Process Costing
Chapter 17
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Learning Objective 1
Identify the situations in which
process-costing systems
are appropriate.
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Illustrating Process Costing
Direct Materials, Direct Labor
Indirect Manufacturing Costs
Department
A
Department
B
Finished Goods
Cost of Goods Sold
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Learning Objective 2
Describe the five steps
in process costing.
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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.
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Learning Objective 3
Calculate equivalent units and
understand how to use them.
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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
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0
35,000
35,000
30,000
5,000
35,000
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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
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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
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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
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Learning Objective 4
Prepare journal entries for
process-costing systems.
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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
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Journal Entries Example
What is the journal entry for conversion costs?
Work in Process, Assembly
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?
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Journal Entries Example
Work in Process, Finishing
132,043
Work in Process, Assembly
132,043
To record cost of goods completed and transferred
from Assembly to Finishing during the period
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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
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Learning Objective 5
Use the weighted-average
method of process costing.
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Physical Units (Step 1)
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
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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%
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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
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Summarize and Assign Total
Costs (Steps 4 and 5)
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
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Summarize and Assign Total
Costs (Steps 4 and 5)
This step distributes the department’s 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
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Summarize and Assign Total
Costs (Steps 4 and 5)
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
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Journalizing: Weighted-Average
What are the journal entries in the
Assembly Department?
Work in Process, Assembly 84,050
Accounts Payable Control
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
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Journalizing: Weighted-Average
Work in Process, Finishing
139,500
Work in Process, Assembly
139,500
To record cost of goods completed and transferred
from Assembly to Finishing during the period
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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
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Learning Objective 6
Use the first-in, first-out (FIFO)
method of process costing.
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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
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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
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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
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Summarize and Assign Total
Costs (Steps 4 and 5)
Work in process beginning inventory: $
7,550
Current costs:
Material
Conversion
Total
84,050
62,000
$153,600
Same as using weighted-average
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Summarize and Assign Total
Costs (Steps 4 and 5)
Costs transferred out:
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
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Summarize and Assign Total
Costs (Steps 4 and 5)
Work in process ending inventory:
Materials: 5,000 × $2.40 $12,000
Conversion:
5,000 × 20% × $1.975
Total
1,975
$13,975
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Summarize and Assign Total
Costs (Steps 4 and 5)
Costs transferred out
+
=
$139,590
Cost in ending inventory $ 13,975
$153,565
($35 rounding error)
An alternative approach:
Costs to account for
–
=
$153,600
Cost in ending inventory $ 13,975
Costs transferred out
$139,625
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