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Process Costing System
Costing system where all product costs for the period are accumulated and divided evenly over all units produced.
Work in Process (WIP)
Inventory account that tracks partially completed goods in a manufacturing process.
Job Order Costing vs. Process Costing
Job order costing accumulates costs by job, while process costing accumulates costs by department.
Example of Companies Using Process Costing
Jelly Belly Candy Company, soft drink bottlers, and paint manufacturers like Sherwin Williams.
Cost Accumulation in Process Costing
Costs are accumulated by department rather than by job.
Stages of Production in Process Costing
Includes multiple work in process accounts such as Mixing, Baking, and Cooling.
Work in Process - Mixing
Account that tracks direct materials, labor, and overhead costs during the mixing stage of production.
Work in Process - Baking
Account that tracks costs incurred during the baking process.
Work in Process - Cooling
Account that tracks costs incurred during the cooling stage of production.
Journal Entry - Transfer of Costs Between Departments
Debit: Work in Process - Next Department XXX Credit: Work in Process - Previous Department XXX.
Similarities Between Job Order and Process Costing
Both accumulate direct materials, direct labor, and manufacturing overhead and track costs through inventory accounts.
Differences Between Job Order and Process Costing
Process costing mass produces identical products with continuous production, while job order costing tracks unique products.
Equivalent Units (EU)
Measure used in process costing that represents unfinished units in terms of completed units.
Equivalent Units Calculation
Add units completed and transferred out to the equivalent units of ending work in process.
Conversion Costs
Production costs that include direct labor and manufacturing overhead.
Calculating Equivalent Units Example
100,000 units at 60% completion are equivalent to 60,000 completed units.
Physical Unit Flow Calculation
Beginning WIP + Units Started = Units Transferred Out + Ending WIP.
Cost Reconciliation in Process Costing
Ensures that total costs from beginning inventory and new costs added match the total costs allocated.
Allocating Product Costs to Units
Equivalent cost per unit = Total costs / Equivalent units of production.
Cost per Equivalent Unit Calculation
Total costs for materials and conversion costs divided by equivalent units.
Ending WIP Cost Calculation
Multiply equivalent units in WIP by cost per equivalent unit.
Cost Transferred to Next Department
Multiply units transferred out by cost per equivalent unit.
Steps in Process Costing
Calculate physical unit flow, 2. Determine equivalent units, 3. Compute cost per equivalent unit, 4. Allocate costs, 5. Reconcile costs.
Journal Entry - Costs Added to WIP
Debit: Work in Process - Department XXX Credit: Raw Materials Inventory, Wages Payable, Overhead Applied XXX.
Journal Entry - Transferring Completed Goods
Debit: Finished Goods Inventory XXX Credit: Work in Process - Last Department XXX.
Cost Allocation for Partially Completed Units
Assign costs based on percentage of completion for materials and conversion costs.
Reconcile Costs Equation
Beginning WIP balance + Costs added = Costs transferred out + Ending WIP balance.
Key Document in Process Costing
Departmental production report.
Key Document in Job Order Costing
Job cost sheet.
Units Transferred Out Calculation
Beginning inventory + Units started - Ending inventory.
Cost Flow in Process Costing
Raw Materials → WIP 1 → WIP 2 → Finished Goods → Cost of Goods Sold.
Importance of Equivalent Units
Ensures fair cost allocation between completed and partially completed units.
Overhead in Process Costing
Applied to each department based on a predetermined overhead rate.
Equivalent Units for Materials vs. Conversion
Materials and conversion costs may have different completion percentages and require separate calculations.
Final Step in Process Costing
Reconciliation of all costs to ensure proper allocation and transfer of costs between departments.
Why Use Process Costing?
Suitable for industries with continuous production and homogeneous products.
Weighted Average vs. FIFO in Process Costing
Two methods to assign costs, with weighted average blending costs and FIFO keeping costs separate by period.
Cost per Unit in Process Costing
Total costs divided by total equivalent units.
Work in Process Inventory Role
Tracks production costs for unfinished goods at different production stages.
Transferred-in Costs
Costs accumulated in previous departments that carry forward to the next department.
Beginning Inventory Impact on Costing
Affects cost allocation depending on whether weighted average or FIFO is used.
Cost of Goods Manufactured (COGM) in Process Costing
Total manufacturing costs assigned to completed units during the period.
Cost of Goods Sold (COGS) in Process Costing
Cost assigned to finished goods sold during the period.
Process Costing in Decision Making
Helps managers determine pricing, budgeting, and cost control strategies.
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