Process Costing



This will be our first video in the process cost series discussing the differences between top costing and process costing. Let us first talk about job costing. As we have talked before in job costing, we can have three different job costing accounts: Job 100, Job 101, Job 102; and each of those jobs will have a certain amount of product cost. Direct material, direct labor, and overhead are what make up our product cost. Once we have completed those jobs, they move into finished goods, we simply sell the job, and it becomes cost of goods sold. Now if you look at this into t-accounts, we see materials move to work in process. Labor (whether it be direct or indirect) are credited to wages payable and are applied to work in process. Remember, our materials and our labor are a direct cost—they are directly traceable to a job. Overhead is applied to work in process, the sum allocation rate we have created based on estimates in a cost driver. Then once the job is completed, it moves from work in process with a credit to finished goods with a debit. Then we sell the good, credit finished goods, debit cost of goods sold. So in job costing, we can’t have individual work in process account for every job, whereas in process costing we will have a work in process account for process that a product may have to go through. So remember, process costing is when we continually produce the exact same product over and over; for example, number two pencils. In this scenario, let’s say we are creating Jelly Belly jellybeans. So the first process the jelly bean has to go through is the center, we have to create the center of the product first. In the centers process, we are going to need a certain amount of direct materials, a certain amount of direct labor, and a certain amount of manufacturing overhead. Then once the center of the jelly belly is complete, the center is then transferred to the shells process. In the shells process we need additional materials, labor and overhead because it’s likely that we have different labor (different people) completing the shells process than were completing the centers process. So we have different labor, we probably have different types of materials and it may be in a different building altogether. Then once the shells have been added to the jelly belly, they must be packaged. The shelled JellyBellies would be moved to packaging, where we would likely need more materials, labor and overhead. Then once it goes through the final process, it is transferred into finished goods, where it waits to be sold, and once it is costed as costs of goods sold. If we look at this process in T accounts we find again where our materials move into each process as they’re needed. Labor moves into each process as it is needed and overhead is applied to each process as it is needed. Once the product gets through the final process, it moves into finished goods and waits to be sold, then it moves into cost of goods sold.


This is the second video in our process costing series, we’ll actual be looking at the computation of equivalent units. So the three things we need to know when we’re using process costing, we’ll call these the building blocks of process costing: the first one is the fact that we’re not going to distinguish between all three product costs, which are direct materials, direct labor, and overhead. In process costing, we really separate the three into two categories, the first one being direct materials, the second category being conversion cost. And recall that conversion costs are made up of your direct labor and your manufacturing overhead. We’ll also need to know the idea of equivalent units, which we’re going to talk about here in a second, as well as the inventory flow assumption that we’re considering. We’re going to focus on the weighted average inventory flow assumption for a couple reasons. Number one, it is the easiest to use. Companies in the real world mainly use it. First in first out is a little more complicated, so it can be a little more costly…and the difference in the results between the two are very negligible. The only difference is how beginning inventory gets treated. So let’s first look at the computation of equivalent units. So here I’ve given us a timeline to look at and we can see that we’re looking at golf balls. And also, we need to know in process costing, typically we think of conversion cost as being added evenly throughout the process of the product. So as we can see here in blue, the conversion costs are added evenly throughout this process from beginning until the product is 100% complete. And if we look at materials, we have two different kinds of materials: rubber, which is added at the very beginning of the process; then we have packaging which is added at the very end of the process. And we notice that the golf balls are 80% complete, or 5,000 of them are 80% complete at the end of the period that we are discussing. So what we see here is that if rubber is added at the very beginning of the process, then they’re all completed as to rubber. Rubber won’t be added any more during the process. However, packaging isn’t added until the very end of the process, so what we can derive from this information is that we have 5,000 equivalent units as to rubber because rubber has been completely added at the very beginning of the process. Packaging, however, is not added until the end of the process. If we’re only 80% through the process, then none of the packaging has been added therefore we have no equivalent units as to packaging materials. And we need to also compute equivalent units as to conversion costs. Well if conversion costs are added evenly throughout the process and we have 5,000 golf balls that were started but not yet finished, and they’re 80% complete, then 80% of 5,000 golf balls…we’ve got an equivalent of 4,000 that have been completed with the amount of costs that have been added.
So let’s look at an example that isn’t really a product or job, but colleges and universities use the equivalent unit concept to describe the number of faculty as well as the number of students. The University of GA has about 2,000 full-time faculty and 400 part-time faculty. Assume the following:
1.     A full-time faculty member teaches six courses per year.
2.     100 part-time faculty teach three courses per year
3.     300 part-time faculty teach two courses per year
What is the “full-time equivalent” faculty – the number of equivalent units of faculty?
So push pause on your player, see if you can come up with the full-time equivalent faculty number for these three statistics here. So the first thing you would see is that a full-time faculty is a full-time faculty. So 2,000 teach 6/6 classes, making them full-time faculty. In number 2, we have 100 part-time faculty that teach 3 courses per year, which is actually half of a full-time faculty. So in number 2 we have 100 that teach 3/6 courses, because 6 would be a full-time faculty, so of the 100, those 100 half-time faculty equate to 50 full-time faculty. So in number three, those 300 that teach 2 courses per year equate to 100 full-time faculty. So our full-time equivalent faculty of the 2400 total faculty is 2,150.