Chapter 4

Process Costing: Cost of Production Report

Discussion Questions production to compute unit cost (f) costs are

transferred from one department to another to arrive
1) The basic objective of process costing is to at final unit cost for the completed product.
determine the costs of the products manufactured by
the company. Determining the cost of the products 5) Three product flow formats are: sequential,
manufactured is necessary in order to properly cost parallel, and selective. Sequential means that the
ending inventories for external reporting purposes product flows or is manufactured in an unchanging
(i.e., reporting to creditors and owners of the fixed set of operations, going from one department to
company, the SEC, and the IRS) and to evaluate the the next.
profitability of the manufacturing activity. In order to Parallel means that certain operational phases take
cost products, the costs must be determined for place simultaneously in other departments and the
materials, labor, and factory overhead used to process partially completed units or parts are brought together
each unit of product through each department. in subsequent departments. Selective refers to the fact
that a product does not necessarily move through
2) The products manufactured within a department every department. Depending upon the character or
(or cost center) during the period can be shape of the final product, different departments are
heterogeneous if job order costing is used, but must engaged in completing the desired product.
be homogeneous if process costing is used. In job
order costing, products are accounted for in batches. 6) Materials Costs— In job order costing, materials
The cost of each unit of product manufactured on a requisitions are used and charges are made to jobs; in
job is determined by dividing the total cost charged to process costing, charges for materials issued to
the job by the number of units produced on the job. production are made to departments, with infrequent
Since the manufacturing cost of each job is accounted use of materials requisitions.
for separately, accurate and useful product cost can Labor Costs— Time tickets are used in job order
be determined even when the products manufactured costing to accumulate labor costs for each job; in
on different jobs are substantially different. By process costing, labor costs are charged to
contrast, in process costing, all manufacturing costs departments, and, therefore, detailed time records are
are charged to the department, and the unit cost is not necessary. Factory Overhead—Job order costing
determined by dividing the cost charged to the requires the use of predetermined rates for charging
department by the number of units produced. overhead to jobs; in process costing, actual overhead
As a consequence, the units of product manufactured may be used. (However, predetermined rates are
within a department must be essentially alike in order often used in order to smooth overhead that is not
for the cost allocated to each unit to be meaningful incurred at the same rate as production activity.)
(i.e., to reasonably reflect the actual cost of the Summarizing Costs— A job order cost sheet is used
resources used to manufacture the product). to accumulate the costs of an order in job order
costing; a cost of production report is used in process
3) (a) Process (b) Process, unless significantly costing. In job order costing, costs are summarized
different models are manufactured (c) Process (d) Job on completion of the job; in process costing, costs
order (e) Process (f) Process (g) Job order (h) charged to the department and costs accounted for are
Process, unless different fabrics are used for different summarized in the cost of production report each
models, in which case the conversion costs may be month (or sometimes each week).
accounted for using process, but the materials using
job order. 7) Predetermined overhead rates can and should be
used if the pattern of overhead cost incurrence does
4) The distinguished characteristics of process cost not follow the pattern of production activity. Some
procedure are: items of overhead are fixed and not responsive to
(a) a cost of production report is used (b) production changes in production activity. If production volume
is accumulated and reported by departments (c) costs varies each month, then predetermined overhead rates
are posted to departmental work in process accounts should be used. Some items of overhead are incurred
(d) production in process at the end of a period is only at certain times during the year, but benefit
restated in terms of completed units (e) total production throughout the year (e.g., payroll taxes,
departmental cost is divided by total departmental insurance, property taxes, vacation pay, etc.). These
items can be recorded as prepaid expenses and provide more detailed data for cost control purposes
amortized uniformly to each month if actual overhead than a plant-wide cost of production report could
is charged to production. Alternatively, estimates of provide. In some cases (e.g., a manufacturing plant
such costs can be included in the predetermined that has a selective production flow for its products),
overhead rate, and the actual cost charged to a plant-wide cost of production report cannot be used.
overhead when incurred. The use of predetermined
rates is often simpler than the allocation of actual 11) As long as fluctuating average unit costs are not
costs because a single predetermined rate requires caused by fluctuating production volumes, they are
only one overhead charge to each department each meaningful data in the control of costs. In such cases,
month. In contrast, the capitalization and the fluctuations can be traced to improved or
amortization of each item of actual overhead would decreased efficiencies, which could lead to improved
require numerous charges each month. cost control.

8) A cost of production report is an effective monthly 12) An equivalent unit of production is the amount of
(or weekly) summary of the cost of materials, labor, a resource (e.g., materials, labor, or overhead) that
and overhead consumed by each department or cost would be required to complete one unit of the product
center, along with a record of the quantity of products with respect to the cost element being considered.
manufactured. It provides information necessary to The total number of equivalent units, with respect to
cost products, prepare journal entries to record the a particular element of cost, represents the number of
transfer of costs between departments, and control units of the product that could have been completed
costs. with the resources used during the period.

9) The sections commonly found in a cost of 13) Whenever a loss of units is normal in producing
production report are: (a) a quantity schedule the final units, the good units completed absorb all
indicating the source and disposition of the units of costs, resulting in a spreading of costs of lost units
product, (b) a cost charged to the department section, over the remaining good units. When abnormal or
indicating the cost in total and per unit for the cost unusual loss occurs, the cost ordinarily assigned to
transferred in from the preceding department, as well any such lost units might be charged to factory
as materials, labor and overhead charged to the overhead or to a current period expense account.
department, and (c) a cost accounted for section
indicating the amount of cost assigned to the units 14) Two effects are; (a) the additional material
transferred out of the department, as well as the cost increase the unit cost (b) the added material increase
of ending inventory. the number of units and also causes cause a change in
the unit cost.
10) Separate departmental cost of production reports
are used to accumulate costs more accurately and to
 Exercises

E-1

Compute the equivalent production for material & conversion cost.

EQUIVALENT PRODUCTION

Material: 15000 + 5000×100% = 20,000 units.

Conversion cost: 15000 + 5000×60% = 18000 units.

UNIT COST

C.C = TC/units in equivalent production = 9000/18000 = 0.5

E-2

Compute the total cost transferred to Dept B.

Cost changed to department TC UC

Cost added by Dept.

Material 27000 3.0

Conversion cost 40,000 5.0

Total cost to be accounted for 67,000 8.0

Cost transferred to next department Rs

7000 units × Rs 8/- units 56000

Equivalent production

Material = 7000 + 2000 × 100% = 9000 units

Conversion cost = 7000 × 2000 × 50% = 80,000 units

E-3

Prepare a cost of production report

A Company

Cost of production report

For the month ended on June

Department 2

QUANTITY SHEDULE Units Units

Units received from previous Dept. 12000

Units transferred to next Dept. 7000

Units still in process 5000 12000

COST CHARGED TO DEPARTMENT TC UC

Cost received from previous dept 1 16320 1.36

Cost added to department 2

Material 43415 4.57

Labour 56100 6.8

FOH 58575 7.1

Total cost added by dept. 158090 18.47

Total cost to be accounted for 174410 19.83

COST ACCOUNTED FOR AS FOLLOWS Rs.

Cost transferred to next dept.

(7000units×Rs 19.83) 138810

WIP ending inventory

Cost from previous dept. (5000units×Rs 1.36) 6800

Material: 5000×50% = 1250units×4.57 11425

Labour: 5000×25% = 1250units×6.8 8500

FOH: 5000×25% = 1250units×7.1 8875

Total cost accounted for 174410

EQUIVALENT PRODUCTION

Material: 7000 + 5000 units × 50% = 9500 units.

Conversion: 7000 + 5000 units × 25% = 8250 units.

E-4

WADI COMPANY

Cost of production report

For the month of March

Department 1

QUANTITY SHEDULE Units Units

Units part into process 10500

Units transferred to next dept 7000

Units still in process 3000

Units lost (Normal spoilage)

7000 + 3000 = 10000 × 5% 500 10500

COST CHARGED TO DEPARTMENT TC UC

Material 52500 5.25

Labour 39770 4.1

FOH 31525 3.25

Total cost to be accounted for 123795 12.6

COST ACCOUNTED FOR AS FOLLOWS Rs

Cost transferred to next dept

(7000units×Rs 12.6) 88200

WIP ending inventory

Material: 3000×100% = 3000units×Rs 5.25 15750

Labour: 3000×90% = 2700units×Rs 4.1 11070

FOH: 3000×90% = 2700units×Rs 3.25 8775

Total cost accounted for 123795

EQUIVALENT PRODUCTION

Material: 7000 + 3000 × 100% = 10000 units.

C.C: 7000 + 3000 × 90% = 9700 units.

UNIT COST

Material = Rs 52500/10,000 units = 5.25/- units

Labour = Rs 39770/9700 units = 4.1/- units

FOH = Rs 31525/9700 units = 3.25/- units

E-5

LAUREN CHMERCIAL

Cost of production report

For the month of December

DEPT#2

QUQNTOTY SHEDULE Units Units

Units received 55000

Units transferred 39500

Units still in process 10500

Units lost in process (Normal) 5000 55000

COST CHARGED TO DEPARTMENT TC UC

From previous department 99000 1.80

Cost added by this department

Material - -

Labour 27520 0.64

FOH 15480 0.36

Total cost added by this dept 43000 1.00

Adjusted cost for lost units _____ 0.18

Total cost to be accounted 142000 2.98

COST ACCOUNTED FOR AS FOLLOWS Rs

Coat transferred to next dept

(39500units×Rs 2.98) 11710

WIP ending inventory

From previous dept 10500units ×Rs 1.98 20790

Labour 10500×1/3×0.64 2240

FOH 10500×1/3×0.36 1260

Total cost to be accounted 142000

Equivalent Production

Labour & FOH = 39500 + 10500 × 1/3 = 43000 units

Unit Cost

Labour = 0.64 FOH = 0.36

Adjustment for lost unit

Unit cost after lost = 1.98

Unit cost before lost = 1.80

0.18
E-6

ALABAMA MILLING

CPR

For the Month of May

Department 2

QUANTITY SHEDULE Units Units

Units received 110,000

Units Transferred 85000

Units still in process 22000

Units lost in process 3000 110,000

COST CHARGED TO DEPARTMENT TC UC

Cost from previous department 176000 1.6

Cost by this department

Labur 26245 0.29

FOH 12670 0.14

Total cost added by this dept 38915 0.43

Adjusted cost for lost units ______ 0.04486

Total cost to be accounted for 214915 2.07486

Cost accounted for as follows Rs

Transferred to next department

(85000×2.071486) 176363.1

WIP ending inventory

Cost from previous department

(22000 ×1.64486) 36186.92

Material –

FOH 22000×1/4×0.14 1595

Labour 22000×1/4×0.29 770

Total cost to be accounted 214915

Equivalent production

Labuor & FOH = 85000 + 22000 × ¼ = 90500

Unit cost

Labour = 26245/90500 = 0.29

FOH = 12670/90500 = 0.14

Adjustment for lost units

After loss = 176000/110000 = 1.6

Before loss = 176000/107000 = 1.64486

0.04486
E-7

NORMAN COMPANY

CPR

For the month of May

Department 2

QUANTITY SHEDULE Units Units

Units received 160,000

Units Transferred 123000

Units still in process 34500

Units lost in process at end 2500 160,000

COST CHARGED TO DEPARTMENT TC UC

Cost from previous department 280,000 1.75

Cost by this department

Labur 45680 0.32

FOH 22840 0.16

Total cost added by this dept 68520 0.48

Total cost to be accounted for 348520 2.23

Cost accounted for as follows Rs

Cost transferred 123000units×Rs2.2753 279865

WIP ending inventory

From previous department (34500units×1.75) 60375

Labour 34500×1/2×0.32 5520

FOH 34500×1/2×0.16 2760

Total cost to be accounted 348520

Equivalent production

Labour & FOH = 123000 + 34500 × 1/2 + 2500 = 142750 units

Unit cost

Labour = 45680/142750 = 0.32

FOH = 22840/142750 = 0.16

Adjustment for lost units

Units transferred = 2.23 × 123000 = 274290

Units lost in process = 2.23 × 2500 = 5575

Total cost = 279865

Adjustment per unit = 279865/123000

= 2.2753 /- units
E-8

ROGERY MILLING

CPR

For the month of May

Department 2

QUANTITY SHEDULE Units Units

Units received 110,000

Units transferred 85000

Units still in process 22000

Units lost in process 3000 110,000

COST CHARGED TO DEPARTMENT TC UC

Cost from previous department 176000 1.6

Cost by this department

Labur 26180 0.28

FOH 13090 0.14

Total cost added by this dept 39270 0.42

Total cost to be accounted for 215270 2.02

Cost accounted for as follows Rs

Cost transferred to next department

(85000units×Rs2.0912) 177760

WIP ending inventory

From previous department

(22000units×Rs1.6) 35200

Labour 22000×1/4×0.28 1540

FOH 22000×1/4×0.14 770

Total cost to be accounted 215270

Equivalent production

Labour & FOH = 22000×1/4 + 85000 + 3000 = 93500 UNITS

Unit cost

Labour = 26180/93500 = 0.28, FOH = 13090/93500 = 0.14

Adjustment for lost units

Units transferred = 2.02×8.5000 = 171700

Units lost = 2.02×3000 = 6060

Total cost 177760

Adjustment per unit = 177760/85000 = 2.09 /- units

E-9

A COMPANY

COST OF PRODUCTION REPORT

FOR THE MONTH OF FEB

ASSEMBLY DEPARTMENT

QUANTITY SHEDULE Units Units

Units received 60,000

Units transferred 50,000

Units still in process 9000

Units lost in process 1000 60,000

COST CHARGED TO DEPARTMENT TC UC

Cost from previous department 212400 3.54

Cost by this department

Material 41650 0.7

Labur 101700 1.8

FOH 56500 1

Total cost added by this dept 199850 3.5

Total cost to be accounted for 412250 7.04

Cost accounted for as follows Rs

Cost transferred to next department

(50,000×7.04) 352000

Cost of abnormal loss 5290

WIP ending inventory

From previous department (9000×3.54) 31860

Material = 9000×100%×0.7 6300

Labour = 9000×2/3×1.8 10800

FOH = 9000×2/3×1 6000

Total cost to be accounted 412250

Equivalent production

Material = 50,000+9000×100%+1000×1/2 = 59500 units

Labour = 50,000+9000×2/3+1000× =56500 units

FOH = same as labour.

Unit cost

Material= 41650/59500=0.7, Labour= 101700/56500=1.8, FOH=56500/56500= 1.0

Calculation for abnormal loss Rs

From previous department (1000×3.54) 3540

By this department

Material = 1000×1/2×0.7 350

Labour = 1000×1/2×1.8 900

FOH = 1000×1/2×1 500

Total cost 5290

___________________________________________
E-10

OLORSO INCORPORATION

COST OF PRODUCTION REPORT

FOR THE MONTH OF MARCH

DEPARTMENT 3

QUANTITY SHEDULE Units Units

Units received 20,000

Units increased 20,000 40,000

Units transferred 32000

Units lost in process 8000 40,000

COST CHARGED TO DEPARTMENT TC UC

Cost from previous department 30,000 1.5

Cost by this department

Material 8800 0.22

Labur 9000 0.25

FOH 7200 0.2

Total cost added by this dept 25000 0.67

Adjustment for increased units ______ 0.75

Total cost to be accounted for 55000 1.42

Cost accounted for as follows Rs

Cost transferred out (32000×1.42) 45440

WIP ending inventory

From previous department (8000×0.75) w 6000

Material 8000×100%×0.22 1760

Labour 8000×50/100×0.25 1000

FOH 8000×50%×0.2 800

Total cost to be accounted 55000

Equivalent production

Material 32000 + 8000 × 100% = 40,000 units

Labour 32000 + 8000 × 50% = 36000 units

FOH Same as labour

Unit Cost

Material = 88000/40000 = 0.22, Labour = 9000/36000 = 0.25

FOH = 72000/36000 = 0.2

Adjustment for increased unit

Unit cost after increase 30000/40000 0.75

Less: unit cost before increase 1.5

0.75
E-11

CRESENT CORPURATION

COST OF PRODUCTION REPORT

FOR THE MONTH OF FEBURERY

DEPARTMENT 2

QUANTITY SHEDULE Units Units

Units received 20,000

Units increased 10,000

30,000

Units transferred 24000

Units in process 6000 30,000

COST CHARGED TO DEPARTMENT TC UC

From previous department 60000 0.3

By this department

Material 30,000 1

Conversion cost 54,000 2

Total cost added by department 84000 _____

Adjustment for increased units ______ 1

Total cost to be accounted for 144000 5.00

Cost accounted for as follows Rs

Cost of units transferred (24000×0.5) 120,000

WIP ending inventory

From previous department (6000×2) 12000

Material 6000×100%×2 6000

Conversion 6000×50%×2 6000

Total cost to be accounted 144000

Equivalent production

Material 24000 + 6000 × 100% = 30,000 units

Conversion 24000 + 6000 × 50% = 27000 units

Unit Cost

Material = 30,000/30,000 = 1.0

Conversion = 54000/30,000 = 2.00

Adjustment for increased unit

Unit cost after increased 60,000/30,000 = 2.0

Unit cost before increase 3

1
 PROBLEMS

P-1

1- Equivalent units of row material in all inventories.

MATERIAL

Fabrication Dept = 6000 × 25% = 1500

Assembly Dept = 10,000 × 100%=10,000

Packing Dept = 3000 × 100% =3000

Shipping Dept = 8000 × 100% = 8000

22500units

2- Equivalent units of fabrication department direct labour in all inventories

Fabrication department = 6000 × 40% = 2400
Assembly Department = 10,000 × 100% = 10,000
Packing Department = 3000 × 100% = 3000
Shipping Department = 8000 × 100% = 8000
23400units
3- Equivalent units of packing department material & direct bour in packing dept
inventory.

Material Labour

3000 × 60% 1800 3000 × 75% = 2250

P-2

Prepare quantity schedule for three departments.

BLENDING DEPARTMENT UNIT UNIT
Stated in process 8000
Transferred out 5400
Still in process 2400
Lost in process 200 8000
TESTING DEPARTMENT UNIT UNIT
Receiving from previous dept 5400
Transferred out 3200
Still in process 1800
Lost in process 400 5400
Equivalent process
Blending Dept:
Material = 5400 + 2400 × 100% = 7800 units
Conversion cost = 5400 + 2400 × 1/3 = 6200 units
Unit cost
FOH = 5580/6200 = 0.9 / units
TESTING DEPARTMENT
Material = 3200 + 1800 × 100% = 5000 units
Labour & FOH = 3200 + 1800 × 1/3 = 3800 units
Unit cost
FOH = 2280/5000 units = 0.456 /- unit
TERMINAL
Material = 2100 + 900 × 100% + 200 = 3000 units
Labour & FOH = 2100 + 900 × 2/3 + 200 = 2700 UNITS
Unit cost
FOH = 5040/2700 = 1.8667 /- unit
(4) Adjusted unit
Cost of testing department
$
Unit cost of prev dept after loss
(28890/5000) 5.778
Less: unit cost for prev dept before loss 5.35
Adjusted unit cost 0.428
Working
Total cost of prev dept
(5400 × 5.35) = $ 28890
P-3

THE DALLAS COMPANY

CPR

FOR THE MONTH OF APRIL

DEPARTMENT 1

QUANTITY SHEDULE Units Units

Units stated 10,000

Units transferred 8000

Units in process 1200

Units lost in process normal

(5%×8000) 400

Units lost in process abnormal 400 10,000

COST CHARGED TO DEPARTMENT TC UC

Material 50,000 5

Conversion cost 45500 5

Total cost to be accounted 95500 10

Cost accounted for as follows Rs

Cost of units transferred

(8000units × Rs 10) + (400units × Rs 10) 84000

Cost of abnormal loss (w) 4000

WIP ending inventory

Material 1200 ×100% × 5 6000

Conversion cost 1200 × 25% × 5 1500

Total cost to be accounted 95,500

Equivalent production

Material 8000 + 1200 × 100% + 400 + 400 = 10,000 units

Conversion 8000 + 1200 × 25% + 400 + 400 = 91000units

Unit Cost

Material = 50,000/10,000 = 5

Conversion cost = 45500/9100 = 5

Calculation of abnormal loss

Material = 400 × 100% × 5 = 2000

Conversion = 400 × 100% × 5 = 2000

4000

______________________________________________
P-4

MENNINGER INC

COST OF PRODUCTION REPORT

FOR THE MONTH OF APRIL

QUANTITY SHEDULE Units Units

Units received 30,000

Units transferred 25000

Units still in process 4200

Units loss (normal spoilage)

25000×3% 750

Units loss (abnormal spoilage) 50 30,000

COST CHARGED TO DEPARTMENT TC UC

Cost from previous department 135000 4.5

By this department

Material 12500 0.5

Conversion cost 139340 5

Total cost by this department 151840 5.5

Total cost to be accounted 286840 10

Cost accounted for as follows Rs

Cost of units transferred

(25000units×Rs 10) + 250,000

Cost of normal loss (w) 6975 256975

Cost of abnormal loss (w) 465

WIP ending inventory

From previous department (4200×4.5) 18900

Conversion cost 4200×50%×5 10500

Total cost to be accounted 286840

Equivalent production

Material = 25000 units

Conversion = 25000 + 42000 × 50% + 750 × 96% + 50 × 96% = 27868 units

Unit Cost

Material = 50,000/10,000 = 0.5

Conversion cost = 45500/9100 = 5

Cost of normal loss

Previous department = 750 × 4.5 = 3375

By this department

Conversion cost = 750 × 96% × 5 = 3600

6975

Cost of abnormal loss

Previous department = 50 × 4.5 = 225

By this department

Conversion cost = 50 × 96% 5 = 240

465
P-5

YARES COMPANY

COST OF PRODUCTION REPORT

FOR DEPARTMENT 20

DEPARTMENT 2

QUANTITY SHEDULE Units Units

Units received 14000

Units transferred 8000

Units in process 5000

Units lost in process 8000×5% 400

Units lost in normal spoilage 600 14000

COST CHARGED TO DEPARTMENT TC UC

From previous department 140,000 10

By this department

Material 12000 1.5

Conversion cost 89250 7.5

Total cost added by the department 101250 9

Total cost to be accounted 241250 19

Cost accounted for as follows Rs

Cost transferred to next department

(8000units × Rs 19/-units) 152000

+ cost of normal loss (w) 6700

Cost of abnormal loss 10050

WIP ending inventory

From previous department (5000×10) 50,000

Material 5000×0/100×1.5 0

Conversion cost 5000×60%×7.5 22500

Total cost to be accounted 241250

Equivalent production

Material = 8000 units

C.C = 8000 + 5000 × 60% + 400 × 90% + 600 × 90%

= 11900 units

Unit Cost

Material = 12000/8000 = 1.5, C.C = 89250/11900 = 7.5

Cost of normal loss

From previous department (400×10) 4000

Conversion cost (400×90%×7.5) 2700

Total cost 6700

Cost of abnormal loss

From previous department (600×10) 6000

Conversion cost (6000×90%×7.5) 4050

Total cost 10050

E- 6
P-7

FARNIENTE COMPANY

COST OF PRODUCTION REPORT

FOR THE MONTH OF JANUARY

DEPARTMENT 2

QUANTITY SHEDULE Units Units

Units received 12000

Units transferred 9000

Units in process 2000

Units lost (Normal spoilage) 9000×5% 450

Units lost (abnormal spoilage) 550 12000

COST CHARGED TO DEPARTMENT TC UC

From previous department 84000 7

From this department

Material 18000 1.6364

Conversion cost 45200 3.8305

Cost added to department 63200 5.4668

Total cost to be accounted for 147200 12.4668

Cost accounted for as follows Rs

Cost transferred out (9000×12.4669) 112201.2

+ Cost of normal loss 4701.35

Cost of abnormal loss 5146.09

WIP ending inventory

Material 2000×100%1.6363 3272.6

Conversion cost 2000×95%×3.8305 7277.95

Cost from previous department 2000×7 14000

Total cost to be accounted 147200

Equivalent production

Material = 9000 + 2000 × 100% = 1100 units

C.C = 9000 + 2000 × 95% + 450 × 90% + 550 × 90%

= 11800 units

Unit cost

Material = 18000/11000 = 1.6364

C.C = 45200/11800 = 3.8305

Cost of normal loss

Previous department (450×7) 3150

C.C (450×90%×3.8305) 1551.3525

4701.3525

Cost of abnormal loss

Previous department (550×7) 3850

C.C 550×90%×3.8305 1896.09

5746.0915