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AE212 - MODULE 6 Process Costing

Accountancy (Saint Louis College)

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MODULE 6 – PROCESS COSTING 8. The ending in process inventory are assigned

AE212: Cost Accounting And Control costs in accordance with their stage of
PROCESS COSTING completion.
When all units of product manufactured in a FLOW OF COSTS IN THE PROCESS COST
cost center are basically alike or homogeneous, SYTEM
keeping track of the cost of each separate batches Products being produced move from one
of product is not as important. Instead of job order process to another process until it is finally
costing, process costing can be used. In a process completed. Each process performs a part of the
costing system, materials, labor and factory whole production operation and transfers its
overhead are charged to cost centers. The cost completed units to the next department for
assigned to each unit is determined by dividing the additional and further processing. From the last
total cost charged to the cost center by the number process, completed units are transferred to the
of equivalent units produced. finished goods warehouse.
Louderback, et. al. describe process costing Production may pass through either a
as “the accumulation of costs by process, or sequential processing or a parallel processing.
department, for a period of time. The company When units must pass through one process before
calculates per-unit costs for goods passing through they can be worked on in later processes it is using
a process by diving cost for the process by sequential processing. But if units pass through two
production for the period.” Hence, process costing or more sequential processes to produce a finished
is used when products are manufactured under good, wherein partially completed units can be
conditions of continuous processing or mass worked on simultaneously in different processes
production. Process costing procedures are often and then brought together in a final process for
times called “continuous or mass production”. completion, it is using parallel processing. (Vicente)
(Matz, et al) Some examples of firms that greatly The following figures illustrate the two types of
use process costing are assembly-type manufacturing process:
manufacturing industries producing products such
as automobiles, airplanes, televisions, and many
other electric household appliances.
In process costing, the cost of completed
units must be computed by dividing total cost
incurred during the period by the total units
completed. The summary of costs takes place
through the preparation of a cost of production
report. The preparation of a cost of production
report is efficient, economical and timesaving
device for the collection of large amounts of data.
BASIC CHARACTERISTICS OF PROCESS
COSTING: MEASURING THE OUTPUT – The Equivalent
Production Concept
1. In process costing materials, labor and
overhead consumed are accumulated and With process costing, the task is to
reported by department rather than per order. determine the amount of production accomplished
during the period. Although this seems to be easy
2. Emphasis is on production for a given period
for finished goods, there is a problem with
rather than on customer specifications.
determining the amount of effort represented by the
3. A cost of production report is used to collect, incomplete products that may still be in process.
summarize and compute total and unit costs.
To accommodate partially completed units,
4. Costs are posted to departmental work in equivalent production is used. An equivalent
process accounts. production is the amount of production effort that if,
5. Production in process at the end of a period is concentrated on a single unit of product, would
expressed in terms of completed units. have resulted in a finished unit. The concept is also
6. Total cost charged to a department is divided referred to as effective unit of production. Thus, if
by total computed production of the department there are two units of product in work-in-process
in order to determine a unit cost for a given each one-half (1/2) completed, is as though
specific period. equivalent to one (1) completed unit.
7. Costs of completed units of a department are To illustrate, analyze the following problem:
transferred from process to process as the Assume that 10,000 units were started in process
product is being transferred to the next at the beginning of January. At the end of January,
department. 8,000 units were completed and 2,000 units work in

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process end with a 25% stage of completion. The The cost analysis section of the cost of
equivalent production is computed as follows: production report shows the periodic total and unit
cost including departmental and cumulative total
and unit costs as well the disposition of these
costs. The cost analysis section also presents how
the total cost was absorbed – it explains how much
Assume further that the costs for the period are: of the total cost went to finished units and
incomplete units. Lost units may have also have
incurred costs.
FIFO COSTING METHOD
FIFO (First-in-First-Out) Method procedures
assume that units in process at the beginning are
to be completed ahead of those that were newly
started in process in a given period. The equivalent
production of such units will be the work done on
The unit cost for the product is P5.50 computed by
them during the period and is equal to the whole
dividing the total factory cost of P46,750 by the
unit minus the stage of completion of the unit at the
equivalent production of 8,500 units.
beginning of the month.
Production may be accounted for as follows:
In first-in-first-out costing, beginning work in
process costs are kept separate from the additional
new costs incurred in the next period, thus giving
separate unit costs for beginning work in process
In the above example, the January 31 work units completed and for units newly started and
in process reached a 25% stage of completion and finished in the same period. In the first department,
is allocated a cost of 25% of the unit cost of P5.50. the cost of completed units in process at the
This is based on the assumption that materials, beginning of the period is computed first, followed
labor and factory overhead have been applied by the computation of the cost of units started and
uniformly during processing that each cost element finished within the period. Units in process at the
is also 25% of the unit material, labor and factory beginning will usually have completed unit cost that
overhead. is different from the unit cost for work started and
completed during the same period. In departments
The presence of incomplete units at the subsequent to the first, the procedure is the same,
beginning of a period poses another problem in the except that the cost of units transferred into these
computation of equivalent production. In such a departments is shown as a separate figure, and the
situation, either of two methods may be applied unit cost determined by dividing total units received
-FIFO COSTING METHOD or WEIGHTED with total costs received.
AVERAGE or (simply) AVERAGE METHOD.
The advantage of FIFO costing is that it
THE COST OF PRODUCTION REPORT supports a manager’s interest in controlling costs.
A cost of production report shows all costs The weighted – average per unit cost is not
chargeable to a department. It is not only the suitable for control purposes because it mixes
source for summary journal entries at the end of performance of the current period with performance
the month but also a most convenient way of in prior periods. Because the unit cost calculation
presenting and disposing costs accumulated during under FIFO uses (1) equivalent production that
the period. It is composed basically of two parts, includes only current work and (2) only the current
these are: quantity schedule and the cost analysis. period production costs, managers obtain
The quantity schedule shows the total performance data related to the current period, not
number of units for which a producing department to current and other periods. Additionally, a
is accountable. The disposition as to what processing company using standard costing must
happened to the total units placed in process form compute FIFO equivalent unit production to be able
part of the quantity schedule. Hence, the total units to determine variances, which depend on work
placed into process have to be accounted for in this done in the current period.
section. Normally, the units are accounted as UNIFORM/EVEN APPLICATION OF COSTS
finished or still in process, in some cases, there are Even application is based on the
lost units. Information provided by the quantity assumption that materials, labor and factory
schedule includes the equivalent production, which overhead are applied uniformly during processing.
is used to determine the cost of the ending This results to the same equivalent production for
inventory and the cost, transferred out of the each of the cost elements which is used in the
department. computation of the product unit cost for a
department.
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Under this assumption, the stage of UNEVEN APPLICATION OF COSTS

completion of a unit may also be determined using When the elements of cost such as
the processing time it has undergone. For example, materials, labor and factory overhead are applied
if it takes 12 days to complete a manufacturing at different stages of the production process,
process, a unit that has been processed for 4 days equivalent production will have to be computed for
is considered 1/3 completed. Meaning to say that each cost element. For example, suppose all
1/3 of materials, labor and factory overhead are materials are added at the start of the process,
presumed to have been applied. then the equivalent production for materials will
To illustrate a simple process cost problem differ from that of labor and overhead.
using FIFO approach and even application of cost To illustrate, using the data from Masipag
in a single department, assume the following data Company, the computation of equivalent production
taken from the books of Masipag Company, during for materials and conversion costs is as follows:
the month of March of the current year:

Note that the units in process (8,000 units)

as of March 1 have zero percentage of work done
for materials. This is so because the same were
started for processing in the prior period, hence, all
materials were added then. On the other hand, the
64,000 units were just started in the month of
March hence, a 100% application of all materials is
done during March. Labor and overhead are
applied uniformly throughout the process. The
change in equivalent production for materials will
result to a change in product unit cost and
consequently to a different cost transferred to the
storeroom.
To fully illustrate the effect of uneven
application of costs to production, a cost of
production report is prepared using the same data
from Masipag Company except that the materials is
applied at 20% at the start of the process; 40%
when the process is 1⁄2 completed; and the
remaining 40% when the process is 80%
completed. Assume labor and overhead are
applied uniformly.

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Note that the finished units coming from the

in process at the beginning (8,000 units) received a
40% application for materials the reason is
because it was only 3/4 or 75% complete as of the
last period hence, an application of the remaining
20% were added this period to be able to complete
the same. On the other hand, the March 31 in
process units (12,000 units) have a 60% material
application because only 1/2 has been done as of
this period and the remaining 40% of materials will
only be added when the units have reached 80%
completion stage.
A more complete illustrative problem
involving several departments with at least two
periods is presented below. Observe the flow of
costs from one department to the other and from
one period to the next period. The corresponding
journal entries are also presented as well as the
Statement of Cost of Goods Manufactured.
JM Company has two successive
departments in its manufacturing operations. Data
for the months of July and August are as follows:

Note: The units started in process in

Department 2 were actually the units received or
transferred by Department 1. Also, the cost
absorbed by the units coming from Department 1
forms part of the cost to be accounted for. Observe
that the Work in Process, July 31 has completely
absorbed the cost transferred from Department 1 in
contrast to the cost placed in process by
Department 2 in the same period. This is true
because the units in process at the end in this
department have completely undergone processing
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in Department 1 though still undergoing processing units In process, July 1 have two sources of costs:
in Department 2. As far as Department 2 is cost last month and cost added this month.
concerned 8,400 units are completed.
Observe the transfer of costs as shown below by
the journal entries for the month of July:

The cost of production reports for JM Company for

the month of August is shown as follows:

FIFO COSTING METHOD

Under average costing, the work in process
at the beginning are no longer treated as a
separate lot from the units that were started in
process and completed during the period. All the
completed units are given 100% equivalent
production regardless of the stage of completion of
the units in beginning work in process. Thus, the
equivalent production is equal to completed units
plus work done on ending work in process
inventory.
Accounting for beginning work in process
inventory costs in departments other than the first
requires additional calculations because part of the
cost assigned to the work in process inventory is
cost from a preceding department.
The portion of work in process inventory
representing the cost of work done in preceding
departments is added to the cost of transfers
received during the current period from preceding
departments. An average cost for work done in
preceding departments is then computed. The
In the solution above, it is noted that the Units costs added in the department both from the cost
Finished and Transferred which, came from the of beginning work in process and costs during the
period are summed up and then divided by the
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equivalent units of production to compute for the that all completed units must have 100% work
average cost of the department. The average cost done regardless of the stage of completion of the
from preceding department and the average cost of beginning work in process inventory.
the department are then added together which For the cost data, the cost of beginning
results to the average cost of an equivalent unit work in process inventory is broken down into cost
completed in the department for the specific period. related to each of the cost elements – materials,
To illustrate, assume the following cost and labor and overhead. This is needed in average
production data from Tow Manufacturing Company costing since an average cost computed for each
for the month of March: of the cost elements should include costs from
beginning work in process inventory. In the cost of
production of Department T, materials cost from
work in process beginning of P507,000 is added to
the materials cost incurred by the department in the
current period amounting to P993,000. The sum,
P1,500,000 is then divided by the equivalent units
of production for materials which is 100,000 units to
arrive at an average materials cost of P15 per unit.
The same procedure is followed for labor and
overhead. These averages are added together to
compute for an average cost per unit of product
which is used in the valuation of inventory
transferred to the next department and inventory
remaining in work in process at the end of the
In the first department, all materials are period.
added at the start of the process, labor and
overhead are added uniformly during the process. Following is the cost of production report of
Department W, a subsequent department:
In the second department, 50% of the
materials are added at the start of the process and
the balance when the process is 1⁄2 completed.
Labor and overhead are added uniformly to
production.

The equivalent production for materials In a subsequent department, costs are

(100,000 units) is different from that of the further classified into costs from preceding
conversion cost (80,000 units) because all department and costs incurred in the current
materials are added at the start of the process. department. After identifying these costs, separate
Also note that though work in process beginning average unit costs are computed for the two
was not started in the current period, it is still given categories.
a 100% work done since it is included in the
Finished and Transferred item and is not The cost from preceding department
distinguished from units which were started, includes the cost transferred last month which is
finished and transferred in the current period. This carried by the beginning work in process inventory,
is in line with the assumption in average costing P522,000 and the cost units transferred in the
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current period, P3,150,000. The total cost 16. How is the beginning work in process handled
transferred from preceding department, P3,672,000 in average costing?
is then divided by the total units received last 17. How does the FIFO method differ from the
month and the current period, 90,000 units. This average costing method?
results to an average unit cost from preceding
department of P40.80. 18. When there is no beginning inventory, the cost
of production report under FIFO and average
The cost incurred in the department itself is costing methods would be the same. Explain.
computed in the same way as in a first department.
The resulting average unit cost for the current 19. Although costing is made simpler under the
department, P30 is added to the average unit cost average costing method, it is not necessarily
from preceding department, P40.80 to compute for made more accurate. Explain.
the average unit cost for the department in a 20. Discuss the procedures in using the average
specific period, P70.80. This is then used in costing to determine product unit cost in a
computing for the value of finished goods inventory succeeding department.
or units transferred out from the department. Since
the department finished 70,000 units, this is Exercise 6-1. TRUE OR FALSE.
multiplied by the average unit cost of P70.80 to get 1. In a job order cost system only one work in
the inventory cost of P4,956,000. process is used, while in process cost system,
multiple work in process accounts are used.
DISCUSSION QUESTIONS: 2. Both a job order and a process cost system
1. What is the primary objective in process track the same manufacturing cost elements –
direct materials, direct labor and factory
costing?
overhead.
2. Under what conditions would it be appropriate
3. In making the journal entry to record materials
to use a process costing system?
cost, the credit is generally to two or more
3. In what ways are job order and process work in process accounts.
costing similar?
4. In process costing, unit cost computation is
4. What are the distinguishing features of a done by departments and at the end of the
process cost system? fiscal period.
5. Why is cost accumulation simpler in a process 5. Equivalent production refers to the measure of
costing system than it is in a job order costing work done in terms of finished units.
system?
6. In process costing, accumulation of costs is by
6. A company has the choice of using either job departments while in job order costing, it is by
order or process costing system. Discuss the process.
advantages of each.
7. Process costing is adopted when the
7. How many work in process accounts are continuous type of manufacturing process is
maintained in a company that uses process used such as in the production of
costing? pharmaceuticals, minerals, beverages, flour
8. Compare the cost accumulation and and houses.
summarizing procedures of a job order system 8. In job order costing, unit cost is equal to the
and a process cost system. accumulated cost of a job divided by the
9. What is the purpose of a cost of production corresponding number of units; in process
report? costing, it is equal to departmental factory
10. Are month to month fluctuations in average costs divided by equivalent units of production.
unit costs computed in a cost of production 9. Job order costing is used for custom made
report meaningful data in controlling costs? products while process costing is used for
11. What is equivalent production? those that are mass produced.
12. What is the effect of equivalent production in 10. The task of making entries on different cost
computing product unit costs? sheets is eliminated under process costing.
13. Explain how the application of costs affects 11. Under process costing, stores requisitions and
equivalent production. clock cards need not be used.
14. Explain the procedures in using FIFO costing 12. Beginning work in process of 6,000 units was
to determine product unit cost. 40% done. If it was completed during the
current period, equivalent units of production
15. What are the advantages and disadvantages (FIFO) must be 2,400.
in using the FIFO costing method to determine
the valuation of inventory?
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13. When goods are processed in consecutive 27. The average method may be considered
producing departments, work in process simpler than the FIFO method but it is not
inventory as of any date must be the total of necessarily more accurate than the latter.
the goods in process in all the said 28. Under average costing, the equivalent
departments. production for materials and conversion costs
14. The FIFO method of process costing are combined regardless of whether material
determines ending inventory value by are added evenly or unevenly during process.
multiplying the equivalent units of each cost 29. Equivalent production is not affected by the
component by the related cost per equivalent percentage of completion of work in process
unit. beginning in average costing.
15. A cost of production report shows equivalent 30. A higher percentage of completion for work in
units of production but not physical units. process ending inventory results to a higher
16. In order to compute equivalent units of equivalent production.
production using FIFO method, work for the
period must be broken down to units started Exercise 6-2. COMPUTATION OF EQUIVALENT
during the period and units transferred out PRODUCTION
during the period. For each of the following independent cases,
17. The FIFO method will produce the same cost compute the equivalent production using [1] FIFO
of goods manufactured amount as the average and [2]Average
cost method when there is no beginning A. Work in process, beginning, 12,000 units – 1⁄4
inventory. completed and 8,000 units 1/8 completed;
18. The FIFO costing method considers the stage started in process, 50,000 units; transferred
of completion of beginning work in process in and completed, 40,000 units; work in process
the computation of equivalent units. end, 1/6 completed.
19. Units started in process plus units added to B. Work in process beginning:
production will always equal to units 10,000 units, 2/5 completed
transferred out plus units completed and still 10,000 units, 3/5 and
on hand plus ending units in process. 5,000 units, 2/5 completed.
20. In determining the unit cost of goods Placed into process: 40,000 units
transferred in from preceding department Finished and transferred: 45,000 units
under the average costing method, the total Work in process end: 1⁄2 is 4/5 completed
cost from preceding department in the current and the balance is 1⁄2 completed.
period is divided by the number of units C. Work in process beginning: 1/3 completed
received in the same period. Started in process: 44,000 units
21. The average costing method is different from Transferred: 30,000 units
FIFO costing since it considers the ending Work in process end: 20,000 units, 1/5
work in process inventory only partially completed
complete. D. Work in process beginning: 6,000 units, 1⁄2
22. When there is no beginning inventory of work completed
in process in a succeeding department, the 9,000 units, 1/3 completed
cost per equivalent unit is the same under Started in process: 30,000 units
FIFO and average costing methods. Completed and transferred: 20,000 units
23. The average costing method is also called Work in process end: 1⁄4 is 2/5
weighted average because the relative completed; 1⁄2 is 4/5 completed; balance 1/10
number of units or units of production is completed
considered in computing for the average unit E. Work in process beginning: 5/8 completed
costs. Started in process: 10,000 units
24. The average method uses simple average unit Transferred out: 8,000 units
costs. Completed and on hand: 1,600 units
25. Under average costing, it is assumed that Work in process, end: 16,400; 4/5 completed
units in process at the beginning and those
transferred in during the period are started at Exercise 6-3. UNEVEN APPLICATION OF COST
the same time.. Williams Company uses the FIFO method
26. Under average costing, equivalent production in its process costing system. The beginning work
is equal to completed units plus work done on in process inventory in a particular department
ending work in process. consisted of 10,000 units, 100% complete with
respect to materials and 60% with respect to
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conversion costs. The total cost in the beginning were transferred out of the Assembly department to
work in process inventory was P48,200. During the finished goods. At the end of the month, 500 units
month, 25,000 units were transferred out of the were still in process, they were 80% complete as to
department. The costs per equivalent unit were materials and 60% complete as to conversion cost.
computed to be P3.10 for materials and P4.50 for Cost data related to February operations follow:
conversion costs. Compute for the total cost of the
units completed and transferred out of the
department.

Exercise 6-4. UNEVEN APPLICATION OF COST

All materials are introduced at the beginning
of the process in Department One. The following Required: Prepare the February cost of production
information is available for the month of January for report for the Assembly Dep’t.
Department One:
WIP,Jan 1 (conversion 40% complete) 500 units Exercise 6-7 EVEN APPLICATION – MULTIPLE
Started in January 2,000 units DEPTS
Transferred to Dep’t 2 during Jan 2,100 units The ICT Manufacturing Corp. has its
WIP,Jan 31 (conversion 25% complete) 400 units product processed in Depatments M and P. The
What are the equivalent units for materials and production data for March are given below:
conversion cost for January?

Exercise 6-5 EVEN APPLICATION – FIRST DEPT

Shankar Manufacturing Company produces
a product that is manufactured in two departments.
Data related to February operations in the first
department are:

At the end of January, there were 100 units in

process which were 60% complete. During the
current month, 850 units were transferred to the
next department. At the end of the month, there
were 150 units still in process with 50% completion. Required: Prepare the cost of production report for
Prepare a cost of production report for month using the two departments.
[A] FIFO; [B] Average
Exercise 6-8 UNEVEN APPLICATION –
Exercise 6-6 EVEN APPLICATION – MULTIPLE DEPTS
SUCCEEDING DEPT
Mahaba Manufacturing Co. operates three
Astro2 Inc. uses two producing departments departments with the following processes:
namely X and Y. In Dep’t Y, the second dept, costs
Cutting – This department adds 60% of the
are applied evenly throughout the process. Prepare
materials at the start of the process, 40% when the
the cost of production report of Dept Y using the
process is 4/5 completed, and applies labor and
following data for February of the current year:
overhead uniformly to production.
WIP, beg – 6,000 units, 1⁄4 done, P19,710 (50% of Grinding – This department adds all the materials
which was from department X, 20% for materials, at the end of processing, applying conversion costs
10% labor, 20% overhead) evenly throughout the process.
Received from Dep’t X – 35,000 units @ P3 Mixing – This department adds 30% of the
Factory Costs : Materials, P20,770; Direct Labor, materials at the beginning of processing, 30%
P8,375; FOH, P16,750 when processing is 1⁄2 completed, and 40% at the
WIP, end – 8,000 units 1⁄4 done end of the process. It applies conversion costs
evenly throughout the process.
Exercise 6-7. UNEVEN APPLICATION OF COST
Production data for the month of March of the
Zay Corporation manufactures a product in current year follows:
two departments, Cutting and Assembly. During
February, the Assembly department received 2,100
units from the Cutting department and 2,000 units
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Required: Prepare the cost of production report for

each of the three departments.

Exercise 6-9 UNEVEN APPLICATION –

MULTIPLE DEPTS
The Matis Manufacturing Company uses
average costing and manufactures a single product
in two producing departments. For the month of
April, the cost and production data were as follows:

Required: Prepare a cost of production report for

both departments for the month of April.

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