Chapter 4 Managerial Accounting PowerPoint

Process Costing and Hybrid
Product-Costing Syst
Chapter 4
Comparison of Job-Order Costing and
Process Costing
• In many ways, job-order costing and process costing are similar. Both product-costing systems have the same
ultimate purpose-assignment of production costs to units of output. Moreover, the flow of costs through the
manufacturing accounts is the same in the two systems.
• Flow of Costs: flow of costs in two process-costing situations; one with a single production department and
one with two production departments used in sequence.
• As goods are finished, costs are transferred to Finished-Goods Inventory. During the period when goods are
sold, the product costs are transferred to Cost of Goods Sold. In the two-department case, when goods are
finished in the first production department, costs accumulated in the Work-in-Process Inventory account for
production Department A are transferred to the Work-in-Process Inventory account for production
Department B
Flow of Costs
journal entries
1. As direct material and direct labor are used in production Department A, these costs are added to the Work-in-Process
Inventory account for Department A. Overhead is applied using a predetermined overhead rate. The predetermined
overhead rate is computed in the same way in job-order and process costing.
Work-in-Process Inventory: Production Department A .................................... 100,000
Raw-Material Inventory ........................................................................... 50,000

Wages Payable ........................................................................................ 20,000
Manufacturing Overhead ........................................................................ 30,000
2. When production Department A completes its work on some units of product, these units are transferred to production
Department B. The costs assigned to these goods are transferred from the Work-in-Process Inventory account for Department
A to the Work-in-Process Inventory account for Department B. In Department B, the costs assigned to these partially
completed products are called transferred-in costs.
Work-in-Process Inventory: Production Department B .................................... 80,000

Work-in-Process Inventory: Production Department A ........................... 80,000
3. Direct material and direct labor are used in production Department B, and manufacturing overhead is
applied using a predetermined overhead rate
Work-in-Process Inventory: Production Department B ..................................... 75,000
Raw-Material Inventory ............................................................................ 40,000
Wages Payable ......................................................................................... 15,000
Manufacturing Overhead ......................................................................... 20,000
4. Goods are completed in production Department B and transferred to the finished-goods warehouse.
Finished-Goods Inventory ............................................................................... 130,000
Work-in-Process Inventory: Production Department B .......................... 130,000
5. Goods are sold
Cost of Goods Sold ......................................................................................... 125,000
Finished-Goods Inventory ...................................................................... 125,000
Differences Between Job-Order and Process Costing
• In job-order costing, costs are accumulated by job order and recorded on job-cost records. The
cost of each unit in a particular job order is found by dividing the total cost of the job order by the
number of units in the job.
• In process costing, costs are accumulated by department, rather than by job order or batch. The cost per unit
is found by averaging the total costs incurred over the units produced.
Differences Between Job-Order and Process
Costing (cont.….)
• The term equivalent units is used in process costing to refer to the amount of manufacturing activity that has been applied to a
batch of physical units.
• equivalent units are the units in production multiplied by the percentage of those units that are complete or those that are in
process
Example: you’ve mixed enough sugar to make 600,000 units of candy. Assume that ending work in process is 25
percent complete for all components of production (material, labor, and overhead). (25 % of the units are
unfinished)
Units Complete Equivalent Units Total
Completed and
600,000 100 percent 600,000
transferred
Work in process,
600,000 25 percent 150,000
ending
Equivalent units 750,000
Cont.……
• suppose the total costs of $101,800.
Now the cost per unit = 101,800 / 750,000 = $0.1357
The important concept that under process costing, costs are

assigned to equivalent units rather than physical units.
Illustration of Process Costing
• Departmental production report: report replaces the job-cost record, which is used to accumulate costs
by job in a job-order costing system. The departmental production report summarizes the flow of production
quantities through the department, and it shows the amount of production cost transferred out of the
department’s Work-in-Process Inventory account during the period.
• The following four steps are used in preparing a departmental production report.
1. Analysis of physical flow of units.
2. Calculation of equivalent units (for direct material and conversion activity).
3. Computation of unit costs (i.e., the cost per equivalent unit for direct material and conversion).
4. Analysis of total costs (determine the cost to be removed from work in process
5. and transferred either to the next production department or to finished goods).
Weighted-Average Method of Process
Costing
• We have three type of costing inventory system
1. FIFO ( first-in-first-out)
2. LIFO (last-in-first-out)
3. WA (Weighted-Average)
Steps to preparing departmental production report using
weighted-average process costing.
• Step 1: Analysis of Physical Flow of Units
• The first step is to prepare a table summarizing the physical flow of production units during March
Ending W.I.P = Begging WIP + physical unit start - Units completed and transferred
Cont. …..
• Step 2: Calculation of Equivalent Units
The second step is to calculate the equivalent units of direct material and conversion activity.
Step 3: Computation of Unit Costs
• The third step in the process-costing procedure, calculating the cost per equivalent unit for both direct
material and conversion activity
• The cost per equivalent unit for direct material is computed by dividing the total direct-material cost,
including the cost of the beginning work in process and the cost incurred during March, by the total
equivalent units
Step 4: Analysis of Total Costs
• determining the total cost to be transferred out of the Cutting Department’s Work-in-Process
Inventory account and into the Stitching Department’s Work-in-Process Inventory account.
cont. …
• under weighted-average process costing, unit cost figures are weighted averages of costs incurred over two or
more accounting periods.
Hybrid Product-Costing Systems
• some production processes exhibit characteristics of both job-order

and process costing environments.
• Examples: clothing, food-processing
Operation Costing for Batch Manufacturing
Processes
• operation costing: product-costing system is used when conversion activities are very
similar across product lines, but the direct materials differ significantly.
• Conversion costs are accumulated by department, and process-costing methods are
used to assign these costs to products. In contrast, direct-material costs are
accumulated by job order or batch, and job-order costing is used to assign material
costs to products.
• Notice in the exhibit that products pass sequentially through production departments A and B.
Direct material costs are traced directly to each batch of goods, but conversion costs are applied
on a departmental basis. Direct labor and manufacturing overhead are combined in a single cost
category called conversion costs, rather than separately identifying direct labor. Moreover, under
operation costing, conversion costs are applied to products using a predetermined application
rate.
• each ball receives the same conversion costs in the Preparation
Department and the Finishing Department, since these operations are
identical for the two products. Direct-material costs and packaging
costs, though, differ for the products.
Journal entries
• Requisition of raw material
• Applied the conversion costs
• transfer of the partially completed basketballs from preparation department to finishing department
• The conversion costs applied in the Finishing Department are recorded as follows:
• The professional balls are transferred to the Packaging Department, and the scholastic balls are transferred to
finished goods.
• Raw-material (packaging) costs and conversion costs are recorded in the Packaging Department as follows:
• the professional basketballs are transferred to finished goods
Question
1. Explain the primary differences between job-order and process
costing.
2. What are the purposes of a product-costing system?
3. Define the term equivalent unit and explain how the concept is
used in process costing.
Q4) Rainbow Glass Company manufactures decorative glass products. The firm employs a process-costing system for its
manufacturing operations. All direct materials are added at the beginning of the process, and conversion costs are incurred
uniformly throughout the process. The company’s production schedule for October follows.
Required: Calculate each of the following amounts using weighted-average process costing.
1. Equivalent units of direct material during October.

2. Equivalent units of conversion activity during October

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Process Costing and Hybrid

Work-in-Process Inventory: Production Department A .................................... 100,000

Raw-Material Inventory ........................................................................... 50,000

Work-in-Process Inventory: Production Department B .................................... 80,000

The important concept that under process costing, costs are

• some production processes exhibit characteristics of both job-order

• Applied the conversion costs

1. Equivalent units of direct material during October.

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