CA 5107 – COST ACCOUNTING & CONTROL

PROCESS COSTING

Process costing is used by companies with continuous mass production of similar products through
several processes or departments where each department is responsible for one or more operations that
bring a product one step closer to completion. In each department, materials, labor and overhead inputs
may be needed and each unit is assumed to receive the same amount of materials, labor and overhead.
Upon completion of a particular process, the partially completed goods are transferred to another process
or department.

Process costing system track the same manufacturing cost elements as in job order, the materials, the
labor and the overhead. Noted differences between job order and process costing system follow:

Features Job Order Cost System Process Cost System

Work in process account one for multiple jobs one for each department
Documents used job cost sheets cost of production report
Determination of total manufacturing each job each period
costs
Unit cost computation Cost of each job/units Total manufacturing costs/units
produced for the job produced

Process Cost Flow:

 Purchase of raw materials:

Raw materials xxx
Accounts payable xxx

 Issuance of raw materials to production:

Work in process – Dept. 1 (direct materials) xxx
Manufacturing overhead (indirect materials) xxx
Raw materials xxx

 Allocation of labor costs:

Work in process – Dept. 1 (direct labor) xxx
Manufacturing overhead (indirect labor) xxx
Payroll xxx

 Incurrence of overhead costs:

Manufacturing overhead xxx
Various accounts xxx

 Application of overhead:
Work in process – Dept. 1 xxx
Manufacturing overhead – applied xxx

 Completion of a process:
Work in process – Dept. 2 xxx
Work in process – Dept. 1 xxx

If department 2 is the last department;

Finished goods xxx
Work in process – Dept. 2 xxx
Methods of Application of Costs Elements in Process Costing

1. Even Application of Costs – materials, labor, and overhead were applied at the same rate
throughout the production, thereby, rendering the EUP to be of equal amounts.

2. Uneven Application of Costs – materials, labor, and overhead may be applied at different stages
of production rendering their EUP to be of unequal amounts.

Methods of Treating Beginning Inventory in Process Costing

1. FIFO Method – Only the costs incurred this period are allocated between finished goods and
ending work in process. Beginning inventory costs are maintained separately from current period
costs.

2. Weighted Average Method – It averages all materials, labor and overhead both incurred in the
beginning work in process and those incurred this period. Thus, no differentiation is made
between goods started in the preceding and the current period.

The result of such computation is that the FIFO Method EUP (equivalent units of production)
differs from the Weighted Average Method EUP by the amount of EUP in the beginning work in
process.

Cost of Production Report

The cost of production report is the key document used in a process cost system. It is an analysis of the
activity in the department or cost center for the period. All costs chargeable to a department or cost center
are presented according to cost elements.

5 Steps:

1. Calculate the total units to account

Beginning inventory in units xxx

Units started or transferred in during the period xxx
Total units to be accounted for xxx

Units completed & transferred xxx

Ending inventory in units xxx
Units spoiled or lost xxx
Total units as accounted for xxx

2. Compute the equivalent units of production

Average Method:
Units started & completed xxx
Ending inventory x % of completion this period xxx
EUP xxx
 FIFO Method:
Beginning inventory x % not complete at the start of period xxx
Units started & completed xxx
Ending inventory x % of completion this period xxx
EUP xxx

3. Find the total costs to account

Cost of beginning inventory xxx

Add: Costs for the current period:
Materials, labor & overhead xxx
Transferred-in costs (from prior dept) xxx xxx
Total costs to be accounted for xxx

4. Compute the unit production costs

Average Method:

Unit cost = Beginning costs + Current costs

EUP (per cost element)

FIFO Method:

Unit cost = Current costs

EUP (per cost element)

5. Assign costs to inventories

Average Method:

 Finished & transferred = Units transferred to next department x total unit costs
 Work in process, end = EUP for each cost element x unit cost for each cost element

FIFO Method:

 Finished & transferred = Beginning inventory costs + Cost to complete the units in process at the
beginning + (units started and completed x total UC)
 Work in process, end = EUP for each cost element x unit cost for each cost element

ILLUSTRATIVE PROBLEMS:

Problem 1: Equivalent Units of Production (EUP) – Even Application (No beginning inventory)

Compute the EUP for the month for each of the following situations:
Units Completed Units in Process, Stage of
During the Month End of the Month Completion
A) 8,000 2,000 ½
B) 21,000 4,000 ¾
C) 6,000 1,000 ¾
 500 2/5
D) 18,000 5,000 ½
4,000 ¾
E) 32,000 1,500 1/5
4,000 ¾

Problem 2: Equivalent Units of Production – Uneven Application (No beginning inventory)

Compute the EUP for materials and conversion costs for the month for each of the following cases:

Case 1 Started in process, 5,000 units; completed, 4,000 units; work in process, end of period, 1,000 units, ¾ completed. All
materials are added at the beginning of the process.

Case 2 Received from preceding department, 50,000 units; completed, 44,000 units; work in process, end of period, 6,000
units; ¼ completed. All materials are added at the end of the process.

Case 3 Started in process, 35,000 units; completed, 29,000 units; work in process, end, 3,000 units, 1/3 completed, 3,000 units,
½ completed. 75% of the materials are added at the beginning of the process and 25% when the process is ½
completed.

Problem 3: Equivalent Units of Production – Even Application (With beginning inventory)

Department II of Yujiro Manufacturing Company presents the following production data for the month of May:

Opening inventory, 3/8 completed 4,000 units

Started in process 13,000 units
Transferred 9,000 units
Closing inventory, ½ completed 4,000 units
¼ completed 4,000 units

What are the equivalent units of production for FIFO and Average Method for the month of May?

Problem 4: Equivalent Units of Production – Uneven Application (With beginning inventory)

Omega Company has a process cost system. All materials are introduced at the beginning of the process in Department One. The
following information is available for the month of January:

Work in process, 1/1 (40% complete as to conversion costs) 500 units

Started in January 2,000 units
Transferred to Department Two during January 2,100 units
Work in process, 1/31 (25% complete as to conversion costs) 400 units

What are the EUP for the month of January for Materials and Conversion Costs under the two methods?

Problem 5: Costs Analysis – Single Department (No beginning inventory)

The following data appeared in the accounting records of Department I of Ultima Company:
Started in process 12,000 units
Completed and transferred 10,500 units
Work in process, end (2/5 complete) 1,500 units
Costs:
Materials P 72,000
Labor 88,800
Overhead 44,400

One half of the materials are added at the beginning of the process and the balance when the units are one-half completed.
Required:
1. EUP for materials and conversion costs.
2. Cost of the units completed and transferred.
3. Cost of the units in process at the end of the month.

Problem 6: Costs Analysis – Multi-Departments (No beginning inventory)

ABM Company uses two departments to produce a product. The following data were taken for the month of January 2020:
Department 1 Department 2
Units:
Started 60,000
Completed & transferred 40,000 30,000
In process, end 20,000 10,000
Stage of completion 75% 80%
Costs:
Materials P 480,000 P 245,000
Labor 330,000 190,000
Factory overhead 220,000 114,000

Department 1 – all materials are added at the beginning of the process.

Department 2 – 50% of the materials are added at the beginning of the process, the remaining are added at the end.

Required: Prepare a cost of production report.

Problem 7: Costs Analysis – Single Department (With beginning inventory)

Consider the following data for De Leon Manufacturing Company.

Whole Units DM CC
WIP, July 1 8,000 P 201,600
Started in July 50,000
C&T 46,000
WIP, July 31 ?
Current Costs P 3,220,000 1,424,000

De Leon Manufacturing Company adds materials at the end of the process. The work in process at the beginning is 60%
completed while the work in process at the end is 40% completed.

Required: Using the two inventory valuation methods;

1. Determine the equivalent units of production for each cost element and compute the cost per EUP.
2. Assign the cost to Finished & Transferred & Work in Process, end.

Problem 8: Costs Analysis – Multi-Departments (With beginning inventory)

Dayag Company manufactures toys in two departments, Forming and Finishing Department. In the Forming Department,
materials are added when the process is 20% complete while in the Finishing department is added when the process is 80%
complete. Conversion costs are added evenly throughout the process. The following data are available for the 6 months ended
June 30, 2020:

Forming Department:
Units Materials CC Transferred In

WIP, Jan. 1 3,000 P 75,000 P 21,250

Started 22,000
Completed 20,000
Costs added 700,000 425,000

Finishing Department:
WIP, Jan. 1 5,000 -0- P 72,500 P 177,500
Started 20,000
Completed 21,000
Costs added P 231,000 P 384,000 ?

Work in process on Jan. 1 is 40% converted in the Forming Department and 60% converted in the Finishing Department. Work
in process on June 30 is 25% converted in the Forming department and 30% in the Finishing Department.

Required: Using the two inventory valuation methods, determine the following:

1. EUP in each department

2. Cost per EUP in each department
3. Assignment of cost in each department

Problem 9: Normal and Abnormal Loss

Lenlen Corporation produces a product through a continuous process in two departments. Materials in this department are added
at the beginning of the process. The production and cost data were taken from Department B during September 2020:

Production and data:

Received from Department A 80,000 units
Completed and transferred 60,000 units
In process, end (50% complete) 10,000 units
Lost 10,000 units
Cost data:
Received from Department A P 560,000
Materials 175,000
Labor 121,875
Overhead 243,750

Required: Prepare cost of production report under the following assumptions:

a. Lost units – normal, discovered at the beginning.

b. Lost units – normal, discovered at the end.
c. Lost units – abnormal, discovered when 60% completed.
d. Lost units – abnormal, discovered at the end. The estimated value of the spoiled units is P12.00 each.