5.1 Compare and Contrast Job Order Costing and Process Costing

The three categories of costs incurred in producing an item are direct material, direct labor, and manufacturing overhead.
Process costing is the system of accumulating costs within each department for large-volume, mass-produced units.
Process costing often groups direct labor and manufacturing overhead as conversion costs.
Costs under GAAP are categorized as period costs when they are not related to production and instead cover a time period.
Selling and administrative costs are period costs related to the sales of products and management of the company and are not directly tied to a specific product.
Process costing determines the cost per unit through the use of equivalent units, or the number of units that would have been produced if production was sequential instead of in batches.

5.2 Explain and Identify Conversion Costs

Conversion costs are the costs of direct labor and manufacturing overhead used to convert raw materials into a finished product.
Materials are added during various stages of the manufacturing process, such as the beginning or end, while conversion of the product from raw material into finished goods is considered to occur uniformly through the process. Thus, it is possible for a product to have all of its materials and not be complete.
Equivalent units for direct materials can be different than the equivalent units for conversion costs because materials are added in steps through the manufacturing process, while conversion costs are incurred evenly throughout the process.

Process costing has a work in process inventory account for each department.
Equivalent units of production for materials may differ from the equivalent units for conversion costs.
The total units to account for is the number of units in the beginning work in process inventory plus the number of units started into production; this total also represents the sum of the number of units completed and the number of units in the ending work in process inventory.
The cost per equivalent unit for materials is the total of the material costs for the beginning work in process inventory and the total of material costs incurred during the period.
The cost per equivalent unit for conversion costs is the total of the conversion costs for the beginning work in process inventory and the total of conversion costs incurred during the period.
The cost of units transferred to the next department is the number of units transferred times the total of the cost per equivalent unit of material plus the cost per equivalent unit for conversion costs.

The total units to account for is the number of units in the beginning work in process inventory plus the number of units transferred from the prior department; this total also represents the number of units completed plus the number of units in the ending work in process inventory.
The cost per equivalent units for materials is the total of the material costs for the beginning work in process inventory plus the cost of material transferred in to the department plus the total of material costs incurred during the period.
The cost per equivalent unit for conversion costs is the total of the conversion costs for the beginning work in process inventory plus the conversion costs transferred in plus the total of conversion costs incurred during the period.

Traditional journal entries show the purchase of material and the incurring of overhead costs.
Each department records the transfer of material from the storeroom into production, its direct labor costs, the application of overhead, and the transfer of goods to the next department or finished goods.
The value of the inventory transferred to the next department or to finished goods equals the amount listed as transferred on the production cost report.