UNIT IV – PROCESS COSTING

Learning Objectives:
1. Define and differentiate process costing from job order costing.
2. Compute the equivalent units of production
3. Prepare cost of production report

Process Costing
 Involves continuous production of identical units where the manufacturing process is endlessly
repetitive.
 A system of accumulating cost of production by department or cost center.
 Similar products are produced in the same manner and consume the same amount of costs.
 Commonly used by companies where a large number of similar pass through different departments in
continuous process until completed in the last department then transferred to finished goods inventory.
 The principal objective is the allocation of manufacturing cost every department to determine the unit
cost of the product for profit determination and inventory costing purposes.
 The cost associated with each department are summarized by preparing a report per department for a
period of time.. called Cost of Production Report”. The cost accumulated will be allocated between work
in process end and units completed and transferred to next department or in the case of final process to
finished goods inventory.

Comparison of Job Order Costing and Process Costing

Similarities:
1. Manufacturing cost elements - both record the three elements of costs – direct materials, direct labor
and factory overhead.

2. Accumulation of Costs – all materials purchased are debited to Materials, Materials issued to production
and direct labor incurred are debited to Work in process account, actual factory overhead costs are
debited to factory overhead control account and application of factory overhead may be credited to
applied factory overhead account.

3. Flow of Costs – the accumulated manufacturing cost are assigned to the same accounts in both costing
system: Work in Process, Finished Goods and Cost of Goods Sold.

Differences:

Job order Process Costing

1. Number of Work in Only one Work In Process Multiple WIP account are used
Process account used - account is used for each production department.

2. Point at which total cost is Total cost are computed when Total cost are determined at
determined the job is completed. then of each month while the
units are being processed.

3. unit cost computation UNIT COST = total cost per job/ UNIT COST = total mfg. cost for
units produced the period/units produced during
the period.
Accumulation of Costs by Department

 Units completed in one department are transferred to the next department accompanied by their
corresponding costs.
 Completed unit of one departments becomes the raw materials of the next department until the units are
converted to finished products.
 The output of Department 1 becomes the input of Department 2. Department 2 receives both the units
produced in Department 1 as well as its production costs.
 Upon completion of the process in Department 2, the cost of units completed consists of costs received
in Department 1 and cost incurred in Department 2.
 The cost of a unit increases as it progresses from one department to the next.

Assignment of Manufacturing costs

Process cost system accumulates the three elements of costs using the either of the following costing
procedures:

1. Normal costing – Direct materials and direct labor are applied as actual cost while factory overhead is
applied at a pre-determined rate.

2. Standard costing - Direct materials, direct labor and factory overhead are applied at standard cost of
estimated cost.

NOTE : for this unit - normal costing will be used.

Pro-forma Entries:

 Direct materials – usually applied to the first department, but they may also be added in the subsequent
departments. The entry to record direct materials used by each department is (3 departments):

Work in Process – Department 1 xxx

Work in Process – Department 2 xxx
Work in Process – Department 3 xxx
Materials xxx
To record direct materials used.

 Direct Labor

Work in Process – Department 1 xxx

Work in Process – Department 2 xxx
Work in Process – Department 3 xxx
Factory Payroll xxx
To record distribution of direct labor

 Factory Overhead – applied using a pre-determined application rate.

Work in Process – Department 1 xxx

Work in Process – Department 2 xxx
Work in Process – Department 3 xxx
Applied Factory Overhead xxx
To record applied factory overhead.
  Transfer to next Department:

From Department 1 to Department 2:

Work in Process – Department 2 xxx

Work in Process – Department 1 xxx
To record cost of units transferred out
from department 1 to department 2

From Department 2 to Department 3:

Work in Process – Department 3 xxx

Work in Process – Department 2 xxx
To record cost of units transferred out
from department 2 to department 3

 Transfer to Finished Goods:

From Department 3 to Stockroom (finished goods) awaiting sales

Finished Goods xxx

Work in Process – Department 3 xxx
To record cost of units transferred out
from department 3 to stockroom(finished goods)

PRODUCTION REPORT
 Prepared for each department by the cost accountant.
 Shows the number of units that were in process in the department at the start of the month, the number
of units started during the month, the number of units transferred out of the department during the
month, the number of units still in work in process at the end of the month and the percentage of
completion of the units still in process at the end of the month.

COST OF PRODUCTION REPORT

 An analysis of the activity in the department or cost center for the period. All costs chargeable to
department or cost center are presented according to cost elements.

 Prepared for each department at the end of the month.

 This report summarizes the cost incurred in the department, the average cost per unit of product, the
total cost units completed and transferred out of the department and the cost related to the ending
inventory of work in process in each department.

 Contains 2 sections:
1. Quantity Schedule
- Accounts for the physical flow of units in and out of departments.
- Divided into 2 parts:
a. Units to be accounted for – shows the number and source of units processed
during the month.
b. Units as accounted for – shows what happened t the units as presents in (a).
 2. Cost Schedule –
- Reconcile the cost figures. The total costs incurred in the production process must agree with
the total costs related to both the units that were fully completed and those that were partially
completed during the month.

 METHODS of Costing

1. FIFO Costing Method

 The flow of manufacturing operations is assumed that those units which are first placed in
process are presumed to be the first ones completed and those that are first completed are to
be the ones transferred out.
 Characteristics:
1. The work in process beginning in the department will require a separate computation for
its equivalent productions.
2. The units started, completed and transferred will have its own computation of equivalent
production.
3. The work in process ending in the department will require a separate computation for its
equivalent productions.

 The units cost are more accurate because they relate more directly to the units in the
beginning inventory and the units started and completed during the period.
 The unit costs reflect current conditions more clearly, because the cost of completed units that
were in process at the beginning of the period and the cost of units started during the period
are computed separately.

2. Average Costing Method

 In the computation of equivalent units of production, the stage of completion of the work in
process beginning is ignored and the total units completed and transferred during the period is
consider to have 100% completion.

Methods of Application of Elements of Cost to production

1. Even application of cost - it is considered that at any stage during the process of production, the
application of the three elements of cost are equal with one another. Only one computation of equivalent
of production should be made.

2. Uneven application of cost – the application of the three elements of cost to production varies at any
stage of production, so there should be as many computation of equivalent production as the elements of
cost that are unevenly applied.

Computation of Equivalent Units of Production

1. Even application of cost

Compute the equivalent production for each of the following independent cases, using FIFO and
AVERAGE method:

Illustrative problems

1: In process, beginning (30% completed) 6,000 units

Placed in process 50,000
In process, end ( 1/9 completed) 9,000
 Solution:
Quantity Schedule:
Actual Work Done EUP
In process beginning 6,000
Started 50,000
Units to be accounted for 56,000

FIFO:
Finished and transferred:
In process, beg. 6,000 70% 4200
Started, finished & transferred 41,000 100% 41,000
In process, end 9,000 1/9 1000
Units as accounted for 56,000 46200

AVERAGE:
Finished and transferred 47,000 100% 47,000
In process, end 9,000 1/9 1000
Units as accounted for 56,000 48,000

Notes:
1. FIFO: WD - for in process beg. for the current month should be 70%. It was already 30%
completed as of the end of last period, so work to be done the current period to
complete or finished the products is 70%.

2. AVERAGE: the stage of completion of the work in process beginning is ignored and the total
units completed and transferred during the period is consider to have 100% completion.

3. WD for in process, end is 1/9.

2. Transferred out 24,000 units

In process, end (2/3 done) 6,000
In process, beg. (1/5 done) ?
Placed in process 28,000

Solution:
Quantity Schedule:
Actual Work Done EUP
In process beginning 2,000
Started 28,000
Units to be accounted for 30,000

FIFO:
Finished and transferred:
In process, beg. 2,000 4/5 1600
Started, finished & transferred 22,000 100% 22,000
In process, end 6,000 2/3 4000
Units as accounted for 30,000 27600

AVERAGE:
Finished and transferred 24,000 100% 24,000
In process, end 6,000 2/3 4000
Units as accounted for 30,000 28,000

Note: total units to be accounted for is 30,000.. computed as follows:

Transferred out 24,000
In process, end 6,000 30,000
 3. Department X Department Y

In process, October 1 3,000 units 2,000 units

Stage of completion 1/3 1/5
Transferred to Dept. Y 26,000 ?
In process, Oct. 31 4,000 7,000
Stage of completion 1/5 2/7

Solution:
DEPARTMENT X
Quantity Schedule:
Actual WD EUP
In process beginning 3,000
Started 27,000
Units to be accounted for 30,000

FIFO:
Finished and transferred:
In process, beg. 3,000 2/3 2000
Started, finished & transferred 23,000 100% 23,000
In process, end 4,000 1/5 800
Units as accounted for 30,000 25800

AVERAGE:
Finished and transferred 26,000 100% 26,000
In process, end 4,000 1/5 800
Units as accounted for 30,000 26,800

DEPARTMENT Y

Quantity Schedule:
Actual WD EUP
In process beginning 2,000
Started(150% x 28,000) 26,000
Units to be accounted for 28,000

FIFO:
Finished and transferred:
In process, beg. 2,000 4/5 1600
Started, finished & transferred 19,000 100% 19,000
In process, end 7,000 2/7 2000
Units as accounted for 28,000 22600

AVERAGE:
Finished and transferred 21,000 100% 21,000
In process, emd 7,000 2/7 2000
Units as accounted for 28,000 23,000

2. Uneven Application of cost

 Illustrative problem 4:
Department D Department E
In process, May 1 2,000 units ( 1/3 incomplete) 3,000 units ( 1/5 incomplete)
Transferred to next Dept. 26,000 ?
In process, May. 31 5,000 6,000
Stage of completion 2/5 1/3

Conversion costs are applied evenly in all departments. Materials are applied as follows:
Department D – 30% at the start of the process, 25% when process is ½ completed, 25% when the
process is ¾ completed and the balance at the end of the process.

Department E – all at the start of the process:

REQ: Compute the equivalent units of production for materials and conversion costs using
a) FIFO b) Average

Solution:
Department D
Quantity Schedule: Materials Conversion Costs
Actual WD EUP WD EUP
In process beginning 2,000
Started 29,000
Units to be accounted for 31,000
FIFO:
Finished and transferred;
In process beg. 2,000 45% 900 1/3 667
Started, finished and transferred 24,000 100% 24,000 100% 24,000
In process , end 5,000 30% 1,500 40% 2000
31,000 25,500 26,667
AVERAGE:
Finished and transferred 26,000 100% 26,000 100% 26,000
In process, end 5,000 30% 1,500 40% 2000
31,000 27,500 28,000

Notes:
1. FIFO:
a) In process beg. - WD for materials – represents the materials applied to complete in process beg.
at
the beginning of the current month it is 1/3 incomplete or 2/3 completed, so materials applied last
month was 55% (30% at the start of the process, 25% when process is ½ completed); materials
to be applied the current month is 45% (25% when the process is ¾ completed and the balance
at the end of the process). Conversion costs are applied evenly during the process.

2. AVERAGE: the stage of completion of the work in process beginning is ignored and the total
units completed and transferred during the period is consider to have 100% completion.

3. In process, end – WD for materials - materials applied was 30% because stage of completion is 2/5 or
40%.. additional 25% materials will be added when the stage of completion is 50%.
 Solution:

Department E
Quantity Schedule: Materials Conversion Costs
Actual WD EUP WD EUP
In process beginning 3,000
Started 26,000
Units to be accounted for 29,000
FIFO:
Finished and transferred;
In process beg. 3,000 - - 20% 600
Started, finished and transferred 20,000 100% 20,000 100% 20,000
In process , end 6,000 100% 6,000 1/3 2,000
29,000 26,000 22,600

AVERAGE:
Finished and transferred 23,000 100% 23,000 100% 23,000
In process, end 6,000 100% 6,000 1/3 2,000
29,000 29,000 25,000

Note: In Department E – all materials are applied at the start of the process; In process beginning – WD
for materials is none or zero because the materials were applied last month at the start of the
process; but in process end will have 100% WD for materials .

Unit IV – Process Costing

Name: ___________________ Date: _______
Course/Section

Activity 1: Equivalent Production

Compute the equivalent production for each of the following independent cases, using FIFO and
AVERAGE method:

1. In process, end (3/8 completed) 28,000 units

In process, beg. ( 1/3 completed) 19,500 units
(units started in process is 150% of the Work in process end)

2. In process beginning (3/5 incomplete) 6,750 units

Finished and transferred units 10,500
(of the units started in process, ½ represent work in process end, which were 20% completed during the
current period)

3. Finished and transferred units 20,500

Started in process 25,000
(Work in Process beginning is only 25% of the Work in Process end and their stages of completion are
40% and 60%, respectively.)

4. Department 1 Department 2
In process, beginning 2,000 units 800 units
Dept. 1 - all materials
25% conversion costs
Dept. 2: - 80% materials
60% conversion costs
Started in process 22,600 21,600
In process, end 3,000 2,400
Dept. 1 - all materials
60% conversion costs
Dept. 2 - 75% materials
80% conversion costs

5. Department A Department B
In process, June 1 3,000 units ( 1/3 complete) 4,000 units ( 2/5 done)
Started . 30,000 ?
In process, May. 31 2,000 4,000
Stage of completion 40% complete 3/5

Conversion costs are applied evenly in all departments. Materials are applied as follows:
Department A – all at the start of the process:
Department B – 40% at the start of the process, 30% when process is ½ completed, and the balance
at the end of the process.

REQ: Compute the equivalent units of production for materials and conversion costs using:
a) FIFO b) Average
Cost of Production Report

1. The GDG Corporation operates two departments in its operations, namely Department I and II. Inventories,
cost, and production data for the month of December 2020 are as follows:

Quantity Department I Department II

In process, beginning 6,000 5,000

Stage of completion 2/3 3/5

Started in process 44,000 --

Transferred out 40,000 37,000

In process ending ? ?

Stage of completion 3/5 7/8

Cost

In process, beginning P 52,000 P 106,850

Added this month:

Materials 198,000 347,990

Labor 142,000 274,700

Overhead 26,000 184,500

Conversion costs are applied evenly in all departments. Materials are applied as follows:
Department I – all at the start of the process:

Department II – 30% at the start of the process, 40% when process is ½ completed 30% at the end

of the process.

Required: Prepare Cost of Production Report for the month of December 2020, using FIFO
Solution - illustrative Problem
GDG CORPORATION
Cost of Production Report
For the Month Ended December 31, 2020
FIFO
Department 1
Materials Conversion Costs
Quantity Schedule: Actual WD EP WD EP
In process, December 1 6,000
Started in process 44,000
Units to be accounted for 50,000

Finished & transferred (40,000 units)

In process, December 1 6,000 - - 1/3 2000
started, finished & transferred 34,000 100% 34,000 100% 34,000
In process, December 31 10,000 100% 10000 3/5 6,000
Units as accounted for 50,000 44,000 42,000

Cost Analysis: Total cost EP Unit cost

Cost to be accounted for
In process, Dec. 1 52,000
Cost added this month:
Materials 198,000 44,000 4.500
Labor 142,000 42,000 3.381
Factory Overhead 26,000 42,000 0.619
Total Factory cost 366,000 8.500
Cost to be accounted for 418,000

Cost as Accounted for:

Finished and transferred: ( 40,000 units)
In process, Dec. 1
Cost last month 52,000
Cost this month:
Conversion costs ( 2,000 x P 4.00) 8,000
Cost of in process Aug. 1, finished & transferred 60,000
Started, finished & transferred ( 34,000 units x P 8.50 ) 289,000
Total cost of transferred out ( 40,000 units) 349,000 40,000 8.725
In process, Dec. 31:
Cost this month:
Materials (10,000 x P 4.50) 45,000
Conversion costs (6,000 x P 4.00) 24,000 69,000
Cost as accounted for 418,000
 GDG CORPORATION
Cost of Production Report
For the Month Ended December 31, 2020
FIFO
Department 2
Materials Conversion Costs
Quantity Schedule: Actual WD EP WD EP
In process, December 1 5,000
Transferred in 40,000
Units to be accounted for 45,000

Finished & transferred ( 37,000 units)

In process, December 1 5,000 30% 1500 40% 2,000
started, finished & transferred 32,000 100% 32,000 100% 32,000
In process, August 31 8,000 70% 5,600 7/8 7,000
Units as accounted for 45,000 39,100 41,000

Cost Analysis: Total cost Units Unit cost

Cost to be accounted for
In process, December 1 106,850
Cost incurred this month:
Transferred in from Dept. 1 349,000 40,000 8.725
Cost added this dept.
Materials 347,990 39,100 8.900
Labor 274,700 41,000 6.700
Factory Overhead 184,500 41,000 4.500
Total Factory cost 807,190 20.100
Cost to be accounted for 1,263,040 28.825

Cost as Accounted for:

Finished and transferred: ( 37,000 units)
In process, Dec. 1
Cost last month 106,850
Cost this month:
Materials (( 1,500 x 8.90) 13,500
Conversion costs (2,000 x P 11.20) 22,400 35,750
Cost of in process Dec. 1, finished & transferred 142,600
Started, finished & transferred ( 32,000 x P 28.825) 922,400
Total cost of transferred out ( 28,000 units) 1,065,000 37,000 28.7838
In process, Dec. 31:
Cost from dept. 1 (8,000 x P 8.725) 69,800
Cost incurred this dept.
Materials ( 5,600 x P 8.90) 49,840
Conversion costs (7,000 x P 11.20) 78,400 128,240 198,040
Cost as accounted for 1,263,040
2. Dara, Inc. has the following production data for the month of March 2020;

Quantity Schedule: Department I Department II

In the process, beginning 2/3 15,000 1/3 9,000

Started, beginning 30,000 ?

In process, ending 2/5 5,000 7/8 8,000

Cost Analysis:

In process, beginning

Cost from preceding department P 9,000

Cost, this Department:

Materials P 8,145.00 P 3,996.00

Labor 3,315.00 1,998.00

Overhead 1,050.00 1,332.00

Cost added this month:

Materials 10,860.00 50,616.00

Labor 7,309.00 23,310.00

Overhead 2,534.00 15,540.00

In Department I all materials are added at the start of the process while labor and overhead are applied
evenly to the process.

In Department II 50% of materials are added at the start of the process and the balance is added when
the process is ¾ completed; conversion costs are applied uniformly to the process.

Required: Prepare Cost of Production Report using Average Method

Solution to Problem 2 - AVERAGE METHOD
DARA INC
Cost of Production Report
For the Month Ended March 31, 2020
AVERAGE METHOD

Department 1
Materials Conversion Costs
Quantity Schedule: Actual WD EP WD EP
In process, December 1 15,000
Started in process 30,000
Units to be accounted for 45,000

Finished & transferred 40,000 100% 40,000 100% 40,000

In process, March 31 5,000 100% 5000 2/5 2,000
Units as accounted for 45,000 45,000 42,000

Cost Analysis: Total cost EP Unit cost

Cost to be accounted for
Cost incurred this department:
Materials:
In process, March. 1 8,145
Cost this month 10,860 19,005 45,000 0.42233
Labor:
In process, March. 1 3,315
Cost this month 7,309 10,624 42,000 0.25295
Factory Overhead
In process, March. 1 1,050
Cost this month 2534 3,584 42,000 0.08533
Cost as Accounted for: 33,213 0.76062

Cost as accounted for:

Transferred to Dept. 2 (40,000 x
P 0.76062) 30,425 40,000 0.76062
In Process , end:
Cost incurred this dept.

Materials (5,000 * 0.42233) 2,112

Conversion Cost ( 2,000 * 0.33828) 677 2,788
Cost as accounted for: 33,213

Note: to compute for unit cost:

Materials: total cost / EP = P 19,005/ 45,000 = 0.42233
 DARA INC
Cost of Production Report
For the Month Ended March 31, 2020
AVERAGE METHOD

Department 2
Materials Conversion Costs
Quantity Schedule: Actual WD EP WD EP
In process, December 1 9,000
Transferred in 40,000
Units to be accounted for 49,000

Finished & transferred 41,000 100% 41,000 100% 41,000

In process, March 31 8,000 100% 8000 7/8 7,000
Units as accounted for 49,000 49,000 48,000

Cost Analysis: Total cost EP Unit cost

Cost to be accounted for
Cost transferred in from Dept. 1:
In Process beg. 9,000
Transferred in cost 30,425
Total transferred in costs 39,425 49,000 0.80459
Cost incurred this department:
Materials:
In process, March. 1 3,996
Cost this month 50,616 54,612 49,000 1.11453
Labor:
In process, March. 1 1,998
Cost this month 23,310 25,308 48,000 0.52725
Factory Overhead
In process, March. 1 1,332
Cost this month 15,540 16,872 48,000 0.35150
Cost as Accounted for: 136,217 1.99328
2.79787
Cost as accounted for:
Finished and Transferred (41,000 x P 2.79787) 114,713 41,000 2.79787
In Process , end:

Incurred from preceding dept. (8,000 x 0.80459) 6,437

Cost incurred this dept.

Materials (8,000 x 1.11453) 8,916

Conversion Cost ( 7,000 * 0.87875) 6,151 21,504

Cost as accounted for 136,217
 Unit IV – Process Costing

Name: ___________________ Date: _______

Course/Section _______________

Activity 2 – Cost of Production Report ( FIFO and AVERAGE)

1. The TROPA Corporation operates two departments in its operations, Department 1 and Department 2. The
inventories, costs and related production data for the month of July 2020 were as follows:

Department 1 Department 2
Units in beginning inventory
Department 1 (1/4 complete) 5,000
Department 2 ( ¾ complete) 500
Units started in process 15,000
Units transferred to Department 2 19,000
Units transferred to warehouse ?
Units in ending inventory :
Department 1 ( 3/4 complete) 1,000
Department 2 ( 3/5 complete) 1,500
Costs in beginning inventory
Cost from preceding department P 10,100
Materials P 14,950 5,150
Labor 13,275 9,000
Overhead 13,275 9,000
Cost added during the current month:
Materials P 94,500 P 57,000
Labor 130,375 74,100
Overhead 130,375 111,150

The following information was available for the two departments:

1. Department 1 – Materials are all applied at the beginning of the process while labor and overhead are
applied evenly throughout the production.

2. Department 2 – Materials are applied as follows: 20% materials at the start of the process; 25% upon
reaching 50% completion; 15% upon reaching 60% completion; 30% at 85%
completion and the balance at the end of the process. Labor and overhead are applied
uniformly throughout the process.

REQUIRED: COST OF PRODUCTION REPORT for Department 1 and Department 2 using:

a) FIFO Method b) AVERAGE Method.
2. The PRIME Corporation operates two departments in its operations, Department A and Department B. In
Department B, materials are all applied 40% at the beginning of the process and the balance at 75%
completion while labor and overhead are applied evenly throughout the production. The inventories, costs
and related production data for the month of October 2020 for Department B were as follows:

Department B
Units in beginning inventory (3/5 incomplete) 4,000
Units transferred from Department A ?
Units transferred to warehouse 33,500
Units in ending inventory ( 3/5 complete) 5,000
Transferred in costs from Department A P 476,503
Costs in beginning inventory
Cost from preceding department P 22,100
Cost this department:
Materials 17,150
Labor 12,000
Overhead 9,000
Cost added during the current month:
Materials P 157,000
Labor 114,100
Overhead 85,575

REQUIRED: COST OF PRODUCTION REPORT for Department B using Average method.

ACCOUNTING FOR LOST UNITS
NORMAL AND ABNORMAL LOST UNITS

1. Normal Lost Units

 are lost units which are inherent, usual or expected by the nature of operations and within tolerance
limits set by the company for human and machine errors and therefore, it cannot be avoided.

 are expected under efficient operating conditions and uncontrollable.

 reported as product cost, since eventually they become part of the cost of good units. The cost of the
lost units are included as part of all units finished or still in process. In other words the goods units
absorb the cost of the lost units. However, this principle still depends whether what particular stage
wherein the normal lost units normally occur.

A. The cost of normal lost units is charged to (a) completed units, and (b) units in process at the end
when:
1. Discovered at the beginning of the process
2. Discovered during the process and no quality control inspection is indicated.
3. Discovered at the end of the process.

Suggested procedures in calculating the equivalent units of production for normal lost units under:

1. A-1 and A-2:

a) Do not assign work done to the lost units, and

b) Adjust the unit cost from preceding department due to the decreased number of units.
c) The above procedures automatically charge the cost of the normal lost units to both
completed units and units in process at the end.

2. A-3:

a. Assign work done to the lost units

b. No need to adjust the unit cost from the preceding department despite the lost units.
c. Calculate the cost of the lost units and add to cost of completed units.

Note: The cost of normal lost units is charged to completed units only, when:
a. Discovered at the end of the process.
b. Discovered upon inspection and the units in process at the end have not yet reached the
inspection point.

3. B-1

a) Do not assign work done to the lost units.

b) Cost from preceding department will be charge to factory overhead.

4. B2 and B – 3:
a. assign work to be done to the lost units
b. the cost of normal lost units is charged as an abnormal lost units and debited to Factory
overhead control as a period cost.
 Equivalent Units of Production –
Stage of Inspection Work Done

Zero. Under the theory of neglect, any lost units

discovered at the start of production are treated as if they
Start of the production were never put into production because they are already
expected even before the actual production.

During the production (point of Zero. Lost units discovered during the production are
inspection not identified) assumed to have been discovered at the start of the
production because difficulties might arise finding the right
stage of completion for lost units.

End of production 100%. Because they are already completed when they
were discovered.

 Cost of Normal Lost Units –

1. First Department

a) Start of the production / No cost of lost units, because manufacturing costs

elements were not introduced in the production.
during the production

b) End of production Unit cost this dept. times Equivalent Units of

production of Normal lost units

2. Subsequent department

a) Start/during the Unit cost from preceding dept. times the actual normal
production lost units

b) End of the production (unit cost from preceding dept x the actual normal lost
units) plus (unit cost this dept. x Equivalent units of
production of normal lost units

 Absorbing Units
Method Start/During End

1. FIFO method

In process, beg. Finished & transferred X

Started/Received, finished & transferred X X

In process, ending X

Start/During End

2. WEIGHTED AVERAGE method

Finished & transferred X X

In process, ending X
2. Abnormal Lost Units

 lost units which is unusual or unexpected or even though expected but it exceeds the normal limits. A
company does not expect such spoilage during efficient operating conditions and can more likely
prevent 9or avoid) abnormal loss than normal loss.
 Cost of abnormal losses should be accummulated and treated as a loss in the period in which those
losses occurred. – this is justified by the cost principle.
 Any cost of abnormal loss is regarded as a period cost or to a current period expense account.
 Logical to charge abnormal loss to Factory overhead control account.
 Suggested procedures in calculating the Equivalent units of production of abnormal lost units.
a. if discovered at the beginning of the process, no need to assign work done. Any cost from
preceding department is charged as an abnormal loss.
b. if discovered at any points in the process, with or without indicated inspection point, assign work
done and the cost is charged to Factory overhead control.

 Equivalent Units of Production:

Stage of Inspection Work Done

Start of the production Zero. Since the lost units were discovered at the start of
production, then they will be removed from the actual
production and will never be processed.

During the production It depends on the point of inspection or what particular

percentage abnormal loss happens.

End of production 100%. Because they are already completed when they
were discovered.

 Cost of Abnormal Lost Units

1. First Department

a) Start of the production No cost of lost units, because manufacturing costs

elements were not introduced in the production.

b) During the production Unit cost this dept. x the Equivalent Units of production
(EUP) of Abnormal lost units.

c) End of production
Same as loss during the production

2. Subsequent department

a) Start/during the production Unit cost from preceding dept. times the actual
abnormal lost units
(Unit cost from preceding dept. x Actual Abnormal lost
units) plus (Unit cost this dept. x Equivalent Units of
b) During the production production of abnormal lost units.)

(Unit cost from preceding dept x the actual abnormal

c) End of the production lost units) plus (unit cost this dept. x Equivalent units
of production of abnormal lost units)
Illustrative Problem: (Source: Cost Accounting by Norma De Leon, et.al)

1. Woodrose Corporation produces a product in two departments – A and B. Data for the month of
August, 2020 are given as follows for Dept. B.

Units:
Received from Dept. A 50,000
Completed and transferred to warehouse 40,000
In process, Aug. 31 ( 60% completed) 5,000
Lost units during the month 5,000

COSTS:
From Dept. A P 225,000
Added in Dept. B during the month:
Materials 135,000
Labor 103,200
Factory Overhead 103,200

In this department, materials are added 100% at the beginning of the process.

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

1. Lost units classified as normal, discovered at the beginning of the process.

2. Lost units classified as normal, discovered at the end of the process.
3. Lost units classified as abnormal, discovered at the end of the process.

Solution:
1. Lost units classified as normal, discovered at the beginning of the process.
WOODROSE CORPORATION
COST OF PRODUCTION REPORT
Month ended August 31, 2020

Department B
Quantity Schedule: Materials Conversion Costs
Actual WD EUP WD EUP
Units received from Dept. A 50,000

Units completed 40,000 100% 40,000 100% 40,000

Units in process 5,000 100% 5,000 60% 3,000
Unit lost - normal 5,000 -- --
50,000 45,000 43,000
Cost Analysis:
Cost charged to the department: Total Cost EUP Unit cost
Cost from preceding department P 225,000 50,000 P 4.50
Cost added this department:
Materials 135,000 45,000 3.00
Labor 103,200 43,000 2.40
Overhead 103,200 43,000 2.40
Total costs added P 341,400 7.80
Adjustment for lost units _________ .50
Total cost to be accounted for P 566,400 P 12.80

Cost accounted for as follows:

 Finished and transferred 40,000 units x P 12.80 P 512,000
In process, end : (5,000 units)
Cost from preceding dept. (5,000 x (P 4.50 + 0.50) P 25,000
Materials (5,000 x P 3.00) 15,000
Labor (3,000 x P 2.40) 7,200
Overhead (3,000 x P 2.40) 7,200 54,400
Total cost as accounted for 566,400

Computation for adjustment for lost units:

Method 1: Cost from preceding dept - units cost from preceding department
Total units received – lost units

= 225,000 / 45,000 = P 5.00 - 4.50 = 0.50

Method 2: units lost x unit cost from preceding dept

Total units received less lost units

= 5,000 units x P 4.50 = 22,500

45,000 45,000

= 0.50

JOURNAL ENTRIES:

1) Work in Process – Department B 225,000

Work in Process – Department A 225,000
To record cost of units transferred out
from department A to department B

2) Work in process Department B 341,400

Materials 135,000
Payroll 103,200
Factory overhead applied 103,200
Materials, labor and factory overhead applied

3) Finished goods 512,000

Work in process – Dept. B 512,000
Cost of goods completed

2. Lost units classified as normal, discovered at the end of the process.

 WOODROSE CORPORATION
COST OF PRODUCTION REPORT
Month ended August 31, 2020

Department B
Quantity Schedule: Materials Conversion Costs
Actual WD EUP WD EUP
Units received from Dept. A 50,000

Units completed 40,000 100% 40,000 100% 40,000

Units in process 5,000 100% 5,000 60% 3,000
Unit lost - normal 5,000 100% 5,000 100% 5,000
50,000 50,000 48,000
Cost Analysis:
Cost charged to the department: Total Cost EUP Unit cost
Cost from preceding department P 225,000 50,000 P 4.50
Cost added this department:
Materials 135,000 50,000 2.70
Labor 103,200 48,000 2.15
Overhead 103,200 48,000 2.15
Total costs added P 341,400 7.00
Total cost to be accounted for P 566,400 P 11.50

Cost accounted for as follows:

Finished and transferred (40,000 units x P 11.50) + ( 5,000 x 11.50) P 517,500
In process, end : (5,000 units)
Cost from preceding dept. (5,000 x P 4.50) P 22,500
Materials (5,000 x P 2.70) 13,500
Labor (3,000 x P 2.15) 6,450
Overhead (3,000 x P 2.15) 6,450 48,900
Total cost as accounted for 566,400

JOURNAL ENTRIES:

1) Work in Process – Department B 225,000

Work in Process – Department A 225,000
To record cost of units transferred out
from department A to department B

2) Work in process Department B 341,400

Materials 135,000
Payroll 103,200
Factory overhead applied 103,200
Materials, labor and factory overhead applied

3) Finished goods 517,500

Work in process – Dept. B 517,500
Cost of goods completed

3. Lost units classified as abnormal, discovered at the end of the process.

WOODROSE CORPORATION
 COST OF PRODUCTION REPORT
Month ended August 31, 2020

Department B
Quantity Schedule: Materials Conversion Costs
Actual WD EUP WD EUP
Units received from Dept. A 50,000

Units completed 40,000 100% 40,000 100% 40,000

Units in process 5,000 100% 5,000 60% 3,000
Unit lost - normal 5,000 100% 5,000 100% 5,000
50,000 50,000 48,000
Cost Analysis:
Cost charged to the department: Total Cost EUP Unit cost
Cost from preceding department P 225,000 50,000 P 4.50
Cost added this department:
Materials 135,000 50,000 2.70
Labor 103,200 48,000 2.15
Overhead 103,200 48,000 2.15
Total costs added P 341,400 7.00
Total cost to be accounted for P 566,400 P 11.50

Cost accounted for as follows:

Finished and transferred (40,000 units x P 11.50) P 460,000
Factory overhead control (abnormal lost units ( 5,000 x P 11.50) 57,500
In process, end : (5,000 units)
Cost from preceding dept. (5,000 x P 4.50) P 22,500
Materials (5,000 x P 2.70) 13,500
Labor (3,000 x P 2.15) 6,450
Overhead (3,000 x P 2.15) 6,450 48,900
Total cost as accounted for 566,400

JOURNAL ENTRIES:
1) Work in Process – Department B 225,000
Work in Process – Department A 225,000
To record cost of units transferred out
from department A to department B

2) Work in process Department B 341,400

Materials 135,000
Payroll 103,200
Factory overhead applied 103,200
Materials, labor and factory overhead applied

3) Finished goods 460,000

Factory Overhead control 57,500
Work in process – Dept. B 517,500
Cost of goods completed
Unit IV – Process Costing
Name: ___________________ Date: _______
Course/Section _______________

Activity 3 – Cost of Production Report with Normal and Abnormal Lost units ( FIFO and AVERAGE)
Problem 1: Normal Lost Units

Porthos Inc., uses three departments to produce a detergent. The Finishing Department is the third and last
step before the product is transferred to storage.

All materials needed to give the detergents its final composition are added at the beginning of the process in the
Finishing department. The following data for the Finishing Department for October have been made available:

Production data:

In process, October 1 ( ¾ converted) 10,000 gallons

Transferred-in from preceding department 40,000
Finished and trans to storage 35,000
In process, Oct. 31 ( ½ converted) 10,000

Additional data:
Work in process, Oct. 1:
Cost from preceding department P 38,000
Cost from this department :
Materials 21,500
Labor 39,000
Factory overhead 42,000
Total work in process inventory, Oct. 1 P 140,500
Transferred in during October P 140,000
Cost added in this department:
Materials P 70,000
Labor 162,500
Factory overhead 130,000
Total cost added during the current period P 362,500
Total cost to be accounted for P 643,000

REQUIRED: Cost of Production Report under a) FIFO and b) AVERAGE: if:

a) Lost units occur at the start of the production and are to be considered normal.
b) Lost units occur at the end of the production and are to be considered normal.

2. FARM Manufacturing Company applies process costing in the manufacture of its sole product, “STAR”:

Manufacturing starts in Department 1 where materials are all added at the start of processing. The good
units are then transferred to Department 2 where all the incremental materials needed for its completion
 are added after final inspection.

In Department 1, units are inspected at the end of processing while in Department 2 inspection takes place
when the units are 90% completed.

Department 1 uses FIFO costing while Department 2 uses average costing.

Production data for the month August, 2020 show the following:

Department 1 Department 2
Units:
Work in process, August 1 8,000 4,000
Work to be done 80% 20%
Work in process, August 31 12,000 7,000
Work completed 2/3 5/7
Started in process during August 60,000 ?
Normal Spoilage (4% of units started in process) 1,000
Abnormal lost units (1/4 of normal spoilage) 500

COSTS:
Work in Process, August 1
Transferred in P - P 114,180
Materials P 54,000 P 85,950
Conversion Costs P 39,000 P 112,290

Current Costs:
Transferred in - P ?
Materials P 792,000 P 336,000
Conversion costs P 1,235,520 P 513,000

REQUIRED: Cost of Production Report – Department 1 and Department 2.

Problem 3
The HIGH RISE Corporation operates two departments in its operations, Department 1 and Department 2. The
inventories, costs and related production data for the month of August 2020 were as follows:

Department 1 Department 2
Units in beginning inventory
Department 1 (1/4 complete) 5,000
Department 2 ( ¾ complete) 500
Units started in process 16,000
Units transferred to Department 2 ?
Units transferred to warehouse ?
Normal lost units 300 500
Abnormal lost units 200 300
Units in ending inventory :
Department 1 ( 7/8 complete) 1,600
Department 2 ( 3/5 complete) 1,000

Costs in beginning inventory

Cost from preceding department P 10,100
Materials P 14,950 5,150
Labor 13,275 9,000
Overhead 13,275 9,000

Cost added during the current month:

Materials P 94,500 P 57,000
Labor 130,375 74,100
Overhead 130,375 111,150

The following information was available for the two departments:

1. Department 1 – Materials are applied as follows: 20% materials at the start of the process; 25% upon reaching
50% completion; 15% upon reaching 60% completion; 30% at 85% completion and the
balance at the end of the process. Labor and overhead are applied uniformly throughout the
process.

2. Department 2 – Materials are all applied at the beginning of the process while labor and overhead are applied
evenly throughout the production.

3. In Department 1, units are inspected when the units are 75% completed (spoilage is discovered during
inspection) while n Department 2 , any lost units occur at end of the process.

REQUIRED: COST OF PRODUCTION REPORT:

1. Department 1 - FIFO Method

2. Department 2 – AVERAGE Method

Unit IV – Process Costing

Name: ___________________ Date: _______
Course/Section _______________

Activity 4 – Multiple Choice Problems

1. Maxwell Company adds materials at the start of the production. The following production information is
available for June:
Beginning Work-in-process inventory ( 45% complete as to conversion) 10,000 units
Started this period 120,000 units
Ending work-in-process inventory (80% complete as to conversion) 8,200 units
Beginning Work-In-Process Inventory Costs:
Materials P 24,500
Conversion 68,905
Current Period Costs:
Materials P 75,600
Conversion 130,053

What is the conversion cost per equivalent unit using the weighted average method?
a) P 1.01 b) P 1.05 c) P 1.55 d) 1.61

for 2- 6:
The cost data and production data for VIVA Company for the month of August, 2020 were as follows:

Cost data:
Work in process, August 1: Materials P 20,800
Conversion costs 27,600
Cost Added this month:
Materials 240,000
Conversion costs 640,800
Production data:
Work in process, August 1 ( 60% incomplete) 3,750 units
Started in production this Aguust 40,000 units
Transferred out 36,250 units
Work in process, August 31, ( 30% to be done) 6,500 units
Normal lost units 550 units
Abnormal lost units ?

All materials are added at the start of the process and lost units are detected at the inspection point of 75%
completion.

2. What are the equivalent units for materials? FIFO: _____ AVERAGE: ________

3. What are the equivalent units for conversion costs: FIFO: ____ AVERAGE: ____ .

4. Using FIFO method , what are the cost of assigned to units transferred out and units in ending work in
process?
Transferred out Ending WIP Transferred out Ending WIP
P 807,650 P 113,450 c) P 807,650 P 111,800
P 809,300 P 111,800 d) P 809,300 P 113,450

5. Using AVERAGE method , what are the cost of assigned to units transferred out and units in ending work in
process?.
Transferred out Ending WIP Transferred out Ending WIP
P 807,638 P 113,450 c) P 809,143 P 111,941
P 799,229 P 113,450 d) P 799,212 P 38,748

6. The cost of abnormal lost units?

FIFO AVERAGE FIFO AVERAGE
P 8,100 P 8,100 c) P 5,430 P 5,400
 P 9,900 P 9,920 d) P 8,100 P 8,112

7. The addition of materials at the start of the process in Department II increases the quantity by 20%. In
September 2020, 40,000 units were received from Department 1 with unit cost at P 3.00.

In accounting for cost from preceding department under FIFO method, what unit cost must be used?
a) P 2.40 b) P 2.50 c) P 3.00 d) not given

8. The addition of water at the start of the process in Department B increases the quantity of goods in process
by 25%. The quantity data for September 2020 are as follows:

In process, Sept. 1, 1/5 done 10,000 gallons

Received from Department A 80,000 gallons
In process, Sept. 30, ¼ done 12,000 gallons

What should be the equivalent units of production using :

FIFO method _ Average method .

for items 9 - 10:

The following data are given on the production of Pinto Company for July 2015:
Total Equivalent production 28,500 units
Placed in process, finished and transferred 20,000 units
In process end 8,000 units, 1/8 done
In process, beginning ? units , ¼ done
Placed in process ?

The FIFO costing method is used.

--
9. How many units were there in the beginning inventory of work in process? __________

10. How many units were placed in process?_______________________

11. The WREN Company manufactures the famous ticktock watch on an assembly line basis. January 1 work
in process consisted of 5,000 units partially completed. During the month an additional 110,000 units were
started and 105,000 units were completed, the ending work-in-process was 3/5 complete as to conversion
costs. Conversion costs are added evenly throughout the process. The following conversion costs were
incurred.

Beginning costs for work-in-process P 1,500

Total current conversion costs 273,920

The conversion costs assigned to ending work-in-process totaled P 15,360 using the FIFO method of process
costing.

What was the percentage of completion, as to conversion costs on the 5,000 units in Beginning work-in-
process?
a) 20% b) 40% c) 60% d) 80%

for items: 12 – 13:

Department X Department Y
 In process, October 1 3,000 units ( 1/3 incomplete) 2,000 units ( 1/5 incomplete)
Transferred to Dept. Y 26,000 ?
In process, Oct. 31 4,000 7,000
Stage of completion 1/5 2/7

Conversion costs are applied evenly in all departments. Materials are applied as follows:
Department X – all at the start of the process:
Department Y – 20% at the start of the process, 30% when process is ½ completed, 30% when the
process is ¾ completed and the balance at the end of the process.

12. the equivalent units of production for materials and conversion costs for using FIFO method:
Materials Conversion Costs
Department 1
Department 2

13. the equivalent units of production for materials and conversion costs using Average method:
Materials Conversion Costs
Department 1
Department 2

__14. BOW Company has the following information for July:

Units started 100,000 units
Beginning work-in-process (35% complete) 20,000 units
Normal spoilage (discrete) 3,500 units
Abnormal spoilage 5,000 units
Ending work-in-process ( 70% complete) 14,500 units
Transferred out 9,700 units
Beginning work-in-process costs:
Material P 15,000
Conversion 10,000

All materials are added at the start of the production process. Bow Company inspects goods at 75%
completion as to conversion.

Assume the costs per EUP for material and conversion are P 1.00 and P 1.50, respectively. What is the
amount of the period cost for July using FIFO?

a) P 0 b) P 9,375 c) P 10,625 d) P 12,500

15. Information concerning Department B of SSS Co is a s follows:

Units Cost Transferred Materials Conversion Total Cost
in
Work in process beg. 5,000 P 6,300 P 2,900 P - P 3,400 P 6,300
Units transferred in 35,000 58,000 17,500 25,500 15,000 58,000
Total 40,000 P 64,300 P 20,400 P 25,500 18,400 64.300
Units completed 37,000 ====== ======= ======= ====== =======
Work in process, end 3,000

Conversion costs were 20% complete as to the beginning work in process and 40% complete as to the ending
work in process. All materials are added at the end of the process. SSS Co. uses the average method. The
portion of the total cost of ending work in process attributable to transferred in cost is:

a) P 0 b) P 1,500 c) P 1,530 d) P 1,650

End