Process Costing

PROCESS COSTING
•Concept
•Comparison of job-order and process costing

•Processing departments
•The flow of materials, labor and overhead costs
•Equivalent units of production
•Weighted average method
•Compute and apply the costs
•Cost reconciliation report
PROCESS COSTING
 Both the job order costing and process costing are
common methods for determining the unit product costs.
 Job order costing – used when many different jobs or
products are worked on each period.
 Process costing – is used most commonly in industries
that convert raw materials into homogeneous (i.e.,
Uniform)products, such as bricks, soda or paper, on a
continuous basis.
 In addition, process costing may also used in companies
with assembly operations. A form of process costing may
also be used in utilities that produce gas, water and
electricity.
COMPARISON OF JOB ORDER AND PROCESS
COSTING
 Similarities:
 Both systems have the same basic purposes – to assign
material, labor and manufacturing overhead costs to products
and to provide a mechanism for computing unit product
costs.
 Both systems use the same basic 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:
Job-order Costing Process Costing
•Many different jobs are worked on •A single product is produced either
during each period, with each job on a continuous basis or for long
having different production periods of time. All units of product
requirements. are identical.
•Costs are accumulated by individual •Costs are accumulated by
job. department.
•Unit costs are computed by job on •Unit costs are computed by
the job cost sheet. department
PROCESSING DEPARTMENT
 Is an organizational unit where work is performed on a
product and where materials, labor or overhead costs are
added to the product.
 Manufacturing of potato chips
Basic raw material input (potatoes) – Processing Department (potato preparation) –

Partially completed goods (prepared potatoes)– Processing Department (Cooking) –
Partially completed goods (cooked potato chips)– Processing Department (inspecting
and packing) – Finished Goods (packaged potato chips)
THE FLOW OF MATERIALS, LABOR, AND
OVERHEAD COSTS
Raw Materials
WIP – Department A Finished Goods
Wages Payable
WIP – Department B Cost of Goods Sold

Manufacturing Overhead
JOURNAL ENTRIES
 Materials costs
Work in Process - Formulating Xxx
Raw Materials Xxx
Work in Process - Bottling Xxx

Raw Materials Xxx
 Labor Costs
Work in Process – Formulating Xxx
Salaries and Wages Payable Xxx
 Overhead Costs
Manufacturing Overhead Xxx
 Completing the Costs Flows
Work in Process – Bottling Xxx
Finished Goods Xxx

Work in Process - Bottling Xxx
Costs of Goods Sold Xxx

Finished Goods Xxx
EQUIVALENT UNITS OF PRODUCTION
 Is the product of the number of partially completed units and the percentage
completion of those units with respect to the processing in the department.
 Is the number of complete units that could have been obtained from the
materials and effort that went into the partially complete units.
Equivalent units = Number of partially completed units x
percentage of completion
 These equivalent units are added to any units completed during the
period to determine the department’s output for the period – called
the equivalent units of production
 There are two ways on how to compute EUP:
 FIFO method – of process costing is a method in which equivalent units
and unit costs relate only to work done during the current period.
 Weighted Average method – blends together units and costs from the
current period with units and costs from the prior period.
WEIGHTED AVERAGE METHOD
WEIGHTED-AVERAGE METHOD
Equivalent units of production = Units transferred to the next department or to
finished goods + Equivalent units in ending work in process inventory
Percent Complete
Shaping and Milling Department Units Materials Conversion
Beginning Work in process 200 55% 30%
Units started into production during May 5,000
Units completed during May and 4,800 100% 100%
transferred to the next department
Ending work in process 400 40% 25%
COMPUTE AND APPLY COSTS
 Cost per Equivalent unit – Weighted Average Method
WEIGHTED AVERAGE METHOD
Cost per equivalent unit = Cost of beginning WIP inventory + Cost Added during the period
Equivalent units of production
Work in process, beginning:

Units in process 200
Completion with respect to materials 55%
Completion with respect to conversion 30%
Costs in the beginning inventory:
Materials costs 9,600
Conversion Costs 5,575
Total costs in the beginning inventory 5,175
Units started into production during the period 5,000
Units completed and transferred out 4,800
Costs added to production during the period:
Materials Costs 368,600
Conversion Costs 350,900
Total costs added in the department 719,500
Work in process, ending:
Units in process 400
Completion with respect to materials 40%
Completion with respect to conversion 25%
COST RECONCILIATION REPORT
 (This will be prepared during class discussion so pay
attention!)
SIMPLE EXERCISES:
 Beginning work in process includes 400 units that are 20%
complete with respect to conversion and 30% complete with
respect to materials. Ending work in process includes 200
units that are 40% complete with respect to conversion and
50% complete with respect to materials. If 2,000 units were
started during the period, what are the equivalent unit of
production for the period according to the weighted average
method?
 Assume the same facts above. Also assume that Php 9,900 of
material costs ate Php 14,880 of conversion costs were in the
beginning inventory and Php 180,080 of materials and Php
409,200 of conversion costs were added to production during
the period. What is the total cost per equivalent unit using the
weighted average method?

Process Costing

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PROCESS COSTING

•Comparison of job-order and process costing

Basic raw material input (potatoes) – Processing Department (potato preparation) –

WIP – Department A Finished Goods

WIP – Department B Cost of Goods Sold

Work in Process - Bottling Xxx

Finished Goods Xxx

Costs of Goods Sold Xxx

Work in process, beginning:

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