CH 21

Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 21
Process Costing
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter Outline
Learning Objectives
LO 1 Discuss the uses of a process cost system and how
it compares to a job order system.
LO 2 Explain the flow of costs in a process cost system
and the journal entries to assign manufacturing
costs.
LO 3 Compute equivalent units.
LO 4 Complete the four steps to prepare a production
cost report.
Copyright ©2017 John Wiley & Son, Inc. 2
Overview of Process Cost System
Uses of Process Cost Systems
To apply costs to similar products that are mass-
produced in a continuous fashion
Examples include the production of cereal, paint,
manufacturing steel, oil refining and soft drinks
ILLUSTRATION 21.1
Manufacturing processes
LO 1 Copyright ©2017 John Wiley & Son, Inc. 3

ILLUSTRATION 21.2
Process cost and job order cost companies and products

Which of the following items is not a characteristic of a
process cost system:
a. Once production begins, it continues until the finished
product emerges.
b. The focus is on continually producing homogenous
products.
c. When the finished product emerges, all units have
precisely the same amount of materials, labor, and
overhead.
d. The products produced are heterogeneous in nature.

Process Cost for Service Companies
Service companies that provide individualized,
nonroutine services will probably benefit from using a
job order cost system.
Those that perform routine, repetitive services will
probably be better off with a process cost system.

Similarities and Differences Between Job
Order Cost and Process Cost Systems
Job Order Cost Process Cost
• Costs assigned to each • Costs tracked through a
job series of manufacturing
• Products have unique processes or
characteristics departments
• Products are uniform or
relatively homogeneous
and produced in a large
volume

Job Order Cost and Process Cost Flow
Job Order Cost Flow
Work in Process
Direct Materials
Inventory
Direct Labor Finished Goods Cost of Goods
Job No. 101
Manufacturing Inventory Sold
Job No. 102
Overhead
Job No. 103
Process Cost Flow

Direct
Materials Work in Work in
Finished Goods Cost of Goods
Direct Labor Process Process
Inventory Sold
Manufacturing Department A Department B
Overhead
ILLUSTRATION 21.3
Job order cost and process cost flow

Similarities Differences
1. Manufacturing cost 1. Number of work in
elements. process accounts used.
2. Accumulation of the 2. Documents used to
costs of materials, track costs.
labor, and overhead.
3. Point at which costs
3. Flow of costs. are totaled.
4. Unit cost
computations.

Feature Job Order Cost System Process Cost System
Work in process One work in process Multiple work in process
accounts account accounts
Documents used Job cost sheets Production cost reports
Determination of total
Each job Each period
manufacturing costs
Unit-cost Cost of each job ÷ Units Total manufacturing costs ÷

computations produced for the job Equivalent units produced
during the period
ILLUSTRATION 21.4
Job order versus process cost systems

DO IT! 1 Job Order and Process Cost
Indicate whether the following are true or false.
False 1. A law firm is likely to use process costing for

major lawsuits.
True 2. A manufacturer of paintballs is likely to use

process costing.
False 3. Both job order and process costing determine

product costs at the end of a period of time,
rather than when a product is completed.
False 4. Process costing does not keep track of

manufacturing overhead.
Process Cost Flow and Assigning Costs
Process Cost Flow
Tyler Company manufactures roller blade and skateboard
wheels that it sells to manufacturers and retail outlets.
Manufacturing consists of two processes: machining and
assembly. The Machining Department shapes, hones, and
drills the raw materials. The Assembly Department
assembles and packages the wheels.

Process Cost Flow ILLUSTRATION 21.5
Flow of costs in process cost system

Assigning Manufacturing Costs
Accumulation of cost of materials, labor, and
overhead is same as in job order costing
 Debit Raw Materials Inventory for purchases of
raw materials
 Debit Factory Labor for factory labor incurred
 Debit Manufacturing Overhead for overhead cost
incurred
Assignment of manufacturing costs to WIP in
process cost is different than job order cost
Material Costs
A process cost system requires fewer material
requisition slips than a job order cost system
Materials are used for processes and not specific
jobs
Requisitions are for larger quantities of materials

Material Costs
Illustration: Tyler Company adds materials at the beginning of
each process. Suppose Tyler adds $50,000 of direct materials
to the machining process and $20,000 of direct materials to
the assembly process. Tyler makes the following entry to
record the materials used.
Work in Process—Machining 50,000
Work in Process—Assembly 20,000
Raw Materials Inventory 70,000

Factory Labor Costs
Time tickets may be used in both systems
All labor costs incurred within a production
department are a cost of processing

Factory Labor Costs
Illustration: Suppose that Tyler Company incurs factory labor
charges of $20,000 in the machining process and $13,000 in
the assembly process. The entry to assign labor costs to
machining and assembly for Tyler is:
Factory Labor 33,000

Manufacturing Overhead Costs
Objective of assigning overhead is to allocate
overhead to production departments on objective
and equitable basis
Use activity that “drives” or causes costs
Machine time used - primary driver

Manufacturing Overhead Costs
Illustration: Assume that based on machine hours that Tyler
Company allocates overhead of $45,000 to the machining
process and $17,000 to the assembly process. Tyler’s entry to
allocate overhead to the two processes is:
Manufacturing Overhead 62,000

Transfers to Next Department
Suppose Tyler transferred goods with a recorded cost of
$87,000 from machining to assembly. Tyler makes the
following entry.

Transfers to Next Department
Assembly Department completes unit with a recorded cost of
$114,000 and then transfers them to the finished goods
warehouse. The entry for this transfer is as follows.
Finished Goods Inventory 114,000
Tyler Company sells finished good with a recorded cost of

$27,000. It records the cost of goods sold as follows.
Cost of Goods Sold 27,000

In making journal entries to assign raw materials costs, a
company using process costing:
a. debits Finished Goods Inventory.
b. often debits two or more work in process accounts.
c. generally credits two or more work in process
accounts.
d. credits Finished Goods Inventory.

DO IT! 2 Process Costing
Ruth Company manufactures ZEBO through two processes:
blending and bottling. In June, raw materials used were
Blending $18,000 and Bottling $4,000. Factory labor costs
were Blending $12,000 and Bottling $5,000. Manufacturing
overhead costs assigned were Blending $6,000 and Bottling
$2,500. The company transfers units completed at a cost of
$19,000 in the Blending Department to the Bottling
Department. The Bottling Department transfers units
completed at a cost of $11,000 to Finished Goods.
Journalize the assignment of these costs to the two processes
and the transfer of units as appropriate.

DO IT! 2 Process Costing (1 of 3)
Journalize the assignment of these costs to the two processes
and the transfer of units as appropriate.
To Record Material Used:
Work in Process—Blending 18,000
Work in Process—Bottling 4,000
Raw Materials Inventory 22,000

To Assign Factory Labor to Production:
Factory Labor 17,000
To Assign Overhead to Production:

Manufacturing Overhead 8,500

To Record Transfer of Units to Bottling Department:
To Record Transfer of Units to Finished Goods:


Equivalent Units
Illustration: Suppose you work in the office of your college’s
president, and she asks you to compute the cost of instruction
per full-time equivalent student at your college. The college’s
vice president for finance provides the following information.
Costs:
Total cost of instruction $9,000,000
Student population:
Full-time students 900
Part-time students 1,000
ILLUSTRATION 21.6
Information for full-time student example

Equivalent Units
Illustration: Part-time students take 60% of the classes of a full-
time student during the year. Compute the number of full-time
equivalent students per year. ILLUSTRATION 21.7
Full-time equivalent unit computation
Full-Time Equivalent Units Full-Time

Students + of Part-Time Students = Equivalent Students
900 + (1,000 x 60%) = 1,500
Cost of instruction per full-time equivalent student =

Total cost of instruction $9,000,000
Number of full-time equivalent students ÷ 1,500
$ 6,000
Weighted-Average Method
Considers degree of completion (weighting) of units
completed and transferred out and units in ending
work in process
Most widely used method
Beginning work in process not part of computation
of equivalent units
. Equivalent
Units Completed Equivalent Units
and Transferred + of Ending Work = Units of
out in Process Production
ILLUSTRATION 21.8
Equivalent unit of production formula

Weighted-Average Method
Illustration: The entire output of Sullivan Company’s Blending
Department consists of ending work in process of 4,000 units
which are 60% complete as to materials, labor, and overhead.
Calculate the equivalent units of production.
Completed units 0
Work in process equivalent units (4,000 x 60%) + 2,400
Equivalent units 2,400

Refinement on the Weighted-Average
Method
Illustration: Kellogg Company has produced Eggo® Waffles
since 1970. Three departments produce these waffles:
Mixing, Baking, and Freezing/Packaging. The Mixing
Department combines dry ingredients, including flour, salt,
and baking powder, with liquid ingredients, including eggs and
vegetable oil, to make waffle batter.
Illustration 21.9 provides information related to the Mixing
Department at the end of June.

Refinement Weighted-Average Method
Illustration: Information related to Mixing Department at the
end of June.
Percentage Complete
ILLUSTRATION 21.9
Information for Mixing Department
Physical Conversion
Units Materials Costs
Work in process, June 1 100,000 100% 70%
Started into production 800,000
Total units to be accounted for 900,000
Units transferred out 700,000
Work in process, June 30 200,000 100% 60%
Total units accounted for 900,000

Mixing Department Equivalent Units
ILLUSTRATION 21.10
Computation of equivalent
Conversion
units—Mixing Department Materials Costs
Units transferred out 700,000 700,000
Work in process, June 30
200,000 x 100% 200,000
200,000 x 60% 120,000
Total equivalent units 900,000 820,000
Conversion costs are labor costs plus overhead costs

Beginning work in process is not part of the equivalent-units-
of-production formula ILLUSTRATION 21.10
Computation of equivalent units—Mixing Department

Equivalent Units Equivalent Units
Units Completed + of Ending Work = of Production-
and Transferred in Process- Materials
Out-Materials Materials
Units Completed Equivalent Units of Equivalent Units

and Transferred Ending Work in
+ = of Production-
Out-Conversion Process-Conversion Conversion Costs
Cost Costs
ILLUSTRATION 21.11
Refined Equivalent unit of production formula

Equivalent Units
The Mixing Department’s output during the period consists of
20,000 units completed and transferred out, and 5,000 units
in ending work in process 60% complete as to materials and
conversions costs. Beginning inventory is 1,000 units, 40%
complete as to materials and conversion costs. The
equivalent units of production are:
a. 22,600
b. 23,000
c. 24,000
d. 25,000
DO IT! 3 Equivalent Units
The fabricating department Outdoor Essentials has the
following production and cost data for the current month.
Beginning Units Ending

Work in Process Transferred Out Work in Process
–0– 15,000 10,000
Materials are entered at the beginning of the process. The

ending work in process units are 30% complete as to
conversion costs. Compute the equivalent units of production
for (a) materials and (b) conversion costs.

The fabricating department has the following production and
cost data for the current month.
–0– 15,000 10,000
Compute the equivalent units of production for (a) materials
and (b) conversion costs.
Units transferred out 15,000
Ending work in process units 10,000
25,000
The fabricating department has the following production and
cost data for the current month.
–0– 15,000 10,000
Compute the equivalent units of production for (a) materials
and (b) conversion costs.
Units transferred out
15,000
LO 3
Equivalent unit in ending WIP (10,000 x 30%)
Production Cost Report
A production cost report is the
Key document used to understand activities
Prepared for each department and shows
Production Quantity and Cost data
Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
Flow of costs to make an Eggo® Waffle and the
related production cost reports for each department.
Raw Materials Factory ILLUSTRATION 21.12
Flow of costs in making
Labor Manufacturing Eggo® Waffles
Overhead
WIP WIP Freezing/

Mixing Baking Finished
Packaging
Department Department Goods
Department
Production Cost Production Cost Production Cost

Report Report Report

ILLUSTRATION 21.13
Unit and cost data—Mixing Department
Mixing Department
Units 100,000
Direct materials: 100% complete
Conversion costs: 70% complete
Units started into production during June 800,000
Units completed and transferred out to Baking Department 700,000
Work in process, June 30 200,000
Costs
Direct materials: 100% complete $ 50,000
Conversion costs: 70% complete 35,000
Cost of work in process, June 1 $ 85,000
Costs incurred during production in June
Direct materials $400,000
Conversion costs 170,000
Costs incurred in June $570,000

Compute the Physical Unit Flow (Step 1)
Physical units - actual units to be accounted for
during a period, regardless of work performed
Total units to be accounted for - units started (or
transferred) into production during period + units
in production at beginning of period
Total units accounted for - units transferred out
during period + units in process at end of period

Compute Physical Unit Flow (Step 1)
Mixing Department
Physical Units
Units to be accounted for
Started (transferred) into production 800,000
Total units 900,000
Units accounted for
Completed and transferred out 700,000
Total units 900,000
ILLUSTRATION 21.14
Physical unit flow—Mixing Department

Equivalent Units of Production (Step 2)
Mixing Department
Department adds materials at beginning of process
Incurs conversion costs uniformly during the process
Equivalent Units
Materials Conversion Costs
Units transferred out 700,000 700,000
200,000 x 100% 200,000
200,000 x 60% 120,000
Total equivalent units 900,000 820,000
ILLUSTRATION 21.15
Computation of equivalent units—Mixing Department
Equivalent Units of Production (Step 2)
Costs expressed in terms of equivalent units of
production
When equivalent units of production are
different for materials and for conversion costs,
three unit costs are computed:
1. Materials
2. Conversion
3. Total Manufacturing

Compute Unit Production Costs (Step 3)
Compute total materials cost related to Eggo® Waffles:
Work in process, June 1 ILLUSTRATION 21.16
Direct materials costs $ 50,000

Cost added to production during June
Direct material cost 400,000
Total material costs $450,000
Total Material Equivalent Units Unit Material

Cost + of Materials = Cost
$450,000 + 900,000 = $0.50
ILLUSTRATION 21.17

Compute total materials cost related to Eggo® Waffles:
Work in process, June 1 ILLUSTRATION 21.18
Conversion costs $ 35,000

Cost added to production during June
Total material costs $205,000
Total Conversion Equivalent Units of Unit Conversion

Cost + Conversion Costs = Cost
$205,000 + 820,000 = $0.25
ILLUSTRATION 21.19

$205,000 + 820,000 = $0.25
ILLUSTRATION 21.19
Compute total manufacturing costs per unit:
Unit Materials Unit Conversion Total Manufacturing

Cost + Cost = Cost per Unit
$0.50 + $0.25 = $0.75
ILLUSTRATION 21.20

Prepare a Cost Reconciliation Schedule
(Step 4) ILLUSTRATION 21.21
Kellogg charged total costs of $655,000 to the Mixing

Department in June, calculated as follows.
Costs to be accounted for
Work in process, June 1 $ 85,000
Direct material cost 570,000
Total costs $655,000

Cost Reconciliation Schedule (Step 4)
Mixing Department
Cost Reconciliation Schedule
Costs accounted for
Transferred out (700,000 × $0.75) $525,000
Materials (200,000 × $0.50) $100,000
Conversion costs (120,000 × $0.25) 30,000 130,000
Total units $655,000
ILLUSTRATION 21.22

Mixing Department
Production Cost Report ILLUSTRATION 21.23
For the Month Ended June 30, 2020
Equivalent Units
Physical Units Materials Conversion Costs
Quantities
Units to be accounted for Step 1 Step 2
Total units 900,000
Units accounted for
Transferred out 700,000 700,000 700,000
Work in process, June 30 200,000 200,000 120,000 (200,000 x 60%)
Total units 900,000 900,000 820,000
Costs
Unit costs Step 3
Total cost $450,000 $205,000 655,000
Equivalent units 900,000 820,000
Unit costs [(a) / (b)] $0.50 $0.25 $0.75
Cost Reconciliation Schedule Step 4
Costs accounted for
Transferred out (700,000 x $0.75) $525,000
Materials (200,000 x $0.50) $100,000
Conversion costs (120,000 x $0.25) 30,000 130,000

Largo Company has unit costs of $10 for materials and $30 for
conversion costs. If there are 2,500 units in ending work in
process, 40% complete as to conversion costs and fully
complete as to materials cost, the total cost assignable to the
ending work in process inventory is:
a. $45,000
b. $55,000
c. $75,000
d. $100,000

Costing Systems – Final Comments
Companies often use a combination of a process cost
and a job order cost system
Called operations costing, this hybrid system is
similar to process costing in its assumption that
standardized methods are used to manufacture
the product
Product may have some customized, individual
features that require use of a job order cost
system

DO IT! 4 Cost Reconciliation Schedule
In March, Rodayo Manufacturing had the following unit production
costs: materials $6 and conversion costs $9. On March 1, it had
zero work in process. During March, Rodayo transferred out 12,000
units. As of March 31, 800 units that were 25% complete as to
conversion costs and 100% complete as to materials were in ending
work in process. Assign the costs to the units transferred out and in
process.
Costs transferred out $180,000
Work in process, March 31
Materials (800 x $6) $4,800
Conversion costs (200 x $9) 1,800 6,600
Appendix 21A FIFO Method for Equivalent
Units
Equivalent Units Under FIFO
Equivalent units are the sum of the work performed
to:
1. Finish units of beginning work in process inventory.
2. Complete units started into production during the
period (referred to as units started and
completed).
3. Start, but only partially complete, units in ending
LO 5
work in process inventory. Copyright ©2018 John Wiley & Son, Inc. 56
Equivalent Units Under FIFO ILLUSTRATION 21A.1
Physical unit flow—Assembly
Department
Assembly Department
Physical Units
Work in process, June 1 (40% complete) 500
Total units 8,500
Units to be accounted
Work in process, June 30 (75% complete) 400
Total units 8,500

Equivalent Units Under FIFO ILLUSTRATION 21A.2
Computation of equivalent
units—FIFO method
Assembly Department
Work Added Equivalent
Production Data Physical Units This Period Units
Work in process, June 1 500 60% 300
Started and completed 7,600 100% 7,600
Work in process, June 30 400 75% 300
Total 8,500 8,200

Comprehensive Example FIFO ILLUSTRATION 21A.3
Unit and cost data—Mixing
Department
Assembly Department
Units
Units started into production during June 800,000
Units completed and transferred out to Baking Department 700,000
Costs
Direct materials: 100% complete $ 50,000
Conversion costs: 70% complete 35,000
Cost of work in process, June 1 $ 85,000
Costs incurred in June $570,000

Compute Physical Unit Flow (1) ILLUSTRATION 21A.4
Physical unit flow—Mixing
Department
Mixing Department
Physical Units
Total units 900,000
Total units 900,000

Compute Physical Unit Flow (1) ILLUSTRATION 21A.5
Physical unit flow (FIFO)—
Mixing Department
Mixing Department
Physical Units
Total units 900,000
Completed and transferred out
Started and completed 600,000
700,000
Total units 900,000

Equivalent Units of Production (2)
Equivalent Units for Materials
Kellogg adds materials at beginning of the process. 100% of
materials costs has been incurred on ending WIP.
Mixing Department—Materials
Materials
Physical Added Equivalent
Production Data Units This Period Units
Work in process, June 1 100,000 0% 0
Work in process, June 30 200,000 100% 200,000
Total 900,000 800,000
ILLUSTRATION 21A.6
LO 5 Computation of equivalent units—materials Copyright ©2018 John Wiley & Son, Inc. 62
Equivalent Units of Production (2)
Equivalent Units for Conversion Costs
The Mixing Department required 30,000 equivalent units (100,000
units x 30%) of conversion costs to complete the beginning
inventory. In addition, 200,000 units of ending work in process
were 60 percent complete in terms of conversion costs.
Mixing Department—Conversion Costs
Physical Word Added Equivalent
Production Data Units This Period Units
Total 900,000 750,000
ILLUSTRATION 21A.7
LO 5 Computation of equivalent units—conversion costs Copyright ©2018 John Wiley & Son, Inc. 63
Compute Unit Production Costs (3)
Under the FIFO method, the unit costs of production are
based entirely on the production costs incurred during
the month.
Total $570,000
ILLUSTRATION 21A.8

Compute Unit Production Costs (3)
Compute unit cost for the following:
Total Materials Equivalent Units of Unit Materials

Cost + Materials = Cost
$400,000 + 800,000 = $0.50
$170,000 + 750,000 = $0.227
Total Materials Unit Conversion Manufacturing
Cost + Cost = Cost per Unit
$0.50 + $0.227 = $0.727
ILLUSTRATION 21A.9
Unit cost formulas and computations—Mixing Department Copyright ©2018 John Wiley & Son, Inc.
LO 5 65
Prepare Cost Reconciliation Schedule (4)
Kellogg is now ready to determine the cost of goods
transferred out of the Mixing Department to the Baking
Department and the costs in ending work in process. The
total costs charged to the Mixing Department in June are
as follows.
ILLUSTRATION 21A.10
Costs charges to Mixing Department

Prepare Cost Reconciliation Schedule (4)
ILLUSTRATION 21A.11
Mixing Department
Cost Reconciliation Schedule
Costs accounted for
Transferred out
Costs to complete beginning work in process
Conversion costs (30,000 × $0.227) 6,810
Total costs 91,810
Units started and completed (600,000 × $0.727) 435,950
Total costs transferred out 527,760
Materials (200,000 × $0.50) $100,000
Conversion costs (120,000 × $0.227) 27,240 127,240

Preparing the Production Cost Report
Internal document for management that shows
production quantity and cost data for a
production department
Provides a basis for evaluating productivity of a
department
Managers can use cost data to assess whether unit
costs and total costs are reasonable
Top management can also judge whether current
performance is meeting planned objectives
ILLUSTRATION 21A.12

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Accounting Principles

LO 1 Copyright ©2017 John Wiley & Son, Inc. 3

LO 1 Copyright ©2017 John Wiley & Son, Inc. 4

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Process Cost Flow

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Unit-cost Cost of each job ÷ Units Total manufacturing costs ÷

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False 1. A law firm is likely to use process costing for

True 2. A manufacturer of paintballs is likely to use

False 3. Both job order and process costing determine

False 4. Process costing does not keep track of

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Tyler Company sells finished good with a recorded cost of

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To Assign Overhead to Production:

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To Record Transfer of Units to Finished Goods:

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Full-Time Equivalent Units Full-Time

Cost of instruction per full-time equivalent student =

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Conversion costs are labor costs plus overhead costs

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Units Completed Equivalent Units of Equivalent Units

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Beginning Units Ending

Materials are entered at the beginning of the process. The

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WIP WIP Freezing/

Production Cost Production Cost Production Cost

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Direct materials costs $ 50,000

Total Material Equivalent Units Unit Material

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Conversion costs $ 35,000

Total Conversion Equivalent Units of Unit Conversion