1. © The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Chapter 3
Process Costing and Analysis

2. © The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
Conceptual Learning
Objectives
C1: Explain process operations and the way
they differ from job order operations
C2: Define equivalent units and explain their
use in process cost accounting
C3: Explain the four steps in accounting for
production activity in a period
C4: Define a process cost summary and
describe its purposes
C5: Appendix 16A: Explain and illustrate the
four steps in accounting for production
activity using FIFO

3. © The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
A1: Compare process cost accounting
and job order cost accounting
A2: Explain and illustrate a hybrid costing
system
Analytical Learning Objectives

4. © The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
P1: Record the flow of direct materials costs in
process cost accounting
P2: Record the flow of direct labor costs in
process cost accounting
P3: Record the flow of factory overhead costs
in process cost accounting
P4: Compute equivalent units produced in a
period
P5: Prepare a process cost summary
P6: Record the transfer of completed goods to
Finished Goods Inventory and Cost of
Goods Sold
Procedural Learning
Objectives

5.  Used for production of small,
identical, low-cost items.
 Mass produced in automated
continuous production process.
 Costs cannot be directly traced
to each unit of product.
Process Manufacturing
Operations
C1

6. Job Order Systems
 Custom orders
 Heterogeneous
products
 Low production volume
 High product flexibility
 Low to medium
standardization
Process Systems
 Repetitive operations
 Homogeneous products
 High production volume
 Low product flexibility
 High standardization
Comparing Job Order and
Process Production
A1

7. Direct
Materials
Finished
Goods
Cost per
unit for
each job
Direct
Labor
Factory
Overhead
Jobs
The Goods in Process
account consists of
individual jobs in a
job order system.
Job Order and Process
Cost Accounting
A1

8. Direct
Materials
Finished
Goods
Direct
Labor
Factory
Overhead
Processes
The Goods in Process
account consists of
specific processes in a
process cost system.
Cost per
unit
processed
A1 Job Order and Process
Cost Accounting

9. Same objective: to determine
the cost of products
Same inventory accounts: raw materials,
work in process, and finished goods
Same overhead assignment method:
predetermined rate times actual activity
Job and Process Costing
Similarities
A1

10. Job and Process Costing
Similarities and Differences
A1
Journal entries for
both job order and
process costing
are the identical
The difference
between job
order and
process costing
lies in how the
cost of goods
transferred to
finished goods
is determined.

11. A1 Job Order and Process
Costing Differences
Job order costing
The cost of goods
transferred to
finished goods is
equal to the sum of
all of the completed
jobs for that period
Process costing
The cost of goods
transferred to finished
goods equals the
number of completed
units times the cost
per equivalent unit

12. Costs are accumulated for a period of
time by process or department.
Unit cost is computed by dividing the
accumulated costs by the number of
equivalent units produced in the period.
Equivalent Units of Production
C2

13. Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
Two one-half full pitchers are
equivalent to one full pitcher.
+ =
Equivalent Units of Production
C2

14. For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
Question
C2

15. For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
10,000 units + (5,000 units × .30)
= 11,500 equivalent units
Question
C2

16. Cost per
equivalent
unit
=
Product costs for the period
Equivalent units for the period
Cost Per Equivalent Unit
C2

17. Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
C2
Question

18. Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
Question
C2

19. Equivalent units may be
different for material and labor
and overhead at different
stages of a process.
At completion of Stage 1 of the process, material
is 40% complete, but labor and overhead are only
25% complete.
Stage 1
40% of
Material
25% of
Labor and
Overhead
Equivalent Units
C2

20. Stage 2
25% of
Labor and
Overhead
60% of
Material
Stage 1
40% of
Material
25% of
Labor and
Overhead
+
+
=
=
100%
50%
Equivalent Units
C2

21. Stage 3
50% of
Labor and
Overhead
The process is now complete.
Stage 2
25% of
Labor and
Overhead
60% of
Material
Stage 1
40% of
Material
25% of
Labor and
Overhead
Equivalent Units
C2

22. GenX makes a
product called
Profen
Process Manufacturing
Operations GenX Example
C3

23. Labor
Materials
Indirect
Indirect
Factory
Overhead
Direct
Direct
Delivered
to
Customers
Goods in
Process
Finished
Goods
Allocated
Overhead
Process Manufacturing
Operations GenX
C3

24. Let’s look at
actual units
processed and
actual costs
incurred for
GenX.
Accounting for GenX
C3

25. GenX Production Data for April
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct materials 100%
Percentage of completion - direct labor 40%
Units started in April 90,000
Units transferred from grinding to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct materials 100%
Percentage of completion - direct labor 25%
Accounting for GenX
C3

26. C4
Accounting for GenX

27. GenX uses a weighted average cost flow
system with the following four steps:
 Determine physical flow of units.
 Compute equivalent units of production.
 Compute cost per equivalent unit.
 Assign and reconcile costs.
Accounting for GenX
C5

28. GenX Physical Flow for April
Units to account for:
Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000
Units accounted for as:
Units transferred from grinding to mixing 100,000
Ending inventory 20,000
Total number of units 120,000
 Determine Physical Flow of
Units
C5

29. GenX Physical Flow for April
Units to account for:
Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000
Units accounted for as:
Units transferred from grinding to mixing 100,000
Ending inventory 20,000
Total number of units 120,000
 Determine Physical Flow of
Units
C5
These two amounts are
reconciled

30. GenX
Direct Materials Equivalent Units of Production for April
Units of Percentage Equivalent
Product of Completion Units
Equivalent units completed and
transferred out 100,000 100% 100,000
Ending goods in process 20,000 100% 20,000
Total units 120,000 120,000
 Compute Equivalent
Units of Production - Materials
C5

31. GenX Direct Labor and Factory
Overhead Equivalent Units of Production for April
Units of Percentage Equivalent
Product of Completion Units
Equivalent units completed and
transferred out 100,000 100% 100,000
Ending goods in process 20,000 25% 5,000
Total units 120,000 105,000
 Compute Equivalent
Units of Production – Direct
Labor and Factory Overhead
C5

32. Equivalent Units of Production for April
Direct Direct Factory
Materials Labor Overhead
Equivalent units completed and
tramsferred out 100,000 100,000 100,000
Equivalent units for ending
ending good in process 20,000 5,000 5,000
Equivalent units of production
for period 120,000 105,000 105,000
 Compute Equivalent
Units of Production
C5

33. GenX
Cost Per Equivalent Unit for April
Direct Direct Factory
Materials Labor Overhead
Costs of beginning goods
in process inventory 3,300
$ 600
$ 720
$
Costs incurred this period 9,900 5,700 6,840
Total costs 13,200
$ 6,300
$ 7,560
$
÷ Equivalent units of
production ÷ 120,000 ÷ 105,000 ÷ 105,000
Cost per equivalent unit
of production = 0.11
$ = 0.06
$ = 0.072
$
 Compute Cost Per Equivalent
Unit
C5

34. In the cost reconciliation, we will
account for all costs incurred
by assigning unit costs to the:
A. 100,000 units transferred out.
B. 20,000 units remaining in ending
inventory.
 Cost Reconciliation
C5

35. C5

36. C5

37. C5

38. Process
Cost
Summary
Process Cost Summary
Helps managers
control their
departments.
Provides cost
information for
financial
statements.
Shows the flow
of units and costs
through work in
process.
Helps factory
managers evaluate
department manager
performance.
C4

39. We will illustrate the process cost
summary for GenX in three sections:
 Costs charged to production.
 Equivalent unit of production and costs per
equivalent unit.
 Cost assignment and reconciliation
Process Cost Summary
C4

40. Process Cost Summary
C4

41. C4

42. C4

43. C4

44. Hybrid costing systems contain features
of both job order and process operations.
Job Order
Costing
Process
Costing
Hybrid Costing
Material costs are
accounted for using
a job order system.
Conversion costs are
accounted for using
a process system.
Hybrid Costing Systems
A2

45. Let’s look at the accounting
journal entries for a process
cost system. We’ll omit the
numbers so that we can focus
on accounts.
Process Costing
Typical Accounting Entries
C4

46. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Raw Materials Inventory XXXXX
Accounts Payable XXXXX
Acquired materials on credit for
use in the factory.
P1 Process Costing
Typical Accounting Entries

47. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Goods in Process Inventory XXXXX
Raw Materials Inventory XXXXX
To assign costs of direct material
used in production
P1 Process Costing
Typical Accounting Entries

48. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Factory Overhead XXXXX
Raw Materials Inventory XXXXX
To record indirect materials used
in April.
P3 Process Costing
Typical Accounting Entries

49. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Factory Payroll XXXXX
Cash XXXXX
To record factory wages for April.
P2 Process Costing
Typical Accounting Entries

50. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Goods in Process Inventory XXXXX
Factory Payroll XXXXX
To assign costs of direct labor
used in production
P1 Process Costing
Typical Accounting Entries

51. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Factory Overhead XXXXX
Factory Payroll XXXXX
To record indirect labor as
overhead.
P3 Process Costing
Typical Accounting Entries

52. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Factory Overhead XXXXX
Prepaid Insurance XXXXX
Accrued Utilities Payable XXXXX
Cash XXXXX
Accumulated Depreciation XXXXX
To record factory overhead items
incurred during April.
P3 Process Costing
Typical Accounting Entries

53. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Goods in Process Inventory XXXXX
Factory Overhead XXXXX
Allocated factory overhead costs to
production on the basis of direct
labor cost
P6 Process Costing
Typical Accounting Entries

54. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Finished Goods Inventory XXXXX
Goods in Process Inventory XXXXX
To record the transfer of completed
goods out of production.
P6 Process Costing
Typical Accounting Entries

55. GENERAL JOURNAL Page 21
Date Description
Post.
Ref. Debit Credit
Cost of Goods Sold XXXXX
Finished Goods Inventory XXXXX
To record cost of goods sold
during April.
P6 Process Costing
Typical Accounting Entries

56. End of Chapter 3