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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Process Costing
Chapter 11
Objectives:
Explain the basic ideas underlying process
costing and how they differ from job costing
Compute costs in process costing system
Demonstrate the weighted average and FIFO
methods for process costing
Analyze process costing with multiple
departments
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Type of Business Using
Process Costing

__________

__________

__________

__________

__________

__________

__________

__________

__________
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Comparing
Job Costing vs Process Costing
Job costing

Costs accumulated by the

job.

Work in process has a job

cost record for each job.

Many unique jobs.

Jobs built to customer order.

Job costing

Costs accumulated by the

job.

Work in process has a job

cost record for each job.

Many unique jobs.

Jobs built to customer order.

Process costing

Costs accumulated by
department or process.

Work in process has a

production report for each
batch of products.

Homogenous products.

Units continuously produced

for inventory in automated
process.
Process costing

Costs accumulated by
department or process.

Work in process has a

production report for each
batch of products.

Homogenous products.

Units continuously produced

for inventory in automated
process.

Same objective: _________________________

Same inventory account: _________________________

Same OH assignment method: _________________________

Same objective: _________________________

Same inventory account: _________________________

Same OH assignment method: _________________________

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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Comparing
Job Costing vs Process
Costing
Direct Materials
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Factory
Overhead
Job Costing
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Finished
Goods
Cost of
Goods
Sold
Process Costing
Comparing
Job Costing vs Process
Costing
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Characteristics of
Process Costing
____________
____________
____________
____________
Direct
Materials
Type of Product Cost
D
o
l
l
a
r

A
m
o
u
n
t
Direct
Labor
Factory
Overhead
So, direct labor and factory overhead are often
combined into one product cost called
_______________.
Direct
Materials
Type of Product Cost
D
o
l
l
a
r

A
m
o
u
n
t Conversion
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Characteristics of Process
Costing
Process costing accumulates costs by process or
department and then assigns them to a large number of
nearly identical products.
Process costing accumulates costs by process or
department and then assigns them to a large number of
nearly identical products.
Continuous
mass production
Continuous
mass production
Similar
processes
Similar
processes
Homogeneous
products
Homogeneous
products

cost unit =
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Equivalent Units
Equivalent units is a concept expressing partially complete units as a smaller
number of fully complete units.
We want to find the unit cost of performing a certain process in a given period,
but
A manufacturing firm typically has partially completed units at the end of an
accounting period
Equivalent units Physical Units
+
=
Two one-half filled cups are equivalent to one full cup.
1
Cost per
equivalent
unit
=
Manufacturing costs for a period
Equivalent units for the period
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Equivalent Units
During its first month of business, 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 month?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Now assume that Jones incurred $27,600 in production costs. What was Jones
cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Flow of Costs in Process
Costing

Costs flow through different processes or departments

Use separate WIP Inventory account for each department
DM, DL, OH costs can be entered directly into either production
departments WIP Inventory account, not just the first department
Transfer of costs from a department subsequent departments FG
Inventory Cost of goods sold

Transfer-in-costs (TI): costs of goods completed in the prior department

and transferred into the department during the period
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
5 Steps in Process
Costing
<
Analyze the physical flow of physical units. Analyze the physical flow of physical units.
O
Calculate equivalent units of production for all Calculate equivalent units of production for all
manufacturing cost elements. manufacturing cost elements.
O
Determine total cost for each manufacturing cost Determine total cost for each manufacturing cost
element. element.
O
Compute cost per equivalent unit for each Compute cost per equivalent unit for each
manufacturing cost element. manufacturing cost element.
O
Assign the total manufacturing costs to units completed Assign the total manufacturing costs to units completed
and units of work in process at the end of the period. and units of work in process at the end of the period.
________
________
________
________
________
________
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Process Costing Method
Weighted-Average Method
__________________
__________________
__________________
__________________

Blends together units and

costs in beginning inventory
with units and costs in the
current period.
FIFO Method

__________________
__________________
__________________

Assumes units in
beginning work in process
inventory are completed
and transferred first.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Weighted Average vs FIFO
Which one is better?

FIFO costing results in a current period cost that can be

used for performance evaluation.

If there is no beginning inventory (JIT) or if beginning

inventory is small, FIFO and weighted-average produce
the same results.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Ex 1: Basic Process Costing
(No Beginning Inventory)
Adapted from Horngren et al. (2002) page 587
XYC Inc. produces portable CD players in large quantities. Assume that the
company has two departments, assembly and testing. The manufacturing
costs in Assembly Dept during February were:
Assume no beginning inventory of WIP. Suppose work on 19,000 CD players
was begun in the assembly department during February, but only 17,000 CD
players were fully completed. All the parts had been made or placed in
process, but only half the labor had been completed for each of the CD
players still in process
Compute the costs of units completed and transferred to the Testing
Dept and the cost of ending WIP.
DM added
DL
OH
$60,800
$50,000
$40,000
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Ex 2: Process Costing
(with beginning inventory; use weighted-Average)
Adapted from Horngren et al. (2002) page 587
ABC Inc. manufactures electric drills. Material is introduced at the beginning
of the process in the Assembly Department. Conversion costs are applied
uniformly throughout the process. As the process in completed, goods are
immediately transferred to Finishing Dept.
Data for the Assembly Dept for the July 20X1:
WIP, June 30: $175,500 .. 10,000 units
($138,000 materials and $37,500 conversion costs); completed for DM but only 25%
completed for conversion costs
Units started during July .. 80,000 units
Units completed during July ... 70,000 units
WIP, July 31: 100% completed for DM, but only 50% completed for conversion costs
.. 20,000 units
DM added during July.. $852,000
Conversion costs added during July $634,500
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Process Costing with
Multiple Departments

Multiple departments in a process result in units and costs that are

transferred from a prior department to the current department.

These transferred-in costs are treated exactly like a direct material

that is added at the beginning of a production process.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Ex 3: Process Costing with Transferred In
Costs
Prior
Departme
nt's Costs
Direct
Materials
Conversion
Costs
Physical flow:
Beginning inventory 2000 100% 40% 80%
Ending inventory 4000 100% 25% 60%
Unit started (transferred in) 12000 100%
Started and completed 8000 100% 100% 100%
Costs incurred:
Beginning inventory 5,000 $ 2,000 $ 1,000 $
Current Costs 52,000 $ 20,000 $ 7,000 $
Deparment Costs
Units