Cost Accounting: A Managerial Emphasis

COST ACCOUNTING
A Managerial Emphasis
Seventh Canadian Edition
HORNGREN, DATAR, RAJAN, BEAUBIEN, GRAHAM

Chapter 17

Process Costing

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 Cost Accounting: A Managerial Emphasis

Learning Objectives
11. Distinguish process- from job-costing
allocation methods within the decision
framework, and apply the weighted-average
method inventory valuation when the
beginning work-in-process inventory is zero.
22. Contrast the journal entries for a process-
costing system when there is and when there
is not ending work-in-process inventory using
the weighted-average method of inventory
valuation.

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 Cost Accounting: A Managerial Emphasis

Learning Objectives

31. Apply the weighted-average method of

process costing to calculate the cost of goods
manufactured and transferred out when there
is both beginning and ending work-in-process
inventory.
42. Analyze weighted-average, FIFO and
standard-costing methods of inventory
valuation of cost of goods manufactured and
transferred out.
53. Apply process-costing methods to report
transferred-in costs.

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Job-Costing and Process Costing:

Opposite Ends of a Continuum

Job-Costing Systems Process-Costing

Systems
Distinct, identifiable
units of a product Masses of identical
or service or similar units of a
product or service
Examples:
Custom-made Examples:
machines, Food,
Houses Chemical processing

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Process Costing

• Process costing is a system where the unit

cost of a product or service is obtained by
assigning total costs to many identical or
similar units
– Used where output is a large volume of a single,
homogeneous product
– One unit of product is indistinguishable from any
other unit of product
– Product flows evenly through a continuous
production process

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Process Costing

• Each unit receives the same or similar

amounts of direct materials costs, direct
labour costs, and manufacturing overhead
• Unit costs are computed by dividing total
costs incurred by the number of units of
output from the production process
– each unit of product is assigned the same average
cost

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Process-Costing Assumptions

• Direct Materials are assumed to be applied at

discrete points in the production process
– Direct materials are often added at the beginning
of the production process, or at the start of work in
a subsequent department down the assembly line
• Conversion Costs are added equally along
the production process
– Conversion costs are all other costs than direct
materials which include manufacturing labour,
indirect materials and all other indirect costs

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Steps in Process Costing

1. Summarize the flow of physical units of
output
2. Compute output cost allocation base in
equivalent units
3. Summarize total costs to account for
4. Compute cost per equivalent unit
5. Assign total costs to:
– Units completed
– Units in ending work in process

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Equivalent Units

• A derived amount of output units that:

– Takes the quantity of each input in units
completed and in unfinished units of work in
process and
– Converts the quantity of input into the amount of
completed output units that could be produced
with that quantity of input
60 units @ 25% complete = 15 equivalent units
• Are calculated separately for each input
(direct materials and conversion costs)

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Weighted-Average
Process-Costing Method
• Weighted-average cost is the total of all costs
in the work-in-process account divided by the
total equivalent units of work done to date
– Calculates the average equivalent unit cost of the
work done to date regardless of when the work
was done
– Assigns this cost to equivalent units completed
and transferred out of the process, and to
incomplete units still in process

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Weighted-Average
Process-Costing Method
• The beginning balance of the work-in-process
account (work done in a prior period) is
blended in with current period costs
– Smooths out unit costs from month to month

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Result of the Process

• Two critical figures arise out of step 5 of the

cost allocation process:
1. The amount of the journal entry transferring the
allocated cost of units completed and sent from
work-in-process inventory to finished goods
inventory
2. The ending balance of the work-in-process
inventory account that will appear on the balance
sheet

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Summary Journal Entries for the month

of February at Global Defence Inc.
1. Work in Process — Assembly $32,000
Accounts Payable $32,000
To record direct materials purchased and used in
production during February

2. Work in Process — Assembly $18,600

[Various Accounts] $18,600
To record Assembly department conversion costs for
February; examples include energy, manufacturing
supplies, all manufacturing labour, and plant depreciation

3. Work in Process — Testing $24,500

Work in Process — Assembly $24,500
To record the cost of goods completed and transferred
from Assembly to Testing during February

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Flow of Costs in Process Costing

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Weighted-Average Method with

Beginning & Ending WIP

• EU calculation is total work done to date

regardless of whether the work was done in
the preceding or current periods
• Weighted-average cost is the total of all costs
entering WIP
– From beginning WIP and new work in the period

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Flow of Production in Physical Units

(steps 1 and 2)

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Calculating Costs — Weighted-Average

(steps 3, 4 and 5)

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FIFO Method

• A distinctive feature of FIFO process-costing

method is that work done on beginning inventory
before the current period is kept separate from
work done in the current period
• Assigns the cost of the previous accounting
period’s equivalent units in beginning work-in-
process inventory to the first units completed
and transferred out of the process
– costs carried forward from the previous period are
assigned directly to completed goods

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FIFO Method

• Assigns the cost of equivalent units worked

on during the current period
– first to complete beginning inventory,
– next to start and complete new units, and
– lastly to units in ending work in process inventory

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FIFO Method
(steps 1 and 2)

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Calculating Costs – FIFO Method

(steps 3, 4, and 5)

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Comparing Weighted-Average
and FIFO Methods

• Unit costs can differ materially between the

two methods when:
– Direct materials or conversion costs per unit vary
from period to period
– Physical inventory levels of WIP are large in
relation to total number of units transferred out
Weighted
Average FIFO Difference
Cost of units completed and
transferred out $ 52,000 $ 52,480 $ 480
Work in process, ending $ 10,280 $ 9,800 ($ 480)
Total costs accounted for $ 62,280 $ 62,289 $0

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Standard Costing and

Process Costing

• Standard costs replace actual costs in

equivalent unit calculations
• Standard costing helps to simplify the record
keeping and costing
• Variances arise due to the difference
between the standard and actual costs

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Standard Costing Method

(steps 1 and 2)

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Calculating Costs – Standard Costing

(steps 3, 4, and 5)

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Hybrid Costing Systems

• A hybrid-costing system blends

characteristics from both job-costing and
process-costing systems.
• Many actual production systems are in fact
hybrids.
– Examples include manufacturers of televisions,
dishwashers, and washing machines, as well as
automobile manufacturers, such as Ford Motor
Company.

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Transferred-in Costs

• Are costs incurred in previous departments

that are carried forward as the products cost
when it moves to a subsequent process in the
production cycle
– Also called “previous department costs”
– As physical units move from one department to
the next, their costs per EU move with them
– Journal entries are made to mirror the progress in
production from department to department
• Transferred-in costs are treated as if they are
a separate type of direct material added at
the beginning of the process
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Transferred-in Costs
and the Weighted Average Method

• Units transferred to the next operation are

100% complete as to transferred-in costs
– Because these costs are simply carried forward
from the previous process to the current one

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Transferred-in Costs
and the FIFO Method

• The amount transferred-out will be based on

applying the FIFO method
• Each department is regarded as being
separate and distinct for accounting purposes
• The amount transferred-in will be the amount
transferred-out from the previous department
and treated as ‘materials’ contributed at the
beginning of the next department operation

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