Process Costing

Mellbourne C. Poliran
Central Mindanao University
METHODS OF APPLYING ELEMENTS OF
COST TO PRODUCTION
1. Even Application – Under this method, it is assumed that the
three elements of cost (direct materials, direct labor, and
manufacturing overhead) are introduced uniformly at every stage of
the production process. As a result, only one computation of
equivalent units of production is required.
2. Uneven Application – Under this method, the introduction of cost
elements varies at different stages of the production process.
Consequently, separate computations of equivalent units are
required for each cost element that is applied unevenly.
Example
XYZ Manufacturing Corporation has the following data:
• Units received from preceding department – 15,000 units
• Units completed and transferred – 11,000 units
• Units in process, end (70% completed) – 4,000 units
CASE 1: Materials are added 100% at the beginning of the process.
CASE 2: Materials are added at the end of the process in the department
CASE 3: Materials are added 50% at the beginning of the process and
remaining 50% added when the units are 40% completed.
CASE 4: Materials are added 50% at the beginning of the process, 30%
when the units are 20% complete, and 20% at the end of the process.
CASE 1

Labor &
Actual Materials
Overhead
Work Done EP Work Done EP
Units received 15,000
Units
completed and 11,000 100% 11,000 100% 11,000
transferred
Units in
4,000 100% 4,000 70% 2,800
process, end
Total
Equivalent 15,000 15,000 13,800
Production
CASE 2

Labor &
Actual Units Materials
Overhead
Work Done EP Work Done EP
Units received 15,000
Units
completed and 11,000 100% 11,000 100% 11,000
transferred
Units in
4,000 0% 0 70% 2,800
process, end
Total
Equivalent 15,000 11,000 13,800
Production
CASE 3

Labor &
Actual Units Materials
Overhead
Work Done EP Work Done EP
Units received 15,000
Units
completed and 11,000 100% 11,000 100% 11,000
transferred
Units in
4,000 100% 4,000 70% 2,800
process, end
Total
Equivalent 15,000 15,000 13,800
Production
CASE 4

Labor &
Actual Units Materials
Overhead
Work Done EP Work Done EP
Units received 15,000
Units
completed and 11,000 100% 11,000 100% 11,000
transferred
Units in
4,000 80% 3,200 70% 2,800
process, end
Total
Equivalent 15,000 14,200 13,800
Production
Comprehensive Problem
• The following data were taken from the books of Anderson Co. for
the month of August 2025.
Production Data
Units Department 1 Department 2
Started / Received 30,000 24,000
Completed & transferred 24,000 21,000
In process, end 6,000 3,000
Stage of completion of ending
50% 50%
WIP
Costs
Costs Department 1 Department 2

Materials P150,000 P84,000

Labor 81,000 45,000

Overhead 54,000 22,500

• In Department 1, materials are added at the beginning of the process,

while in Department 2, materials are added at the end of the process.
Required: Prepare the Cost of Production Report for Department 1 and
Department [Link] the necessary journal entries. Prepare the Cost of
Goods Manufactured Statement.
Solution: Production Report (Department 1)
• 1. Quantity Schedule

Particulars Units
Units started 30,000
Units completed and transferred 24,000
Units in process, end 6,000
Total units accounted for 30,000
Solution: Production Report (Department 1)
• Equivalent Units of Production
• Materials
Particulars % Equivalent Units
Units completed 100% 24,000
Ending WIP 100% 6,000
Total EU 30,000

• Labor and Overhead

Particulars % Equivalent Units
Units completed 100% 24,000
Ending WIP 50% 3,000
Total EU 27,000
Solution: Production Report (Department 1)
• Cost per Equivalent Unit
• Materials: P150,000 / 30,000 EU = P5.00
• Labor: P81,000 / 27,000 EU = P3.00
• Overhead: P54,000 / 27,000 EU = P2.00
• Total unit cost, Department 1: P5.00 + P3.00 + P2.00 = P10.00
Solution: Production Report (Department 1)
• Cost Assignment
• Units completed and transferred =24,000 × P10.00 = P240,000
• Ending WIP:
Materials: 6,000 × P5.00 = P30,000
Labor: 3,000 × P3.00 = 9,000
Overhead: 3,000 × P2.00 = 6,000
• Total ending WIP = P45,000
• Total costs accounted for: P240,000 + P45,000 = P285,000
Solution: Production Report (Department 2)
1. Quantity Schedule

Particulars Units
Units received from Department 1 24,000
Units completed and transferred 21,000
Units in process, end 3,000
Total units accounted for 24,000
Solution: Production Report (Department 2)
[Link] Units of Production
Transferred-in Cost
Particulars % Equivalent Units
Units completed 100% 21,000
Ending WIP 100% 3,000
Total EU 24,000

Materials
Particulars % Equivalent Units
Units completed 100% 21,000
Ending WIP 0% 0
Total EU 21,000
Labor and Overhead
Particulars % Equivalent Units
Units completed 100% 21,000
Ending WIP 50% 1,500
Total EU 22,500
Solution: Production Report (Department 2)
3. Cost per Equivalent Unit
• Cost from preceding department: P240,000 / 24,000 EU =
P10.00
• Materials: P84,000 / 21,000 EU = P4.00
• Labor: P45,000 / 22,500 EU = P2.00
• Overhead:P22,500 / 22,500 EU = P1.00
• Total unit cost, Department 2: P10.00 + P4.00 + P2.00 + P1.00 =
P17.00
Solution: Production Report (Department 2)
• 4. Cost Assignment
• Units completed and transferred: 21,000 × P17.00 = P357,000
• Ending WIP:
• Cost from preceding department: 3,000 × P10.00 = P30,000
• Materials: 0 × P4.00 = 0
• Labor: 1,500 × P2.00 = 3,000
• Overhead: 1,500 × P1.00 = 1,500
• Total ending WIP = P34,500
• Total costs accounted for: P357,000 + P34,500 = P391,500
Solution: Production Report (Department 2)
• Summary of Unit Costs
• Department 1
• Materials = P150,000 / 30,000 = P5.00
• Labor = P81,000 / 27,000 = P3.00
• Overhead = P54,000 / 27,000 = P2.00
• Total = P10.00
• Department 2
• Transferred-in = P240,000 / 24,000 = P10.00
• Materials = P84,000 / 21,000 = P4.00
• Labor = P45,000 / 22,500 = P2.00
• Overhead = P22,500 / 22,500 = P1.00
• Total = P17.00
Solution: Journal Entries
a. Materials issued
• Work in Process – Dept. 1 150,000
Work in Process – Dept. 2 84,000
Materials 234,000
b. Labor cost
• Work in Process – Dept. 1 81,000
Work in Process – Dept. 2 45,000
Payroll 126,000
c. Overhead applied
• Work in Process – Dept. 1 54,000
Work in Process – Dept. 2 22,500
Factory Overhead Applied 76,500
d. Interdepartmental transfer of cost
• Work in Process – Dept. 2 240,000
Work in Process – Dept. 1 240,000
e. Transfer to finished goods
• Finished Goods 357,000
Work in Process – Dept. 2 357,000
Solution: Cost of Goods Manufactured
Statement
ANDERSON CO.
Cost of Goods Manufactured Statement
For the Month of August 2025

Direct materials P234,000

Direct labor 126,000
Factory overhead 76,500
Total manufacturing cost P436,500
Less: Ending work in process, August 31 79,500
Cost of goods manufactured P357,000
Accounting for Losses in Production
• Losses in Production Process
► Losses in a production process may occur continuously or at a
specific point.
• ► Types of losses:
(1) Continuous loss
(a) Normal
(b) Abnormal
• (2) Discrete loss
(a) Normal
(b) Abnormal
Accounting for Losses in Production
• Continuous loss
► This type of loss is assumed to occur uniformly throughout the process.
• ► Normal continuous loss is accounted for using the method of neglect
which excludes the spoiled units in the EUP schedule.
• Note:
► Excluding the spoiled units in the EUP schedule results in a smaller EUP
and dividing manufacturing costs by a smaller EUP increases the cost per
EUP.
○ In effect, the spoilage cost is spread over the good units transferred out
and those units in the ending WIP.
• ► Normal continuous loss is treated as a product cost.
• ► Abnormal continuous loss is extended in the EUP schedule at 100%.
○ Treated as a period cost.
Accounting for Losses in Production
• Discrete loss
► This type of loss is ASSUMED TO OCCUR AT A SPECIFIC POINT
IN PRODUCTION PROCESS AND IS DETECTED WHEN AN
INSPECTION IS PERFORMED.
• ► Normal discrete losses should only be assigned to good units
since normal losses are treated as product cost.
• Note: Good units are those units that have already passed the
inspection point.
• ► Abnormal discrete loss is extended in the EUP schedule at the
point of inspection.
○ Treated as a period cost.
Example
• Units in beginning WIP inventory (40% complete) .............. 20,000
Units started during the month ......................................... 220,000
Units completed and transferred ...................................... 190,500
Ending WIP inventory (70% complete) .............................. 32,000
Spoiled units ...................................................................... 17,500
• All materials are added at the start of production and conversion costs
are applied uniformly throughout the production process. The
company sets a normal loss percentage at 6% of the units started.
Assume the use of the weighted average method.
• Q-1: Assume the spoiled units are attributable to shrinkage that
occurred throughout the process. Compute for the EUP.
• Q-2: Assume the spoiled units were discovered when the units are
inspected at 80% completion. Compute for the EUP.
Answer 1: 226,800; 217,200
Description Units Materials % Materials EUP Conversion % Conversion EUP

Units
completed and 190,500 100% 190,500 100% 190,500
transferred out
Units in ending
32,000 100% 32,000 70% 22,400
WIP
Normal lost
13,200 0% – 0% –
units
Abnormal lost
4,300 100% 4,300 100% 4,300
units
Total Units
Accounted For 240,000
(TUAF)
WA EUP 226,800 217,200
Answer 1: 226,800; 217,200

• Note:
220,000 x 6% = 13,200
17,500 – 13,200=4,300
• Note:
► Shrinkage is considered a continuous loss. Normal continuous
loss is not extended in the EUP schedule. However, abnormal
continuous loss is extended at 100%.
• ► No cost will be assigned to the normal continuous loss units.
• ► Abnormal loss units will always be treated as period cost.
Answer 2: 240,000; 226,900
Description Units Materials % Materials EUP Conversion % Conversion EUP

Units
completed and 190,500 100% 190,500 100% 190,500
transferred out
Units in ending
32,000 100% 32,000 70% 22,400
WIP
Normal lost
13,200 100% 13,200 80% 10,560
units
Abnormal lost
4,300 100% 4,300 80% 3,440
units
Total Units
Accounted For 240,000
(TUAF)
WA EUP 240,000 226,900
Answer 2: 240,000; 226,900
Conversion
Description Units Materials % Materials EUP Conversion %
EUP
Units
completed and 190,500 100% 190,500 100% 190,500
transferred out
Units in ending
32,000 100% 32,000 70% 22,400
WIP
Normal lost
13,200 100% 13,200 80% 10,560
units
Abnormal lost
4,300 100% 4,300 80% 3,440
units
Total Units
Accounted For 240,000
(TUAF)
WA EUP 240,000 226,900
Answer 2: 240,000; 226,900
• Note:
220,000 x 6% = 13,200
17,500 – 13,200=4,300
• Note:
► Discrete losses are extended in the EUP schedule at the point of
inspection.
○ 100% is extended for materials because all materials are added at the start
of production.
• ○ 80% is extended with respect to conversion because the inspection point
is at 80% completion.
• ► Normal discrete losses will be assigned only to good units or those units
that have already passed the inspection point.
○ The cost of units transferred out will be increased by the cost of normal
discrete losses.