Process
Costing
PROCESS COSTING SYSTEM
• Oftentimes, the production of manufactured products is easily divisible into
specific jobs, and job order costing system is appropriate.
• However, job order costing system does not work well when the production cycle
involves a continuous flow of raw materials through various processing
departments, and the finished output is characterized as homogenous units, each
displaying the same basic characteristics.
• Wood pulp is processed into giant rolls of paper, refineries process crude oil into
gasoline, iron ore is processed into steel, sand is process into glass, and so forth.
• The physical nature of these process makes it hard to identify and associate
specific units of direct labor and direct materials with the final output.
PROCESS COSTING SYSTEM
• Process costing system is a methodology used in cost
accounting to allocate the total cost of production to
homogenous units produced via a continuous process
that usually involves multiple steps or departments.
CHARACTERISTICS OF PROCESS
COSTING
1. Cost are accumulated by department or cost center.
2. Each department has its own general ledger Work-in-process Inventory account. This
account is debited with the processing costs incurred by the department and credited
with the costs of completed units transferred to another department or to finished
goods inventory.
3. Equivalent units are used to restate – work in process inventory to terms of completed
units at the end of a period.
4. Completed units and their corresponding costs are transferred to the last department
or to finished goods inventory. By the time units leave the last processing department,
total costs for the period have been accumulated and can be used to determine the
unit cost of each and total finished goods.
5. Total costs and unit costs for each department are periodically calculated and
analyzed with the use of department cost of production report.
PROCESS COSTING SYSTEM
Work in Work in Work in Finished
process process process Goods
Department Department Department Inventory
1 2 3
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Department Department Department Inventory
1 2 3
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Department Department Department Inventory
1 2 3
Labor
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Department Department Department Inventory
1 2 3
Labor
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Department Department Department Inventory
XXX 1 2 3
Labor XXX
XXX
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department Department Department Inventory
XXX 1complet 2 3
ed units
Labor XXX in Dept
1 to
XXX transfer
in Dept
2
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department Department Department Inventory
XXX 1complet 2 3
ed units XXX
Labor XXX in Dept
1 to
XXX transfer
in Dept
2
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department Department Department Inventory
XXX 1complet 2 3
ed units XXX
Plus
Labor XXX in Dept addition
1 to al
applicab
XXX transfer le M, L ,
in Dept OH
2
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department DepartmentCost of Department Inventory
XXX 1complet 2complet 3
ed units XXX ed units
Plus
Labor XXX in Dept addition in Dept
1 to al 2 to
applicab
XXX transfer le M, L , transfer
in Dept OH in Dept
2 3
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department DepartmentCost of Department Inventory
XXX 1complet 2complet 3
ed units XXX ed units XXX
Plus
Labor XXX in Dept addition in Dept
1 to al 2 to
applicab
XXX transfer le M, L , transfer
in Dept OH in Dept
2 3
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department DepartmentCost of Department Inventory
XXX 1complet 2complet 3
ed units XXX ed units XXX
Plus Plus
Labor XXX in Dept addition in Dept addition
1 to al 2 to al
applicab applicab
XXX transfer le M, L , transfer le M, L ,
in Dept OH in Dept OH
2 3
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department DepartmentCost of Department Inventory
XXX 1complet 2complet 3
ed units XXX ed units XXX Cost of
Labor XXX in Dept
Plus
in Dept Plus complet
addition addition
1 to al 2 to al
ed units
applicab applicab in Dept
XXX transfer le M, L , transfer le M, L ,
3 to FGI
in Dept OH in Dept OH
2 3
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department DepartmentCost of Department Inventory
XXX 1complet 2complet 3
ed units XXX ed units XXX Cost of XXX
Labor XXX in Dept
Plus
in Dept Plus complet
addition addition
1 to al 2 to al
ed units
applicab applicab in Dept
XXX transfer le M, L , transfer le M, L ,
3 to FGI
in Dept OH in Dept OH
2 3
Overhead
PROCESS COSTING SYSTEM
Materials Work in Work in Work in Finished
process process process Goods
Cost of
Department DepartmentCost of Department Inventory
XXX 1complet 2complet 3
ed units XXX ed units XXX Cost of XXX When
Labor XXX in Dept
Plus
in Dept Plus complet sold,
addition addition
1 to al 2 to al
ed units debit to
applicab applicab in Dept
XXX transfer le M, L , transfer le M, L ,
3 to FGI
COGS
in Dept OH in Dept OH
2 3
Overhead
ILLUSTRATION: PRODUCTION BY
DEPARTMENT
Sunbloc manufactures chairs and uses three departments to produce one chair.
Department 1 cuts and cleans the wood at an average cost of P45.00 per unit. The
wood are then moved to Department 2, where they assembled and put together at
an average cost of P15.00 per unit. The net stop is Department 3, where they are
painted at an average cost of P25.00 per unit. The completed chairs are transferred
from Department 3 to finished goods inventory. The total unit cost of one finished
chair is...
Department 1 P45.0
0
Department 2 15.00
Department 3 25.00
Total unit costs P85.0
0
SYSTEM FLOW
Units and costs flow together through a process cost system. The following equation
summarizes the physical flow of units in a department.
UNITS TO ACCOUNT FOR UNITS ACCOUNTED FOR
Beginning units in process Units completed & transferred
+ +
Units started in process or Units completed and on hand
received from previous =
department
+ +
Increase in units due Units in process end
addition of M, L, OH
PRODUCT
FLOW
1. SEQUENTIAL PRODUCT FLOW
2. PARALLEL PRODUCT FLOW
3. SELECTIVE
SEQUENTIAL
PRODUCT
FLOW
In this product flow, the initial raw
materials are placed into process in
the first department and flow through
every department in the factory.
Additional materials may or may not
be added in the subsequent
departments. All items purchased go
through the same processes in the
same sequence.
PARALLEL PRODUCT FLOW
Certain portions of the work are done at the same time and then brought together
for the final process and upon completion transferred to finished goods inventory.
SELECTIVE
The product moves to different departments within the factory depending upon the
desired final product. Several products are produced from the same initial raw
materials.
STEPS IN PROCESS COSTING
SYSTEM
Step 1.
• Analyze the cost-flow model by determining the inventory levels on:
1. Beginning balance of work-in-process inventory for a specific department
(which were not completed in the previous period).
2. Units started during the period in the department.
3. How much of the beginning WIP units and units started during the period were
completed in the same period.
4. Units not yet finished (WIP, ending which will be brought to the next period as
WIP, beginning).
STEPS IN PROCESS COSTING
SYSTEM
Step 2.
Determine the number of equivalent units produced in the process called
EQUIVALENT UNITS OF PRODUCTION (EUP).
For example, if the ending work-in-process inventory in a specific department is
1,000 units and all materials were added at the beginning of the process and labor
and overhead to the units is 60% complete as to conversion, the EUP will be:
Materials 1,000 units x 100% = 1,000
units
Labor and overhead 1,000 units x 60% = 600
units
STEPS IN PROCESS COSTING
SYSTEM
Step 3.
Calculate all of the applicable direct costs and indirect costs that was incurred in
the production process so that these costs will be assigned later to the equivalent
units as to completed units and in-process units.
Relevant costs in this scenario includes all costs associated with the beginning
inventories and current period costs added to continue the production process.
STEPS IN PROCESS COSTING
SYSTEM
Step 4.
Calculate the cost per equivalent unit of production (Cost per EUP).
Cost per EUP = Applicable costs in the production process / EUP
STEPS IN PROCESS COSTING
SYSTEM
Step 5.
When cost per EUP is available, allocate all relevant costs to all products completed
and all products still in process.
TWO METHODS
1. FIRST IN, FIRST OUT
2. WEIGHTED AVERAGE
FIRST IN, FIRST OUT
• This method of process costing focuses on assisting costs to units in the order
that they are produced.
• Products that are produced first are assigned a cost first and then they are the
first products to ship or otherwise put out.
• Furthermore, first in, first out assigns one set of costs to products started in prior
accounting periods but not finished, and another set of costs for products started
in the current accounting period.
WEIGHTED AVERAGE
• This type of process costing groups together all the costs associated with
production and assigns them to the units the company produced.
• This type of method may not take into account the time period of production and
can be the simplest type of process costing to calculate.
ILLUSTRATION – EP
COMPUTATION
Units received from preceding department 10,000
Units completed and transferred 8,000
Units in process, end (60% completed) 2,000
Materials are added 100% at the beginning of the process
ILLUSTRATION – EP
COMPUTATION
Units received from preceding department 10,000
Units completed and transferred 8,000
Units in process, end (60% completed) 2,000
Materials are added 100% at the beginning of the process
Materials Labor and Overhead
Actual Work done EP Work done EP
Units received 10,000
Units 8,000 100% 8,000 100% 8,000
completed
Units in 2,000 100% 2,000 60% 1,200
process
10,000 10,000 9,200
ILLUSTRATION – EP
COMPUTATION
Units received from preceding department 10,000
Units completed and transferred 8,000
Units in process, end (60% completed) 2,000
Materials are added 100% at the end of the process
ILLUSTRATION – EP
COMPUTATION
Units received from preceding department 10,000
Units completed and transferred 8,000
Units in process, end (60% completed) 2,000
Materials are added 100% at the end of the process
Materials Labor and Overhead
Actual Work done EP Work done EP
Units received 10,000
Units 8,000 100% 8,000 100% 8,000
completed
Units in 2,000 - - 60% 1,200
process
10,000 8,000 9,200
ILLUSTRATION – EP
COMPUTATION
Units received from preceding department 10,000
Units completed and transferred 8,000
Units in process, end (60% completed) 2,000
Materials are added 50% at the beginning of the process,
and remaining 50% when units are 40% completed
ILLUSTRATION – EP
COMPUTATION
Units received from preceding department 10,000
Units completed and transferred 8,000
Units in process, end (60% completed) 2,000
Materials are added 50% at the beginning of the process,
and remaining 50% when units are 40% completed
Materials Labor and Overhead
Actual Work done EP Work done EP
Units received 10,000
Units 8,000 100% 8,000 100% 8,000
completed
Units in 2,000 100% 2,000 60% 1,200
process
10,000 10,000 9,200
ILLUSTRATION – EP
COMPUTATION
Units received from preceding department 10,000
Units completed and transferred 8,000
Units in process, end (60% completed) 2,000
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
ILLUSTRATION – EP
COMPUTATION
Units received from preceding department 10,000
Units completed and transferred 8,000
Units in process, end (60% completed) 2,000
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
Materials Labor and Overhead
Actual Work done EP Work done EP
Units received 10,000
Units 8,000 100% 8,000 100% 8,000
completed
Units in 2,000 80% 1,600 60% 1,200
process
10,000 9,600 9,200
ILLUSTRATIVE PROBLEM 1
• The following data were taken from the books of Michelle Co. for the month of
June, DEPARTMENT 1 DEPARTMENT 2
UNITS
Started 25,000
Completed and transferred 20,000 18,000
In process, end 5,000 2,000
Stage of completion 40% 50%
COSTS
Materials P 100,000 P 54,000
Labor 66,000 38,000
Overhead 44,000 19,000
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.
SOLUTION
MICHELLE CO.
COST OF PRODUCTION REPORT
For the month of June 2022
(Department 1)
Materials Labor and Overhead
Quantity Actual Work done EP Work done EP
Schedule
Units started 25,000
Units completed 20,000 100% 20,000 100% 20,000
Units in process 5,000 100% 5,000 40% 2,000
25,000 25,000 22,000
SOLUTION
COST CHARGED TO THE DEPARTMENT
Cost added in the department
Materials P 100,000 P 4.00 (P 100,000 / 25,000)
Labor 66,000 3.00 ( 66,000 / 22,000)
Overhead 44,000 2.00 ( 44,000 / 22,000)
Total added 210,000 9.00
SOLUTION
COST CHARGED TO THE DEPARTMENT
Cost added in the department
Materials P 100,000 P 4.00 (P 100,000 / 25,000)
Labor 66,000 3.00 ( 66,000 / 22,000)
Overhead 44,000 2.00 ( 44,000 / 22,000)
Total added 210,000 9.00
COST ACCOUNTED FOR AS FOLLOWS
Completed and transferred (20,000 x 9.00 P 180,000
In process, end
Materials (5,000 x 4.00) P 20,000
Labor (2,000 x 3.00) 6,000
Overhead (2,000 x 2.00) 4,000 P 30,000
Total costs as accounted for P210,000
SOLUTION
MICHELLE CO.
COST OF PRODUCTION REPORT
For the month of June 2022
(Department 2)
Materials Labor and Overhead
Quantity Actual Work done EP Work done EP
Schedule
Units received 20,000
Units completed 18,000 100% 18,000 100% 18,000
Units in process 2,000 - - 50% 1,000
20,000 18,000 19,000
SOLUTION
COST CHARGED TO THE DEPARTMENT
Cost from preceding department P180,000 P 9.00
Cost added in the department
Materials P 54,000 3.00 (P 54,000 / 18,000)
Labor 38,000 2.00 ( 38,000 / 19,000)
Overhead 19,000 1.00 ( 19,000 / 19,000)
Total added 111,000 6.00
Total cost as accounted for P 219,000 P 15.00
SOLUTION
COST CHARGED TO THE DEPARTMENT
Cost from preceding department P180,000 P 9.00
Cost added in the department
Materials P 54,000 3.00 (P 54,000 / 18,000)
Labor 38,000 2.00 ( 38,000 / 19,000)
Overhead 19,000 1.00 ( 19,000 / 19,000)
Total added 111,000 6.00
Total cost as accounted for P 291,000 P 15.00
COST ACCOUNTED FOR AS FOLLOWS
Completed and transferred (18,000 x 15.00) P 270,00
In process, end
Cost form preceding 18,000
department
Materials ----
Labor ( 1,000 x 2.00) 2,000
Overhead (1,000 x 1.00) 1,000 P 21,000
Thank you