Indian Institute of Management Rohtak

Management Accounting

Session 4
Process Costing
By
Prof Archana Patro
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 costs.
• 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.
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 having different production requirements are
worked on each period.
• Process costing systems accumulate costs by
department. Job-order costing systems accumulated
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.
 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.
 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.
 Processing Departments
Any unit 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.
Products in a process costing environment
typically flow in a sequence from one department
to another.
Learning Objective 1

Record the flow of

materials, labor, and
overhead through a
process costing system.
 Comparing Job-Order and Process
Costing
Direct
Materials

Work in Finished
Direct Labor
Process Goods

Manufacturing Cost of
Overhead Goods
Sold
 Comparing Job-Order and Process
Costing
Costs are traced and
applied to individual
Direct jobs in a job-order
Materials cost system.

Finished
Direct Labor Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
 Comparing Job-Order and Process
Costing
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
Job-Order Costing System
Process Costing System
 Flow of Costs Between
Processing Departments
T-Account and Journal Entry Views of
Process Cost Flows

For purposes of this example, assume

there are two processing departments –
Departments A and B.
We will use T-accounts and journal
entries.
Process Cost Flows: The Flow of Raw
Materials (in T-accountWork
form)
in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B
•Direct
Materials
Process Cost Flows: The Flow of Raw
Materials (in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
Process Cost Flows: The Flow of Labor
Costs (in T-account form)
Salaries and Work in Process
Wages Payable Department A
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor
 Process Costing: The Flow of Labor
Costs (in journal entry form)
GENERAL JOURNAL Page 4
Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
 Process Cost Flows: The Flow of
Manufacturing Overhead Costs (in T-
account form) Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
 Process Cost Flows: Transfers from
WIP-Dept. A to WIP-Dept. B (in T-account
form)
Work in Process Work in Process
Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labor Labor
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A

Department Department
A B
Process Cost Flows: Transfers from WIP-Dept.
A to WIP-Dept. B (in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
Process Cost Flows: Transfers from WIP-
Dept. B to Finished Goods (in T-account
Work in Process
form)
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
Process Cost Flows: Transfers from WIP-Dept.
B to Finished Goods (in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
 Process Cost Flows: Transfers from
Finished Goods to COGS (in T-account
Work in Process
Department B
form) Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labor
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold

•Cost of
Goods
Sold
Process Cost Flows: Transfers from Finished
Goods to COGS (in journal entry form)

GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record the transfer of finished
goods inventory to cost of goods
sold.
 Equivalent Units of Production
Equivalent units are the product of the number of
partially completed units and the percentage
completion of those units.

We need to calculate equivalent units because a

department usually has some partially completed units
in its beginning and ending inventory. These partially
completed units complicate the determination of a
department’s output for a given period and the unit cost
that should be assigned to that output.
Equivalent Units – The Basic Idea
Two half completed products are
equivalent to one complete product.

+ = 1

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.
 Quick Check 
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
 Quick Check 
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
10,000 units + (5,000 units × 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
Basic Steps in Process Costing
Step 1: Account for the number of physical
units
Step 2: Calculate the cost per equivalent
unit for materials, labor, and
overhead
Step 3: Assign cost to items completed and
items in ending Work in Process
Step 4: Account for the amount of product
cost
 Calculating Equivalent Units

Equivalent units can be calculated

two ways:
The First-In, First-Out Method – FIFO
The Weighted-Average Method.
Learning Objective 2

Compute the equivalent

units of production using
the weighted-average
method.
 Equivalent Units of Production
Weighted-Average Method
The weighted-average method . . .
1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.
 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 cost systems.

Type of Product Cost

 Treatment of Direct Labor
Direct
Materials
Direct labor and
Conversion
manufacturing
Dollar Amount

Direct overhead may be

Labor
combined into
Direct Manufacturing one classification
Labor Overhead of product
cost called
conversion costs.
Type of Product Cost
 Weighted-Average – An Example
Smith Company reported the following activity in the
Assembly Department for the month of June:

Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 Weighted-Average – An Example
The first step in calculating the equivalent units is to
identify the units completed and transferred out of
Assembly Department in June (5,400 units)
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
 Weighted-Average – An Example
The second step is to identify the equivalent units of production in
ending work in process with respect to materials for the month
(540 units) and adding this to the 5,400 units from step one.

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

Equivalent units of Production in

the Department during June 5,940
 Weighted-Average – An Example
The third step is to identify the equivalent units of production in
ending work in process with respect to conversion for the month
(270 units) and adding this to the 5,400 units from step one.

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
 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
 Learning Objective 3

Compute the cost per

equivalent unit using the
weighted-average method.
 Compute and Apply Costs
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
 Compute and Apply Costs
The formula for computing the cost per
equivalent unit is:
Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit
Equivalent units of production
 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

 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

 Learning Objective 4

Assign costs to units using

the weighted-average
method.
 Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
 Applying Costs
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
 Applying Costs
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
 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
 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
 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
Learning Objective 5

Prepare a cost
reconciliation report.
 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
 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
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more
accurate than 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.
Learning Objective 6

Compute the equivalent

units of production using
the FIFO method.
 Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Here is
information concerning the Assembly Department
for the month of June.
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 Equivalent Units – FIFO Method
Step 1: Determine equivalent units needed to complete
beginning Work in Process Inventory.

Materials Conversion
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
 Equivalent Units – FIFO Method
Step 2: Determine units started and completed during
the period.

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
 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
 Equivalent Units: Weighted-Average
vs. FIFO
As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the
weighted-average method to obtain the equivalent units of
production under the FIFO method.

Materials Conversion
Equivalent units - weighted-average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units × 40% 120
300 units × 20% 60
Equivalent units - FIFO method 5,820 5,610
Learning Objective 7

Compute the cost per

equivalent unit using the
FIFO method.
 Cost per Equivalent Unit - FIFO
Let’s revisit the Smith Company Assembly Department
for the month of June to prepare our production report.
Beginning work in process: 400 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 900 units

Materials: 60% complete
Conversion: 30% complete
 Cost per Equivalent Unit - FIFO
The formula for computing the cost per
equivalent unit under FIFO method is:

Cost per Cost added during the period

equivalent =
unit Equivalent units of production
 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

 Learning Objective 8

Assign costs to units using

the FIFO method.
 Applying Costs - FIFO
Step 1: Record the equivalent units of production in ending Work
in Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270

900 units × 60% 900 units × 30%

 Applying Costs - FIFO
Step 2: Record the cost per equivalent unit.

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
 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

 Cost of Units Transferred Out
Step 1: Record the cost in beginning Work in Process Inventory.
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 of Units Transferred Out
Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
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 Transferred Out
Step 3: Compute the cost of units started and completed this
period.
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
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
Learning Objective 9

Prepare a cost
reconciliation report
using the FIFO method.
 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
 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
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.