Cost & Management Accounting-I

Chapter III: Job and process costing system

3.1 Costing system
Costing system is the process or technique or method of accumulation and assignment of costs
to cost objects provided by a company. The essential purpose of any managerial costing system
should be to provide cost data to help managers plan, control, direct and make decisions. The
costing system to be used by a particular concern depends on the type of production and the
nature of industry. There are five building blocks for any costing system. These are: cost
object, direct cost, indirect cost, cost pool, and cost allocation base.

Cost accounting systems measure, record, and report product costs. Managers use product costs
for setting product prices, controlling operations, and developing financial statements. The two
main types of cost accounting systems for manufacturing and service companies are: Job order
costing systems and process costing systems. This chapter focuses on the job-order costing
system and process costing system.

3.2 job order costing system features

Job order costing system is concerned with the accumulation and assignment of costs to products
that are readily identified by individual units or batches. In this system the cost object is a unit or
multiple units of a distinct product or services called job. Each job uses a different amount of
resources. Job order costing systems are often used by companies that manufacture custom
products for customers or batches of similar products. Many companies produce products
individually designed to meet the needs of a specific customer. Each customized product is
manufactured separately and its production is called job order production, or job order
manufacturing (also called customized production, which is the production of products in
response to special orders).

Manufacturers that use a job order costing system are sometimes called job shops. A job order
costing system accumulates costs for each batch, or job. Clothing factory produces jeans for men
and women during a particular period based on the order of customers; construction project
constructs different construction (e.g. dam, bridge, school etc.) during a period; commercial
aircraft produces different air planes according to the customer’s order. There are also other
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companies producing their product or delivering their services according to the customer’s order
they received such as accounting firms, music studios, health-care providers, furniture
manufacturers, synthetic football fields, special-order machines, custom jewelry, wedding
invitations, and artwork.

The first step in any costing system is accumulation of costs through recording (record keeping).
Companies generally classify manufacturing costs of a product/job in to three broad categories:
direct materials, direct labor and manufacturing overhead. Direct materials and direct labor costs
can be directly traced to a particular job, whereas indirect costs are allocated between various
jobs.

Job cost sheet/record: is a form prepared by the accounting department for each separate job
that records the materials, labor and overhead costs charged to the job. The following sources are
used to record cost of a particular cost object on a job cost sheet.

 Materials requisition form: is a detailed source document that specifies the type and
quantity of materials to be drawn from the storeroom, and identifies the job to which the
costs of the materials are to be charged. In other word, material requisition form contains
information about the cost of direct materials used on a specific job and in a specific
department. It is prepared by the production department after receiving the production
order from the selling department. Hence direct materials cost of a job directly traced from
the material requisition form to job cost sheet/record.
 Employee time ticket (labor time record): is workers use time ticket to record the time
they spend on each job and task. It is used as a source document to record the direct labor
cost on the job cost sheet.

Before we are entering manufacturing overhead costs into job cost sheet, the allocation base
should be determined. An allocation base is a variable that systematically link the indirect cost
pool with a cost object/job. The rate of allocating overhead costs is the per variable/allocation
base cost to be charged to the cost objects. There are two rates: budgeted overhead rates and

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actual overhead rates. There are two costing approaches to assign costs to cost objects/jobs.
These are: actual costing and normal costing approach.

i) Actual costing approach

Actual costing is a costing system that traces direct costs to cost object by using the actual direct
cost rates times the actual quantity of the direct cost inputs. It allocates indirect costs based on
the actual indirect cost rates times the actual quantities of the cost allocation bases/activity
consumption.

Total indirect cost allocation ¿ a cost object / job=actual indirect cost rate∗actual activity consumption

Actual indirect cost rate = actual total indirect cost/ actual total activity consumption

ii) Normal costing approach

Normal costing is a costing system that (1) traces direct costs to a cost object by using the actual
direct-cost rates times the actual quantities of the direct-cost inputs and(2) allocates indirect costs
based on the budgeted indirect-cost rates times the actual quantitiesof the cost-allocation bases.

Total indirect cost allocated to a cost object/job = budgeted indirect cost rate * actual
activity consumption

Budgeted indirect cost rate = budgeted total indirect cost/budgeted total activity
consumption

Both methods allocated direct costs to cost objects based on actual direct cost rate multiplied by
actual activity consumption. The only difference between costing a job with actual costing and
normal costing is that actual costing uses actual indirect cost rates, whereas normal costing uses
budgeted indirect cost rates.

Actual direct labor cost of a job = actual direct labor rate * actual labor hours used to
complete a job

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Actual direct materials cost of a job = actual direct materials rate * actual quantity
consumption by a job

A general approach to assign costs in a job order costing system includes the following steps.

1. Identify the job that is the chosen cost object;

2. Identify the direct costs of the job (direct materials cost and direct manufacturing labor cost);
3. Select the cost allocation bases to use for allocating indirect costs to the job;
4. Identify the indirect costs associated with each cost allocation base;
5. Compute the rate per unit of each cost allocation base used to allocate indirect costs to the
job;
6. Compute the indirect costs allocated to the job and
7. Compute the total cost of the Job by adding all direct and indirect costs assigned to the Job.
Total cost of a job = Direct materials cost + Direct manufacturing labor cost + Manufacturing
overhead cost.
Customer order materials requisition form

Selling/marketing dep’t Production order direct labor time ticket Job cost sheet
(Issue sales order as a
basis for issuing a
production order) manufacturing overhead

3.3 Materials and cost flows in a job order system and the accounting treatment

Costs of jobs are accumulated in two inventory accounts for manufacturing sector companies.
These are: work-in-process and finished goods inventory accounts.

Work-in-process inventory: accumulates all costs of resources used on jobs that have not been
completed. When direct materials and direct labor costs are incurred they immediately entered
into the job cost sheet and debited for the work-in-process account. After allocation/application
the manufacturing overhead account is also debited for WIP inventory account.

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Finished goods inventory: accumulates all costs of resources used on jobs that have been
completed. When goods are completed the costs of materials and labor held at WIP inventory
account is transferred to finished goods inventory account.

To truck materials and cost flows from the acquisition stage until the sale of finished goods to
customers, the accounting system use different controlling accounts in the general ledger and
other special accounts in the subsidiary ledger.

General ledger:
General ledger accounts with “Control” in the titles (for example, Materials Control and
Accounts Payable Control) have underlying subsidiary ledgers that contain additional details,
such as each type of material in inventory and individual suppliers that a company must pay.A
general ledger should be viewed as only one of many tools that assist management in planning
and control.

The general ledger account Work-in-Process Control presents the total of these separate job-cost
records pertaining to all unfinished jobs. The job-cost records and Work-in-Process Control
account track job costs from when jobs start until they are complete. Materials and cost flows
and their respective journal entries for manufacturing companies are as follows:

1. Purchase/acquisition of raw materials (both direct and indirect)

Raw materials- Control xx
Account payable/cash – Control xx
(To record the cost of purchasing materials)
Therefore, when materials are purchased they are recorded as assets not as expenses.
2. Requisition or issuing of direct and indirect materials by the production department from the
store.
Work-in-process (for direct materials) – Control xx
Manufacturing overhead (for indirect materials) – Control xx
Raw materials – Control xx

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Direct materials entered into the WIP account are also recorded on the appropriate job cost sheet.
The job cost sheet form a subsidiary ledger. Indirect materials costs are charged to
manufacturing overhead controlling account in the general ledger and it should be separated
from WIP account. It is used to accumulate all manufacturing overhead costs as they are incurred
during a period.
3. Incurred direct and indirect wages (labor cost)
As work is performed each day in various departments, employees’ time tickets (labor time card)
are filled out by workers, collected, and forwarded to the accounting department. In the
accounting department, wages are computed and the resulting costs are classified as either direct
or indirect labor. Hence, the journal entry to record wage is by debiting WIP account for direct
labor cost and manufacturing overhead controlling account for the indirect
Work-in-process – Control xx
Manufacturing overhead – Control xx
Salaries and wages payable – Control xx
4. Recording various actual indirect costs other than indirect materials and indirect labor costs.
Manufacturing overhead – Control xx
Accounts payable – Control xx
Prepaid expense xx
Property tax payable xx
Accumulated depreciation xx
5. Allocations of indirect cost to WIP account (overhead application).
Work-in-process – Control xx
Manufacturing overhead applied xx
6. To record cost of products are completed and transferred out from production department to
the ware house.
Finished goods - Control xx
Work-in-process – Control xx
Overhead application is the process of charging manufacturing overhead costs to job cost
sheets and to work-in-process account.
7. To record the sale of finished goods to customers

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Accounts receivable/cash - Control xx

Sales xx
Cost of goods sold xx
Finished goods – Control xx
Note: All actual overhead costs incurred throughout a period are added (debited) to the
Manufacturing Overhead Control account. These costs are not debited to Work-in-Process
Control because, unlike direct costs, they cannot be traced to individual jobs. Manufacturing
overhead costs are added (debited) to individual jobs and to Work-in-Process Control only when
manufacturing overhead costs are allocated in Transaction (e). At the time these costs are
allocated, Manufacturing Overhead Control is, in effect, decreased (credited) via its contra
account, Manufacturing Overhead Allocated.
3.4 Job order costing system-illustration
Example:
Consider the following transactions for XY-Furniture Company for the month of January, 2011
and pass the necessary journal entries assuming the perpetual inventory system.
a) Raw materials were purchased on account for $600,000
b) Raw materials were requisitioned for use in production during the month costs $500,000
(direct materials of $480,000 and indirect materials of $20,000)
c) Total payroll of the company for the month was about $200,000 (direct manufacturing
labor, indirect manufacturing labor, sales commission for marketing personnel and
administrative salary of 60%, 15%, 18% and 7% respectively)
d) Other overhead costs consists of depreciation for $10,000 (80%, 20% related to factory
operation and selling and administrative activities respectively), insurance expired during
the year total $2,000 and other manufacturing overheads costs of $27,000 (70% is paid in
cash).
e) Manufacturing overhead application to jobs totals $70,000.
f) Work completed and transferred to finished goods considering from goods started 90%
were completed.
g) Sales for the period total $650,000 (40% is received in cash) and 90% of the sales price
represents cost of goods sold).
Solution:

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a) Raw materials – Control $600,000

Accounts payable – Control 600,000
(To record the purchase of raw materials)
b) Work-in-process – Control $480,000
Manufacturing overhead– Control 20,000
Raw materials 500,000
(To record the requisition of raw materials from the ware house by the production dep’t)
c) Work-in-process – Control $120,000
Manufacturing overhead – Control l30, 000
Wages payable 150,000
(To record the accumulation of direct and indirect manufacturing labor costs or inventoriable
costs of labor)

Sales commission expense $36,000

Administrative salary expense 14,000
Salaries payable 50,000
(To record period/non inventoriable costs of labor)
Direct manufacturing labor = 60% of $200,000 = $120,000
Indirect manufacturing labor = 15% of $200,000 = $30,000
Sales commission = 18% of $200,000 = $36,000
Administrative salary = 7% of $200,000 = $14,000
Total wage = $200,000
d) Depreciation expense – administrative and selling $2,000
Manufacturing overhead – Control 37,000
Accumulated depreciation 10,000
Prepaid insurance 2,000
Accounts payable 8,100
Cash 18,900
(To record other manufacturing overhead costs)
Depreciation expense of factory is charged to MOH (i.e. 80% of $10,000 = $8,000), the $2,000
depreciation is not product cost rather it is period cost and recorded as expense during the year of
incurrence.
e) Work-in-process – Control $70,000
Manufacturing overhead allocation 70,000
f) Finished goods – Control $603,000
Work-in-process – Control 603,000
(To record the cost of completed goods during the period)

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The total cost of manufacturing during the year = direct materials cost used + direct
manufacturing labor used + manufacturing overhead cost applied= $480,000 + 120,000 + 70,000
= $670,000 (i.e. the balance of WIP inventory account). 90% of 670,000 = 603,000
g) Cash $260,000
Accounts receivable 390,000
Sales 650,000
(To record the sale of goods during the year)
Cost of goods sold $585,000
Finished goods – Control 585,000
(To record cost of goods sold = 90% of $650,000 = $585,000

Subsidiary ledger
Subsidiary ledger consists of a summary of the job-cost record. Subsidiary ledgers present the
underlying details regarding to the controlling accounts in the general ledger.The sum of all
entries inunderlying subsidiary ledgers equals the total amount in the corresponding general
ledger control accounts.
Materials records by type of materials: keeps a continuous record of quantity received,
quantity issued to jobs, and inventory balances for each type of material. As direct materials are
used, they are recorded as issued in the Materials Records. Direct materials are also charged to
Work-in-Process Inventory Records for Jobs, which are the subsidiary ledger accounts for the
Work-in-Process Control account in the general ledger. As indirect materials are used, they are
charged to the Manufacturing Department overhead records subsidiary ledger for Manufacturing
Overhead Control.
Labor records by employee: Labor records by employee are used to trace direct manufacturing
labor to individual jobs and to accumulate the indirect manufacturing labor in Manufacturing
Department overhead records. The labor records are based on the labor-time sheet source
documents. The subsidiary ledger for employee labor records shows the different jobs that an
organization worked on and the amount of wages owed to different parties.
Manufacturing department overhead records by month: The Manufacturing Department
overhead records are consists of the subsidiary ledger for Manufacturing Overhead Control,
show details of different categories of overhead costs such as indirect materials, indirect
manufacturing labor, engineering, plant insurance and utilities, and plant depreciation.

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Work-in-process inventory records by jobs: As we have already discussed, the job-cost record
for each individual job in the subsidiary ledger is debited by the actual cost of direct materials
and direct manufacturing labor used by individual jobs. The job-cost record for each individual
job in the subsidiary ledger is also debited for manufacturing overhead allocated based on the
budgeted manufacturing overhead rate times the actual direct manufacturing labor-hours used in
that job.
Finished goods inventory records by jobs: includes the total cost of all jobs completed and
transferred to finished goods during a particular period. When goods are sold out the cost is
transferred from finished goods inventory record to cost of goods sold.
Other subsidiary records: Just as in manufacturing payroll, a company may maintains
employee labor records in subsidiary ledgers for marketing and customer service payroll as well
as records for different types of advertising costs (print, television, and radio).

3.5 Allocation of manufacturing overhead costs

It is the process of applying or assigning the overhead costs from the controlling account (i.e.
manufacturing overhead) to the work-in-process account. Under the normal approach actual
overhead costs are not charged to jobs; actual overhead costs do not appear on the job cost sheet
nor do they appear in the work-in-process account. Only the applied overhead cost based on the
predetermined overhead rate, appears on the job cost sheet and in the work-in-process account.
Applied overhead cost is a predetermined overhead cost established by using normal costing
approach at the beginning of each period.

Manufacturing overhead cost is applied to WIP based on budgeted rate under the normal costing
approach. Under normal costing, manufacturing overhead allocated—also called
manufacturing overhead applied—is the amount of manufacturing overhead costs allocated to
individual jobs based on the budgeted rate multiplied by actual quantity used of the allocation
base.

Predetermined MOH cost rate = estimated total MOH cost for a period/estimated total
units in the allocation base

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There are generally five allocation bases to allocate MOH costs among different jobs. From
those bases, the company manager selects one that can be a best cost driver to the manufacturing
overhead costs or indirect costs of the factory.

 Physical output allocation base: it applies or allocates MOH costs equally to each unit
produced. It is appropriate when a company manufacture only one type of product. In this
case, number of units produced is the causes (cost drivers) for the cost of MOH.

Predetermined MOH cost rate = Estimated total MOH cost/Estimated units of production

Indirect cost allocated to a job = predetermined MOH cost rate * Actual units of a job

 Direct materials cost: is used to allocate indirect materials cost. Here MOH cost rate is
expressed as a percentage of direct materials cost. In other words, direct materials cost is a
cost driver/cause for the manufacturing overhead cost.

Predetermined MOH cost rate=( Estimated total MOH co st / Estimated total DM cost )∗100 %

Indirect cost allocated ¿ a job= predetermined rate∗actual total DM cost

 Direct labor cost: is used to allocate indirect labor costs. Here, MOH cost rate is expressed
as a percentage of direct labor/DL cost.

Predetermined MOH cost rate=( Estimated total MOH cost / Estimated total DL cost)∗100 %

Indirect cost allocated ¿ a job= predetermined rate∗actual total DL cost

 Direct labor hour: if there is a cause and effect relationship between direct labor hour and
MOH cost, direct labor hour is used as an allocation base. Direct labor hour is used as an
allocation base for allocating indirect labor cost.

Predetermined MOH cost rate=estimated total MOH cost /estimated DL hour available

Hence,

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Indirect cost allocated ¿ a job= predetermined MOH cost rate∗actual DL hour consumed for a job

 Machine hours: if the job is machine intensive, machine hours can be taken as allocation
base.

Predetermined MOH cost rate=estimated total MOH cost /estimated machine hours available

Indirect cost allocated ¿ a job= predetermined MOH cost rate∗actual machine hours consumed for a job

Note: actual factory overhead costs are debited to the account manufacturing overhead - control
as they are incurred day by day throughout an accounting period. At certain interval during the
year usually when a job is completed, overhead cost is applied to the job by means of the
predetermined overhead rate. The journal entry to record the application of overhead costs on the
general ledger is:

Work-in-process - control xx
Manufacturing overhead – applied xx

Application of overhead cost is done when a job is completed to determine its total cost.
Total cost of a job=direct materials cost (actual)+ direct labor cost ( actual)+ MOH cost of a job (applied )

Illustration: Assume the following budgeted data for ABC Company for the year 2011. And the
Company wants to undertake three jobs (job No. 1, job No.2 and job No. 3) during the year. The
estimated total manufacturing overhead cost for the year is birr 450,000.
Estimated direct materials cost Birr 300,000
Estimated units of production 200,000 units
Estimated direct labor cost Birr 900,000
Estimated direct labor hours 30,000 hours
Estimated machine hours 90,000 hours

Required: computed the predetermined MOH rate based on physical output, DM cost, DL cost,
DL hours and machine hours.
Allocation base Computation Predetermined MOH rate
Physical output level Birr 450,000/200,000 units Birr 2.25 per unit
DM cost Birr (450,000/birr 300,000) * 100% 150% of DM cost

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DL cost (Birr 450,000/birr 900,000) * 100% 50 % of DL cost

DL hour Birr 450,000/30,000 hours Birr 1.5 per DL hour
Machine hours Birr 450,000/90,000 hours Birr 5 per machine hour

Assume all information in the above example and the following additional information for actual
data for job No. 2. The actual units of job No.2 completed during the year is 2000 units, actual
direct materials used by the job is birr 30,000 (from job cost sheet), actual direct labor cost
incurred for the job is birr 20,000 (from the job cost sheet), direct labor hours worked for the job
is 400 hours and machine hours used for the job is 240 hours.

Required: record the applied MOH and determine the total cost of the job under each of the
above cost allocation bases.

Allocation base (1) Predetermined Actual activity Total MOH applied Total cost of Job
allocation rate (2) consumption (3) to Job No.2 (2*3) No.2 (DM + DL +
MOH)

Physical output level Birr 2.25 per unit 2000 units Birr 4,500 Birr 54,000 (30,000
+20,000 +4,500)

DM cost 150% of DM cost Birr 30,000 Birr 45,000 Birr 95,000 (30,000
+ 20,000 +45,000)
DL cost 50 % of DL cost Birr 20,000 Birr 10,000 Birr 60,000 (30,000
+ 20,000 +10,000)
DL hour Birr 1.5 per DL hour 400 hours Birr 45,000 Birr 95,000 (30,000
+ 20,000 +45,000)
Machine hours Birr 5 per machine hour 240 hours Birr 1,200 Birr 51,000

The journal entries to record the application of overhead costs debit WIP controlling account and
crediting MOH applied account. For instance, if the allocation base is the physical output level,
the journal entry to record the application of MOH is:

Work-in-process - control birr 4,500

Manufacturing overhead- applied 4,500

Unit cost of Job No .2=total cost of Job No.2 under the selected allocation base /total units of Job No .2 pro duced

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Hence, if the allocation base is the physical output level, the total cost of Job No.2 is birr 54,000.
And the unit cost of Job No. 2 = birr 54,000/2000 units produced = birr 27.25 per unit.

Under applied and over applied overhead

Using budgeted indirect-cost rates and normal costing instead of actual costing has the advantage
that indirect costs can be assigned to individual jobs on an ongoing and timely basis, rather than
only at the end of the fiscal year when actual costs are known. However, budgeted rates are
unlikely to equal actual rates because they are based on estimates made up to 12 months before
actual costs are incurred. We now consider adjustments that are needed when, at the end of the
fiscal year, indirect costs allocated differ from actual indirect costs incurred

The difference between the overhead applied to work-in-process and the actual overhead costs of
a period is called either under applied or over applied overhead. Under the actual costing
approach there is no under/over estimation or application but this problem exists in normal
costing approach only. Under allocated (over allocated) indirect costs are also called under
applied (over applied) indirect costs and under absorbed (over absorbed) indirect costs.

If applied overhead cost < actual overhead cost, the difference between applied overhead and
actual overhead is called under applied overhead.

If applied overhead cost > actual overhead cost, the difference between applied overhead and
actual overhead is called over applied overhead.

Under /¿ applied overhead =( MOH – control)– ( MOH – applied)

Manufacturing overhead control indicate the actual indirect manufacturing costs incurred during
a particular period taken from the manufacturing overhead subsidiary ledger. Whereas, the
manufacturing overhead applied indicate the indirect manufacturing costs allocated to WIP under
the predetermined rate. Generally, there are two indirect-cost accounts in the general ledger that
have to do with manufacturing overhead: 1) Manufacturing Overhead Control, the record of the
actual costs in all the individual overhead categories (such as indirect materials, indirect
manufacturing labor, supervision, engineering, utilities, and plant depreciation) and 2)
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Manufacturing Overhead Allocated, the record of the manufacturing overhead allocated to

individual jobs on the basis of the budgeted rate multiplied by actual unit of the allocation base.

 Disposition of under applied and over applied overhead: is the process of removing
under/over applied overhead from manufacturing overhead account at the end of an
accounting period. There are three approaches to dispose-off under/over applied overhead
costs. These are: adjusted allocation rate approach, proration approach and write-off to cost
of goods sold approach.
i. Adjusted allocation rate approach
The adjusted allocation-rate approach restates all overhead entries in the general ledger and
subsidiary ledgers using actual cost rates rather than budgeted cost rates. First, the actual
manufacturing overhead rate is computed at the end of the fiscal year. Then, the manufacturing
overhead costs allocated to every job during the year are recomputed using the actual
manufacturing overhead rate (rather than the budgeted manufacturing overhead rate). Finally,
end-of-year closing entries are made. The result is that at year-end, every job-cost record and
finished goods record—as well as the ending Work-in-Process Control, Finished Goods Control,
and Cost of Goods Sold accounts—represent actual manufacturing overhead costs incurred.
ii. Proration approach
Proration approach spreads under allocated overhead or over allocated overhead among ending
work-in-process inventory, finished goods inventory, and cost of goods sold. Materials inventory
is not included in this proration, because no manufacturing overhead costs have been allocated to
it. Companies prorates under allocated or over allocated amounts on the basis of the total amount
of manufacturing overhead allocated during a particular accounting period (before proration) in
the ending balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods
Sold. On the other hand, some companies use the proration approach but base it on the ending
balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold before
proration.
iii. Write-off to cost of goods sold approach

Closing the over/under application to cost of goods sold is the simplest method. The over
application is closed to cost of goods sold by debiting manufacturing overhead control account
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and crediting cost of goods sold account for the total over application. On the other hand, the
under application is closed by debiting cost of goods sold account and crediting manufacturing
overhead control account. Therefore, the under applied overhead results increase in cost of goods
sold, whereas, the over applied overhead results decrease in cost of goods sold.

CGS xx MOH – control____

MOH – control xx actual xx xx- applied
Under application – xxx xxx – disposition of under applied MOH
0

(To record the disposition of under applied overhead)

MOH – control xx
CGS xx

(To record the disposition of over applied overhead)

Illustration: assume the following data for a particular company at the end of 2011. The applied
overhead for job no. 2 from the job cost sheet of the job was 3,520.

MOH – control (actual indirect manufacturing cost) $ 1,215,000

MOH – applied (estimated indirect manufacturing cost) 1,080,000
Cost of goods sold (CGS) at the end of a period 2,375,000
Finished goods (FG) at the end of a period 75,000
Work-in-process (WIP) at the end of a period 50,000
MOH – applied is prorated to CGD, FG and WIP based on the following percentage:
CGS $1,032,480 (95.6%)
FG 31,320(2.9%)
WIP 16,200 (1.5%)
Total $1,080,000 (100%)

Required:
1) compute the over/under applied overhead
2) present the required closing entry assuming
a) Adjusted allocation rate approach
b) Proration approach
 the MOH applied to each account

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 end balance of the selected accounts

c) Write – off to cost of goods sold approach.
Solution:
1) Over/under applied MOH = MOH –control – MOH – applied
= Actual MOH - Estimated MOH
Under applied overhead = $1,215,000 – 1,080,000 = $135,000
2) a) Adjusted allocation rate approach
Under applied overhead = 135,000/1,080,000 = 12.5%
For the job No.2, 12.5% of the applied overhead is allocated. Hence the cost reallocated to
job No. 2 is 12.5% of 3,520 = $440. Similar to this the remaining under applied over head is
allocated to all other jobs done during a period. Finally, the after reapplying the under
applied overhead to all jobs based on the actual rate, the balance in manufacturing overhead –
control and applied accounts will be equal. Hence, the closing entry at the end of the period
is required to close all under applied to each job CGS, FG and WIP.
Cost of Goods Sold (J1) xx
Finished Goods (J1) xx
Work-In-Process (J1) xx
Manufacturing overhead – applied (J1) xx

b) Proration approach
Alternative 1: Disposition of under applied overhead based on the amount of MOH applied to
each (CGS, FG and WIP). Hence, the disposition of the under applied overhead of $ 135,000 is
as follows:
CGS = 95.6% of under applied overhead = 0.956 * $135,000 = $129,060
FG = 2.9% of under applied overhead = 0.029 * $135,000 = $3,915
WIP = 1.5% of under applied overhead = 0.015 * $135,000 = $2,025
Total $135,000
Hence, the closing entry to close the under applied MOH cost is as follows:
Cost of goods sold $129,060
Finished goods 3,915
Work-in-process 2,025
Manufacturing overhead – applied 1,080,000
Manufacturing overhead – control 1,215,000
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Alternative 2: The under applied overhead is allocated to CGS, FG and WIP based on their
yearend balance:
Accounts Ending balance Percentage
CGS $2,375,000 95%
FG 75,000 3%
WIP 50,000 2%
Total $2,500,000 100%
Therefore, under applied overhead closed to
CGS = 95% of $135,000 = $128,000
FG = 3% of $135,000 = $4,050
WIP = 2% of $135,000 = $2,700
The closing entry will be:
Cost of goods sold $128,000
Finished goods 4,050
Work-in-process 2,700
Manufacturing overhead – applied 1,080,000
Manufacturing overhead – control 1,215,000

c) Write – off to cost of goods sold approach

The total under applied overhead (i.e. $135,000) is charged to cost of goods sold account only.
Hence the closing entry is;
Cost of goods sold $135,000
Manufacturing overhead – applied 1,080,000
Manufacturing overhead – control 1,215,000

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3.6 Process costing system

Process costing system is a product costing system commonly used in industries that convert raw
materials into homogeneous (i.e., uniform) products for long period or on a continuous basis. It
is used to determine the cost of products when products are manufactured under conditions of
mass production. Examples of companies using the process costing system are textile, chemical,
petroleum, sugar, cement, aluminum, drug, toilet paper, flour, gasoline and lubricating oils, and
others.
The system accumulates costs by departments, rather than by order and assigns those costs
uniformly to all units that pass through the department during a period because each unit is
identical and expected to receive identical inputs.
Unit cost =total cost incurred /t otal units output
Processing department: is an organizational unit where work is performed on a product and
where materials, labor, or overhead costs are added to the product. They are arranged in a
sequential manner of the overall production process. In other words, Products in a process
costing environment, such as bricks or potato chips, typically flow in sequence from one
department to another

A company can have as many or as few processing departments as are needed to complete a
product or service. Regardless of the number of processing departments, they all have two
essential features. First, the activity in the processing department is performed uniformly on all
of the units passing through it. Second, the output of the processing department is homogeneous;
in other words, all of the units produced are identical.

The department production report is prepared for each department in which work is done on
products. Department production report is used to record all information regarding to the
production in a department. This includes:

 The number of units moving through a department during a period;

 Costs charged to the department and costs disposed from the department;

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 Computation of unit product cost for a department (unit cost = total cost of a
department/total units of products pass through the department).
Process-costing systems separate costs into cost categories according to when costs are
introduced into the process. Often only two cost classifications—direct materials and
conversion costs—are necessary to assign costs to products. Why only two? Because all direct
materials are added to the process at one time and all conversion costs generally are added to the
process evenly through time. If, however, two different direct materials were added to the
process at different times, two different direct-materials categories would be needed to assign
these costs to products. Similarly, if manufacturing labor costs were added to the process at a
different time from when the other conversion costs were added, an additional cost category—
direct manufacturing labor costs—would be needed to separately assign these costs to products.

3.7 Materials and cost flows in process costing system

Cost accumulation is simpler in a process costing system than in a job-order costing system. In a
process costing system, instead of having to trace costs to hundreds of different jobs, costs are
traced to only a few processing departments. First, note that a separate Work in Process account
is maintained for each processing department .In contrast; in a job-order costing system the
entire company may have only one Work in Process account. Second, note that the completed
production of the first processing department is transferred to the Work in Process account of the
second or subsequent processing department. This transfer continues until the last department.
After further work in the final department, the completed units are then transferred to Finished
Goods.

Finally, note that materials, labor, and overhead costs can be added in anyprocessing department
—not just the first. For instance costs in the second department Work in Process account consist
of the materials, labor, and overhead costs incurred in the second department plus the costs
attached to partially completed units transferred in from the first department (called transferred-
in costs).

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a) Requisition or issuance of materials: First materials are drawn from the store room using a
material requisition form (MRF). Then, materials can be added to any processing department.
The journal entry to record materials used in the first department is:
Work-in-process – department 1 XXX
Raw materials – control XXX
b) Labor costs: In process costing, labor costs are traced to departments—not to individual
jobs. The following journal entry records the labor costs
Work in Process—department 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Salaries and Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
A similar entry would be made to record labor costs in other subsequent departments.
c) Overhead costs: In process costing, as in job-order costing, predetermined overhead rates
are usually used. Manufacturing overhead cost is applied according to the amount of the
allocation base that is incurred in the department. The following journal entry records the
overhead cost applied in the first department:
Work in Process—department 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Manufacturing Overhead - applied. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
d) Completing the cost flows: Once processing has been completed in a department 1; the units
are transferred to the next department for further processing. The following journal entry
transfers the cost of partially completed units from the first Department to the second
Department:
Work in Process—department 2 . . . . . . . . . . . . . . . .... XXX
Work in Process—department 1 . . . . . . . . . . . . . . . . . . . . . . . . . XXX
If other materials are subsequently added to another department, the journal entry will be:
Work in process – department 2 XXX
Raw materials – control XXX
After processing has been completed in the second Department, if the second department is the
last department the costs of the completed units are transferred to the Finished Goods inventory
account:
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Work in Process—department 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX

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Finally, when a customer’s order is filled and units are sold, the cost of the units is transferred to
Cost of Goods Sold:
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Finished Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
To summarize, the cost flows between accounts are basically the same in a process costing
system as they are in a job-order costing system. The only difference at this point is that in a
process costing system each department has a separate Work in Process account.

3.8 Process costing methods

Equivalent units of production for a period can be computed in different ways. The FIFO
method of process costing is a method in which equivalent units and unit costs relate only to
work done during the current period. In contrast, the weighted average method blends together
units and costs from the current period with units and costs from the prior period. In the
weighted-average method, the equivalent units of production for a department are the number
of units transferred to the next department (or to finished goods) plus the equivalent units in the
department’s ending work in process inventory. The choice between these two methods of
costing is based on the presence of the beginning and ending inventory with in a department.
Generally there are three cases to see the application of FIFO and Weighted average methods
under the process costing system.
Case 1: process costing with no/zero beginning and zero ending work-in-process inventories.
(That is, all units are started and fully completed within the accounting period.) This case
presents the most basic concepts of process costing and illustrates the feature of averaging of
costs. This is a common situation in service sector companies. For instance, banks to compute
the unit cost of processing a certain amount of customers deposit.
Case 2: process costing with zero beginning but some ending WIP inventories. This case
introduces the five steps of process costing and the concept of equivalent units.
Case 3: process costing with both beginning and ending WIP inventory. This case adds more
complexity and illustrates the effect of weighted-average and first-in, first-out (FIFO) cost flow
assumptions on cost of units completed and cost of work-in-process inventory.
Case 1:

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Illustration: XY- auto assembling company has two processing departments, the Assembling
department (department 1) and the Testing department (department 2).Assume all direct material
costs are added to the production at the beginning and conversion costs evenly throughout the
production process. Data for the Assembling department for the month of January, 2012 are as
follows:
Units’ data:
- Work-in-process, beginning ------------------------------------------------------ 0 units
- Units started during the current period ------------------------------------ 50,000 units
- Units completed and transferred out to testing department ------------- 50,000 units
Cost data:
- Direct materials -------------------------------------------------- birr 60,000
- Conversion costs ------------------------------------------------- birr 95,000
Required: prepare the cost of production report for the assembly department for the year 2012
ended on December 31.
XY- auto assembling company
Cost of production report – Assembling department
For the month ended, January 31, 2012
Quantity schedule:
 Units to account for:
- WIP, beginning --------------------------------------------------------- 0 units
- Units started during the period --------------------------------- 50,000 units
Total units to account for -----------------------------------------------50,000 units
 Units accounted for:
- Units completed and transferred to testing department --- 50,000 units
- Units still in process (WIP – ending) ------------------------------ 0 units --- 50,000 units
Equivalent units schedule:
Direct materials Conversion costs
Items completed and transferred to testing department 50,000 units 50,000 units

Units still in process 0 units 0 units

Total equivalent units 50,000 units 50,000 units

Cost to account for schedule:

Costs added by assembling Total cost Equivalent units (EU) Weighted average cost per EU
department (dep’t 1)

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- Direct materials Birr 60,000 50,000 units Birr 60,000/50,000 units = birr
1.2 per unit
- Conversion costs Birr 95,000 50,000 units Birr 95,000/50,000 units = birr
1.9 per unit
Total cost to account for: Birr 155,000 Birr 3.1 per unit

Cost accounted for schedule:

 Cost of units completed and transferred to testing department
(50,000 units * birr 3.1 per unit) -------------------------------------------------- birr 155,000
 Cost of WIP, ending inventory (0 units * birr 3.1 per unit) -------------------- 0
 Total cost accounted for ------------------------------------------------------------ birr 155,000
Assembling department (dep’t 1):
Work-in-process – Assembling dep’t ----------------------------- birr 60,000
Accounts payable --------------------------------------------------------------------- 60,000
(To record direct materials purchased and used in production during January)
Work-in-process – Assembling dep’t ----------------------------- birr 95,000
Various accounts such as Wages Payable Control and accumulated Depreciation ---- 95,000
(To record conversion costs for January; examples include energy, manufacturing supplies, all
manufacturing labor, and plant depreciation).
Work-in-process – Testing dep’t ------------------------------- birr 155,000
Work-in-process – assembling dep’t ---------------------------------------- 155,000
(To record cost of goods completed and transferred from assembly to testing during February).

WIP – assembling dep’t WIP – testing dep’t

Birr 60,000 155,000 155,000
95,000
155,000

Case 2: process costing with zero beginning and some ending inventory
Illustration
Consider the following information for the Testing department in the above example for the
month of January, 2012.
Units’ data:
- WIP, beginning inventory (January 1) --------------------------------------- 0 units
- Units started or received from dep’t 1 during the month -------------- 50,000 units
- WIP, ending inventory
(100% completed as to direct materials and 40% as to conversion costs) --15,000 units
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Cost data:
- Direct materials added by the department ------------------------------- birr 60,000
- Conversion costs ------------------------------------------------------------ birr 82,000
Required: prepare the cost of production report for department 2 (Testing department).
XY- auto assembling company
Cost of production report – Assembly department
For the month ended, January 31, 2012

Quantity schedule:
 Units to account for
- WIP, beginning ------------------------------------------ 0 units
- Units started during January -------------------- 50,000 units
 Units accounted for
- Units completed and transferred to Finished goods ------- 35,000 units
- WIP, ending (100% DM and 40% CC) --------------------- 15,000 units -- 50,000 units

Equivalent units schedule:

Direct materials (DM) Conversion costs (CC)
Items completed and transferred out from the 35,000 units 35,000 units
department
WIP, end (Units still in process) 15,000 6,000 (40% of 15,000)
Total equivalent units 50,000 units 41,000 units

Cost to account for schedule (costs incurred to date):

Costs added by the Assembly Total cost Equivalent units of Weighted average cost
department work done during the per EU
month of February
- Direct materials (DM) Birr 60,000 50,000 units Birr 60,000/50,000 units
= birr 1.2per unit
- Conversion costs (CC) Birr 82,000 41,000 units Birr 82,000/41,000 units
= birr 2 per unit
Total cost to account for: Birr 142,000 Birr 3.2 per unit

Costs accounted for schedule (assignment of costs):

 Cost of finished goods (35,000 units * birr 3.2 per unit) ---------------------------- birr 178,500
 Cost of WIP, ending inventory
DM (15,000 * birr 1.2 per unit) --------------------------- birr 18,000
CC (6,000 * birr 2 per unit) -------------------------------- birr 12,000 birr 30,000
 Total cost accounted for ----------------------------------------------------------------- birr 142,000

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Note that: steps 1 and 2 measure the physical units of output and equivalent units of output for a
particular production department. Whereas, step 3 and 4 compute costs per equivalent units,
summarize total costs to account for and assign total costs to: units completed and to units in
ending work-in-process inventory account.

Journal entries to record the accumulation and assignment of costs to the Assembling and
Testing department are:
Case 3: process costing with both beginning and ending WIP
There are two methods of costing in this case: these are
1) Weighted average process costing method (WA)
2) First-in-First out process costing method (FIFO)
Illustration: assume in the previous example, the company add all direct materials at the start of
the process for the assembly department and at the end of the process in testing department.
Conversion costs are applied uniformly throughout the process in both departments. Information
for the Assembling department for the month of January is as follows:
Unit data for February:
- WIP, beginning (100% DM, 2/3 completed for CC) ----------- 3,000
- Units started during January -----------------------------------------9,000 12,000
- Units completed and transferred to dep’t 2 ---------------------- 8,000
- WIP, ending (100% DM, 1/2 completed for CC) ----------------4,000 12,000
Cost data:
- WIP, beginning (prior period cost)
Direct materials --------------------------------------------------- birr 9,600
Conversion costs ------------------------------------------------- birr 6,400
- Current period cost:
Direct materials ---------------------------------------------------- birr 27,000
Conversion costs --------------------------------------------------- birr 24,000
Required: prepare cost of production report for the Assembly department for the month of
January by using:
1) Weighted average/WA method
2) First in First out/FIFO method
Solution:
1) Weighted average method

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The weighted-average process-costing method calculates cost per equivalent unit of all work
done to date (regardless of the accounting period in which it was done) and assigns this cost to
equivalent units completed and transferred out of the process and to equivalent units in ending
work-in-process inventory. The weighted-average cost is the total of all costs entering the Work
in Process account (whether the costs are from beginning work in process or from work started
during the current period) divided by total equivalent units of work done to date.
The cost per equivalent unit=cost incurred ∈the previous period+ current cost /total equivalent units
XY- auto assembling company
Cost of production report - Assembly department
For the month ended, January 31, 2012
Quantity schedule:
 Units to account for
- WIP, beginning (2/3 completed) ---------------------- 3,000 units
- Units received from department 1 -------------------- 9,000 units 12,000
 Units accounted for
- Units completed and transferred to dep’t 2 ---------8,000 units
- WIP, ending (1/2 completed ) ------------------------ 4,000 units -- 12,000 units
Equivalent units schedule:
Direct materials (DM) Conversion costs (CC)
Items completed and transferred out 8,000 units 8,000 units
to the Testing department
WIP, end (Units still in process) 4,000 2,000 (50% of 4,000)
Total equivalent units 12,000 units 10,000 units
Cost to account for schedule:
Total cost Equivalent units of Weighted average cost
work done during per EU
the month of
February
DM:WIP–beginning ---- birr 9,600 Birr 36,600 12,000 units Birr 36,000/12,000 units
Current month ---- birr 27,000 = birr 3.05 per unit
CC: WIP –beginning --- birr 6,400 Birr 30,400 10,000 units Birr 30,400/10,000 units
Current month ---- birr 24,000 = birr 3.04 per unit

Total cost to account for: Birr 67,000 Birr 6.09 per unit

Costs accounted for schedule (assignment of costs):

 Cost of completed and transferred out units (8,000 units * birr 6.09 per units) --- birr 48,720
 Cost of WIP, ending inventory
DM (4,000 * birr 3.05 per unit) ------------------------------ birr 12,200

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CC (2,000 * birr 3.04 per unit) -------------------------------- birr 6,080 birr 18,280
 Total cost accounted for ------------------------------------------------------------ birr 67,000

2) First in first out (FIFO) method

The first-in, first-out (FIFO) process-costing method (1) assigns the cost of the previous
accounting period’s equivalent units in beginning work-in-process inventory to the first units
completed and transferred out of the process, and (2) assigns the cost of equivalent units worked
on during the current period first to complete beginning inventory, next to start and complete
new units, and finally to units in ending work-in-process inventory. The FIFO method assumes
that the earliest equivalent units in work in process are completed first.

A distinctive feature of the FIFO process-costing method is that work done on beginning
inventory before the current period is kept separate from work done in the current period. Costs
incurred and units produced in the current period are used to calculate cost perequivalent unit of
work done in the current period. In contrast, equivalent-unit and cost per-equivalent-unit
calculations under the weighted-average method mergeunits andcosts in beginning inventory
with units and costs of work done in the current period.
Units completed and transferred out = Units in beginning WIP + units started and
completed during the current period (for the remaining units)

XY- auto assembling company

Cost of production report - Assembly department
For the month ended, January 31, 2012
Quantity schedule:
 Units to account for
- WIP, beginning (2/3 completed) ---------------------- 3,000 units
- Units received from department 1 -------------------- 9,000 units 12,000 units
 Units accounted for
- Units completed and transferred to dep’t 2
Units from WIP, beginning --------------- 3,000
Units started during January ------------- 5,000 8,000
- WIP, ending (1/2 completed ) -------------------------- 4,000 units -- 12,000 units
Equivalent units schedule:

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Direct materials (DM) Conversion costs (CC)

WIP – beginning inventory 3,000 * 0 = 0 units (3000 * 1/3) = 1,000
Items started and completed during the current month 5,000 units 5,000 units
WIP, end (Units still in process) 4,000 2,000 (50% of 4,000)
Total equivalent units 9,000 units 8,000 units
Cost to account for schedule:
Total cost Equivalent units of Cost per EU for the work
work done during the done during January
month of February
WIP–beginning: (prior period cost)
- DM ------- birr 9,600
- CC -------- birr 6,400 Br. 16,000

Costs added during January: Birr 27,000/9,000 units =

- DM -------- birr 27,000 9,000 units birr 3 per equivalent unit&
- CC --------- birr 24,000 Br. 51,000 8,000 units 24,000/8,000 units = birr 3
per equivalent unit
Total cost to account for: Br. 67,000 Birr 6 per unit

Costs accounted for schedule (assignment of costs):

Total cost = DM + CC Direct materials (DM) Conversion cost (CC)

Cost of units completed

and transferred out:
(8,000 units)

 WIP, beg (3,000 units)

- Costs added to beginning

work in process in the
previous period
Birr 16,000 9,600 6,400
- Costs added to beginning
WIP during the current
period
Birr 3,000 0 units * birr 3= birr 0 1,000 * birr3 = birr 3000
- Total cost from
beginning inventory Birr 19,000

 Units Started and 5,000* birr 3 = birr 15,000 5,000 * birr 3 = birr 15,000
completed (5,000
units) Birr 30,000

Total costs of units

completed and transferred
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out

Birr 49,000
Work in process, ending Birr 18,000 4000 * birr 3 =birr 12,000 2000 * birr 3 =birr 6,000
(4,000 units):
Total costs accounted for Birr 67,000

Note that: The weighted-average ending inventory is higher than the FIFO ending inventory by
$280. This would be a significant difference when aggregated over the many thousands of
products that the company makes. When completed units are sold, the weighted-average method
in our example leads to a lower cost of goods sold and, therefore, higher operating income and
higher income taxes than the FIFO method.
Transferred-in costs:
Many process-costing systems have two or more departments or processes in the production
cycle. As units move from department to department, the related costs are also transferred by
monthly journal entries. Transferred-in costs (also called previous-department costs) are costs
incurred in previous departments that are carried forward as the product’s cost when it moves to
a subsequent process in the production cycle. Transferred-in costs are treated as if they are a
separate type of direct material added at the beginning of the process. That is, transferred-in
costs are always 100% complete as of the beginning of the process in the new department. When
successive departments are involved, transferred units from one department become all or a part
of the direct materials of the next department; however, they are called transferred-in costs, not
direct material costs.
Illustration:

Consider the following information for the Testing department in the above example for the
month of January, 2012.

Units’ data:
- WIP, beginning inventory (100% DM, 60% CC) ------------------------- 1,000 units
- Units started or received from dep’t 1 during the
month (transferred-in units) ---------------------------------------------- 8,000 units
- WIP, ending inventory (100% completed as
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To direct materials and 40% as to conversion costs) ------------------- 2,000 units

WIP, beginning (prior period cost)
- Transferred-in cost ----------------------------------------------- birr 14,280
- Direct materials --------------------------------------------------- birr 0
- Conversion costs ------------------------------------------------- birr 6,400
Cost data: (for January or current period)
- Transferred-in cost --------------------------------------------------------- birr 48,720
- Direct materials added by the department ------------------------------- birr 0
- Conversion costs ------------------------------------------------------------ birr 71,600
Required: prepare the cost of production report for department 2 (Testing department).
1) Weighted average method
2) FIFO method
Solution:
1) Transferred- in costs and the Weighted average method
The transferred-in cost is birr 48,720 (i.e. cost of goods completed in the Assembly and
transferred out to the Testing department).
XY- auto assembling company
Cost of production report – Testing department
For the month ended, January 31, 2012
Quantity schedule:
 Units to account for
- WIP, beginning -------------------------------------------------------1,000 units
- Units received from department 1 (Assembling dep’t) ------- 8,000 units 9,000 units
 Units accounted for
- Units completed and transferred to Finished goods ------- 7,000 units
- WIP, ending (100% DM and 40% CC) --------------------- 2,000 units -- 9,000 units
Equivalent units schedule:
Transferred-in Direct materials (DM) Conversion costs (CC)
costs
Items completed and 7,000 units 0 units 7,000 units

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transferred out from the

department to FG
WIP, end (Units still in 2,000 units 0 units 800 (40% of 2,000)
process)
Total equivalent units 9,000 units 0 units 7,800 units
Cost to account for schedule (costs incurred to date):
Total Equivalent units of work Weighted average cost
production done during the month per EU
cost of February
Costs of goods received from
the Assembling department
(dep’t 1) (Transferred-in cost)
- WIP, beginning- 14,280
- Current period –48,720 Birr 63,000/9,000 units =
Birr 63,000 9,000 birr 7per unit
Costs added by the Testing
department (department 2)
 Direct materials (DM)
- WIP, beginning –birr 0 Birr 0/0 units = birr 0 per
- Current period – birr 0 Birr 0 0 units unit
 Conversion costs (CC)
- WIP, beginning– 6,400 Birr 78,000/7,800 units =
- Current period– 71,600 Birr 78,000 7,800 units birr 10per unit
Total cost to account for: Birr 141,000 Birr 17per unit

Costs accounted for schedule (assignment of costs):

 Cost of finished goods (7,000 units * birr 17per unit) ------------------------- birr 119,000
 Cost of WIP, ending inventory
Transferred-in costs (2000 * birr 7) ------------------ birr 14,000
DM (2,000 * birr 0 per unit) -------------------------------- birr 0

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CC (800 * birr 10per unit) ---------------------------- birr 8,000birr 22,000

 Total cost accounted for ------------------------------------------------------------ birr 141,000

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Journal entries:

Work-in-process- Testing dep’t ------------------------- birr 48,720

Work –in-process – Assembly dep’t ------------------------------------ birr 48,720
(To record the transferred in cost from the Assembly dep’t to the Testing dep’t)

Work-in-process – Testing dep’t ----------------------------- birr 72,600

Various accounts such as Wages Payable Control and
Accumulated Depreciation -------------------------------------------------------- 72,600
(To record all conversion costs incurred in the Testing department during the month of January)

Finished goods -------------------------------- birr 119,000

Work-in-process – Testing dep’t ------------------------- birr 119,000
(To record the cost of goods completed and transferred out from the Testing department)
2) Transferred- in costs and FIFO method
The transferred-in cost is birr 49,000 (i.e. cost of goods completed in the Assembly and
transferred out to the Testing department) under the FIFO method for the Assembly dep’t.
XY- auto assembling company
Cost of production report - Assembly department
For the month ended, January 31, 2012
Quantity schedule:
 Units to account for:
- WIP, beginning (60% completed)------------------------------ 1,000 units
- Units received from department 1(assembly dep’t) ---------8,000 units 9,000 units
 Units accounted for:
- Units completed and transferred to finished goods
Units from WIP, beginning --------------- 1,000
Units transferred-in January -------------- 6,000 7,000
- WIP, ending (40% completed ) --------------------------- 2,000 units ------- 9,000 units

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Equivalent units schedule:

Transferred-in Direct materials (DM) Conversion costs (CC)
costs (TIC)
Units completed and transferred
out to finished goods:
- WIP beginning inventory
- Units completed
transferred from the
0 units 0 units = 400 (1000 * 40%)
current month transferred-
in units

6,000 0 units 6,000 units

WIP, end (Units still in process)
from the current period units

2,000 units 0 units 800 (40% of 2,000)

Total equivalent units 8,000 units 0 units 7,200 units

Cost to account for schedule:

Total cost Equivalent units of work Cost per EU for the

done during the month of work done during
February January
WIP, beginning:
- Transferred-in cost --
14,280
- Direct material ------- 0 Birr 20,680
- Conversion costs -----
6,400
Costs added during January: Birr 49,000/8,000 = birr
- Transferred-in cost - 8,000 units 6.125 per unit;
49,000 0 units 0/0 = birr 0 per unit
- DM ------------------ 0 7,200 units 71,600/7200 = birr 9.94
- CC -------------------71,600
Birr 120,600

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Total cost to account for: Birr 141,280 Birr 16.1per unit

Costs accounted for schedule (assignment of costs):

Total cost Transferred-in Direct materials Conversion cost

costs
Cost of units
completed: (7,000
units)
 WIP, beg Birr 20,680
(1,000)
0 EU * birr 6.125 0 EU * birr 0 (birr 400 EU * birr 9.94
- Costs added to
beginning work in (0 birr) o) (3,978birr)
process in current Birr 3,978
period

-Total from
beginning WIP Birr 24,658

 Total cost of 6,000 EU * birr 0 EU * birr 0 per 6,000 EU * birr

Units 6.125 per EU = EU = birr 0 9.94 per EU = birr

transferred birr 36,750 59,667

and completed
Birr 96,417
(6,000 units)

Total cost of units

transferred out to
FG
Birr 121,075

Work in process, 2,000 EU * birr 0 EU * birr 0 per 800 EU * 9.94 per

ending (2,000 6.125 per EU = EU = birr 0 EU = birr 7,955
units): Birr 20,205 birr 12,250
Total costs Birr 141,280

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 Cost & Management Accounting-I

accounted for

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 Cost & Management Accounting-I

Note: for the transferred-in costs

1. Be sure to include transferred-in costs from previous departments in your calculations.

2. In calculating costs to be transferred on a FIFO basis, do not overlook costs assigned in the
previous period to units that were in process at the beginning of the current period but are now
included in the units transferred.
3. Unit costs may fluctuate between periods. Therefore, transferred units may contain batches
accumulated at different unit costs.
4. Units may be measured in different denominations in different departments. Consider each
department separately.
3.9 Hybrid costing system:
Product-costing systems do not always fall neatly into either job-costing or process-costing
categories. A hybrid-costing system blends characteristics from both job-costing and process
costing systems. Product-costing systems often must be designed to fit the particular
characteristics of different production systems. Many production systems are a hybrid: They
have some features of custom-order manufacturing and other features of mass-production
manufacturing. Manufacturers of a relatively wide variety of closely related standardized
products (for example, televisions, dishwashers, and washing machines) tend to use hybrid-
costing systems.

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