Chapter 4
Process Costing
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.
Sequential Processing Departments
T-Account Model of Process Costing Flows
Process Costing and Direct Labor
Dollar Amount
Direct
Materials
Direct
Labor
Direct labor costs
may be small
Mfg. Ovhd.
in comparison to
other product
costs in process
cost systems.
Type of Product Cost
Process Costing and Direct Labor
Dollar Amount
Direct
Materials
Direct labor costs
Conversion
may be small
in comparison to
other product
costs in process
cost systems.
Type of Product Cost
Direct labor and manufacturing overhead may be
combined into one product cost called conversion.
Example A – January
No Beginning/No Ending Inventory
Work in process, January 1:
Manufacturing Costs in Beginning Inventory:
0 units
$0
Production started during January:
Production completed during January:
1,000 units
1,000 units
Costs added to production in January:
$50,000
Work in process, January 31:
Manufacturing Costs in Ending Inventory:
0 units
$0
Manufacturing Costs transferred out in January:
?
Example A – February
No Beginning/Some Ending Inventory
Work in process, February 1:
Manufacturing Costs in Beginning Inventory:
0 units
$0
Production started during February:
Production completed during February:
1,000 units
800 units
Costs added to production in February
$45,000
Work in process, February 28 (50% complete):
Manufacturing Costs in Ending Inventory:
Manufacturing Costs transferred out in February:
200 units
?
?
Equivalent Units of Production
Equivalent units are the product of the number of partially
completed units and the percentage completion of those
units. Partially completed units are thus expressed in terms
of a smaller number of fully completed units
Equivalent Units of Production
Two half completed products are
equivalent to one completed product.
+
=
1
So, 10,000 units 70 percent 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
Calculating and Using Equivalent
Units of Production
To calculate the cost per
equivalent unit for the period:
Cost per
equivalent
unit
=
Costs for the period
Equivalent units of production
for the period
Quick Check 
Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent unit
for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Example A – March
Some Beginning/Some Ending Inventory
Work in process, March 1 (50% complete):
Manufacturing Costs in Beginning Inventory:
200 units
$5,000
Production started during March:
Production completed during March:
1,500 units
1,200 units
Costs added to production in March
$65,000
Work in process, March 31 (40% complete):
Manufacturing Costs in Ending Inventory:
500 units
?
Manufacturing Costs transferred out in March:
?
Equivalent Units of Production
Weighted-Average Method
The weighted-average method . . .
1. Blends together costs from prior and current periods.
2. 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.
3. Ignores percentage completion of the Beginning
Inventory
Weighted-Average Method
• For each category of cost (material and
conversion) in each processing department the
following calculations are made:
Costs to be
Costs of
Costs added
accounted = beginning WIP + during the
for
inventory
current period
Equivalent
Units
Equivalent units
units of = transferred + of ending WIP
production
out
inventory
Weighted-Average Method
Cost per = Costs to be accounted for
EU
Equivalent units of production
Costs of units =
Units
× Cost
transferred out
transferred out
per EU
Costs of units in
= Equivalent units of × Cost
ending WIP inventory
ending WIP inventory
per EU
Production Report Example
Double Diamond Skis uses process costing to
determine unit costs in its Shaping and Milling
Department.
Double Diamond uses the weighted average cost
procedure.
Using the following information for the month of
May, let’s prepare a production report for Shaping
and Milling.
Production Report Example
Work in process, May 1:
Materials:
Conversion:
55% complete
30% complete
200 units
$ 9,600
5,575
Production started during May:
Production completed during May:
5,000 units
4,800 units
Costs added to production in May:
Materials cost
Conversion cost
$ 368,600
350,900
Work in process, May 31:
Materials
Conversion
400 units
40% complete
25% complete
Manufacturing Costs in Ending Inventory:
?
Manufacturing Costs transferred out in May:
?
Production Report Example
Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for:
Work in process, May 1
Started into production
Total units
200
5,000
5,200
Equivalent units
Conversion
Materials
Units accounted for as follows:
Completed and transferred
Work in process, May 31
Materials 40% complete
Conversion 25% complete
4,800
400
4,800
4,800
160
5,200
4,960
100
4,900
Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
$
15,175
Materials
Conversion
$
$
9,600
5,575
719,500
368,600
350,900
$ 734,675
$ 378,200
$ 356,475
4,960
4,900
Cost per equivalent unit
$ 76.25
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
$
72.75
Production Report Example
Section 3: Cost Reconciliation
4,800 units @ $149.00
Cost accounted for as follows:
Transferred out during May
Work in process, May 31:
Materials
Conversion
Total work in process, May 31
Total cost accounted for
Total
Cost
$ 715,200
Equivalent Units
Materials Conversion
4,800
4,800
160
100
Production Report Example
Section 3: Cost Reconciliation
160 units @ $76.25
Cost accounted for as follows:
Transferred out during May
Work in process, May 31:
Materials
Conversion
Total work in process, May 31
Total cost accounted for
Total
Cost
Equivalent Units
Materials
100 units @Conversion
$72.75
$ 715,200
4,800
12,200
7,275
160
19,475
All costs
accounted for
$ 734,675
4,800
100