AFAR

Process Costing

I. Process costing defined

A system of accumulating costs of production by department or cost center. It is used by industries where a large
number of similar product pass through different departments in a continuous process until completed in last
department.
1. chemical processing
2. oil refining
3. food processing
4. manufacturer of multiple vitamin and mineral product

II. Basic Features of Process Costing

1. Homogenous units pass through a series of similar processes.
2. Each unit in each process receives a similar dose of manufacturing costs.
3. Manufacturing cost flows and the associated journal entries are generally similar to job-order costing.
4. There is a Work in Process account for each process.
5. The department cost of production report is the key document for tracking manufacturing activity and costs.
6. Manufacturing costs are accumulated by a process for a given period of time.
7. Unit costs are computed by dividing the departmental costs of the period by the output of the period.
III. Comparison of Process and Job order cost systems

Similarities Job order Process

Manufacturing cost Direct materials, direct labor and
elements overhead Direct materials, direct labor and overhead
Accumulation of the cost
of materials, labor and (same journal entries for these 3
OH elements) (same journal entries for these 3 elements)

Flow of costs WIP, F/G, AND CGS WIP, F/G, AND CGS

Differences: Job order Process

Number of WIP accounts
used ONE WIP account only Different WIP for each different department.
Point at which total costs Total cost is completed when the job is
is determined completed. Total costs are determined at the end of the period.
unit cost is determined by dividing the Unit cost is equal to the total manufacturing costs for the
Unit cost computations total cost per job by the units produced period divided by the units produced during the period.

IV. Materials, Labor, and Overhead Cost Entries

Materials cost Work in process-Dept. A XX
Raw materials XX
Labor Costs Work in process- Dept. A XX
Salaries and wages payable XX
Overhead costs Work in process- Dept. A XX
Manufacturing overhead applied XX
When units are transferred to the next department (e.g. Dept. B)
Work in process-Dept. B XX
Work in process-Dept. A XX
When units are completed and transferred to finished goods
Finished goods XX
Work in process-Dept. B XX

V. Objectives of Process Costing

1. To determine how manufacturing costs incurred should be allocated.
2. To compute the total unit costs for the product for income determination.

VI. Cost of Production Report defined

It is the document that summarizes the manufacturing activity that takes place in a process department for a given period of
time. It contains two sections, the Quantity Schedule and the Cost Schedule

VII. Steps in Cost of Production Report

There are five steps that must be followed in preparing a cost of production report:
1. Analysis of the flow of physical units
2. Calculation of equivalent units of production.
3. Computation of unit cost
 4. Valuation of inventories (goods transferred out and ending work in process)
5. Cost reconciliation

VIII. First-In, First-Out and. Weighted Average method

First-In, First-Out of process costing- the method of cost assignment that computes an average cost per equivalent
unit of production for the current period; keeps beginning inventory units and costs separate from current period
production and costs.
Weighted Average Method of process costing- a composite of the cost of the various sources of funds that computes
an average cost per equivalent unit of production for all units completed during the current period; combines beginning
inventory units and costs with current production and costs, respectively, to compute the average.

Comparison of Weighted Average and FIFO Costing Methods

Weighted Average FIFO Method
Overview No distinction is made between Units in the beginning work in process
completed units from beginning inventory are reported separately from
work in process inventory and units started in the current period.
completed units from the current
period
Cost of production report
1. Quantities Same procedures for both methods
2. Equivalent Production All units completed – 100% EUP WIP, beg – only % done during the
current period is added to EUP
3. Costs to be accounted for Cost of WIP, beginning – added to Cost of WIP, beginning – not included in
the current costs the computation of unit costs.
4. Costs accounted for Cost of completed units: Cost of completed units =
EUP x one unit cost xxx WIP, beg
(Cost last period +
EUP x unit cost) xxx
+ EUP current prod. x u.c. xxx

IX. Equivalent Units of Production (EUP) defined

 EUP is the complete units that could have been produced given the total amount of productive effort expended
for the period under consideration.
 It is the measure of work done during the period, express in fully completed units

Computation of Equivalent Units of Production (EUP)

Weighted average Materials, Labor or First-In, First Out (FIFO) Materials, Labor or
overhead overhead
Completed and transferred units XX Completed and transferred units XX
Add Work in process, end (work XX Add Work in process, end (work done XX
done this period x WIP, end units) this period x WIP, end units)
EUP XX Less Work in process, beginning (work XX
done last period x WIP, beg. units)
EUP

Based on the above formula, if there are no work in process beginning units, equivalent units of production under the first-
in, first out method and weighted average are the same.
X. Direct Materials Added in the Subsequent Department
Effects on units and cost
1. No increase in units but with increase in costs.
2. Increase in units and costs.
Problem 1

ABC Manufacturing has the following data for the month:

Quantity data:
WIP, beg (20% complete) 50,000
Started in process 100,000
WIP, end (70%) 40,000

Cost data:
WIP, beg:
Materials 188,000
Labor 158,000
Overhead 316,000
Costs during the period:
Materials 640,000
Labor 256,000
Overhead 512,000
Manufacturing costs are applied evenly throughout the process.
 Required: Prepare the Cost of Production Report using:
a. Average Method
b. FIFO Method

Problem 2
DEF Manufacturing has the following data for the month:
Quantity data:
WIP, beg (25% complete) 50,000
Started in process 130,000
WIP, end (60% complete) 20,000
Costs data:
WIP, beg.
Materials 16,700
Labor 7,660
Factory overhead 4,690
Costs added this period:
Materials 131,200
Labor 31,900
Factory overhead 15,950

Materials are applied using the following:

20% at the start of the process
50% when the process is 55% complete
30% when the process is 90% complete

Conversion costs are applied evenly throughout the process.

Required: Prepare the Cost of Production Report using:

a. Average Method
b. FIFO Method

Problem 3
Jayson Callangan Manufacturing has the following data for the month:
Second Dept.
WIP, beg (40% complete) 20,000
Received prec. Dept. 50,000
WIP, end (70% complete) 10,000
Costs data:
WIP, beg.
Transferred in 30,000
Materials 35,000
Conversion costs 93,000
Costs added this period:
Transferred in 250,000
Materials 550,000
Conversion costs 1,180,000

Materials are using the following:

a. 50% at the start of the process.
b. 50% end of the process.
c. Conversion costs are applied evenly throughout the process.

Required: Prepare the Cost of Production Report using:

a. Average Method
b. FIFO Method

ACCOUNTING FOR LOST UNITS

LOSS UNITS refers to missing units at the end of the processing. Loss units are classified into evaporation loss and spoilage
loss. Evaporation loss refers to the normal decrease in units or volume which is necessary or inherent in processing. Spoilage
loss refers to unwanted destruction or breakage of units during processing. Loss can discrete or continuous. Discrete production
loss is a reduction in units that occurs at a specific point in a production process. If not specifically identifiable, discrete loss is
assumed to have occurred at the end of process. Continuous loss is any reduction in units that occurs uniformly throughout a
production process.

Classification of spoilage loss

1. Normal loss – 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. Normal lost units are expected
under efficient operating conditions and are uncontrollable.
 2. Abnormal loss – defined as lost units which are unusual, or unexpected or even though expected but it exceeds the
normal limits. A company does not expect such spoilage during the efficient operating conditions and can more likely
prevent (or avoid) abnormal loss than normal loss.

EUP COMPUTATION
1. Evaporation Loss is ignored and is not assigned EUP as if not placed into process and is not valued.
2. Spoilage Loss (normal or abnormal) is assigned an equivalent unit of production and is separately valued.

DISPOSITION OF THE COST OF SPOILAGE LOSS

1. Normal loss units
a. If the FOH application rate includes an estimate of spoilage, the cost of normal loss units is debited to FOH
Control up to the extent of estimated spoilage cost charged to the units; the excess is debited to loss
b. If the FOH application rate does not include an estimate of spoilage, the cost of normal loss is added to the cost of
good units. Good units are those that surpassed the point of inspection.
2. Abnormal loss units
- The cost of abnormal loss units is debited to Loss.

Problem 1
Use the following information to answer the next 5 questions:
UC 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 97,000 units
Beginning Work in Process Costs:
Material P15,000
Conversion 10,000
All materials are added at the start of the production process. UC inspects goods at 75 percent completion as to conversion.

1. Assume that the costs per EUP for material and conversion are P1.00 and P1.50, respectively. What is the amount of the
period cost for July using weighted average?
a. P0
b. P9,375
c. P10,625
d. P12,500

2. What are equivalent units of production for material assuming weighted average is used?
a. 107,000
b. 116,500
c. 120,000
d. 115,000

3. What are equivalent units of production for conversion costs assuming weighted average is used?
a. 113,525
b. 114,400
c. 114,775
d. 115,650

4. Assume that the costs per EUP for material and conversion are P1.00 and P1.50, respectively. What is the cost assigned to
normal spoilage, using weighted average, and where is it assigned? Value Assigned To
a. P7,437.50 Units transferred out and Ending Inventory
b. P7,437.50 Units transferred out
c. P8,750.00 Units transferred out and Ending Inventory
d. P8,750.00 Units transferred out

5. Assume that the costs per EUP for material and conversion are P1.00 and P1.50, respectively. Assuming that weighted
average is used, what is the cost assigned to ending inventory?
a. P29,725.00
b. P37,162.50
c. P38,475.00
d. P36,250.00

Problem 2
Use the following information to answer the next two questions:
The following information is available for UB Company for the current year:
Beginning Work in Process (75% complete) 14,500 units
Ending Work in Process (60% complete) 16,000 units
Started 75,000 units
Abnormal spoilage 2,500 units
Normal spoilage (continuous) 5,000 units
Transferred out 66,000 units

Costs of Beginning Work in Process:

Material P25,100
Conversion 50,000
Current Costs:
Material P120,000
Conversion 300,000
All materials are added at the start of production.

1. Using weighted average, what are equivalent units for material?

a. 82,000
b. 89,500
c. 84,500
d. 70,000

2. What is the cost per equivalent unit for material using weighted average?
a. P1.72
b. P1.62
c. P1.77
d. P2.07