the unit cost is total manufacturing costs for the period by the units produced during the
period.
TEACHING TIP
ILLUSTRATION 3-1 contrasts the differences between a job order cost and a
process cost system.
C.
Process Cost Flow.

1. The company can add materials, labor, and manufacturing overhead in
each production department.
2. The costs of units completed are transferred from one department to
another as those units move through the manufacturing process.
3. The costs of completed work are transferred to Finished Goods Inventory.
4. When inventory is sold, costs are transferred to Cost of Goods Sold.
3-13
TEACHING TIP
ILLUSTRATION 3-2 provides an overview of the flow of costs in a process cost

system. Point out that a work in process account is maintained for each department
or process in a process cost system.
D.
Assignment of manufacturing costs.

1. The accumulation of the costs of materials, labor, and manufacturing
overhead is the same in a process cost system as in a job order cost
system.
2. Entries to assign the costs of raw materials, factory labor, and overhead
consist of a debit to Work in Process for each department and a credit to
Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.
3. The assignment of the three manufacturing cost elements to Work in
Process in a process cost system is different from a job order cost system.
a.
All raw materials issued for production are a materials cost to the
producing department. A process cost system may use materials
requisition slips, but fewer requisitions are generally required than
in a job order system, because the materials are used for processes
rather than specific jobs.
b.
Companies may use time tickets to determine the cost of factory

labor assignable to production departments. Since labor costs are
assigned to a process rather than a job, the labor cost chargeable
to a process can be obtained from the payroll register or departmental
payroll summaries.
c.
The objective in assigning overhead in a process cost system is to

allocate the overhead costs to the production departments on an
objective and equitable basis. A primary driver of overhead costs
in continuous manufacturing operations is machine time used, not
direct labor. Companies widely use machine hours in allocating
manufacturing overhead costs.
3-14
4. The entry to record units completed and transferred to the warehouse is

a debit to Finished Goods Inventory and a credit to Work in Process.
5. The entry to record the sale of goods is a debit to Cost of Goods Sold
and a credit to Finished Goods Inventory.
E.
Equivalent Units.
1. Equivalent units of production measure the work done during the period,
expressed in fully completed units.
2. This amount is used to determine the cost per unit of completed product.
3. Equivalent units of production are the sum of:
a.
Units completed and transferred out.
b.
Equivalent units of ending work in process.
4. The weighted-average method is used to compute equivalent units of

production.
5. This method considers the degree of completion (weighting) of the units
completed and transferred out and the ending work in process.
6. In computing equivalent units, the beginning work in process is not part
of the equivalent units of production formula.
7. Companies need to make two equivalent unit computations: one for
materials, and the other for conversion costs. This is necessary because
ending work in process is fully complete as to materials, but only partially
complete as to conversion costs.
3-15
F.
Production Cost Report.
TEACHING TIP
Use ILLUSTRATION 3-3 to identify the four-step procedure to be followed at the

end of a period for each department or process. Illustrations 3-4 through 3-8
provide an integrated example of each of the four required steps, culminating in
the preparation of a production cost report.
1. In order to complete a production cost report, the company must perform

four steps:
a.
Compute the physical unit flow.
b.
Compute the equivalent units of production.
c.
Compute unit production costs.
d.
Prepare a cost reconciliation schedule.
2. The first step in completing a production cost report requires computing

physical unit flow.
TEACHING TIP
ILLUSTRATION 3-4 provides an example of computing the physical units within

a department. Point out that it is necessary to know how many units were worked
on during the period and to know what happened to the units.
a.
The physical units are computed by adding the units started (or
transferred) into production during the period to the units in process
at the beginning of the period. This amount is called the total units
to be accounted for.
3-16
b.
These units then are accounted for by the output of the period, which
consists of units transferred out during the period and any units in
process at the end of the period.
3. The second step in completing a production cost report requires computing

equivalent units of production.
a.
Each processing department adds materials at the beginning of the

process, and incurs conversion costs uniformly during the process.
b.
Two computations of equivalent units are requiredone for materials

and one for conversion costs.
TEACHING TIP
ILLUSTRATION 3-5 provides an example of the computation of equivalent units

of production for materials and conversion costs. Emphasize that when manufacturing cost elements are not incurred at the same time, there must be a separate
equivalent unit computation for each cost element.
4. The third step in completing a production cost report requires computing
unit production costs.
TEACHING TIP
ILLUSTRATION 3-6 provides an example of calculating unit production costs.

Individual calculations of unit cost for materials and conversion costs are made.
Emphasize that both beginning inventory costs and the current periods material
and conversion costs are used in the unit cost calculations.
a.
Unit production costs are costs expressed in terms of equivalent units

of production.
b.
When equivalent units of production are different for materials and

conversion costs, companies compute three unit costs: (1) materials,
(2) conversion, and (3) total manufacturing.
3-17
c.
Total manufacturing cost per unit is computed as the sum of unit

materials cost + unit conversion cost.
5. The fourth step in completing a production cost report requires preparing

a cost reconciliation schedule.
a.
The company then prepares a cost reconciliation schedule to assign

total costs to (1) units transferred out to the next department and
(2) ending work in process.
b.
The total manufacturing cost per unit is used in costing the units
completed and transferred out.
c.
The cost reconciliation schedule shows that the total costs accounted for equal the total costs to be accounted for.
TEACHING TIP
ILLUSTRATION 3-7 provides an example of the preparation of a cost reconciliation schedule. Point out that the cost reconciliation schedule shows that the
total costs accounted for equal the total costs to be accounted for.
G.
Preparing the Production Cost Report.

1. The production cost report contains both quantity and cost data for a
production department.
a.
This report is an internal document for management that shows

production quantity and cost data for a production department.
3-18
TEACHING TIP
ILLUSTRATION 3-8 provides an example of a production cost report. The

calculations made in the examples used in Illustrations 3-4 through 3-7 are used
to complete the production cost report.
b.
There are four steps in preparing a production cost report:

(1) Prepare a physical unit schedule.
(2) Compute equivalent units.
(3) Compute unit costs.
(4) Prepare a cost reconciliation schedule.
c.
Production cost reports provide a basis for evaluating the productivity

of a department. Managers can use the cost data to assess whether
unit costs and total costs are reasonable.
*H. Equivalent Units Under FIFO.

1. Under the FIFO method, companies compute equivalent units on a firstin, first-out basis.
2. Companies assume that the beginning work in process is completed
before new work is started under the FIFO method.
3. Equivalent units are the sum of the work performed to:
a.
Finish the units of beginning work in process inventory.
b.
Complete the units started into production during the period (units
started and completed).
c.
Start, but only partially complete, the units in ending work in

process inventory.
3-19
4. The units started and completed during the current period are the units
transferred out minus the units in beginning work in process.
5. Companies often expand the physical units schedule to ensure reporting
of the beginning work in process and the units started and completed.
6. As with the weighted average method, once companies determine the
physical flow of units, they need to compute the equivalent units of
production.
a.
Since companies add materials at the beginning of the process, no

additional materials costs are required to complete the beginning
work in process.
b.
Equivalent units for materials are the sum of:

(1) Units started and finished.
(2) Equivalent units of ending work in process.
c.
Equivalent units for conversion costs are the sum of:

(1) Equivalent units of beginning work in process.
(2) Units started and finished.
(3) Equivalent units of ending work in process.
7. The unit production costs are based entirely on the production costs
incurred during the month. The costs in the beginning work in process
are ignored because they were incurred on work done in the preceding
month.
8. In preparing a cost reconciliation schedule under the FIFO method:
a.
The cost of the beginning work in process is always assigned to the

goods transferred to the next department (or finished goods, if
processing is complete).
b.
The ending work in process also will be assigned only the production costs incurred in the current period.
3-20
9. The weighted-average method of computing equivalent units is simple to

understand and apply. It will be very similar to the FIFO method when
prices do not fluctuate significantly from period to period.
10. Conceptually, the FIFO method is superior to the weighted-average
method because it measures current performance is using only costs
incurred in the current period. It provides current cost information, which
the company can use to establish more accurate pricing strategies for
goods manufactured and sold in the current period.
3-21
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Costs are assigned to each specific job in a process cost system.
True
False
2. In a process cost system, total costs are determined at the end of a period of time, such
as a month.
True
False
3. In a process cost system, the unit cost is total manufacturing costs divided by the units
produced during the period.
True
False
4. The accumulation of the costs of materials, labor, and manufacturing overhead is the
same in a process cost system as in a job order cost system.
True
False
5. More materials requisitions are generally required in a process cost system than in a job
order cost system.
True
False
6. Equivalent units of production equals units completed and transferred out + units in
beginning work in process.
True
False
7. Two equivalent unit computations are necessaryone for materials and the other for
conversion costs.
True
False
8. The first step in preparing a production cost report is to compute the equivalent units of
production.
True
False
9. The cost reconciliation schedule shows that the total costs accounted for equal the total
costs to be accounted for.
True
False
*10. Units in work in process at the beginning of the period are included in units started and
completed under the FIFO method.
True
False
3-22
Multiple Choice
1.
Which of the following is not a step in preparing a production cost report?

a. Prepare a cost reconciliation schedule.
b. Compute equivalent units of production.
c. Compute the physical unit flow.
d. Assign costs to particular jobs.
2.
A department has no beginning work in process, has started 80,000 units and completed
50,000 units. Its ending work in process is 30,000 units, 60% complete as to conversion
costs and fully complete as to materials. Its equivalent units for conversion costs are
a. 50,000.
b. 80,000.
c. 68,000.
d. 44,000.
3.
In process costing, the computation of unit production costs requires

a. the accumulation of material and conversion costs in work in process for each
department or process.
b. the computation of equivalent units for material and conversion costs.
c. both a and b.
d. neither a nor b.
4.
Which of the following is not included in a production cost report?

a. Costs accounted for.
b. Entries to assign cost.
c. Units accounted for.
d. Units to be accounted for.
5.
Unit costs for materials and conversion costs amount to $4 and $5 respectively. The
ending work in process costs for 8,000 units (100% complete as to material and 70%
complete as to conversion costs) amount to
a. $60,000.
b. $72,000.
c. $44,000.
d. $40,000.
3-23
ANSWERS TO QUIZ
True/False
1.
2.
3.
4.
5.
False
True
True
True
False
6.
7.
8.
9.
*10.
False
True
False
True
False
Multiple Choice
1.
2.
3.
4.
5.
d.
c.
c.
b.
a.
3-24
ILLUSTRATION 3-1
DIFFERENCES BETWEEN JOB ORDER COST AND
PROCESS COST SYSTEM
Features
Job Order Cost

System
Process Cost
System
Work in process
accounts
One for each job
One for each process
Documents
used
Job cost sheets
Production cost
reports
Determination of
total manufacturing
costs
Each job
Each period
Cost of each job

Units produced for
the job
Total manufacturing
costs Units produced
during the period
Unit-cost
comparison
3-25
Raw Materials Assigned

Factory Labor to
Manufacturing
Overhead
Manufacturing Costs
3-26
Cost of
completed
work
Work In Process
Assembly Department B
Costs
transferred
out to
Work In Process
Machining Department A
Cost of Goods Sold
Cost of
goods sold
Finished Goods Inventory
ILLUSTRATION 3-2
FLOW OF COSTS IN PROCESS COST SYSTEM
ILLUSTRATION 3-3
PRODUCTION COST REPORT (STEPS)
Step 4. Prepare a cost reconciliation schedule.

Step 3. Compute unit production costs.
Step 2. Compute the equivalent units of production.
Step 1. Compute the physical unit flow.
COMPLETE THE STEPS FOR EACH DEPARTMENT
3-27
ILLUSTRATION 3-4
STEP 1: COMPUTE THE PHYSICAL UNIT FLOW
Analyze Physical Units Without Regard to

Percentages of Completion
Units in beginning work in process
Add: Units started into production
Total units
Units accounted for
Units completed and transferred out
Add: Units in ending work in process
Total units
3-28
2,000
8,000
10,000
9,000
1,000
10,000
ILLUSTRATION 3-5
STEP 2: COMPUTE EQUIVALENT UNITS OF PRODUCTION
Equivalent Units Calculation Given the Physical Units and

Percentage(s) of Completion
Beginning work in process
Units started into production
Total units to be accounted for
Ending work in process
Total units accounted for
(75%)
(80%)
2,000
8,000
10,000
9,000
1,000
10,000
COMPUTATION OF EQUIVALENT UNITS

1,000 100%
1,000 80%
Total equivalent units
Materials*
9,000
Conversion Costs**
9,000
1,000
800
10,000
9,800
* Materials are added at the beginning of the process.

** Conversion costs are incurred uniformly throughout the process.
3-29
ILLUSTRATION 3-6
STEP 3: COMPUTE UNIT PRODUCTION COST
COST INFORMATION
Beginning work in process
Costs added to production
during period
Total
Materials
$16,000
Conversion Costs
$9,000
64,000
40,000
$80,000
$49,000
COMPUTATION OF UNIT COSTS

1.
2.
3.
TOTAL
MATERIALS
COST
EQUIVALENT
UNITS OF
MATERIALS
UNIT
MATERIALS
COST
$80,000
10,000
$8
TOTAL
CONVERSION
COSTS
UNIT
CONVERSION
COST
$49,000
EQUIVALENT
UNITS OF
CONVERSION
COSTS
9,800
UNIT
MATERIALS
COST
UNIT
CONVERSION
COST
$8
$5
3-30
$5
TOTAL
= MANUFACTURING
COST PER UNIT
$13
ILLUSTRATION 3-7
STEP 4: PREPARE A COST RECONCILIATION SCHEDULE

Costs Accounted For
Transferred out
Materials
Conversion costs
Equivalent Unit
Units
Cost
9,000 $13
1,000 $8
800 $5
Total Costs
Assigned
$117,000
$8,000
4,000
12,000
$129,000
COST INFORMATION
Beginning work in process ($16,000 + $9,000) $ 25,000
Started into production ($64,000 + $40,000) 104,000
$129,000
3-31
ILLUSTRATION 3-8
PREPARING THE PRODUCTION COST REPORT

Equivalent Units
QUANTITIES
Work in process, beginning
Total units
Units accounted for
Transferred out
Work in process, ending
Total units
Physical
Units Materials
(Step 1)
Conversion Costs
(Step 2)
2,000
8,000
10,000
9,000
1,000
10,000
9,000
1,000
10,000
9,000
800 (1,000 80%)
9,800
Conversion
Materials
Costs
COSTS
Unit costs (Step 3)

Costs in current period
(a) $80,000
Equivalent units
(b) 10,000
Unit costs (a) (b)
$8
Work in process, beginning ($16,000 + $9,000)
Started into production ($64,000 + $40,000)
Total costs
Cost Reconciliation Schedule (Step 4)
Costs accounted for
Transferred out
(9,000 $13)
Work in process, ending
Materials
(1,000 $8)
Conversion costs
(800 $5)
Total costs
3-32
$49,000
9,800
$5
Total
$129,000
$13
$ 25,000
104,000
$129,000
$117,000
$ 8,000
4,000
12,000
$129,000

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CHapter 3

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CHAPTER 3

1. Understand who uses

2. Explain the similarities

3. Explain the flow of costs

4. Make the journal entries

10, 11, 12,

3, 5, 6, 7, 8, 1A, 2A, 4A,

1B, 2B, 4B,

6. Explain the four steps

3, 5, 6, 7, 8, 1A, 2A, 4A,

1B, 2B, 4B,

16, 17, 19,

1A, 2A, 4A,

1B, 2B, 4B,

16, 17, 18,

*8. Compute equivalent units

ASSIGNMENT CHARACTERISTICS TABLE

Complete four steps necessary to prepare a production

Complete four steps necessary to prepare a production

Assign costs and prepare production cost report.

Determine equivalent units and unit costs and

Compute equivalent units and complete production

Determine equivalent units and unit costs and assign

Complete four steps necessary to prepare a production

Complete four steps necessary to prepare a production

Assign costs and prepare production cost report.

Determine equivalent units and unit costs and

Compute equivalent units and complete production

Determine equivalent units and unit costs and assign

*7. Prepare a production cost report.

Broadening Your Perspective

*8. Compute equivalent units using the

*6. Explain the four steps necessary

*1. Understand who uses process cost

Managerial Analysis Decision Making

BLOOMS TAXONOMY TABLE

UNDERSTAND WHO USES PROCESS COST SYSTEMS.

EXPLAIN THE SIMILARITIES AND DIFFERENCES

EXPLAIN THE FLOW OF COSTS IN A PROCESS

COMPUTE EQUIVALENT UNITS.

EXPLAIN THE FOUR STEPS NECESSARY TO PREPARE A PRODUCTION COST REPORT.

PREPARE A PRODUCTION COST REPORT.

COMPUTE EQUIVALENT UNITS USING THE FIFO

Job cost sheets

Production cost reports

Cost of each job

Total manufacturing costs

Process Cost Flow

Assignment of Manufacturing Costs

Finished Goods Inventory ........................................................

Cost of Goods Sold....................................................................

Work in process, Beg.

The two equivalent unit computations are as follows:

Units transferred out

Production Cost Report

The computation of physical units involves:

Costs incurred during production

Costs to be accounted for

Cost Reconciliation Schedule

Equivalent Units Using the FIFO Method

Work in process, Beg.

Production Cost Report Using the FIFO Method

Costs incurred during the production

Costs to be accounted for