ACCT 3420

Intermediate Managerial Accounting

Chapter 18

Process Costing

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Learning Objectives (1 of 2)
1. 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.
2. 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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Learning Objectives (2 of 2)
3. 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.
4. Analyze weighted-average, FIFO and standard-
costing methods of inventory valuation of cost of
goods manufactured and transferred out.
5. Apply process-costing methods to report
transferred-in costs and operations costing.
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Job-Costing and Process Costing: Opposite
Ends of a Continuum
Job-Costing Systems Process-Costing Systems

Distinct, identifiable units of Masses of identical or

a product or service similar units of a product
or service
Examples: Custom-made Examples: Food,
machines, Houses Chemical processing

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Process Costing (1 of 2)
• 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 (2 of 2)
• 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
(1 of 2)

• 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
(2 of 2)

• 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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Flow of Costs in Process Costing

Exhibit 18-5 Flow of Costs in a Process-Costing System, Assembly Department of Global Defence Inc. for
February

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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)

Exhibit 18-6 Summarizing the Flow of Production in Physical Units and Equivalent Units for the Assembly
Department of Global Defence Inc. for March—Case 3, Weighted-Average Method With Beginning
and Ending WIP Inventory

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Calculating Costs — Weighted-Average
(steps 3, 4 and 5)

Exhibit 18-7 Calculating Equivalent-Unit Costs and Assigning Costs to Completed Units and Ending WIP
Inventory for the Assembly Department of Global Defence Inc. for March—Case 3, Weighted-Average
Method With Beginning and Ending WIP Inventory

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FIFO Method (1 of 2)
• 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 (2 of 2)
• 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)

Exhibit 18-8 Summarizing the Flow of Production in Physical Units and Equivalent Units for the Assembly
Department of Global Defence Inc. for March—Case 3, FIFO Method With Beginning and Ending WIP
Inventory

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Calculating Costs – FIFO Method
(steps 3, 4, and 5)

Exhibit 18-9 Calculating Equivalent-Unit Costs and Assigning Costs to Completed Units and Ending WIP
Inventory for the Assembly Department of Global Defence Inc. for March—Case 3, FIFO Method With
Beginning and Ending WIP Inventory

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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

blank 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)

Exhibit 18-10 Summarizing the Flow of Production in Physical Units and Equivalent Units for the Assembly
Department of Global Defence Inc. for March—Standard Costing With Beginning and Ending WIP Inventory

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Calculating Costs – Standard Costing
(steps 3, 4, and 5)

Exhibit 18-11 Standard Costs per Equivalent-Unit and Assigning Costs to Completed Units and Ending WIP
Inventory for the Assembly Department of Global Defence Inc. for March—Case 3, Standard-Costing
Method With Beginning and Ending WIP Inventory

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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 hybrids.
– For example, Ford Motor Company manufactures
automobiles in a continuous flow, but each may be
customized for engine size, transmission, music
system etc.

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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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