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1. Systems Design:
Process Costing
Chapter
4

2. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 2
Types of Costing Systems Used to
Determine Product Costs
Job-order
Costing
Process
Costing
Many units of a single, homogeneous product
flow evenly through a continuous production
process.
One unit of product is indistinguishable from any
other unit of product..
Each unit of product is assigned the same
average cost.
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill

3. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 3
Job order costing
Many jobs are worked
during the period.
Costs are accumulated
by individual jobs.
Job cost sheetis the
key document.
Unit cost computed by
job.
Process costing
A single product is
produced for a long
period of time.
Costs are accumulated
by departments.
Department production
reportis key document.
Unit costs are computed
by department.
Differences Between Job-Order and
Process Costing

4. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 4
Sequential Processing Departments
Processing
Department 1
Processing
Department 2
Processing
Department 3
Finished Goods
Start
Basic raw
materials
Processing
costs
Partially completed goods
Partially completed goods
Processing
costs
Completed goods
Processing
costs

5. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 5
Parallel Processing Departments
Processing
Department 1
Processing
Department 2
Processing
Department 3
Finished Goods
Start
Basic raw
materials
Processing
costs
Partially completed goods
Partially completed goods
Processing
costs
Completed goods
Processing
costs
Processing
Department A

6. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 6
Flow of Materials, Labor and
Overhead Costs
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Processing
Department
Direct Material
Manufacturing
Overhead

7. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 7
Raw Materials
PurchasesDirect
Material
Other
Overhead
Manufacturing
Overhead
Flow of Materials, Labor and
Overhead Costs
Work in Process
FinishingDepartment
Work in Process
MixingDepartment
Direct
Material
Direct
Material
Indirect
Material
Indirect
Material
Actual Applied

8. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 8
Wages Payable
Direct
Material
Direct
Material
Flow of Materials, Labor and
Overhead Costs
Direct
Labor Direct
Labor
Direct
Labor
Indirect
Labor
Other
Overhead
Manufacturing
Overhead
Indirect
Material
Actual Applied
Indirect
Labor
Work in Process
FinishingDepartment
Work in Process
MixingDepartment

9. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 9
Wages Payable
Direct
Material
Direct
Material
Flow of Materials, Labor and
Overhead Costs
Direct
Labor Direct
Labor
Direct
Labor
Indirect
Labor
Overhead
Applied to
Work in
Process
Applied
Overhead
Applied
Overhead
Other
Overhead
Manufacturing
Overhead
Indirect
Material
Actual Applied
Indirect
Labor
Work in Process
FinishingDepartment
Work in Process
MixingDepartment

10. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 10
Flow of Materials, Labor and
Overhead Costs
Now, let’s transfer the partially
completed goods from
Mixing Department
to
Finishing Department.

11. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 11
Flow of Materials, Labor and
Overhead Costs
Direct
Material
Direct
Labor
Applied
Overhead
Direct
Material
Direct
Labor
Applied
Overhead
Transferred
to Finishing
Transferred
from Mixing
Work in Process
FinishingDepartment
Work in Process
MixingDepartment

12. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 12
Flow of Materials, Labor and
Overhead Costs
The goods have been completed in the
Finishing Department and will be
transferred to Finished Goods Inventory
when they are ready to be sold.

13. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 13
Finished Goods
Cost of Goods Sold
Flow of Materials, Labor and
Overhead Costs
Direct
Material
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Cost of
Goods
Sold
Cost of
Goods
Sold
Cost of
Goods
Manufactured
Cost of
Goods
Manufactured
Work in Process
FinishingDepartment

14. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 14
Materials, Labor, and Overhead
Cost Entries GENERAL JOURNAL Page 4
Date Description Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.
Work in Process - Mixing Department XXXXX
Work in Process - Finishing Department XXXXX
Raw Materials XXXXX
To record the use of direct material.

15. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 15
Flow of Materials, Labor and
Overhead Costs GENERAL JOURNAL Page 4
Date Description Debit Credit
Work in Process - Mixing Deparment XXXXX
Work in Process - Finishing Department XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.

16. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 16
Flow of Materials, Labor and
Overhead Costs GENERAL JOURNAL Page 4
Date Description Debit Credit
Work in Process - Mixing Department XXXXX
Work in Process - Finishing Department XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.

17. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 17
Flow of Materials, Labor and
Overhead Costs GENERAL JOURNAL Page 4
Date Description Debit Credit
Work in Process - Finishing Department XXXXX
Work in Process - Mixing Department XXXXX
To record the transfer of goods from
Mixing to Finishing.

18. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 18
Flow of Materials, Labor and
Overhead Costs GENERAL JOURNAL Page 4
Date Description Debit Credit
Finished Goods XXXXX
Work in Process - Finishing Department XXXXX
To record the completion of goods and their
transfer from the Finishing Department
to finished goods inventory.

19. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 19
Flow of Materials, Labor and
Overhead Costs GENERAL JOURNAL Page 4
Date Description Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.

20. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 20
Equivalent Units of Production
Equivalent units are partially complete and are part of
work in process inventory. It is the concept of
expressing partially completed products as a
smaller number of fully completed units.
+ =
Two one-half completed products are equivalent to
one completed product. So, 10,000 units 70%
complete are equivalent to7,000 complete units.

21. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 21
For the current period, Matrix 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
Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick 

22. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 22
For the current period, Matrix 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
Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick 
10,000 units + (5,000 units ×.30)
= 11,500 equivalent units

23. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 23
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

24. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 24
Now assume that Matrix incurred $27,600
in production costs for the 11,500
equivalent units of production. What
was Matrix’s cost per equivalent unit for
the period?
a.$1.84
b.$2.40
c.$2.76
d.$2.90
Quick 

25. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 25
Now assume that Matrix incurred $27,600
in production costs for the 11,500
equivalent units of production. What
was Matrix’s cost per equivalent unit for
the period?
a.$1.84
b.$2.40
c.$2.76
d.$2.90
Quick 
$27,600 ÷11,500 equivalent units
= $2.40 per equivalent unit

26. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 26
Weighted Average MethodUnits transferred to the next
department or to finished goods 10,000
Equivalent units in ending work in
process inventory +4,200
Equivalent units of production =14,200
Under the weighted-average method equivalent
units will always be calculated as follows:

27. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 27
Weighted Average Method
Matrix, Inc. reported the following activity in
Mixing Department for the month of June:Percent Completed
UnitsMaterialsConversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400 100% 100%
of the Mixing Department during June
Work in process, June 30 900 60% 30%

28. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 28
Equivalent units are calculated as follows:
Weighted Average MethodMaterialsConversion
Units completed and transferred
out of Mixing in June 5,400 5,400

29. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 29
Equivalent units are calculated as follows:
Weighted Average MethodMaterialsConversion
Units completed and transferred
out of Mixing in June 5,400 5,400
Work in process June 30
(900 units x 60% complete) 540

30. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 30
Equivalent units are calculated as follows:
Weighted Average MethodMaterialsConversion
Units completed and transferred
out of Mixing in June 5,400 5,400
Work in process June 30
(900 units x 60% complete) 540
(900 units x 30% complete) 270
Equivalent units of production
in the Mixing Deparment 5,940 5,670
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process

31. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 31
Beginning
Work in Process
300 Units
40% Complete
Ending
Work in Process
900 Units
60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Started
and Completed
Weighted Average Method
Materials
5,400 Units Completed
540 Equivalent Units
900 ×60%
5,940 Equivalent units
of production

32. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 32
6,000 Units Started
5,400 Units Completed
270 Equivalent Units
900 ×30%
5,670 Equivalent units
of production
Weighted Average Method
Conversion
Beginning
Work in Process
300 Units
40% Complete
Ending
Work in Process
900 Units
30% Complete
5,100 Units Started
and Completed

33. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 33
Production Report
Production
Report
Section 1
Section 2
Section 3
A computation of cost per
equivalent unit.
Quantity schedule with
computation of equivalent units.
A reconciliation of cost flows
for the period.

34. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 34
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

35. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 35
Work in process, May 1: 200 units
Materials: 50% complete. $ 3,000
Conversion: 30% complete. 1,000
Units started into production in May: 5,000
Units completed and transferred out in May:4,800
Costs added to production in May
Materials cost $ 74,000
Conversion cost 70,000
Work in process, May 31: 400 units
Materials 40% complete.
Conversion 25% complete.
Cost
Production Report Example

36. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 36
Step:Quantity Schedule with Equivalent Units
Production Report Example Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
MaterialsConversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800

37. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 37
Production Report Example Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
MaterialsConversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900
Step:Quantity Schedule with Equivalent Units

38. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 38
Section: Compute cost per equivalent unit
Production Report ExampleTotal
Cost MaterialsConversion
Cost to be accounted for:
Work in process, May 1 4,000$ 3,000$ 1,000$
Costs added in the Shipping
and Milling Department 144,000 74,000 70,000
Total cost 148,000$ 77,000$ 71,000$
Equivalent units 4,960 4,900

39. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 39
Production Report ExampleTotal
Cost MaterialsConversion
Cost to be accounted for:
Work in process, May 1 4,000$ 3,000$ 1,000$
Costs added in the Shipping
and Milling Department 144,000 74,000 70,000
Total cost 148,000$ 77,000$ 71,000$
Equivalent units 4,960 4,900
Cost per equivalent unit 15.524$
$77,000 ÷4,960 units = $15.524 (rounded)
Section: Compute cost per equivalent unit

40. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 40Total
Cost MaterialsConversion
Cost to be accounted for:
Work in process, May 1 4,000$ 3,000$ 1,000$
Costs added in the Shipping
and Milling Department 144,000 74,000 70,000
Total cost 148,000$ 77,000$ 71,000$
Equivalent units 4,960 4,900
Cost per equivalent unit 15.524$ 14.490$
Total cost per equivalent unit = $15.524 + $14.490 = $30.014
Production Report Example
$71,000 ÷4,900 units = $14.490 (rounded)
Section: Compute cost per equivalent unit

41. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 41
Section : Cost Reconciliation
Production Report ExampleTotal Equivalent Units
Cost MaterialsConversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for

42. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 42Total Equivalent Units
Cost MaterialsConversion
Cost accounted for as follows:
Transferred out during May144,067$ 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
4,800 units @ $30.014
Production Report Example
Section : Cost Reconciliation

43. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 43Total Equivalent Units
Cost MaterialsConversion
Cost accounted for as follows:
Transferred out during May144,067$ 4,800 4,800
Work in process, May 31:
Materials 2,484 160
Conversion 1,449 100
Total work in process, May 313,933
Total cost accounted for 148,000$
160 units @ $15.524
Production Report Example
100 units @ $14.49
All costs
accounted for
Section : Cost Reconciliation

44. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 44
End of Chapter 4