Chapter 4 Notes
A. Process costing is used in industries that produce homogeneous products such as
bricks, flour, and cement. It is also used in some assembly-type operations, as well as in
utilities producing gas, water, and electricity.
B. Process costing is similar to job-order costing in three ways:
1. Both systems have the same basic purposes, which are to assign material,
labour, and overhead costs to products and to provide a mechanism for
computing unit costs.
2. Both systems use the same basic manufacturing accounts: Manufacturing
Overhead, Raw Materials, Work in Process, and Finished Goods.
3. Costs flow through these accounts in basically the same way in both systems.
C. Process costing differs from job order costing in four ways:
1. A single product is produced on a continuous basis, and each unit is
2. Costs are accumulated by department, rather than by job.
3. The department production report (rather than the job cost sheet) is the key
document showing the accumulation and disposition of cost.
4. Unit costs are computed by department (rather than by job). This computation
is made on the department production report.
D. A processing department is any work center where work is performed on a product
and where materials, labour, or overhead costs are added. Processing departments in a
process costing system have two common features. First, the activity carried out in the
department is performed uniformly on all units passing through it. Second, the output of
the department is basically homogeneous.
E. Less effort is usually required to use a process costing system than a job-order
costing system; costs only need to be traced to a few processing departments, rather
than to many individual jobs.
F. Exhibit 4-3 provides a T-account model of cost flows in a process costing system. A
separate work in process account is maintained for each processing department.
Materials, labour, and overhead costs are entered directly into each processing
departments work in process account. G. Separate computations are made within each processing department for each cost
category. The cost categories may include:
1. Costs of prior departments associated with units transferred into the
2. Materials costs added in the department.
3. Direct labour costs added in the department.
4. Manufacturing overhead costs applied in the department.
In process costing, direct labour costs and manufacturing overhead costs are often
combined into one cost category called conversion costs.
H. Once the costs in each category have been totalled for a department, the
departments output must be determined so that unit costs can be computed. Units that
have only been partially completed pose a problem. A unit that is only 10% complete
should not count as much as a unit that has been completed and transferred on to the
next department. This is where the concept of equivalent units comes in.
1. Equivalent units are the number of whole, complete units one could obtain
from the materials and effort contained in partially completed units. Equivalent
units are computed using the following formula:
Equivale Number of Percentag
nt = partially e
units completed completio
2. Equivalent units of production is used to compute the cost per equivalent unit.
Study Exhibit 4-6 carefully to develop an understanding of the equivalent unit
concept. Under the weighted-average method, the equivalent units of
production are determined as follows:
Units transferred out to the
next department or to
finished goods....... XXX
Equivalent units in ending work
Equivalent units of
= production.............. XXX
3. The equivalent units of production are computed separately for each cost
category. I. Note the following points concerning process costing.
1. The equiva