Chap 008

Chapter 08 - Process Costing Systems
CHAPTER 8
Process Costing Systems
Chapter Outline
A. Cost Management Challenges — There are three questions addressed in this chapter.
1. How should costing systems measure costs of products, services, and operations when
outputs are numerous and indistinguishable?
2. How should organizations recognize and measure the costs of spoilage and waste?
3. What is the advantage of first-in first-out (FIFO) process costing over weighted-average
process costing?
B. Learning Objectives — This chapter has nine learning objectives.
1. What organizations should use process costing or job costing?
2. Why is process-costing information useful for decision making?
3. Describe the five-step method to assign process costs to products.
4. Analyze the process costs assigned to products using weighted-average price.
5. Account for costs transferred between processes.
6. Analyze and manage “normal” and “abnormal” spoilage.
7. Assign costs to products using first-in, first-out (FIFO) costing (Appendix A).
8. Compare and contrast the results from weighted-average and FIFO costing (Appendix A).
9. Compare and contrast operation costing with job costing and process costing (Appendix
B).
C. Process costing is a method for assigning product costs to units of product when all units of
product are virtually the same. Products are completed in a short time, and costs for a single
period can be averaged over the number of units produced.
1. With process costing, costs are not traced to units of product. Instead, all production costs
(unit-level and otherwise) are assigned or allocated based on total production costs and
total units produced.
2. Job costing and process costing differ in the way costs are assigned, and they differ
because of differences in product characteristics. With job costing, many costs are
traceable to jobs or can be assigned to specific jobs using cost-driver rates. For products
in a process costing environment, all costs must be assigned using a cost-driver approach.
The key difference is that the only cost-driver is the actual number of units produced.
8-1
D. A very basic model of process costing assumes there are only two cost categories — materials
and conversion costs. Materials costs (also called direct materials) are unit-level costs, but they
are assigned to units of product based on the cost of materials and the actual number of units
produced. Conversion costs include all other costs for resources used besides materials. These
other costs may be batch, product, or facility-level costs. Resources are recorded as processes
rather than activities. Simplifying assumptions in the basic process costing model presented in
Chapter 8 preclude the use of ABC.
E. The simplest case for assigning costs using a process costing approach assumes all production is
started and completed within a single accounting period. This simplifying assumption makes it
easier to see how materials and conversion costs are used and applied to units of product. If all
units of product are completed in one month, there is no work-on-process inventory. It is the
presence of WIP inventory that makes process costing complex.
1. There are only two cost categories to consider in a simple process costing model. They
are direct material and conversion costs. Each of these resources is assigned to units of
product separately. That is because, except in the simplest case, these two resources are
added and used in production in differing amounts and points in time.
2. There is only one cost-driver. The cost-driver in process costing is the actual number of
units produced. Calculation of a rate for direct materials is calculated as total direct
materials cost divided by total number of (equivalent) units = direct materials cost per
unit of product. The rate for conversion costs is total conversion cost divided by total
(equivalent) units = conversion cost per unit of product. The process costing system
described is an actual costing system.
3. Calculation of the cost per unit for conversion costs includes higher-level resources. For
decision-making purposes, the cost per unit information can be misleading. Managers
should separate higher-level costs from unit-level costs when making cost decisions or
when trying to assess profitability.
4. When making decisions, managers should determine whether the decision should be
based on resource spending or resource use. Average costing, as it is used in process
costing, measures resource use.
F. A slightly more complex case for process costing occurs when there is production that is not
completed at the end of an accounting period. In other words, there is no beginning work-in-process
inventory, but there is ending WIP inventory. This case better illustrates the need to segregate the
costs and activities of different resources like materials and conversion activities. It is useful at his
point to explain the five steps used to assign costs to units of product.
1. First, summarize the flow of physical units. What is the total number of units being made
when all production is complete?
a. The basic cost flow model can be used to depict the flow of physical units
through WIP inventory. Beginning WIP + units transferred in (or units started) –
units transferred out (or completed) = ending WIP.
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b. In the simplest case, beginning WIP and ending WIP are zero. In this simple case,
the number of units transferred (started) equals the number of units transferred
out (completed).
c. In the case where there is no beginning WIP but there is ending WIP, the number
of units transferred in (started) does not equal the number of units transferred out
(completed). Transferred in units are greater than units transferred out because
some units are not completed at the end of an accounting period.
d. This first step expresses the number of units to account for and then accounts for
them. It shows where units of product came from (beginning WIP and units
started) and where they went (transferred out and ending WIP).
2. The second step requires that the number of equivalent units (EUs) be computed.
Equivalent units equal the number of whole units that could have been completed given
the amount of resources actually used. For instance, if 5,000 toys had 90% of the direct
materials needed for the toys to be complete, this would be the equivalent of having
5,000 * 90%, or 4,500 toys being fully completed. Suppose 2,000 physical units were
started and 1,500 were fully complete as far as conversion activity goes, and the
remaining 500 were 60% complete as far as conversion activity goes. This is the
equivalent of 1,500 + (60% * 500) = 1,500 + 300 = 1,800 equivalent units.
a. The number of equivalent units must be computed separately for each different
resource. In the simplest case there are just two resources — direct materials and
conversion costs.
b. The equivalent units calculations could be expanded to include as many different

categories as the accounting system needed to improve information, but the
calculations for each resource would be accomplished the same way.
3. The third step requires that costs to account for be identified, and classified as direct
materials cost or conversion cost. This information comes from the beginning WIP
balance and costs transferred in for the period. In the case where there is no beginning
WIP, just the costs transferred in are the costs to account for. This cost information can be
obtained from the accounting system.
4. Step 4 requires that cost per equivalent unit be calculated. It is simply the cost obtained in
Step 3 divided by the number of equivalent units calculated in Step 2. Separate costs per
equivalent unit must be calculated for direct materials costs and for conversion costs.
a. The total cost per equivalent unit is the sum of direct materials cost per
equivalent unit plus conversion cost per equivalent unit. This represents the cost
of producing one whole unit.
b. Managers should compare monthly calculations over time to see whether costs
are stable. Costs per equivalent unit should not fluctuate erratically from month
to month, because the corresponding price cannot usually fluctuate the same way.
This would result in erratic profits.
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5. The last step shows the assignment of costs to the ending WIP inventory balances and to
units transferred out (to FGI, or the next production department).
a. This step shows how costs to account for in Step 3 are accounted for.
b. The number of equivalent units transferred out * cost per EU = total dollar
amount transferred out. Since the number of equivalent units transferred out is
the same for both materials and conversion costs, it is not necessary to calculate
costs transferred out separately for materials and conversion costs. This is true
when the weighted average method is used but is not true when the FIFO method
is used. The number of equivalent units in ending WIP * cost per EU = total
dollar value of ending WIP. For ending WIP, calculations must be made
separately for materials and conversion costs because the number of equivalent
units will probably not be the same for these two resources.
6. Steps 1 and 2 divide the cost flow model into two pieces for quantities. Beginning WIP
and units transferred in (started) are used in Step 1 to identify the number of physical
units. These amounts show where the units came from. Units transferred out and units
remaining in ending WIP are converted to equivalent units, and in Step 2 these units are
identified as either completed and transferred out or as incomplete units in ending WIP.
7. Steps 3 and 5 divide the cost flow model into two pieces also, but, instead of quantities
identified in Steps 1 and 2, Steps 3 and 5 divide costs into two pieces. Step 3 uses the
beginning WIP balance and costs transferred in, indicating the costs to account for. Step 5
uses costs transferred out and ending WIP, indicating how the costs were accounted for.
8. When an item is completed in one department, it may be transferred to a second

department as an intermediary product for additional work. In such a case the
“transferred in” cost is treated as a separate ingredient to which additional material and
processing costs are added. So we would have at least three cost items, transferred in,
materials, and processing costs for which we need to calculate costs.
G. The third example of process costing and cost assignment adds another layer of complexity to the
process costing approach by including spoilage. Spoilage is the cost of wasted resources and
defective products that cannot be recovered by rework or recycling
1. Spoilage is a normal part of production costs. One way to handle spoilage costs is to view
them as a normal part of production. Spoilage, if material in amount, should be identified
and reported, at least internally, so that managers can assess spoilage and waste as a cost
to be managed and minimized. Calculations for spoiled units are made the same way as
for good units, using the five-step approach described earlier. However, the number of
physical units must be split between good units and spoiled units. Equivalent units are
also split so that costs can be assigned to the spoiled units. The percentage of completion
for spoiled units depends on when the spoilage is detected and what portion of the work
has been completed for those units.
8-4
a. Step 1 of the five-step process is the same as described before — determine the
total number of physical units.
b. Step 2 is different. Now, units must be split three ways instead of two. Before,
units were split between those that were completed and transferred out and those
remaining in ending WIP. With spoiled units included, there is a third group of
units — those that are spoiled. The number of equivalent units for each of these
three groups must be calculated separately.
c. Step 3 is the same as before — it consists of determining what costs are to be

accounted for.
d. Step 4 is the same, except now the number of equivalent units will be calculated
and shown for spoiled units, and therefore the cost per EU will be different.
e. Step 5 is different. Now, costs must be assigned to units completed and

transferred out, ending WIP inventory and spoiled units.
2. Spoilage costs can be reported as a period cost and expensed right away (as part of cost
of goods sold), or they can be treated as part of production costs and flow through the
inventory system until product is sold.
a. Normal spoilage is waste that is considered to be part of the production process.

It is generally counted as a normal cost of good units produced.
b. Abnormal spoilage is waste in excess of normal spoilage. Abnormal spoilage is

usually treated as a period cost, regardless of how normal spoilage is treated.
c. Spoilage is usually not listed as a separate expense on financial statements.

Regardless of how spoilage is reported on financial statements though, the
amount and associated cost of spoilage is important information for managers to
have.
H. The next layer of complexity in process costing arises when there are units from the prior period
included in the assignment of production costs. There are two methods that can be used in process
costing. These methods are the weighted average (WA) method and the first-in, first-out (FIFO)
method. The only difference between these two methods is the way in which beginning WIP units and
costs are treated.
1. The weighted average method treats the units in beginning WIP as if they are part of the
current month’s production activity. The amount of work completed on these units in
prior months is assumed to be zero. The costs in beginning WIP are added to the current
month’s costs, and this total cost is used to compute cost per EU. Steps 1 through 5 of the
five-step costing approach are reviewed based on the WA method.
a. Step 1 is exactly the same as before, except now there are some physical units
that came from beginning WIP
8-5
b. Step 2 is different. The beginning WIP units are treated as units that were started
and completed in the current period. The calculation of equivalent units is based
on the assumption that 100% of the work for the beginning WIP units was
completed in the current month. Thus, for units completed and transferred out,
the number of EUs is 100% of the physical number of units transferred out.
Calculation of EUs for ending WIP is the same as described before.
c. Step 3 is the same as before, except that now there is a dollar amount for
beginning WIP.
d. Step 4 is the same as before also, except that the number of equivalent units now
includes some from beginning inventory. The calculation is the same though.
e. Step 5 is also the same. Costs assigned go to units completed and transferred out,
spoiled units, and units in ending WIP.
f. A disadvantage of the WA method is that it combines current period costs with

prior period costs. This makes it difficult to isolate fluctuations in current period
costs.
2. The FIFO method segregates prior period costs and production activity from current
period costs and activity. The FIFO method only considers that portion of work needed to
complete the beginning WIP units in calculating the number of EUs for beginning WIP
units. Spoilage must be segregated in the same fashion. That is, spoilage must be
identified as being from beginning WIP or from current month’s activity. The units in
beginning WIP are assumed to be the first units completed and transferred out. Units
started in the month are either completed and transferred out or are incomplete and
remain in ending WIP.
a. Step 1 of the five-step process is the same under WA and FIFO.
b. Step 2 is different. Spoilage quantities are exactly the same as before, except they
are shown as spoiled units from beginning WIP and spoiled units from those
units started. Calculation of EUs for ending WIP is exactly the same as for WA.
The total number of equivalent units from the total period are calculated just as
they were for the WA method, but the equivalent units from beginning WIP that
were completed in the prior month are subtracted from the EUs transferred out.
c. Step 3 is the same as the WA method, but the beginning WIP costs are not used to
calculate cost per EU in Step 4.
d. Step 4 is different. Cost per EU is based on current costs divided by EUs. The
balance in beginning WIP is not used to calculate cost per equivalent unit.
e. Step 5 is complicated by the fact that costs for spoiled units come from beginning
WIP and current period costs. It is further complicated by the fact that, even
though beginning WIP costs are not included in the calculation of cost per EU,
those costs must be transferred out in order for the costs to account for to equal
the costs accounted for. The only straightforward calculation in Step 5 is
calculation of the costs in ending WIP.
8-6
f. The main differences between the WA and FIFO methods are that the WA method
is simple but less accurate, while the FIFO method is more accurate, more
complex, and more costly to maintain. If costs change a lot from period to period
and beginning WIP balances are relatively large, it is probably better to use the
FIFO method. However, if an organization has many products that are process
costed, using FIFO may be too messy and complex to justify its use.
I. The WA and FIFO methods are compared below, in terms of how the five steps are completed.
STEP 1 WEIGHTED AVERAGE FIFO

1. Summarize flow of Use the basic cost flow Same, except keep track of units
physical units model: from beginning WIP separately from
BI + TI = TO + S + EI units started in the current period
2. Compute EUs for each Multiply physical units by Same, except subtract EUs in
cost category degree of completion beginning WIP to obtain current EUs
3. Summarize total costs Add costs in beginning WIP Same as WA costing
to account for to costs of the current period
4. Compute costs per EU Divide total costs in process Divide current costs in process by
by total EUs in each cost current EUs in each cost category to
category to get average get current cost/EU
cost/EU
5. Assign costs to Multiply EUs by cost Beginning WIP units started in the
products and spoilage category for units period are always transferred out or
completed, units spoiled, assigned to spoiled units. Costs of
units in ending WIP by units completed or spoiled include
cost/EU in each cost costs of beginning WIP, costs to
category finish beginning WIP, and costs from
the current period. Ending WIP units
include costs from the current period.
J. Many companies that use process costing have more than one production process. Instead of
completing production and transferring finished goods to finished-goods inventory, some portion
of production may be completed, and then partially completed goods are passed on to the next
production department. In this case, there are three types of costs to be assigned to units of
product in a subsequent production department. These costs are direct materials and conversion
cost, as well as transferred-in costs. All units transferred in are 100% complete in terms of the
prior department’s process costs, so cost computations are simple since the number of EUs equals
the number of physical units for this resource called transferred-in costs.
K. Operation costing is a hybrid of job-order and process costing and is used when companies
produce batches of similar products with significantly different types of material. An operation is
a standardized method of making a product that is repeatedly performed. Hybrid costing also
occurs when the same product is produced in a process costing environment, and then additional
custom features are added to it. Like a computer made to specifications for its software and
operating system or a car that has many custom features.
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Problem 1 – Chapter 8
LO: 3, 7, and 8
Process costing: weighted average price and FIFO – a comparison
Timed needed: one hour
Saba enterprises had 250 units in WIP beginning which were 80% complete with regard to conversion
costs. 9,250 units were added during the period. 7,200 units were completed. There were normal
spoilage equal to 5% of completed goods and abnormal spoilage amounting to 490 units. WIP ending
was 80% complete with regard to material and 60% complete with regard to conversion. WIP beginning
amounted to $3,500 of which $1,000 was for conversion. Costs added amounted to $132,280 of which
$94,870 was for materials.
Required:
1) Compute cost of goods completed (inclusive of normal spoilage cost), abnormal spoilage cost, and
cost of WIP ending using weighted average price method.
2) Compute cost of goods completed (inclusive of normal spoilage cost), abnormal spoilage cost, and
cost of WIP ending using FIFO method.
3) Determine cost per unit of completed goods for last period and this period (under both FIFO and
weighted average price methods.
4) Prepare journal entries for goods completed and disposition of spoilage costs under FIFO method.
Unit reconciliation Equivalent number of units

Weighted average Units Material Conversion
WIP beginning 250
Added 9,250
Units to account for 9,500
Completed 7,200 7,200 7,200
Normal spoilage 360 360 360
Abnormal spoilage 490 490 490
WIP ending 1,450 1,160 870
Units accounted for 9,500 9,210 8,920
Cost Total $ Material Conversion
WIP beginning 3,500 2,500 1,000
Costs added 132,280 94,870 37,410
Costs to account for 135,780 97,370 38,410
Unit cost 14.88 10.5722 4.3061
Completed 112,480 79,926 32,554
Abnormal spoilage 7,290 5,180 2,110
WIP ending 16,010 12,264 3,746
Costs accounted for 135,780 97,370 38,410
8-8
Unit reconciliation Equivalent number of units

FIFO Units Material Conversion
WIP beginning 250 250 200
Added 9,250
Units to account for 9,500
Completed 7,200 7,200 7,200
Normal spoilage 360 360 360
Abnormal spoilage 490 490 490
WIP ending 1,450 1,160 870
Units accounted for 9,500 8,960 8,720
Cost Total $ Material Conversion
WIP beginning 3,500 2,500 1,000
Costs added 132,280 94,870 37,410
Costs to account for 135,780 97,370 38,410
Unit cost 14.88 10.5882 4.2901
Completed 112,480 80,047 32,433
Abnormal spoilage 7,290 5,188 2,102
WIP ending 16,015 12,282 3,732
Costs accounted for 135,785 97,517 38,268
c) Cost per unit of goods completed:

WIP beginning 15 10 5
Weighted average price 14.88 10.5722 4.3061
FIFO 14.88 10.5882 4.2901
d) Journal entries
Finished goods inventory 112,480

Work in process – Materials 94,870
Work in process – Conversion 37,410
Loss – Abnormal spoilage 7,290

Work in process – Materials 5,188
Work in process – Conversion 2,102
The abnormal spoilage could be prorated between finished goods inventory, work in process inventory,
and cost of sales. Here we chose to write it off directly to the period’s expenses.
8-9
Problem 2
LO: 3, 4, 5
Process costing using weighted average price method
Estimated time: 30 minutes
Ariana Company uses process costing in the production of polyethylene sheets. Work in process
beginning includes 30 rolls which were 80% complete with regard to material and 60% complete with
regard to processing. The cost of beginning work in process was $3,000 – 60% of which was for
material. Added costs included $20,600 for material and $8,500 for processing.
Prepare a cost of production report and necessary journal entries using weighted average price method.
Solution:
Journal entries:
Debit Credit
Work in process inventory $28,000
Raw Material inventory $20,600
Labor and overhead 8,500
Finished goods inventory $25,500

8-10
Problem 3
LO: 7
Process costing using FIFO
Estimated time: 30 minutes
Ryan Company uses process costing in the production of polyethylene sheets. Work in process beginning
includes 30 rolls which were 80% complete with regard to material and 60% complete with regard to
processing. The cost of beginning work in process was $3,000 – 60% of which was for material. Added
costs included $20,600 for material and $8,624 for processing.
Prepare a cost of production report and necessary journal entries using weighted average price method.
Solution:
Journal entries:
Raw material inventory $20,600
Labor and overhead accounts $8,624
Finished goods inventory $25,486

8-11
Problem 4:
General
Estimate time: 20 minutes
Use the information in problems 2 and 3 to calculated and compare a) prior period cost per unit, cost per
unit under weighted average price, cost per unit under FIFO, cost per unit for goods completed under
FIFO, b) comment on whether or not prior period cost per unit, cost of goods completed under FIFO and
weighted average price should be the same or could be different.
Solution:
a) You can determine prior period cost per unit dividing prior period costs into the equivalent
number of units for prior period. Make sure that this is done separately for material and
conversion because the items could be at different stages of completion with regard to material
and conversion costs. The results will be the same under both methods because we use the same
set of assumptions for both.
b) Weighted average price computations are shown in problem 2. It is computed by taking total
costs inclusive of work in process beginning by total units which is inclusive of goods completed
and equivalent number of units of work in process ending – also separately for material and
conversion costs.
c) FIFO cost per unit for WIP ending is computed by taking current costs divided by FIFO
equivalent units (total units minus prior period equivalent units) as illustrated in problem 3 above.
d) FIFO method for goods completed was not separately illustrated in problem 3. It can be
computed by taking cost of goods completed by number of units completed. The related cost is
derived at by subtracting the computed cost of WIP ending from total costs. Notice the fairly
significant difference in the two FIFO costs which has come about because of the significant
difference in cost per unit for the prior period in terms of material and conversion costs.
Although the difference is not as significant due to the fact that prior period inventory was fairly
low and has not had that much of an impact on costs when averaged with the current period costs.
8-12
Sample Quiz
1. In process costing
a. only high level costs are assigned to products; all other costs are traced.
b. only low level costs are assigned to products; all other costs are traced.
c. all costs are assigned to products.
d. all costs are traced to products.
e. None of the above.
Answer: c Learning Objective: 1
2. Abalone Company has used $2450 worth of materials and $3760 in conversion costs for the
production of 500 units of Aba. Cost per unit amounts to
a. 4.90
b. 7.52
c. 12.42
d. 12.50

(2,450 + 3,760) / 500 = 12.42
3. Abalone Company has used $2450 worth of materials and $3760 in conversion costs for the
production of 500 units of Aba. The product cost so determined have managerial implications in
a. resource spending.
b. resource use.
c. quality engineering.
d. a and b
Answer: b Learning Objective: 2
4. The five steps in process costing include

a. beginning inventory, costs added, units completed, ending inventory, and spoilage.
b. units to account for, units accounted for, equivalent number of units, costs to account for, and unit
costs.
c. unit reconciliation, equivalent number of units, cost of work in process beginning, costs added
during the period, and unit cost.
d. unit reconciliation, equivalent number of units, costs to account for, cost per unit, and costs
accounted for.
Answer: d Learning Objective: 3
8-13
5. Arman Manufacturing Company produces office chairs. Work in process beginning includes 30 units
which were 80% complete with regard to material and 60% complete with regard to conversion. The
cost of work in process beginning was $3000 — 60% of which was for materials. 200 units were
added during the period at a cost of $28,000 — 70% of which is for materials. WIP ending amounted
to 60 units which were 90% complete with regard to materials and 40% complete with regard to
conversion. Material cost per unit for prior period amounts to
a. $66.67
b. $75.00
c. $95.54
d. $98.00

(3,000 * 60%) / (30 * 80%) = $75
conversion. Material cost per unit using weighted average price method amounts to
a. $66.67
b. $75.00
c. $95.54
d. $98.00

[(3,000 * 60%) + (28,000 * 70%)] / [(60 * 90%) + (30 + 200 – 60)] = 95.54
conversion. Conversion cost per unit using FIFO method amounts to
a. $47.73
b. $49.48
c. $56.27
d. $66.67
Answer: a Learning Objective: 3

(28,000 * .30) / [(30 + 200 - 60) – (30 * .60) + (60 * .40)] = 47.73
8-14
conversion. The journal entry for goods completed under weighted average price will be
a. WIP – Materials 19600
WIP – Conversion 8400
Raw material inventory 19600
Various accounts 8400
b. Finished goods inventory 24653.40
WIP – Materials 16241.80
WIP – Conversion 8411.60
c. Finished goods inventory 24562.54
WIP – Materials 16108.00
WIP – Conversion 8454.54
d. None of the above.
conversion. Cost of work in process ending using the FIFO method amounts to
a. $6,246.56
b. $6,346.56
c. $6,437.46
d. $6,537.46
10. If costs change from period to period, using which method is suitable for decision making?
a. weighted average price
b. FIFO
c. LIFO
d. a or b
8-15
11. Including spoilage as part of the cost of goods completed

a. has the advantage of highlighting cost of spoilage.
b. hides the cost of spoilage.
c. provides a better picture of true cost of products.
d. b and c
12. Operation costing compared to process costing

a. separates material costs by type of product.
b. separates conversion costs by type of product.
c. separates material and conversion costs by type of product.
d. separates material and labor costs by type of product.
Use this data to respond to questions 13 through 19.
Saba Plastics has a work in process inventory of 250 yards, 100% complete with regard to material and
80% complete with regard to conversion. 9,250 yards were added during the period. 7,200 yards were
completed. Normal spoilage amounted to 5% of completed units. Abnormal spoilage amounted to 490
yards, caused primarily due to malfunctioning machines in this time period. WIP end of the period was
80% complete with regard to materials and 60% complete with regard to conversion costs. The cost of
WIP beginning was $3,500, $1000 of which was for conversion costs. From the total cost of $132,280 of
added costs, $37,410 was for conversion costs.
13. Equivalent number of units using FIFO for materials amounts to

a. 8760
b. 8900
c. 8960
d. 9200
14. Equivalent number of units using weighted average price for conversion costs amounts to
a. 8700
b. 8920
c. 8950
d. 9200
8-16
15. Cost per unit of material using FIFO amounts to

a. 10.59
b. 10.60
c. 11.03
d. 11.76
16. Cost per unit of conversion costs using FIFO method amounts to
a. $4.29
b. $4.32
c. $4.50
d. $4.80
17. Cost per unit of completed goods using FIFO, assuming that normal spoilage is considered as part of
cost of goods completed amounts to
a. $14.90
b. $15.62
c. $16.55
d. $17.56
18. Abnormal spoilage costs using the FIFO method amount to

a. $3,286
b. $4,619
c. $5,194
d. $7,290
19. Cost of work in process ending using FIFO method amounts to

a. $23,891
b. $17,914
c. $16,015
d. $12,720
8-17
20. Costs transferred in from another department in a process costing environment are treated as
a. a separate cost item in the new department.
b. an addition to material costs in the new department.
c. an addition to conversion costs in the new department.
d. partly material and partly conversion cost in the new department.
21. Operations costing differs from process costing in that both use the same
a. cost per unit for material costs
b. cost per unit for labor costs only
c. cost per unit for overhead costs only
d. cost per unit for conversion costs
e. none of the above.
Answer: d. LO: 9
In operations costing, material cost is computed similar to job costing because different jobs use different
kinds of materials, but an averaged conversion cost because it uses the same averaged processing cost as
used in process costing.
8-18

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Chap 008

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Chapter 08 - Process Costing Systems

B. Learning Objectives — This chapter has nine learning objectives.

1. What organizations should use process costing or job costing?

2. Why is process-costing information useful for decision making?

3. Describe the five-step method to assign process costs to products.

4. Analyze the process costs assigned to products using weighted-average price.

5. Account for costs transferred between processes.

6. Analyze and manage “normal” and “abnormal” spoilage.

b. The equivalent units calculations could be expanded to include as many different

8. When an item is completed in one department, it may be transferred to a second

c. Step 3 is the same as before — it consists of determining what costs are to be

e. Step 5 is different. Now, costs must be assigned to units completed and

a. Normal spoilage is waste that is considered to be part of the production process.

b. Abnormal spoilage is waste in excess of normal spoilage. Abnormal spoilage is

c. Spoilage is usually not listed as a separate expense on financial statements.

f. A disadvantage of the WA method is that it combines current period costs with

a. Step 1 of the five-step process is the same under WA and FIFO.

STEP 1 WEIGHTED AVERAGE FIFO

Unit reconciliation Equivalent number of units

Unit reconciliation Equivalent number of units

c) Cost per unit of goods completed:

Finished goods inventory 112,480

Loss – Abnormal spoilage 7,290

Finished goods inventory $25,500

Finished goods inventory $25,486

Answer: c Learning Objective: 1

Answer: c Learning Objective: 1

Answer: b Learning Objective: 2

4. The five steps in process costing include

Answer: d Learning Objective: 3

Answer: b Learning Objective: 3

Answer: c Learning Objective: 3

Answer: a Learning Objective: 3

Answer: b Learning Objective: 3

Answer: c Learning Objective: 8

Answer: b Learning Objective: 8

11. Including spoilage as part of the cost of goods completed

Answer: d Learning Objective: 6

12. Operation costing compared to process costing

Answer: a Learning Objective: 9

Use this data to respond to questions 13 through 19.

13. Equivalent number of units using FIFO for materials amounts to

Answer: c Learning Objective: 8

Answer: b Learning Objective: 3

15. Cost per unit of material using FIFO amounts to

Answer: a Learning Objective: 8

Answer: a Learning Objective: 8

Answer: b Learning Objective: 8

18. Abnormal spoilage costs using the FIFO method amount to

Answer: d Learning Objective: 8

19. Cost of work in process ending using FIFO method amounts to

Answer: c Learning Objective: 8

Answer: a Learning Objective: 3

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