3.3: Process Costing Calculations for a Department in a Manufacturing Company

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Goals of process costing are to determine a manufacturing department’s cost of finished goods during a month and the cost of work in process at the end of that month. An example of the process follows.

Information for production in the Packaging Department for May is as follows:

Beginning work in process, May 1: 5,900 units, 20% completed (1)	$102,896
Direct materials costs in May for 44,700 units	599,427
Direct labor costs incurred in May	589,323
Factory overhead costs incurred in May	314,601

A grid is used to organize the unit (not dollar) information above and to calculate key amounts.

The first step is to classify the units into one of three groups in the whole units column based on when they were started and completed according to the information given.

Group	Whole Units	Equivalent Units of Production for Materials	Equivalent Units of Production for Conversion Costs
(1) Started in April; Completed in May	(1) 5,900
(2) Started in May; Completed in May	(2) 37,400
(3) Started in May; Completed in June	(3) 7,300
TOTAL	(4) 50,600

(1) Group 1 consists of 5,900 (given) units started the previous month and completed this month.

(2) Group 2 includes 37,400 units that are both started and completed this month. This amount must be calculated in one of two ways.

Total completed in May (43,300) minus those started in April (5,900) = 37,400
Total started in May (44,700) minus those not completed in May (7,300) = 37,400 (Remember the assumption that the job is started when materials are added.)

(3) Group 3 has 7,300 (given) units started this month to be completed next month.

(4) Total whole units equals the sum of the whole units in the three groups:

5,900 + 37,400 + 7,300 = 50,600

The second step is to classify the units into one of three groups in the equivalent units of production for materials column based on when they were started and completed according to the information given. Remember the assumption is that materials are added when a batch is started. Equivalent units of production for materials equals the number of units in each group that had materials added in May.

Group	Whole Units	Equivalent Units of Production for Materials	Equivalent Units of Production for Conversion Costs
(1) Started in April; Completed in May	(1) 5,900	(5) 0
(2) Started in May; Completed in May	(2) 37,400	(6) 37,400
(3) Started in May; Completed in June	(3) 7,300	(7) 7,300
TOTAL	(4) 50,600	(8) 44,700

The first group was started in April, so none of the whole units had materials added in May (all were added in April, when started). The second and third groups were started in May, so all of the whole units had materials added in May.

(5) Group 1: The equivalent units of production for materials is zero.

(6) Group 2: The equivalent units of production is the same as the whole units amount, 37,400.

(7) Group 3: The equivalent units of production is the same as the whole units amount, 7,300.

(8) Total materials equals the sum of the materials in the three groups.

Calculation: 0 + 37,400 + 7,300 = 44,700

The third step is to classify the units into one of three groups in the equivalent units of production for conversion costs (direct labor and factory overhead) column based on when they were started and completed according to the information given.

Group	Whole Units	Equivalent Units of Production for Materials	Equivalent Units of Production for Conversion Costs
(1) Started in April; Completed in May	(1) 5,900	(5) 0	(9) 4,720
(2) Started in May; Completed in May	(2) 37,400	(6) 37,400	(10) 37,400
(3) Started in May; Completed in June	(3) 7,300	(7) 7,300	(11) 2,190
TOTAL	(4) 50,600	(8) 44,700	(12) 44,310

Group

Whole Units

Equivalent Units of Production for Materials

Equivalent Units of Production for Conversion Costs

(1) Started in April; Completed in May

(1)

5,900

(5)

(9)

4,720

(2) Started in May; Completed in May

(2)

37,400

(6)

37,400

(10)

37,400

(3) Started in May; Completed in June

(3)

7,300

(7)

7,300

(11)

2,190

TOTAL

(4)

50,600

(8)

44,700

(12)

44,310

Equivalent units of production for conversion costs uses the percentages of conversion costs completed in May that are given to mathematically convert partial units to whole units for costing purposes. The equivalent units of production for conversion costs equals the number of whole units times the percentage of conversion that takes place in May.

(9) Group 1: The units were already 20% complete at the beginning of May, so the remaining 80% of the conversion costs are incurred in May.

Calculation: 5,900 x 80% = 4,720

(10) Group 2: These units are started and completed in May, so 100% of the conversion costs takes place in May.

Calculation: 37,400 x 100% = 37,400

(11) Group 3: Only 30% of the conversion costs takes place in May. The remaining conversion will take place in June.

Calculation: 7,300 x 30% = 2,190

(12) Total equivalent units of production for conversion costs equals the sum of the three groups.

Calculation: 4,720 + 37,400 + 2,190 = 44,310

Example

Think of equivalent units of production for conversion costs like this. You have 8 one-gallon buckets in your backyard. It starts to pour rain. When the rain stops, you go out and see that each bucket is 3/4 full. Mathematically you can convert this to say that the same amount of water would make 6 of the buckets 100% full (8 x 3/4). It is highly unlikely that it would rain in such a way that only one bucket would fill at a time. But after the rain stopped, you could empty two of the buckets by filling the other six.

(If you had to carry the water a mile and could only carry two buckets at a time, combining them would save you one trip! You would only have to go three times rather than four!)

The following dollar amounts should now be calculated from the information given, as follows:

Total conversion costs in May
Calculation: $589,323 (direct labor) + $314,601 (factory overhead) = $903,924
Conversion cost per equivalent unit
Calculation: $903,924 total conversion cost /44,310 equivalent units = $20.40 per unit
Materials cost per unit started in May
Calculation: $599,427 total materials cost / 44,700 units started = $13.41 per unit
Cost per unit of work in process on May 1 (100% of materials + 20% of conversion costs)
Calculation: $102,896 total work in process cost / 5,900 units started = $17.44 per unit

In a process costing system, the cost of units transferred out of each department must be determined as well as the cost of any partially completed units remaining in the department. Based on the previous calculations, the following seven cost results can be determined. These amounts are the goals of process costing and can be used to determine progress and for comparison purposes over time.

Cost per unit of finished goods started in April and completed in May
Calculation: $17.44 + ($20.40 x 80%) = $17.44 + $16.32 = $33.76
Total cost of all finished goods started in April and completed in May
Calculation: $33.76 (from #1) x 5,900 whole units = $199,184
Cost per unit of finished goods started and completed in May
Calculation: $13.41 + $20.40 = $33.81
Total cost of all finished goods started and completed in May
Calculation: $33.81 (from #2) x 37,400 whole units = $1,264,494
Cost per unit of the work in process inventory on May 31
Calculation: $13.41 + ($20.40 x 30%) = $19.53
Total cost of the work in process inventory on May 31
Calculation: $19.53 (from #3) x 7,300 whole units = $142,569
Total cost of units transferred to Finished Goods
Calculation: $199,184 + $1,264,494 = $1,463,678

The following journal entries relate to the production activity for the Packaging Department in May.

Direct materials costs incurred for 44,700 units, $599,427 (given)

Account	Debit	Credit
Work in Process – Packaging Dept.	599,427		▲ Work in Process is an asset (inventory) account that is increasing
Materials		599,427	▼ Materials is an asset (inventory) account that is decreasing

Direct labor costs incurred, $589,323 (given)

Account	Debit	Credit
Work in Process – Packaging Dept.	589,323		▲ Work in Process is an asset (inventory) account that is increasing
Wages Payable		589,323	▲ Wages Payable is a liability account that is increasing

Factory overhead applied, $314,601 (given)

Account	Debit	Credit
Work in Process – Packaging Dept.	314,601		▲ Work in Process is an asset (inventory) account that is increasing
Factory Overhead – Packaging Dept.		314,601	▼ Factory Overhead is an expense account that is decreasing

Transfer of completed products to Finished Goods, $1,463,678

Account	Debit	Credit
Finished Goods	1,463,678		▲ Finished Goods is an asset (inventory) account that is increasing
Work in Process - Packaging Dept.		1,463,678	▼ Work in Process is an asset (inventory) account that is decreasing

The Work in Process - Packaging ledger account summarizes these transactions and balances.

Work in Process – Packaging Department
Date	Item	Debit	Credit	Debit
1.	Beginning work in process, May 1			102,896
2.	Materials added to production in May	599,427		702,323
3.	Labor added to production in May	589,323		1,291,646
4.	Overhead added to production in May	314,601		1,606,247
5.	Transferred to Finished Goods		1,463,678