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Systems Design: Process Costing
Chapter 4
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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.
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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.
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Comparing Job-Order and Process Costing
FinishedGoods
Cost of GoodsSold
Work inProcess
Direct Materials
Direct Labor
Manufacturing Overhead
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Comparing Job-Order and Process Costing
FinishedGoods
Cost of GoodsSold
Direct Labor
Manufacturing Overhead
ProcessingDepartment
Costs are traced and applied to departments
in a process cost system.
Direct Materials
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Raw Materials
Process Cost Flows: The Flow of Raw Materials (in T-account form)
Work in ProcessDepartment B
Work in ProcessDepartment A
•DirectMaterials
•DirectMaterials
•DirectMaterials
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Process Cost Flows: The Flow of Labor Costs (in T-account form)
Work in ProcessDepartment B
Work in ProcessDepartment A
Salaries and Wages Payable
•DirectMaterials
•DirectMaterials
•DirectLabor
•DirectLabor •Direct
Labor
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Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)
Work in ProcessDepartment B
Work in ProcessDepartment A
Manufacturing Overhead
•OverheadApplied to
Work inProcess
•AppliedOverhead
•AppliedOverhead
•DirectLabor
•DirectMaterials
•Direct Labor
•DirectMaterials
•Actual Overhead
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Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)
Work in Process Department B
Work in ProcessDepartment A
•DirectMaterials•DirectLabor
•AppliedOverhead
•DirectMaterials•DirectLabor
•AppliedOverhead
Transferredto Dept. B
•Transferredfrom Dept. A
DepartmentA
DepartmentB
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Finished Goods
Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form)
Work in ProcessDepartment B
•Cost ofGoods
Manufactured
•DirectMaterials•DirectLabor
•AppliedOverhead
•Transferredfrom Dept. A
•Cost ofGoods
Manufactured
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Equivalent Units – The Basic Idea
Two half completed products are equivalent to one complete product.
So, 10,000 units 70% completeare equivalent to 7,000 complete units.
+ = 1
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Equivalent Units of ProductionWeighted-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.
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Compute and Apply Costs
The formula for computing the cost per equivalent unit is:
Cost perequivalent
unit=
Cost of beginningWork in Process
Inventory Cost added during
the period
Equivalent units of production
+
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Operation Costing
Operation cost is a hybrid of jobOperation cost is a hybrid of job--order and order and process costing because it possesses attributes process costing because it possesses attributes
of both approachesof both approaches
Operation costing is Operation costing is commonly used when commonly used when
batches of many different batches of many different products pass through the products pass through the
same processing same processing department.department.
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End of Chapter 4
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