Process Costing

Chapter 18
Learning Objectives

(1) Understand the basic concepts of process costing

(2) Calculate equivalent units

Use the weighted-average method and FIFO method of

(3)
process costing

Apply process-costing methods to situations with

(4)
transferred-in costs

(5) Understand the need for hybrid-costing systems

2
Costing Systems
Process costing system

Testing
• Direct department
materials • Direct
• Conversion materials
costs • Conversion
Assembly costs Finished
Department goods
Process costing system

Cost • Processing
departments

object • Processing stages

• Partially completed
Cost unit at earlier
processing stages
• Completed units at
unit the last processing
stage
Process-cost flows

Job Costing

Direct materials Work-in-Process

Cost of
Direct labor Job 001 Finished
Manufacturing Job 002 goods
goods sold
overhead Job 003

Process costing

Direct materials
Work-in- Cost of
Direct labor Work-in-Process Finished
Manufacturing Process goods
Department 1 Department 2 goods sold
overhead
Process-cost flows (cont’d)

Direct materials
Direct labor Work-in-Process
MOH Deptartment 01

Work-in-Process
Department 02
Process-cost flows (cont’d)

Work-in-Process Work-in-Process
Department 01 Department 02
•Direct Transferred •Direct
materials to Dept. 02 materials
•Direct •Direct
labor labor
•Allocated •Allocated
MOH MOH
•Transferred
from Dept. 01
 Process-cost flows (cont’d)

Work-in-Process
Department 02 Finished goods
•Direct •Cost of •Cost of •Cost of
materials goods goods goods
•Direct manufactured manufactured sold
labor
•Allocated MOH

•Transferred
from Dept. 01 Cost of goods sold
•Cost of
goods
sold
Exercise 1

❖ The following data in Textile Company for October.

Weaving Dyeing Finishing

Dept. Dept. Dept.
Direct materials $5,000 $500 -
Direct labor 800 200 100
MOH 1,200 700 300
❖ In October, plain fabric of $ 5,500 was transferred from
Weaving department to Dyeing department; dyed fabric of
$6,300 was transferred from Dyeing department to Finishing
department. Colored fabric of $6,500 was transferred from
Finishing department to the finished goods warehouse.
❖ Illustrate cost flows in T-accounts.
Vinamilk Mega Factory

https://www.youtube.com/watch?v=MEpx6ugQa3A&t=5s
Process Costing and Direct Labor

Direct Direct labor costs

Materials may be small
in comparison to
other product
Dollar Amount

costs in process
Conversion cost systems.

Direct
Labor

Type of Product Cost

Process Costing and Direct Labor

Direct Direct labor costs

Materials may be small
in comparison to
Conversion other product
Dollar Amount

costs in process
cost systems.

Type of Product Cost

Direct labor and manufacturing overhead may be
combined into one product cost called conversion.
Exercise 2

MOH is 20% of conversion costs. If direct labor cost is

$38,000 direct materials cost is $47,000, MOH is:

A. $152,000
B. $11,750
C. $21,250
D. $9,500
Process costing system – Illustrated
Case 1: No WIP
Process costing system – Illustrated
Case 2: Some WIP

Units % complete

WIP March 1st 225 60%

Started during March 275
Completed & transferred out during March 400
WIP March 31st 100 50%
Equivalent units

The concept of equivalent units involves expressing

a given number of partially completed units as a
smaller number of fully completed units.

+ = 1

Two half completed products are equivalent to

one completed product.
Exercise 3

For the current period, Jones 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
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Equivalent units

Weighted-average method FIFO method

❖ Makes no distinction between ❖ Makes distinction
work done in prior or current between work done in
periods.
prior or current periods.
❖ Blends together units and ❖ Assume any units that were
costs from prior and current not completed last period
periods. (beginning work-in-process)
are finished before anything
else is started.
Equivalent units (Cont’d)

Weighted-average method

Completed
units
Equivalent Equivalent units
in the
units from ending WIP
current
period

First-in, First-out method

Units started
Equivalent units
Equivalent and completed Equivalent units
from beginning
units in the current from ending WIP
WIP
period
Equivalent units - Illustrated

Units % complete

WIP March 1st 225 60%

Started during March 275
Completed & transferred out during March 400
WIP March 31st 100 50%
Physical units flow WIP March 1st
Started during March
Units

225
275
% complete

60%

Completed & transferred out during March 400

WIP March 31st 100 50%

Input Output

225 units
(Beg. WIP)
400 units
completed

275 units
started
during
March 100 units
(End. WIP)
Physical units flow WIP March 1st
Started during March
Units

225
275
% complete

60%

Completed & transferred out during March 400

WIP March 31st 100 50%

Input Output

400 units completed (end. WIP)

225 units 225 units
(beg. WIP) (beg. WIP)

175 started
275 units during
started March

100 units
during
100 started
March
during
March

First started, first completed

Equivalent units Illustrated:
Weighted-Average method

Materials 275 Units Started

Beginning Ending
Work in Process 175 Units Started Work in Process
225 Units and Completed 100 Units
100% Complete 100% Complete

400 Units Completed

100 Equivalent Units 100 × 100%
500 Equivalent units
of production
Equivalent units Illustrated:
Weighted-Average method (Cont’d)

Conversion 275 Units Started

Beginning Ending
Work in Process 175 Units Started Work in Process
225 Units and Completed 100 Units
60% Complete 50% Complete

400 Units Completed

100 × 50%
50 Equivalent Units
450 Equivalent units
of production
 Equivalent Units Illustrated:
FIFO Method
275 Units started
Materials

Beginning Ending
175 Units Started and Work in Process
Work in Process
Completed 100 Units
225 Units
100% Complete 100% Complete

225 x (100%-100%)
0 equivalent unit
175 units started and completed
100 equivalent units 100 × 100%

275 equivalent units

 Equivalent Units Illustrated:
FIFO Method (Cont’d)
275 Units started
Conversion

Beginning Ending
175 Units Started and Work in Process
Work in Process
Completed 100 Units
225 Units
60% Complete 50% Complete

225 x (100%-60%)
90 equivalent unit
175 units started and completed
50 equivalent units 100 × 50%

315 equivalent units

 Exercise 4

There were 16,000 units in process on November 1st (45% complete).

During November the company started 78,000 units. On November 30th there
were 9,000 units in process (40% complete). The company applied weighted-
average method to compute equivalent units. How many equivalent units of
ending work in process were there?
A. 7,200
B. 3,600
C. 81,600
D. 86,600
Exercise 5

In 2022 Company E started 8,000 units. There were 2,000

units in process (60% complete) on January 1st and 3,000
units in process (50% complete) on December 31st. During
the year there were 7,000 units completed. The company
applied weighted-average method, equivalent units in 2022
were:
A. 8,200
B. 8,500
C. 9,200
D. 9,500
E. None of them.
Exercise 6

In 2022 Company E started 8,000 units. There were 2,000

units in process (60% complete) on January 1st and 3,000
units in process (50% complete) on December 31st. During
the year there were 7,000 units completed. The company
applied FIFO method, equivalent units in 2022 were:
A. 8,300
B. 7,700
C. 7,300
D. 700
E. None of them.
 Cost per equivalent unit

Weighted-average method FIFO method makes no

makes no distinction distinction between work done
between work done in prior in prior or current periods.
or current periods.

Beg. Work Cost incurred in Cost incurred

Cost per in Process +the current period Cost per in the current
equivalent = equivalent = period
unit Equivalent units Equivalent units
unit
Exercise 7

Company M applied FIFO method. Beginning WIP on May

1st was $6,000. Manufacturing costs incurred during May
were $75,000. There were 20,000 equivalent units in May.
Cost per equivalent unit in May was:
A. $3.75
B. $4.05
C. $0.30
D. None of them.
Production report

Shows the Provides cost

physical units flow information for
& the cost flow in financial
production reporting

Production
report

Assists managers to
Is similar to “Job control activities in
cost sheet” production process
33
Production report

Direct materials
Direct labor
MOH

Blending Baking Packing Finished

Dept. Dept. Dept. goods

Production Production Production

report 1 report 2 report 3
Production report

• Summarize the flow of physical units

Step 1

• Compute equivalent units

Step 2

• Summarize The total costs to account for

Step 3

• Compute the cost per equivalent unit

Step 4

• Assign costs to units completed and units in

Step 5 end. WIP
Production Report Illustrated
Weighted-average method

Assembly Dept.
Work in process, March 1: 225 units

Materials: 100% complete $18,000

Conversion: 60% complete 8,100

Production started during March 275 units

Production completed during March 400 units

Costs added to production in March

Materials cost $ 19,800
Conversion cost 16,380

Work in process, March 31 100 units

Materials: 100% complete
Conversion: 50% complete
Production Report Illustrated
(Weighted-Average Method)
Step1&2: Prepare Quantity Schedule with Equivalent Units.
Units to account for:
Work in process, March 1 225
Started into production 275
Total units 500

Equivalent units
Direct Conversion
materials costs
Units accounted for:
Completed and transferred 400 400 4,800
Work in process, March 31 100
Exercise 8

There were 1,400 units in process on May 1st and 1,100

units in process on May 31st. Units completed and
transferred out in May were 22,000. How many units started
in production were there in May?
A. 21,700
B. 23,100
C. 24,800
D. 21,400
Exercise 9

Company H applied the weighted-average method to compute

equivalenet units. There were 1,100 units in process on June 1st (70%
complete of direct materials, 60% complete of conversion costs). 24,000
units were started and 23,600 units were completed during June. Units
in process on June 30 were 90% complete of direct materials and 30%
complete of conversion costs. How any equivalent units for direct
materials were there?
A. 24,950
B. 24,050
C. 25,720
D. 22,950
Production Report Illustrated
(Weighted-Average Method)
Step 3: Summarize the total costs to account for

Total Direct Conversion

Cost Materials costs
Cost to account for:
Work in process, March 1 $ 26,100 $ 18,000 $ 8,100
Costs added in the current
period 36,180 19,800 16,380
Total cost $ 62,280 $ 37,800 $ 24,480
 Units to account for:
Work in process, March 1 225

Production Report Illustrated Started into production

Total units
275
500

Equivalent units

(Weighted-Average Method) Units accounted for:

Completed and transferred 400
Direct
Materials

400
Conversion
Costs

400
Work in process, March 31 100
Materials 100% complete 100
Conversion 50% complete 50
500 500 450

Step 4: Compute the cost per equivalent unit.

Total Direct Conversion

Cost Materials costs
Cost to account for:
Work in process, March 1 $ 26,100 $ 18,000 $ 8,100
Costs added in the current
period 36,180 19,800 16,380
Total cost $ 62,280 $ 37,800 $ 24,480

Costs incurred to date

Equivalent units of work done to date
Cost per equivalent unit of work done to date
Exercise 10

Company H applied the weighted-average method for equivalent units.

There were 2,300 units in process on June 1. During June there were
11,000 units completed and 2,000 units in process on June 30 (80%
complete of direct materials and 30% complete of conversion costs.
WIP, June 1:
Direct materials $28,800
Conversion costs 48,000
Costs added during June:
Direct materials 198,000
Conversion costs 242,000
How much was conversion costs per equivalent unit?
A. $18
B. $25
C. $15.71
D. $39.75
 Total Direct Conversion
Cost Materials costs
Cost to account for:
Work in process, March 1 $ 26,100 $ 18,000 $ 8,100
Units to account for:
Costs added in the current
Work in process, March 1 225
period 36,180 19,800 into 16,380
Started production 275
Total cost $ 62,280 $ Total
37,800 $ 24,480
units 500

Costs incurred to date $ 62,280 $ 37,800 $ 24,480 Equivalent units

Equivalent units of work done to date 500 450 Direct Conversion
Materials Costs
Cost per equivalent unit of work done to date $ 130.00 Units
$ 75.60 $ 54.40
accounted for:
Completed and transferred 400 400 400
Work in process, March 31 100
Materials 100% complete 100
Conversion 50% complete 50
500 500 450

Step 5: Assign costs (Prepare a Cost Reconciliation)

Direct Conversion
Total Cost Materials Costs
Assignment of costs:
Transferred out during March
Work in process, March 31:
Materials
Conversion
Total work in process, March 31
Total cost accounted for
 Production Report Illustrated
(Weighted-Average Method)
Total Direct Conversion
Cost Materials costs
Cost to account for:
Work in process, March 1 $ 26,100 $ 18,000 $ 8,100
Costs added in the current
period 36,180 19,800 16,380
Total cost $ 62,280 $ 37,800 $ 24,480

Direct Conversion
Total Cost Materials Costs

Assignment of costs:
Transferred out during March (400 units) $ 52,000 30,240 21,760
Work in process, March 31 (100 units):
Materials 7,560 7,560
Conversion 2,720 2,720
Total work in process, March 31 10,280
Total cost accounted for $ 62,280 37,800 24,480
Exercise 11

Company A used the weighted-average method for

equivalent units. There were 1,000 units in ending work in
process (100% complete of direct materials and 80%
complete of conversion costs). Direct materials and
conversion costs per equivalent unit were $215 and $165,
respectively. How much were total costs of ending work in
process?
A. $347
B. $380
C. $304
D. $215
Exercise 12

Company E used the weighted average method. There were no

beginning WIP. Direct materials and conversion costs added in the
current period were $200,000and $321,300, respectively. Direct
materials were added at the beginning of the production process and
conversion costs were added evenly during process. There were 75,000
units completed and 5,000 units in process (30% complete). How much
were total costs transferred to the Finished goods account?

A. $521,300
B. $488,719
C. $502,500
D. $556,053
Journal entries
Production Report Illustrated
FIFO method

Assembly Sept.
Work in process, March 1: 225 units

Materials: 100% complete $18,000

Conversion: 60% complete 8,100

Production started during March 275 units

Production completed during March 400 units

Costs added to production in March

Materials cost $ 19,800
Conversion cost 16,380

Work in process, March 31 100 units

Materials: 100% complete
Conversion: 50% complete
 Work in process, March 1: 225 units

The Production Report Materials: 100% complete

Conversion: 60% complete
$18,000
8,100

(FIFO Method) Production started during March

Production completed during March
275 units
400 units

Step 1 &2 : Summarize the flow of physical Costs added to production in March
Materials cost $ 19,800
units and Calculate the total equivalent Conversion cost 16,380
units for materials and conversion. Work in process, March 31 100 units
Materials: 100% complete
Conversion: 50% complete
Units to account for:
Work in process, March 1 225
Started into production 275
Total units 500
Equivalent units
Direct Conversion
Units accounted for: Materials Costs
Beginning WIP:
Materials
Conversion
Units started and completed
Ending WIP:
Materials
Conversion
Total units
Production Report Illustrated
(FIFO Method)
Step 3: Summarize the total costs to account for

Total Direct Conversion

Cost Materials costs
Cost to account for:
Work in process, March 1 $ 26,100 $ 18,000 $ 8,100
Costs added in the current
period 36,180 19,800 16,380
Total cost $ 62,280 $ 37,800 $ 24,480
 Equivalent units

Production Report Illustrated Units accounted for:

Beginning WIP: 225
Direct
Materials
Conversion
Costs

(FIFO Method) Materials 225 units × (100%-100%)

Conversion 225 units × (100% - 60%)
Units started and completed 175
-

175
90
175
Ending WIP: 100
Step 4: Compute the cost per Materials 100 units × 100%
Conversion 100 units × 50%
100
50
equivalent unit. Total units 500 275 315

Total Direct Conversion

Cost Materials costs
Cost to account for:
Work in process, March 1 $ 26,100 $ 18,000 $ 8,100
Costs added in the current period 36,180 19,800 16,380
Total cost $ 62,280 $ 37,800 $ 24,480

Costs added in current period

Equivalent units of work done in current period
Cost per equivalent unit of work done
in current period
 Equivalent units Total Direct Conversion
Cost Materials costs
Production Report Illustrated
Units accounted for:
BeginningCost
WIP: to account for: 225
Direct
Materials
Conversion
Costs

Work
units in process, March 1 $ 26,100 $ 18,000 $ 8,100
(FIFO Method) Materials 225
ConversionCosts
× (100%-100%)
225 units
Units started Total
added
× (100%in
and completed
cost
- 60%)
175
-
the current period
175
90
175
36,180
$ 62,280
19,800
$ 37,800
16,380
$ 24,480
Ending WIP: 100
Materials 100 units × 100% 100
Costs
Conversion added
100 units in current period
× 50% 50 $ 36,180 $ 19,800 $ 16,380
Step 5: Assignment of costs.
Equivalent units of work
Total units 500 done in275
current period
315 275 315
Cost per equivalent unit of work done $ 124.00 $ 72.00 $ 52.00
in current period

Direct Conversion
Total Cost Materials Costs
Completed and transferred out (400 units)
Work in process, beg. (225 units):
Costs added to beg. WIP in current period
Materials
Conversion
Total from beg. Units

Started and completed in March (175 units)

Total costs of units completed & transferred out
Work in process, end. (100 units):
Materials
Conversion
Total
Total cost accounted for
 Production Report Illustrated
Total Direct Conversion
Cost Materials costs
(FIFO Method)
Cost to account for:
Work in process, March 1 $ 26,100 $ 18,000 $ 8,100
Costs
Step 5: added in
Assignment of the current
costs.
period 36,180 19,800 16,380
Total cost $ 62,280 $ 37,800 $ 24,480
Direct Conversion
Total Cost Materials Costs
Completed and transferred out (400 units)
Work in process, beg. (225 units): $ 26,100 $ 18,000 $ 8,100
Costs added to beg. WIP in current period
Materials (0 × $72.00) - -
Conversion (90 × $52.00) 4,680 4,680
Total from beg. Units 30,780

Started and completed in March (175 units) 21,700 12,600 9,100

Total costs of units completed & transferred out $ 52,480
Work in process, end. (100 units):
Materials (100 × $72.00) 7,200 7,200
Conversion (50 × $52.00) 2,600 2,600
Total 9,800
Total cost accounted for $ 62,280 $ 37,800 $ 24,480
Exercise 13

Company M used the FIFO method for equivalent units. There were
12,000 units in beginning work in process (100% complete of direct
materials and 60% complete of conversion costs). Total costs of
beginning WIP were $56,400. During the current period there were
25,000 units completed. Direct materials and conversion costs per
equivalent unit were $3.40 and $4.70, respectively.Total cost of goods
manufactured was:

A) $195,540
B) $146,100
C) $202,500
D) $184,260
Transferred-In Costs
Weighted-average method
Testing Dept.
Work in process, March 1: 240 units
Transferred-In Costs: ???% complete $33,600
Direct Materials: 0% complete 0
Conversion: 62.5% complete 18,000

Transferred-in during March ???

Completed & transferred out during March 440 units

Costs added to production in March

Direct Materials $ 13,200
Conversion cost 48,600
Transferred-in ???
Work in process, March 31 200 units
Materials: 0% complete
Conversion: 80% complete
Transferred-in: ???% complete
 Transferred-In Costs
Weighted-average method
Step1&2: Prepare Quantity Schedule with Equivalent Units.
Units to account for:
Work in process, March 1 240
Started into production 400
Total units 640

Equivalent units

Transferred- Direct Conversion

In Costs Materials Costs
Units accounted for:
Completed and transferred 440
Work in process, March 31 200
Transferred-In 100% complete
Materials 0% complete
Conversion 80% complete
640
Transferred-In Costs
Weighted-average method

Step 3: Summarize the total costs to account for

Total Transferred- Direct Conversion

Cost In Costs Materials costs

Cost to account for:

Work in process, March 1 $ 51,600 $ 33,600 $ - $ 18,000
Costs added in the current
period $ 113,800 52,000 13,200 48,600
Total cost $ 165,400 $ 85,600 $ 13,200 $ 66,600
 Transferred-In Costs Transferred-
In Costs
Direct
Materials
Conversion
Costs
Units accounted for:

Weighted-average method Completed and transferred

Work in process, March 31
440
200
440 440 440

Transferred-In 100% complete 200

Materials 0% complete -
Conversion 80% complete 160
640 640 440 600

Step 4: Compute the cost per equivalent unit.

Total Transferred- Direct Conversion
Cost In Costs Materials costs

Cost to account for:

Work in process, March 1 $ 51,600 $ 33,600 $ - $ 18,000
Costs added in the current
period $ 113,800 52,000 13,200 48,600
Total cost $ 165,400 $ 85,600 $ 13,200 $ 66,600

Costs incurred to date

Equivalent units of work done to date
Cost per equivalent unit of work done
to date
 Transferred-In Costs Transferred- Direct
Cost Materials
In Costs
Conversion
Costs
to account for:
Total
Cost
Transferred-
In Costs
Direct
Materials
Conversion
costs

Weighted-average method
Units accounted for: Work in process, March 1 $ 51,600 $ 33,600 $ - $ 18,000
Completed and transferred 440 440 Costs added
440 in the current
440
Work in process, March 31 200 period $ 113,800 52,000 13,200 48,600
Transferred-In 100% complete 200 Total cost $ 165,400 $ 85,600 $ 13,200 $ 66,600
Materials 0% complete -
Conversion 80% complete Costs incurred to date 160 $ 165,400 $ 85,600 $ 13,200 $ 66,600
Equivalent units of work done to date 640 440 600
640 640 440 600
Cost per equivalent unit of work done $ 274.75 $ 133.75 $ 30.00 $ 111.00
to date

Transferred- Direct Conversion

Total Cost In Costs Materials Costs

Assignment of costs:
Transferred out during March (440 units)
Work in process, March 31 (200 units):
Transferred-In Costs
Direct Materials
Conversion Costs
Total work in process, March 31
Total cost accounted for
Work in Process Accounts
Hybrid Costing Systems

Operation costing is a hybrid of job-order

and process costing because it
possesses attributes of both approaches.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Material Costs charged Conversion costs

to batches as in assigned to batches
job-order costing. as in process costing.
 Exercise 14

The Wiring department is the second stage of Flem Company’s production

cycle. On May 1, the beginning WIP contained 25,000 units 60% complete
as to conversion costs. During May, 100,000 units were transferred in from
the first stage of Flem’s production cycle. On May 31, ending WIP contained
20,000 units 80% complete as to conversion costs. Direct materials are
added at the end of the process. Using the weighted-average method, the
equivalent unit of production on May 31 were
Transferred-In Direct Conversion
costs Materials costs
A 100,000 125,000 100,000
B 125,000 105,000 105,000
C 125,000 105,000 121,000
D 125,000 125,000 121,000
 Exercise 15

The Wiring department is the

second stage of Flem
Company’s production cycle.
On May 1, the beginning WIP
contained 25,000 units 60%
complete as to conversion
costs. During May, 100,000
units were transferred in from
the first stage of Flem’s
production cycle. On May 31,
ending WIP contained 20,000
units 80% complete as to
conversion costs. Direct
materials are added at the end
of the process. Using the FIFO
method, the equivalent unit of
production on May 31 were
Learning Materials

❖ Chapter 18 (Horngren’s Cost Accounting)

❖ Exercises: 18-16→ 18-19, 18-21, 18-22, 18-23, 18-36,
18-37, 18-38, 18-39, 18-40, 18-43