1. Examples: Industries using process costing include paper, petroleum, chemical, textiles, food processing, lumber and electronics.

1. Comparing Job-Order and Process Costing:

1. Similarities generally: In many ways, job-order costing and process costing are similar.

1. Same purpose: Both product-costing systems have the same ultimate purpose—assignment of production costs of units.
2. Flow similar: The flow of costs through the manufacturing accounts is the same in the two systems.

1. Example: See Exhibit 4-1 (Text at p. 121).

1. Differences generally: In job-order costing, costs are accumulated by job order and recorded on job-costing sheets. In process costing, costs are accumulated by department, rather than by job order or batch.

1. Equivalent Units—A Key Concept

1. Conversion + direct material applied: The term equivalent unit cost refers to conversion and direct-material dollars applied to physical units after adjusting the stage of completion.
2. Physical and equivalent units equal in completed batch: If a batch of goods has been completed, the number of physical units and equivalent units will be the same.
3. Work-in-Process only partially completed: The units in ending Work-in-Process Inventory are only partially completed and may be in different stages of production.

1. Example: 100% of materials may be present in the product, but only 50% if the conversion work (labor and overhead) may have been produced.

1. Conversion costs added continuously: Conversion costs are usually added continuously throughout the process.

1. Example: If 100 units are 60% of the way through the process, 60 equivalent units have been produced. Notice that none of the units are completed—the firm is said to have done the work equivalent to manufacturing 60 finished units.

1. Direct material added at specific points: Direct materials are usually added at discrete points in the process in text problems.

1. Consider when material added: When considering materials, determine at what point the ending in-process costs are and evaluate whether or not the materials have been added.
2. Once added 100% complete: If added, the units are 100% complete with respect to materials; if not, the units are 0% complete.

1. Unit cost based on equivalent units: When computing the cost of a unit, we based the related calculations on equivalent units, not physical units. The procedure states fully-completed units on the same measurement scale as partially-completed units, thus avoiding the addition (combination) of "apples and oranges."
2. Next divide costs by equivalent units: Next, the cost of direct materials and conversion is divided by the proper number of equivalent units for each of these production elements.
3. Using physical units will understate costs: If total costs are divided by physical units, the cost per units will understate the true cost of making a finished product.

1. Production reports:

1. Departmental production reports: These reports are completed to derive the preceding information (i.e., equivalent units, units costs, cost of completed production, and cost of ending work-in-process).
2. Production report components: Production reports have several sections that are completed as follows:

1. Analyze flow: Analyze the physical flow of actual units.
2. Calculate equivalent units: Calculate the equivalent units for the various direct materials and conversion.
3. Calculate unit cost: Calculate the cost per equivalent unit.
4. Analyze total costs: Analyze the total costs to determine the cost of completed production and the cost of ending work-in-process inventory.

1. Note: Step d is accomplished by multiplying equivalent units (step b) by the equivalent unit costs (step c).

1. Other issues in Process Costing:

1. Actual or applied overhead used in process costing: Either actual or applied (i.e., actual costing or normal costing) may be used with process costing. The use of applied overhead smoothes per-unit cost fluctuations attributable to changes in sales and production levels, as was the case in job-costing systems.
2. Carefully choose cost drivers: As in job costing, costs drivers should carefully be chosen to provide an equitable allocation of overhead to products.

1. Non-labor related cost driver: If a cost driver other than labor is used, overhead and direct labor should be separated on the production-cost report and not combined into one conversion cost amount.
2. Separate because goods may be at different stages: This procedure is needed because goods may be at different stages of completion with respect to labor and other cost driver.

1. Hybrid Product-Costing Systems:

1. Generally: Some production processes have elements similar to both job-cost environment and the process-cost environment.

1. Example: The manufacture of fruit juice requires similar conversion processes but different direct materials (e.g., artificial sweetener versus sugar). Direct materials would be tracked by job, but the other cost elements would be more efficiently tracked by process. This hybrid of the two systems is called operation costing.

1. Sequential production departments

1. Generally: In many cases, goods received processing in more than one department. As the units exit the initial processing department, their costs are charged to the Work-in-Process account of the second department, not to Finished-Good Inventory.
2. Cost travel: If a product travels through two or more departments, the costs attached to those products "travel" with them and are called transferred-in costs on the subsequent department’s production report. Such costs, from the receiving department’s perspective, are similar to direct materials introduced at the start of the process.
3. Subsequent department adds conversion costs: The subsequent department will add conversion cost (and perhaps materials) to these units, and all costs are summed (including the transferred-in-costs) and passed along to the next processing department.

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