11 CH 17

Process Costing
Chapter 17
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
17 - 1
Learning Objective 1
Identify the situations in which
process-costing systems
are appropriate.
17 - 2
Illustrating Process Costing

Direct Materials, Direct Labor
Indirect Manufacturing Costs
Department
A
Department
B
Finished Goods
Cost of Goods Sold
17 - 3
Describe the five steps
in process costing.
17 - 4
Five Steps in Process Costing

Step 1: Summarize the flow of physical units of
output.
Step 2: Compute output in terms of equivalent units.
Step 3: Compute equivalent unit costs.
Step 4: Summarize total costs to account for.
Step 5: Assign total costs to units completed and to
units in ending work in process inventory.
17 - 5
Calculate equivalent units and
understand how to use them.
17 - 6
Physical Units (Step 1)

Physical units
Flow of Production
Work in process, beginning
Started during current period
To account for
Completed and transferred out
during current period
Work in process, ending (100%/20%)
Accounted for
0
35,000
35,000
30,000
5,000
35,000
17 - 7
Compute Equivalent Units

(Step 2)
Equivalent units
Direct
Conversion
Flow of Production Materials
Costs
Completed and
transferred out
30,000
30,000
Work in process,
ending
5,000 (100%) 1,000 (20%)
Current period work 35,000
31,000
17 - 8
Compute Equivalent Unit Costs

(Step 3)
Total production costs are $146,050.
Equivalent units
Cost per equivalent unit
Direct Conversion
Materials
Costs
$84,050 $62,000
35,000
31,000
$2.4014
$2.00
17 - 9
Summarize and Assign Total

Costs (Steps 4 and 5)
Step 4: Total costs to account for: $146,050
Step 5: Assign total costs:

Completed and transferred out
30,000 $4.4014
$132,043
Work in process, ending (5,000 units)
Direct materials 5,000 $2.4014
12,007
Conversion costs 1,000 $2.00
2,000
Total
$146,050
17 - 10
Prepare journal entries for
process-costing systems.
17 - 11
Journal Entries Example

Assume that Omaha, Inc. has two processing
departments Assembly and Finishing.
Omaha, Inc., purchases direct materials as needed.
What is the journal entry for materials?

Work in Process, Assembly
84,050
Accounts Payable Control
84,050
To record direct materials purchased and used
17 - 12

What is the journal entry for conversion costs?
62,000
Various accounts
62,000
To record Assembly Department conversion costs
What is the journal entry to transfer completed
goods from Assembly to Finishing?
17 - 13

Work in Process, Finishing
132,043
132,043
To record cost of goods completed and transferred
from Assembly to Finishing during the period
17 - 14
Flow of Costs Example

Accounts Payable
84,050
Various Accounts
62,000
WIP Assembly
84,050 132,043
62,000
14,007
WIP Finishing
132,043
17 - 15
Use the weighted-average
method of process costing.
17 - 16

Work in process, beginning:
100% material
60% conversion costs
1,000
Units started in process 35,000
Units transferred out:
31,000
Units in ending inventory:
100% material
20% conversion costs
5,000
36,000
36,000
17 - 17
Compute Equivalent Units (Step 2)
Completed and transferred

Ending inventory
Equivalent units
Materials Conversion
31,000
31,000
5,000
1,000
36,000
32,000
100%
20%
17 - 18
Compute Equivalent
Unit Costs (Step 3)
Materials
Beginning inventory $ 2,350
Current costs
84,050
Total
$86,400
Equivalent units
36,000
Cost per unit
$2.40
Conversion
$ 5,200
62,000
$67,200
32,000
$2.10
17 - 19

Work in process beginning inventory:
Materials
$ 2,350
Conversion
5,200
Total beginning inventory
$ 7,550
Current costs in Assembly Department:
Materials
$ 84,050
Conversion
62,000
Costs to account for
$153,600
17 - 20

This step distributes the departments costs to units
transferred out: 31,000 units $4.50 = $139,500
And to units in ending work in process inventory:
$12,000 + $2,100 = $14,100
17 - 21

Costs transferred out:
31,000 ($2.40 + $2.10)
Costs in ending inventory:
Materials
5,000 $2.40
Conversion 1,000 $2.10
Total costs accounted for:
$139,500
12,000
2,100
$153,600
17 - 22
Journalizing: Weighted-Average
What are the journal entries in the
Assembly Department?
Work in Process, Assembly 84,050
84,050
To record direct materials purchased and used
Work in Process, Assembly 62,000
Various accounts
62,000
To record Assembly Department conversion costs
17 - 23
Journalizing: Weighted-Average
Work in Process, Finishing
139,500
139,500
To record cost of goods completed and transferred
from Assembly to Finishing during the period
17 - 24
Key T-Account:
Weighted-Average
Work in Process Inventory, Assembly
Beg. Inv.
7,550
Transferred
Materials
84,050
to Finishing
Conversion 62,000
139,500
Balance
14,100
17 - 25
Use the first-in, first-out (FIFO)
method of process costing.
17 - 26
Compute Equivalent
Units (Steps 1 and 2)
Quantity schedule (Step 1) is the same as
the weighted-average method.
Materials Conversion
Completed and transferred:
From beginning inventory
0
400
Started and completed
30,000
30,000
Ending inventory
5,000
1,000
35,000
31,400
17 - 27
Compute Equivalent
Units (Step 2)
Materials
Conversion
Completed
and transferred:
Ending inventory
31,000
31,000
5,000 (100%) 1,000 (20%)
36,000
32,000
Beginning inventory 1,000 (100%)
600 (60%)
Equivalent units
35,000
31,400
17 - 28
Compute Equivalent
Unit Costs (Step 3)
Current costs
Equivalent units
Cost per unit
Materials
$84,050
35,000
$2.40
Conversion
$62,000
31,400
$1.975
17 - 29

Work in process beginning inventory: $ 7,550
Current costs:
Material
Conversion
Total
84,050
62,000
$153,600
Same as using weighted-average

17 - 30

From beginning inventory: $7,550
Conversion costs added:
1,000 40% $1.975
790
From current production:
30,000 $4.375
Total
$ 8,340
131,250
$139,590
17 - 31

Work in process ending inventory:
Materials: 5,000 $2.40 $12,000
Conversion:
5,000 20% $1.975
Total
1,975
$13,975
17 - 32

Costs transferred out
+
=
$139,590
Cost in ending inventory $ 13,975

$153,565
($35 rounding error)
An alternative approach:
$153,600
Cost in ending inventory $ 13,975
Costs transferred out
$139,625
17 - 33
Key T-Account: FIFO

Work in Process Inventory, Assembly
Beg. Inv.
7,550
Transferred
Materials
84,050
to Finishing
Conversion 62,000
139,625
Balance
13,975
17 - 34
Comparison of WeightedAverage and FIFO Methods

Weighted
Average
Costs of units
completed and
transferred out
Work in process,
ending
Total costs
accounted for
FIFO Difference
$139,500 $139,625 +$125

14,100
13,975 $125
$153,600 $153,600
0
17 - 35
Incorporate standard costs
into a process-costing system.
17 - 36
Standard-Costing Method
of Process-Costing Example
Process-costing systems using standard costs
usually accumulate actual costs incurred
separately from the inventory accounts.
Assume that actual materials cost is $84,050
and standard materials cost is $84,250
What are the journal entries in the
Assembly Department?
17 - 37
Standard-Costing Method
of Process-Costing Example
Direct Materials Control
84,050
84,050
Work in Process
84,250
Direct Material Variances
200
Direct Materials Control
84,050
To record direct materials purchased and used in
production during the period and variances
17 - 38
Apply process-costing methods
to cases with transferred-in costs.
17 - 39
Transferred-In Costs
Weighted-Average Example
Finishing Department beginning WIP inventory:
4,000 units (60% materials) (25% conversion)
Ending work in process inventory:
2,000 units (100% materials) (40%) conversion)
31,000 units transferred-in from Assembly.
17 - 40

Beginning inventory
Units started in process
Units completed and transferred
to finished goods
Ending inventory
4,000
31,000
35,000
33,000
2,000
35,000
17 - 41
Compute Equivalent
Units (Step 2)
Equivalent units for transferred-in costs:
Transferred to finished goods
Ending inventory
33,000
2,000
35,000
Inventory is 100% complete for the work
performed in the Assembly Department.
17 - 42
Compute Equivalent
Units (Step 2)
Equivalent units for direct materials costs:
33,000
Ending inventory (100%)
2,000
35,000
17 - 43
Compute Equivalent
Units (Step 2)
Equivalent units for conversion costs
(ending inventory 2,000):
Transferred to finished goods 33,000
800
33,800
17 - 44
Compute Equivalent
Unit Costs (Step 3)
Assume the following costs in the
Finishing Department:
Work in process beginning inventory from:
Assembly Department
$30,200
Direct materials
9,400
Conversion costs
8,000
Total cost in beginning inventory $47,600
17 - 45
Compute Equivalent
Unit Costs (Step 3)
Current costs in Finishing Department
are as follows:
Costs received from the
Assembly Department
$139,500
Direct materials
9,780
Conversion
42,640
Total
$191,920
17 - 46
Compute Equivalent
Unit Costs (Step 3)
(Transferred-in costs $30,200 + Costs transferred
in from the Assembly Department $139,500)
35,000 units
$4.85
(Direct materials $9,400 + $9,780)
35,000 units
$0.55
(Conversion costs $8,000 + $42,640)
33,800 units
$1.50
Total unit cost
$6.90
17 - 47

Total costs in beginning inventory
Current costs in Finishing Department
$ 47,600
191,920
$239,520
Costs to account for: $47,600 + $ 191,920 = $239,520
17 - 48

Costs in work in process ending inventory:
Transferred-in costs: 2,000 $4.85 $ 9,700
Direct materials: 2,000 $0.55
1,100
Conversion: 2,000 40% $1.50
1,200
Total cost in ending inventory
$12,000
17 - 49

Costs to account for:
$239,520
Costs transferred to finished goods inventory:

33,000 $6.90
$227,700
Costs in ending work in process inventory:
$12,000 $180 rounding error
11,820
Total
$239,520
17 - 50
T-Account Finishing Department

Work in Process Inventory, Finishing
Beg. Inv.
47,600 Transferred to
Transferred-in 139,500 Finished Goods
Materials
9,780 227,700
Conversion
42,640
Balance
11,820
17 - 51
Transferred-In Costs
FIFO Method
The physical units (Step 1) is the same
as in weighted-average.
Beginning inventory
4,000
Units started in process
31,000
35,000
Units transferred to finished goods 33,000
Ending inventory
2,000
35,000
17 - 52

FIFO (Step 2)
From beginning work in process
0
29,000
Work in process, ending (100%)
2,000
Total equivalent units
31,000
17 - 53

FIFO (Step 2)

33,000
Ending work in process inventory
2,000
Total
35,000
Beg. work in process inventory
4,000
Equivalent units
31,000
Inventories are 100% complete for the work
performed in the Assembly Department.
17 - 54

FIFO (Step 2)
Equivalent units for materials costs:
1,600
29,000
2,000
32,600
17 - 55

FIFO (Step 2)
Equivalent units for material costs
(beginning inventory 4,000):
33,000
Total
Beginning inventory (60%)
2,000
35,000
2,400
Equivalent units
32,600
17 - 56

FIFO (Step 2)
Equivalent units for conversion costs:
3,000
29,000
800
32,800
17 - 57

FIFO (Step 2)
Equivalent units for conversion costs (beginning
inventory 4,000, ending inventory 2,000):
33,000

Total
Beginning inventory (25%)
800
33,800
1,000
Equivalent units
32,800
17 - 58
Compute Equivalent Unit Costs

FIFO (Step 3)
Cost per equivalent unit:
Transferred-in: $139,590 31,000 $4.50
Direct materials: $9,780 32,600
0.30
Conversion: $42,640 32,800
1.30
Total unit cost
$6.10
17 - 59

Costs FIFO (Steps 4 and 5)
Current costs in Finishing Department: $192,010
Work in process beginning inventory:
47,600
Costs to account for:(same as weighted-average) $239,610
17 - 60

Work in process ending inventory:
Transferred-in: 2,000 $4.50
$ 9,000
Direct materials: 2,000 $0.30

Conversion: 800 $1.30
Total
600
1,040
$10,640
17 - 61

From beginning inventory:
$47,600
Direct materials added:

4,000 40% $0.30
480
Conversion costs added:
4,000 75% $1.30
3,900
Total
$51,980
17 - 62

Total costs transferred out:
From beginning inventory
$ 51,980
From current production: 29,000 $6.10 176,900
Total
$228,880
17 - 63

Total costs accounted for:
Transferred to finished goods:
$176,900 + $51,980
$228,880
Work in process ending inventory 10,640
Rounding error
Total
90
$239,610
17 - 64

$239,610
Work in process ending inventory 10,640

$228,970
17 - 65
End of Chapter 17
17 - 66

11 CH 17

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Process Costing

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Illustrating Process Costing

Cost of Goods Sold

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Five Steps in Process Costing

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Physical Units (Step 1)

Compute Equivalent Units

Compute Equivalent Unit Costs

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Summarize and Assign Total

Step 5: Assign total costs:

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Journal Entries Example

What is the journal entry for materials?

Journal Entries Example

Journal Entries Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Flow of Costs Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Physical Units (Step 1)

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Compute Equivalent Units (Step 2)

Completed and transferred

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Summarize and Assign Total

Summarize and Assign Total

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Summarize and Assign Total

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Summarize and Assign Total

Same as using weighted-average

Summarize and Assign Total

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Summarize and Assign Total

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Summarize and Assign Total

Cost in ending inventory $ 13,975

Cost in ending inventory $ 13,975

Costs transferred out

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Key T-Account: FIFO

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Comparison of WeightedAverage and FIFO Methods

$139,500 $139,625 +$125

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Physical Units (Step 1)

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Summarize and Assign Total