4-1

Managerial Accounting

Chapter 4
• Systems Design: Process Costing

Instructor: Dr. Ha Phuoc Vu

 Chapter 4
• Systems Design: Process Costing

PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA

McGraw-Hill /Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
4-3

Similarities Between Job-Order

and Process Costing
• Both systems assign material, labor and
overhead costs to products and they provide a
mechanism for computing unit product cost.
• Both systems use the same manufacturing
accounts, including Manufacturing Overhead,
Raw Materials, Work in Process, and Finished
Goods.
• The flow of costs through the manufacturing
accounts is basically the same in both systems.
4-4

Differences Between Job-Order

and Process Costing
• Process costing is used when a single product is
produced on a continuing basis or for a long
period of time. 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
accumulate costs by individual jobs.
• Process costing systems compute unit costs by
department. Job-order costing systems compute
unit costs by job on the job cost sheet.
4-5

Processing Departments
Any location in an organization where materials,
labor, or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output
of a processing department must be
homogeneous.

Cotton wool → fiber → cloth → costume

pull weave sew
4-6

Learning Objective 1

Record the flow

of materials, labor, and
overhead through a
process costing system.
4-7

Flow of Materials, Labor, and Overhead Costs

Direct Materials Work in Process
transferred to
department B
Direct Labor Dept
A
Manufacturing Direct Materials
Overhead
Direct Labor Dept B

Manufacturing
Overhead

Cost of Goods Sold Finished Goods

4-8

Flow of Materials, Labor, and

Overhead Costs
Costs are traced and
applied to individual
Direct jobs in a job-order
Materials cost system.

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
4-9

Flow of Materials, Labor, and

Overhead Costs
Costs are traced and
applied to departments
Direct in a process cost
Materials system.

Direct Labor Processing Finished

Department Goods

Manufacturing Cost of
Overhead Goods
Sold
4-10

Flow of Materials, Labor, and Overhead Costs

Department A Department B Department N

WIP A WIP N-1

+ +
-Direct Material -Direct Material -Direct Material
- Direct Labor - Direct Labor - Direct Labor
- Manufacturing - Manufacturing - Manufacturing
Overhead Overhead Overhead

WIP A WIP B Finished Goods

4-11

Equivalent Units of Production

We need to calculate equivalent units because a
department usually has some partially completed
units in its beginning and ending inventory.

For the current period, dept A started 15.000 units

and completed 10.000 units, leaving 5.000 units in
process that are 30 percent complete.
4-12

Equivalent Units – The Basic Idea

Two half completed products are
equivalent to one completed product.

= 1

5.000 units 30% complete

are equivalent to 1.500 complete units.
4-13

Equivalent Units of Production

Equivalent
units =
number
of partially
completed units
* the percentage
of completion of
those units

For the current period, dept A has 1.000 + 1.500 =

11.500 equivalent units of production

three manufacturing costs do OR do not have

same percentage of complete in WIP inventory?
Direct material cost VS conversion cost
4-14

Treatment of Direct Labor

Direct
Materials Direct labor costs
may be small
Dollar Amount

Manufacturing in comparison to
Overhead
other product
Direct costs in process
Labor costing systems.

Type of Product Cost

4-15

Treatment of Direct Labor

Direct
Materials Direct labor costs
Conversion may be small
Dollar Amount

in comparison to
other product
costs in process
costing systems.

Type of Product Cost

Direct labor and manufacturing overhead may be
combined into one product cost called conversion.
4-16

Equivalent Units of Production

DIRECT MATERIAL
In WIP ( this to complete WIP (next
period) period )
Put /introduced at 100% completed 0% added
the start of work

add at the end of 0% completed 100% added

the process
…..
4-17

Calculating Equivalent Units

Equivalent units can be calculated two

ways:
The First-In, First-Out Method – FIFO
is covered in the appendix (email).

The Weighted-Average Method – This

method will be covered in the main portion of
the chapter.
4-18

Learning Objective 2

Compute the equivalent

units of production and cost per
equivalent unit using the
weighted-average method
4-19

Characteristics of the Weighted

Average Method
The weighted-average method . . .
• Makes no distinction between work done in
prior or current periods.
• Blends together units and costs from prior
and current periods.
number of
equivalent units the equivalent
units of completed and units in the
production = transferred to + department’s
for a the next ending WIP
department department inventory
(or FGs)
4-20

Compute and Apply Costs

The formula for computing the cost per
equivalent unit is:

Cost of beginning WIP Cost added during

Cost per + the period
inventory
equivalent =
unit Equivalent units of production
4-21

An Example
Smith Company reported the following activity in the
Assembly Department for one period:
- costs in the beginning WIP inventory: 80.000
+ units in process: 10
+ completion with respect to materials and
conversion cost: 80%
- costs added to production during the period:
612.000
+ to complete 10 beginning WIP inventory: 12.000
+ to start and complete 100 units during the period:
600.000
- there was no ending Work in Process inventory
4-22

Weighted Average Method

number of units
EUs of the EUs in the
completed and
production department’s
= transferred to the +
for a ending WIP
next department
department inventory
(or FGs)
= 100 + 0
= 110

Cost of beginning WIP Cost added during

Cost per + the period
inventory
equivalent =
unit Equivalent units of production

= (80.000 + 612.000)/110 = 6.290,9

4-23

Learning Objective 3

Compute the equivalent

units of production and cost per
equivalent unit using the
FIFO method
4-24

FIFO vs. Weighted-Average Method

The FIFO method (generally considered

more accurate that the weighted-average
method) differs from the weighted-average
method in two ways:

1. The computation of equivalent units.

2. The way in which the costs of beginning
inventory are treated.
4-25

Compute and Apply Costs

EUs
units the EUs in
The EUs of needed to
started and ending
production complete
for a
= beginning
+ completed + WIP
during the inventory
department WIP
period
inventory

Cost per Cost added during the period

equivalent =
unit Equivalent units of production
4-26

FIFO Method
EUs
units the EUs in
The EUs of needed to
started and ending
production complete
for a
= beginning
+ completed + WIP
during the inventory
department WIP
period
inventory
= 20%*10 + 100 + 0
= 102

Cost per Cost added during the period

equivalent =
unit Equivalent units of production

= 612.000 / 102 = 6.000

4-27

An example:
Beginning Work in Process Inventory: 300 units
Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units

Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130

Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete

- determine equivalent unit and cost per equivalent unit in this

department
- determine total costs of units completed and total costs for
ending work in process in this department
4-28

Weighted-Average – An Example
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in Work in Process

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in Process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
4-29

Weighted-Average – An Example
Materials

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

5,400 Units Completed

540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production
4-30

Weighted-Average – An Example

Conversion

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

5,400 Units Completed

900 × 30%
270 Equivalent Units
5,670 Equivalent units
of production
4-31

Weighted-Average :Compute and Apply

Costs
Here is a schedule with the cost and equivalent
unit information.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in Process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

4-32

Weighted-Average : Compute and Apply

Costs
Here is a schedule with the cost and equivalent
unit information.
$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00
Total
Cost Materials Conversion
Cost to be accounted for:
Work in Process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

Cost per equivalent unit $ 21.00 $ 15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00

4-33

Learning Objective 4

Assign costs to units and prepare

a cost reconciliation report using
the weighted-average method.
4-34

Weighted-Average: Computing the

Cost of Units Transferred Out
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit $ 21.00 $ 15.00
Cost of units transferred out $ 113,400 $ 81,000 $ 194,400
4-35

Weighted-Average: Reconciling
Costs
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 15,390
Cost of units transferred out 194,400
Total cost accounted for $ 209,790
4-36

Equivalent Units – FIFO Method

Step 3: Add the equivalent units in ending Work in
Process inventory.
Materials Conversion
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
Ending Work in Process:
Materials: 900 units × 60% complete 540
Conversion: 900 units × 30% complete 270
Equivalent units of production 5,820 5,610
4-37

FIFO Example
Materials 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

300 × 60%
180 Equivalent Units
5,100 Units Completed 900 × 60%
540 Equivalent Units
5,820 Equivalent units
of production
4-38

FIFO Example
Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

300 × 80%
240 Equivalent Units
5,100 Units Completed 900 × 30%
270 Equivalent Units
5,610 Equivalent units
of production
4-39

Cost per Equivalent Unit - FIFO

Total
Cost Materials Conversion

Cost added in June $ 199,751 $ 118,621 $ 81,130

Equivalent units 5,820 5,610
Cost per equivalent unit $ 20.3816 $ 14.4617

$118,600 ÷ 5,820 $81,130 ÷ 5,610

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

4-40

Learning Objective 5

Assign costs to units and

prepare a cost
reconciliation report
using the FIFO method
4-41

Applying Costs - FIFO

Step 3: Compute the cost of ending Work in Process inventory.

Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of Ending WIP inventory $ 11,006 $ 3,905 $ 14,911

540 × $20.3816 270 × 14.4617

4-42

FIFO: Cost of Units Transferred Out

Step 4: Compute the total cost of units transferred out.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,668 $ 3,471 7,139
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of units started and completed $ 103,946 $ 73,755 177,701
Cost of Units Transferred Out $ 194,879
4-43

FIFO: Reconciling Costs

Assembly Department
Cost Reconciliation for June
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 14,911
Cost of units transferred out 194,879
Total cost accounted for $ 209,790
4-44

A Comparison of Costing Methods

In a lean production environment, FIFO and
weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is
superior to weighted-average because it
does not mix costs of the current period with
costs of the prior period.
4-45

End of Chapter 4
4-46

Quick Check 

Process costing is used for products that are:

a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
4-47

Quick Check 

Process costing is used for products that are:

a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.