Reflection Paper

PROCESS COST ACCOUNTING
A Reflection Discussion Paper on Chapters 5 and 6 of The Principles of Cost

Accounting 17th ed. By E. J. Vanderbeck and M. R. Mitchell
By Maureen Anne B. dela Cruz (Class No. 13)
As we have learned, even in a very short span of time, Accounting is an essential field in
our everyday lives. Whether it is for personal purposes, organizational, government, or private
institutions, accounting touches a broad spectrum of coverage in the business field which may
be directly or indirectly related to us.
Conceptually speaking, Cost accounting, as discussed, is a specialized branch of

accounting that deals with the classification, recording, and allocation of current costs and
prospective costs. In the modern commercial world, it is one of the most important techniques or
process for a business. The management of an organization and its workers both greatly benefit
from it. From production or manufacturing, operations, distributions, etc., cost accounting is involved
in such a great deal that it is a very crucial aspect of business that must always be considered to
ensure efficiency, effectiveness, and success.
Oftentimes the production of manufactured products is easily divisible into specific jobs,
and the job costing method illustrated in the previous chapter is appropriate. However, the job
costing method does not work well when the production cycle involves a continuous flow of raw
materials through various processing departments, and the finished output is characterized as
homogenous units, each displaying the same basic characteristics. The physical nature of
these processes makes it hard to identify and associate specific units of direct labor and direct
material with the final output.
On the other hand, in order to logically develop a mathematical approach that would
divide the total cost and allocate it in some proportion to the production, there is what we call
process costing. It is a methodology used to allocate the total costs of production to
homogenous units produced via a continuous process that usually involves multiple steps or
departments.
The cost flow concepts from the prior chapter(s) of the book are useful in understanding
process costing. The reason is that the same cost flow concepts and accounts will be evident.
That is, material, labor, and factory overhead will still occur and still be assigned to work in
process. And, amounts assigned to work in process will in turn make their way to finished
goods.
The big difference between job costing and process costing arises in the work in process
“units.” We have learned that under job costing, costs were captured for each job. Under
process costing, the costs are captured for each process or department.
With a job costing system, the costs of each job are tabulated on a job cost sheet. A
similar tabulation of costs is needed for process costing but with emphasis on costs by
department. The cost report that is prepared for each department is termed a cost of production
report. The cost of production report provides comprehensive information on the material, labor,
and overhead incurred within each department during a period. It is the primary source
document for determining how those costs are allocated to actual production.
Equivalent units must be considered relative to each of the factors of production. In other
words, 80% of necessary direct material may be in process but only 60% of the direct labor and
factory overhead. Therefore, proper costing methodology for 100 units in process would entail
80 equivalent units of material, and 60 equivalent units of conversion.
To assess the equivalent units of production requires careful reasoning about the
amount of direct material injected into production for each department, relative to the total
amount of direct material that will ultimately be needed to complete the process within that
department. This type of assessment must be repeated for direct labor and overhead. If
overhead is applied based on labor, the process is simplified because the “percent complete”
would be the same for labor and overhead. However, if overhead were applied on some other
basis like machine hours, then a separate determination of equivalency would be needed for
labor and for overhead.
The equivalent unit calculations are carried forward into the “cost per equivalent unit”
schedule. This shows how the combined costs from beginning work in process and current
period production are divided by the equivalent units. The result is the weighted-average cost
per equivalent unit for each factor of production. The individual cost factors can be combined to
identify conversion cost and overall cost per equivalent unit. The cost per equivalent unit
calculations are used to allocate cost incurred between a department’s completed production
and the units in ending work in process.
The chapter has revealed helpful ways on how to compute for the abovementioned
important parts of costing systems, especially process costing, as well as how to systematically
and properly present them.
Sometimes in a process, the total of the input units may differ from the total of the output
units. Losses may occur due to the evaporation or wastage of materials and this may be an
expected part of the process and they may sometimes be sold and generate a revenue which is
generally referred to as scrap proceeds or scrap value.
Normal loss is the loss that is expected in a process and it is often expressed as a
percentage of the materials input to the process. If normal loss is sold as scrap the revenue is
used to reduce the input costs of the process. Normal gain is the expected gain in a process. If
the loss or the gain in a process is different to what we are expecting, then we have an
abnormal loss or an abnormal gain in the process. Normal loss is the expected loss in a
process.
In the weighted average method, opening inventory values are added to current costs to

provide an overall average cost per unit. Also in the said method, opening inventory values are
added to current costs to provide an overall average cost per unit. With FIFO, opening WIP
units are distinguished from those units added in the period.
Some processes produce more than one output. Depending on the relative importance
of these products they may be known as joint or by products, a classification that affects the
costing treatment.
Joint products are two or more products separated in the course of processing, each
having a sufficiently high saleable value to merit recognition as a main product. Joint products
include products produced as a result of the oil-refining process, for example, petrol and
paraffin. Petrol and paraffin have similar sales values and are therefore equally important (joint)
products.
By-products are outputs of some value produced incidentally in manufacturing

something else (main products). By-products, such as sawdust and bark, are secondary
products from the timber industry (where timber is the main or principal product from the
process). Sawdust and bark have a relatively low sales value compared to the timber which is
produced and are therefore classified as by-products.
Joint process costs occur before the split-off point. They are sometimes called pre-
separation costs or common costs. The joint costs need to be apportioned between the joint
products at the split-off point to obtain the cost of each of the products in order to value closing
inventory and cost of sales. The basis of apportionment of joint costs to products is usually one
of the following: sales value of production (also known as market value), production units, and
net realisable value.
As by-products have an insignificant value the accounting treatment is different. The

costs incurred in the process are shared between the joint products alone. The by-products do
not pick up a share of the costs, like normal loss. The sales value of the by-product at the split-
off point is treated as a reduction in costs instead of an income, again just the same as normal
loss. If the by-product has no known value at the split-off point but does have a value after
further processing, the net income of the by-product is used to reduce the costs of the process.
Learning such topics outside classroom premises has been a greater challenge
especially due to lack of learning materials and additional and important inputs from professors,
disrupted focus, equipment and connection problems, and health threats brought by the
pandemic. However, it has taught students independence and confidence on the abilities
oneself as long as there is the willingness and eagerness to learn despite of all possible
hindrances present.

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PROCESS COST ACCOUNTING

A Reflection Discussion Paper on Chapters 5 and 6 of The Principles of Cost

By Maureen Anne B. dela Cruz (Class No. 13)

Conceptually speaking, Cost accounting, as discussed, is a specialized branch of

In the weighted average method, opening inventory values are added to current costs to

By-products are outputs of some value produced incidentally in manufacturing

As by-products have an insignificant value the accounting treatment is different. The

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