COST ACCOUNTING AND COST MANAGEMENT 2

PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

PROCESS COSTING – FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Process Costing Defined

Process costing refers to the product costing procedure whereby products are assigned costs by departments or
processes.

- Cost accumulation and unit cost computation are by departments or processes.

- As goods are completed in one department and transferred to the succeeding department, their assigned costs go
with the physical transfer until their completion and transfer to the finished goods stockroom.
- Emphasis: Production for a given period, say, a week or a month instead of by orders or lots.
- Used for goods produced using the continuous type of manufacturing process or under mass production methods.
- Products are homogeneous or do not have individual identities.
- Nature of operations to which process costing is applicable varies as indicated in the following types of business
activities in which it is used:

Manufacturing Mining Public Utilities

Petroleum products Gold Power and electricity

All other types of Copper Gas
chemical products Coal Water
Bakeries
Textiles
Sugar refineries
Plastics
Beverages
OBJECTIVE OF PROCESS COSTING

Allocation of manufacturing costs in every department to calculate the unit cost of the product for profit
determination and inventory costing purposes.

- During the production period, some of the units started will not be completed at the end of the period.
Therefore, each department must determine the total costs of the units still in process and the costs of the
units completed.

Example:
Assume that during the month 1,000 units were started in process in the Department 1. During the month, costs were
incurred as follows:
Direct materials P 150,000
Direct labor 50,000
Factory overhead 100,000

At the end of the month, 700 units were completed and transferred to Department 2.

- The objective of process cost system is to calculate how much of P 150,000 direct materials, P 50,000 of direct
labor, and P 100,000 of manufacturing overhead costs will be allocated to 700 units completed and
transferred to Department 2 and how much will be allocated to the 300 units still in process in Department 1.

COMPARISON OF PROCESS COST AND JOB ORDER COST SYSTEM

SIMILARITIES

- Manufacturing cost elements.

o Both track and record three elements of cost: direct materials, direct labor and factory overhead
- Accumulation of costs
o Under both costing system, all raw materials purchased are debited to Materials account; all direct
labor are debited to Factory Payroll account; and all actual manufacturing overhead costs are debited
to Factory Overhead Control account.
- Flow of costs.
o The accumulated manufacturing costs are assigned to the same accounts in both costing systems:
Work in Process, Finished Goods, and Cost of Goods Sold.

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DIFFERENCES

DIFFERENCES JOB ORDER COSTING PROCESS COSTING

Multiple Work in Process accounts

Number of Work in Process Only one Work in Process account
are used for each production
accounts used is used
department

Point at which total costs is At the end of each month while the
when the job is completed
determined units are being processed

Unit cost is equal to the total

Determined by dividing the total manufacturing costs for the period
Unit cost computation
cost per job by the units produced divided by the units produced
during the period

ACCUMULATION OF COSTS BY DEPARTMENT

The departmental accumulations of costs under process cost system are summarized below:

- Units completed in one department are transferred to the next department accompanied by their
corresponding costs
- Completed unit of one department becomes the raw materials of the next department until the units are
converted to finished products
- The output of Department 1 becomes the input of Department 2. Department 2 receives both the units
produced in Department 1 as well as its production costs
- Upon completion of the process in Department 2, the cost of units completed consists of the costs received in
Department 1 and cost incurred in Department 2
- The cost of a unit increases as it progresses from one department to the next.

Example:

TM Corporation manufactures office tables in three departments. Department 1 cuts the woods at an average cost of P
100 per unit. The woods are then transferred to Department 2, where they are assembled at an average cost of P 200
per unit. The last stop is in Department 3 where they are painted at an average cost of P 300 per unit. The completed
units are transferred from Department 3 to finished goods inventory.

The total unit cost of one finished table is P 600, computed as follows:

Department Unit Cost Added

1 P 100
2 200
3 300

Total unit cost P 600

NOTE:
- In general, the cost per unit increases as units follow through each department.
o However, the unit cost decrease when volume is added to the units that pass through a department.

ASSIGNMENT OF MANUFACTURING COSTS

For each producing department, a work in process accounts is used. Manufacturing costs incurred by a department
are charged to its own work in process account.
Process cost system accumulates the three elements of costs using either the following cost procedures:

- Normal costing.
o Direct materials and direct labor are applied at actual cost while factory overhead is applied at a
predetermined rate
- Standard costing
o Direct materials, direct labor and factory overhead are applied at standard cost or estimated cost.

In this chapter and in the following chapter process costing using the normal costing will be used.

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Direct materials.

• Usually direct materials are added to the first department, but they may also be added in the subsequent
departments.
• Departmental charges for materials costs are based on stores requisitions and consumption reports.
• Consumption reports is often required of department heads because not all of the materials issued during a
period are used during the same period.
• The inventory of raw materials in the producing departments still form part of the raw materials inventory.
• Materials cost incurred were tallied with the expected amount thereof considering the actual volume of
production.
• All materials used by a producing department (whether forming part of the finished product or not) are
charged to work in process.

Example:
Materials and supplies used are as follows:
Mixing Dept. P 12,000
Brewing Dept. 10,000
Finishing Dept. 6,000
Service Departments 2,100

Entry:
Work in Process – Mixing Dept. P 12,000
Work in Process – Brewing Dept. 10,000
Work in Process – Finishing Dept. 6,000
Factory Overhead Control 2,100
Stores/ Materials P 30,100

LABOR COST
- Labor costs per payroll (whether directly expended on goods in process or not) are charged to the payroll account
and subsequently charged to the different departments where they are incurred as indicated on summary of daily
time tickets or daily clock cards.

- Example:
Payroll amounted to P 32,000. The distribution is as follows:
Mixing Dept. P 11,000
Brewing Dept. 9,000
Finishing Dept. 8,000
Service Departments 4,000

Entry:
Work in Process – Mixing Dept. P 11,000
Work in Process – Brewing Dept. 9,000
Work in Process – Finishing Dept. 8,000
Factory Overhead Control 4,000
Payroll P 32,000

FACTORY OVERHEAD
- Factory overhead is accumulated in the Factory overhead (or Factory Overhead Control) account supported by
the subsidiary record – factory overhead analysis sheet
o If departmentalization is observed, departmental factory overhead analysis sheets (or standing orders)
are maintained also.
- Factory overhead may be charged to production at its actual amount or at a predetermined rate based on
normal capacity.
o Actual amounts may be used if overhead per unit is expected to remain at more or less the same level and
this holds true when
▪ Production volume is more or less constant and
▪ Factory overhead (particularly, fixed overhead) is not a significant portion of cost.
o If production volume fluctuates significantly and fixed factory overhead is a significant portion of cost,
application of factory overhead is preferably by the use of predetermined rate(s) based on normal
capacity.

- Example:
Applied factory overhead is P 33,800, while factory overhead as accumulated amounts to P 35,000. They are
analyzed as follows:

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Factory overhead applied:
Mixing Department P 13,500
Brewing Department 9,200
Finishing Department 11,100
Total P 33,800
Factory overhead control
Distribution:
Mixing Department P 15,000
Brewing Department 9,000
Finishing Department 11,000
Total P 35,000
Entries:
Work in Process – Mixing Dept. P 13,500
Work in Process – Brewing Dept. 9,200
Work in Process – Finishing Dept. 11,100
Factory Overhead – Mixing Dept. P 33,800
Factory Overhead - Brewing Dept. 9,200
Factory Overhead - Finishing Dept. 11,100
Overhead charged to production
Factory Overhead Control P 35,000
Cash and Other Credits P 35,000
Actual factory overhead

Factory Overhead – Mixing Dept. P 15,000

Factory Overhead - Brewing Dept. 9,000
Factory Overhead - Finishing Dept. 11,000
Factory Overhead Control P 35,000

- After these entries, the balance of the factory overhead account for each department must be equal to the
departmental factory overhead variance.

INTERDEPARTMENTAL TRANSFERS
- Transfers from one department to another are recorded by debiting the work in process account of the transferee
department and crediting that of the transferor department.
o Upon completion, the accumulated cost of the finished goods is charged to the finished goods accounts and
credited to the work in process account. The goods still in process in the different departments comprise
the ending inventory of work in process for the entire factory.
- Example:
Goods completed in Dept. A (cost, P 38,000) are transferred to Dept. B. During the same period, Dept. B.
completed goods with accumulated cost of P 64,200 and transferred these to the finished goods stockroom.

Entries:
Work in Process – Dept B P 38,000
Work in Process – Dept A P 38,000
Goods completed and transferred out by Dept A
Finished Goods 64,200
Work in Process – Dept B 64,200
Goods completed and transferred out by Dept. B.
Production report (Quantity Schedule)

At the end of each month a production report is prepared for each department by the cost accountant.

Production report – shows the number of units that were in process in the department at the start of the month, the
number of units started during the month, the number of units transferred out of the
department during the month, the number of units still in work in process at the end of the
month, and the percentage of completion of the units still in process at the end of the
month.

Cost of Production Report

Based on the production report and the information about costs incurred during the month a cost of
production report is prepared for each department at the end of the month.

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Cost of production report
– the document used by the management to understand and evaluate the operations of a
department because it shows the flow of units as well as the flows of costs related to that
department.
- summarizes the costs incurred in the department, the average cost per unit of product, the
total costs of products completed and transferred out of the department, and the costs
related to the ending inventory of work in process in each department.
- the source for summary journal entries for the period.

Warehousing
- Cost procedures related to warehousing are almost the same as those in job order costing.
- A difference is that the cost of goods completed is transferred from the last departmental Work in Process
account to Finished Goods Inventory by an entry in the general journal rather than in a job cost sheet.
- One summary entry is made at the end of the month to record the cost of goods completed during the month.

Selling
- All procedures in recording sales are similar to those used when goods are sold from stock under the job
order cost system. The Cost of Goods Sold account is debited and the Finished Goods Inventory account is
credited for cost of products sold.

Characteristics of Process Costing

- Cost data are accumulated and reported by departments or processes.
- A cost of production report is used as subsidiary record for work in process and on which total and unit costs are
computed.
- Volume of work done is stated in terms of equivalent units of production.
- Unit cost in a department is equal to departmental costs divided by equivalent units of production.
Unit cost (per dept) = Departmental costs______
Equivalent units of production
- Units cost is computed at the end of the costing period which, in general, is one month.
- Cost assigned to processed units are identified with them so that when goods in process are transferred from
department to another, the corresponding costs go with them and have to be accounted for in the succeeding
department.
Procedures should be designed to
a) Accumulate factory costs by departments or processes,
b) Determine departmental unit costs
c) Transfer costs from one department to the next and subsequently, to finished goods, and
d) Assign cost to ending inventories of work in process.
FLOW OF COST UNDER PROCESS COSTING (WITH MULTIPLE DEPARTMENTS)

Stores

Work in Process - Work in Process -

Dept A Dept B Finished Goods

Payroll

Factory Overhead - Factory Overhead -

Dept. A Dept. B
Actual Applied Actual Applied

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
COSTING BY DEPARTMENTS
- Inasmuch as homogeneous products cannot be identified from one another and are processed in a continuous flow,
the different elements of cost (materials, labor and factory overhead) are accumulated by processes or
departments.
- Unit cost in each department is computed based on volume of work done and
- The total unit cost of a unit completed in all departments is the total of the unit costs in all the departments in
which it passed through.
- If it is partly done only in a department, the cost assigned is proportionate to the amount of work done.
Example: Ago-o Manufacturing Co. has three producing departments (A, B and C). For January 2014, the unit
costs in these departments are as follows:
Dept. A Dept. B Dept. C Total
Materials cost P 5.00 P 8.00 P 3.00 P 16.00
Labor cost 3.00 4.00 1.50 8.50
Factory overhead 2.00 2.50 1.50 6.00
Total P 10.00 P 14.50 P 6.00 P 30.50
- The assignment of unit costs would be as follows:
o A unit of the product that was placed in process in Dept. A and completed in January in all the three
departments is assigned the total unit cost of P 30.50.
o A unit cost of the product that was started in January, completed in Depts. A and B, and ¼ done in Dept C
shall be assigned the unit cost of P 26.00 arrived at as follows:
Dept. A P 10.00
Dept. B 14.50
Dept. C (one unit x ¼ x P 6) 1.50
P 26.00
o A unit of the product that was started on in January and completed only in Depts. A and B shall be assigned
the total of the unit costs from these two departments of P 24.50 (or P 10.00 + 14.50).
o A unit of the product that was started on in January, completed in Dept. A and 1/5 done in Dept B shall be
assigned the unit cost of P 12.90 or:
Dept A P 10.00
Dept B (one unit x 1/5 x P 14.50) 2.90
P 12.90
EQUIVALENT UNITS OF PRODUCTION – EVEN APPLICATION OF COSTS
- Under process costing, the volume of work done is measured in terms of finished units or equivalent units of
production.
Example:
Three thousand (3,000) units were started on during the month of January. As of January 31, they are 1/5 done
only.
The equivalent production for January is computed as follows:
Equivalent production = (3,000 units x 1/5) = 600
- If there is an ending inventory of work in process, it is assumed to have come from those placed in process during
the month.
Example:
Assume that of the 3,000 units, only 500 units (1/4 done) are still in process as of January 31. The equivalent
production is computed as follows:

Actual Work Done This Equivalent Production

Month
Placed in process 3,000
Placed in process, finished and 2,500 100% 2,500
transferred to stockroom
Work in Process, Jan. 31 500 ¼ 125
Units accounted for 3,000
Total equivalent production 2,625
- When there is work in process inventory at the beginning, the computation for equivalent units of production
depends on the assumed flow of cost, that is, whether it is FIFO or average.

Even application of costs

o Refers to the assumption that the three elements of cost (materials, labor and factory overhead) are
applied during processing so that each element conforms to the completion stage of each unit.
o Thus, if a unit of work in process were 1/5 done, it implies that 1/5 of materials, labor and factory
overhead have been applied.

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

- Equivalent units of production – FIFO

o First-in, first-out, being the normal flow of cost, is observed in the absence of any statement to the
contrary.
o Under FIFO, it is assumed that the units still in process at the beginning of a period are completed ahead of
those placed in process during the period.
▪ The corresponding equivalent production are based only on the fraction or percentage of
work done during the current month.
o Example A:
There were 2,000 units still in process as of February 1, 2014 and they were ¼ done. They were
completed during the month.
▪ Work done on the 2,000 units in February must be the remaining ¾ so that the equivalent
unit of production must be equal to 1,500 arrived at as follows:
Actual Work done this Equivalent
month Production
Work in process, Feb. 1 and 2,000 ¾ 1,500
completed in February

o Example B:
The following production data on a one department factory are given for March, 2014
Units Stage of completion
Work in process, March 1 6,000 1/4
Placed in process 20,000
Work in process, March 31 5,000 1/5

The work in process as of March 31 of 5,000 units must be part of the 20,000 units placed in process
so that only 15,000 units of the latter must have been completed in March.

Quantity Schedule (or schedule of equivalent units of production):

Work in Process, March 1 6,000

Placed in process 20,000
Units to be accounted for 26,000
Equivalent
Actual Work Done Production

Work in process, Mar. 1, finished and transferred to stockroom 6,000 3/4 4,500

Placed in process, finished, and transferred to

stockroom (20,000 - 5,000) 15,000 100% 15,000
Work in process, March 31 5,000 1/5 1,000
Units accounted for 26,000
Total equivalent production 20,500

Equivalent Production – Multiple departments

o When goods are processed in one department and subsequently transferred to another, the units
transferred out from the first department become part of the units to be accounted for in the next.
o Example:
The following production data are given by Luzon Mfg. Co. for February, 2014:

Dept. A Dept. B
Stage of Stage of
Units Completion Units Completion
In process, Feb. 1 5,000 1/4 2,000 1/5
Placed in process 20,000
Transferred to Dept. B 19,000
Transferred to stockroom 18,000
Work in process, Feb. 28 6,000 1/3 3,000 1/6

Factory costs are applied evenly throughout the process.

The quantity schedule is shown below:

Luzon Mfg. Co

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 COST ACCOUNTING AND COST MANAGEMENT 2
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Quantity Schedule
February, 2014

Department A Department B
Work Work
Done Done
This Equivalent This Equivalent
Actual Month Production Actual Month Production
In process, Feb. 1 5,000 2,000
Placed in process 20,000
Received from preceding
dept. 19,000
Units to be accounted for 25,000 21,000

In process, Feb. 1, finished and transferred 5,000 3/4 3,750 2,000 4/5 1,600
Placed in process, finished and transferred 14,000 100% 14,000
Received, finished and transferred 16,000 100% 16,000
In process, Feb. 28 6,000 1/3 2,000 3,000 1/6 500
Units accounted for 25,000 19,750 21,000 18,100

Notes:
- Department A:
o The 19,000 units transferred out consist of 5,000 units in process on February 1st and 14,000 coming from
those just placed in process.
o The units still in process as of February 28 must have come from those placed in process during the
month.
- Department B:
o Inasmuch as 19,000 units were transferred out from Department A, these are part of the units to be
accounted for in Department B so that the total to be accounted for is 21,000.
o With 18,000 units given as transferred out, priority is given to work in process, February 1st, of 2,000 units
so that only the difference of 16,000 must have come from those received (or transferred in) from
Department A. Thus out of the 19,000 units received, 3,000 units are still in process as of February 28.
LAST-IN, FIRST-OUT
- Not used in process costing because the layering aspects of this technique would make process costing
applications quite difficult.
- May be used in valuing raw materials and finished goods inventories.
COST OF PRODUCTION REPORT;
FORMS THEREOF

- The subsidiary record for work in process under process costing.

- It serves as the backbone in this costing method.

- Shows:
o Flow of units in process and their stages of completion
o Computation of equivalent units of production
o Costs charged to a producing department or costs to be accounted for
o Computation of cost per equivalent unit
o An accounting for total cost

- Cost to be accounted for – the debits to work in process

- Cost accounted for – (with the exception of the ending inventory of work in process) are the credits to work in
process

Forms of Cost of Production Report

1. Conventional form of cost of production report

o Computations are shown ahead of the amounts.

2. Modified form – shows the computations after the total cost column.
- the column headings amount and unit cost are observed throughout the report by presenting
computations in the unit cost column. In so doing, errors can easily be traced.
- the consistency in the use of the columns makes it easier to computerize the report.

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 COST ACCOUNTING AND COST MANAGEMENT 2
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Regardless of the form being used, the quantity schedule may be shown separately. This has the advantage of being
able to emphasize cost analysis on a shorter cost of production report. In some cases, errors in one do not require the
revision of both.
ILLUSTRATIVE PROBLEM A
EVEN APPLICATION OF COST, ONE DEPARTMENT FACTORY WITHOUT BEGINNING WORK IN PROCESS
The Solo Mfg. Co. provides you with the following data based on its first month of production in January, 2014:

Quantity data:
Placed in process 60,000 units
In process, January 31 20,000 units, 1/2 done

Factory costs:
Materials P 25,000
Labor 20,000
Factory Overhead 15,000
Factory costs are applied evenly throughout the process.

The schedule of equivalent production and the cost of production report are presented on the next page:
Quantity Schedule

Work Done Equivalent

Actual This Month Production
Placed in process 60,000
Placed in process, finished and transferred 40,000 100% 40,000
In process, January 31 20,000 1/2 10,000
Units accounted for 60,000 50,000

Solo Mfg. Co
Cost of Production Report
For the Month Ended January 31, 2014

Amount Unit Cost

Costs to be accounted for:
Factory costs:
Materials P 25,000 ÷ 50,000 = P 0.50
Labor 20,000 ÷ 50,000 = 0.40
Factory overhead 15,000 ÷ 50,000 = 0.30
Total cost to be accounted for 60,000 P 1.20

Costs accounted for as follows:

Placed in process, finished and transferred
out P 48,000 ( 40,000 units x P 1.20)
In process, January 31 12,000 ( 20,000 x 1/2 x P 1.20)
Total cost accounted for P 60,000

Based on the foregoing cost of production report, the postings to the work in process account would be as follows:

Work in Process
2014 2014
Jan 1-31 Materials 25,000 Jan 1-31 To finished goods 48,000
Labor 20,000
Factory Overhead 15,000

The ending balance of work in process of P 12,000 is the cost assigned to the 20,000 units that are still one-half done
as of January 31, per cost of production report.

Costing Work in Process at the Beginning, Finished and Transferred.

When there are some units in process as of the beginning of the costing period, their cost, upon completion, is
computed as follows:

Cost last month of work in process, beginning

+
Cost added this month based on work done this month

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Cost last month - refers to the accumulated cost as of the beginning of the month
Cost added this month – pertains to the factory cost added during the current costing period based on work done
during the same period.
Example:
As of March 1, 2014, there were 6,000 units in process, 1/4 done, with accumulated cost of P 3,100. Factory costs for
March amount to P 40,000 and equivalent production is 20,000 units so that the unit cost for the month must be P
2.00. The cost of the 6,000 units is computed as follows:

Work in process, March 1,

Finished and transferred:
Cost last month P 3,100
Cost added in March 9,000 (6,000 u. x 3/4 x P2.00)
P 12,100

Cost last month may also be called cost, March,1 and cost added in March as cost this month.
The 6,000 units were 1/4 done as of March 1st so that to complete them this month, work done in March ought to be
the remaining 3/4.

ILLUSTRATIVE PROBLEM B:
EVEN APPLICATION OF COST, ONE DEPARTMENT FACTORY WITH BEGINNING WORK IN PROCESS

The Manggahan Mfg. Co. has a one-department factory and uses the process costing method for its sole product.
Factory costs are applied evenly throughout the process. The following production data are given:

Cost data:
Work in process, March 1, 2014 P 17,600
Factory costs, March, 2014
Materials 50,000
Labor 25,000
Factory overhead 20,000

Quantity data:
In process, March 1 (5/8 done) 8,000 units
Placed in process, March 30,000 units
In process, March 31 (1/5 done) 10,000 units

The schedule of equivalent production and the cost of production report are shown below.
Quantity Schedule
Work Done Equivalent
Actual This Month Production
In process, March 1 8,000
Place in process 30,000
Units to be accounted for 38,000
In process, March 1, finished and transferred 8,000 3/8 3,000
Placed in process, finished
and transferred ( 30,000 - 10,000) 20,000 100% 20,000
In process, March 31 10,000 1/5 2,000
Units accounted for 38,000 25,000

Manggahan Mfg. Co.

Cost of Production Report
For the Month Ended March 31, 2014
Amount Unit Cost
Costs to be accounted for
Factory costs
Materials P 50,000 ÷ 25,000 = P 2.00
Labor 25,000 ÷ 25,000 = 1.00
Factory overhead 20,000 ÷ 25,000 = 0.80
P 95,000
Work in process, March 1, 2014 17,600
Total unit cost P 3.80
Total cost to be accounted for P 112,600

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Cost accounted for as follows:
Transferred to stockroom: 28,000 units
In process, March 1, finished and transferred 8,000 units
Cost last month P 17,600
Cost, this month 11,400 (8,000 x 3/8 x P 3.80)
P 29,000
Placed in process, finished and transferred 20,000 units 76,000 (20,000 x P 3.80)
Total cost transferred out P 105,000 (28,000 @ P 3.75)
In process, March 31 10,000 units 7,600 (10,000 x 1/5 x P 3.80)
Total cost accounted for 112,600
The postings to the work in process account would be as follows:

Work in Process
2014 2014
Mar 1 Balance 17,600
1-31 Materials 50,000 Mar 1-31 To finished goods 105,000
Labor 25,000
Factory Overhead 20,000

Based on the above postings, the ending balance must be P 7,600, the cost assigned to work in process per cost of
production report.
CONVENTIONAL FORM OF COST OF PRODUCTION REPORT
Manggahan Mfg. Co,
Cost of Production Report
For the Month Ended March 31, 2014

Quantity Schedule:
Work Done Equivalent
Actual This Month Production
In process, March 1 8,000
Place in process 30,000
Units to be accounted for 38,000

In process, March 1, finished and transferred 8,000 3/8 3,000

Placed in process, finished
and transferred ( 30,000 - 10,000) 20,000 100% 20,000
In process, March 31 10,000 1/5 2,000
Units accounted for 38,000
Total equivalent production 25,000

Cost Analysis: Total Cost Unit Cost

Materials P 50,000 ÷ 25,000 = P 2.00
Labor P 25,000 ÷ 25,000 = 1.00
Factory Overhead P 20,000 ÷ 25,000 = 0.80

Factory cost, March, 2014 P 95,000 3.80

Work in process, March 1, 2014 17,600
Total cost to be accounted for P 112,600
Cost accounted for as follows:
Finished and transferred to storeroom: 28,000 units
In process, March 1, finished and transferred 8,000 units
Cost last month P 17,600
Cost this month ( 8,000 x 3/8 x P 3.80) 11,400 P 29,000
Placed in process, finished and transferred 20,000 units
(20,000 x P 3.80) 76,000
Total cost transferred to storeroom
(28,000 @ P 3.75) P 105,000
Work in process, March 31 10,000 units
(10,000 x 1/5 x P 3.80) 7,600

Total cost accounted for P 112,600

COST OF PRODUCTION REPORT – MULTIPLE DEPARTMENTS

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

- When goods in process pass through consecutive departments, costs from preceding departments become part of
the cost to be accounted for in the succeeding departments.
- In the succeeding department, cost from preceding department is identified with the units transferred in during
the period.
- Thus, at the end of the current costing period, their cost shall be the sum of the costs from the preceding and the
current departments.
- Accordingly, the cost of units in process at the end shall be equal to:

Cost, preceding department: 100 %

+
Cost, this department: Based on work done this month

ILLUSTRATIVE PROBLEM C:
EVEN APPLICATION OF COST, TWO-DEPARTMENT FACTORY
The sole product of Amapola Manufacturing Co. is processed in two consecutive departments A and B. The production
data for April, 2014 are as follows:

Quantity data: Dept A Dept B

In process, April 1 1,000 2,000
Stage of completion 20% 60%
Placed in process 10,000
In process, April 30 500 700
Stage of completion 80% 10%

Cost data:
Work in process, April 1 P 305.00 P 2,502.00
Factory costs:
Materials P 5,350.00 1,600.50
Labor 2,140.00 3,201.00
Factory overhead 3,210.00 533.5

Factory costs are applied evenly throughout the process.

mAmapola Mfg. Co.

Quantity Schedule
April, 2014

Department A Department B
Work Work
Done Done
This Equivalent This Equivalent
Actual Month Production Actual Month Production
In process, April. 1 1,000 2,000
Placed in process 10,000
Received from preceding dept. 10,500
Units to be accounted for 11,000 12,500

In process, April. 1, finished and transferred 1,000 80% 800 2,000 40% 800
Placed in process, finished and transferred 9,500 100% 9,500
Received, finished and transferred 9,800 100% 9,800
In process, April 30 500 80% 400 700 10% 70
Units accounted for 11,000 10,700 12,500 10,670

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Based on the cost of production report, the postings to the departmental work in process would be as follows:

Work in Process – Dept. A

2014 2014
April 1 Balance 305.00
1-30 Materials 5,350.00 April 1-30 To Dept B 10,605.00
Labor 2,140.00
Factory Overhead 3,210.00 30 Balance 400.00
11,005.00 11,005.00

Work in Process – Dept. B

2014 2014
April 1 Balance 2,502.00
From Dept A 10,605.00
1-30 Materials 1,600.50 April 1-30 To Stockroom 17,700.00
Labor 3,201.00
Factory Overhead 533.50 30 Balance 742.00
18,442.00 18,442.00

JOURNAL ENTRIES
The journal entries for Amapola Mfg. Co. would be as follows:
Work in Process P 10,700.00
Materials P 5,350.00
Payroll 2,140.00
Factory Overhead 3,210.00
Dept. A’s factory costs in April 2014

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Work in Process – Dept B 10,605.00
Work in Process – Dept A 10,605.00
Cost transferred to Dept B

Work in Process – Dept B 5,335.00

Materials 1,600.50
Payroll 3,201.00
Factory Overhead 533.50
Dept B’ factory costs in April 2014

Finished Goods 17,700.00

Work in Process – Dept B 17,700.00
Finished goods from Dept B

After posting the foregoing entries to the respective work in process accounts, the balance in each should be
equal to the ending work in process per cost of production report.

SCHEDULE OF COST OF GOODS MANUFACTURED

- This may be prepared based on the cost of production report or on the postings to the departmental work in
process accounts as follows:
o Work in process inventory, beginning = Total of the departmental work in process inventories
o Factory costs, current period = Total of the departmental factory costs for the current period
o Work in process inventory, end = Total of the departmental work in process inventories
o Cost of goods manufactured = Total cost transferred out from the last department

For Amapola Manufacturing Co., the schedule is prepared as follows:

Amapola Manufacturing Co.

Cost of Goods Manufactured
For the Month Ended April 30, 2014
Factory costs:
Materials P 6,950.50
Labor 5,341.00
Factory overhead 3,743.50 P 16,035.00
Work in process, April 1 2,807.00
Work in process, April 30 (1,142.00)
Cost of Goods manufactured P 17,700.00

Raw Materials and Finished Goods on Floor.

- At year-end, there may be raw materials already issued to the factory but are not yet worked on.
- These are raw materials on floor and are treated as part of raw materials inventory.
- The entry made upon their issuance may be temporarily reversed on working paper for the purpose of preparing
the periodic financial statements.
- In some cases, goods already completed by the last department have not yet been transferred to the stockroom.
They are called finished goods on floor and are part of the ending inventory of finished goods.
- For financial statement preparation, a working paper entry may be made for the reclassification.
UNEVEN APPLICATION OF COSTS
- There is uneven application of cost when an element of cost is applied to production at a rate different from
the rate of progress in the manufacturing process.
- In other words, the portion added does not comply with the completion stage of a unit. This holds true in the case
of materials. In most manufacturing operations, the greater portion of material s is added at the start of the
process.
- Uneven application of cost results in a different equivalent units of production for the particular element.
- The computation for equivalent units of production for materials is illustrated in the following examples. It is
assumed that conversion costs are evenly applied throughout the process so that the computation for the
corresponding equivalent units of production remains the same.
Example A:
Lagundi Mfg. Co. adds all the materials at the start of the process. Conversion cost is applied evenly
throughout the process. The quantity data are as follows:
Placed in process, May, 2014 20,000 units
In process, May 31 5,000 units, 60% done

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The equivalent units of production for materials should be different from those for the conversion cost. They are
computed as follows:
Materials
Work done Equivalent
Actual this month Production
Placed in process 20,000

Placed in process, finished and transferred out 15,000 100% 15,000

In process, May 31 5,000 100% 5,000
Units accounted for 20,000 20,000

- It may be noted that due to the addition of materials at the start of the process, the equivalent production of
ending work in process for materials is 100% despite the fact that it is 60% completed only.
- This is emphasized in the following diagram:

Start of the
process Manufacturing process

Materials
///////////////
///////////////
Conversion cost /////////////////////////////////////////////////////////////////

Example B:
Assume that in example A, there were 3,000 units in process on May 1st, 30% done. The equivalent units of
production for materials must also be 20,000 units as arrived at in the following computation.

-
Work done Equivalent
Actual this month Production
In process, May 1 3,000
Placed in process 20,000
Units to be accounted for 23,000

In process, May 1, finished and transferred out 3,000 -

Placed in process, finished and transferred out 15,000 100% 15,000
In process, May 31 5,000 100% 5,000
Units accounted for 23,000 20,000

- Despite the existence of beginning work in process, equivalent production for materials remains at 20,000, the
number of units started on during the current month.
o Reason: beginning work in process has zero equivalent production for materials because the required
materials for the lot were already added when it was started last month.
o Therefore, when materials are added at the start of the process, equivalent production for materials
(under the FIFO assumed flow of cost) must be equal to the number of units started on during the current
month.

Example C:
Sixty percent of the materials are added at the start of the process and 40%, when the process is 4/5
completed.

In process, beg. 6,000 3/10 done

Placed in process 30,000
In process, end 5,000 7/10 done

The equivalent units of production for materials must be 30,400 as shown below.
Materials
Work done Equivalent
Actual this month Production
In process, May 1, finished and transferred out 6,000 40% 2,400
Placed in process, finished and transferred out 25,000 100% 25,000
In process, May 31 5,000 60% 3,000
Units accounted for 36,000 30,400

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The following visual aids would make it easier to understand the percentage of work done for materials:

,
Manufacturing process

60% 40%
Addition of materials

Work in process, beg. ///////////////////////////////

///////////////////////////////
Work in process, end ///////////////////////////////////
///////////////////////////////////

- Work in process beginning was 30% done at the start so that 60% of the materials were added last month. Only
the remaining 40% are added this month.
- Work in process, end is 70% done only so that only 60% of the materials were added during the month. The
remaining 40% shall be added next month when it reaches 4/5 or 80% completion.

Example D:
Seventy percent of materials are added at the start of the process, 10% at the middle, and 20%, at the end. Same
quantity data as in Example C.
The equivalent units of production for materials are arrived at as follows:
Materials
Work done Equivalent
Actual this month Production
In process, May 1, finished and transferred out 6,000 30% 1,800
Placed in process, finished and transferred out 25,000 100% 25,000
In process, May 31 5,000 80% 4,000
Units accounted for 36,000 30,800

The following diagrams would be of help to understand how the equivalent units of production are arrived at:

Manufacturing process

70% 10% 20%

Addition of materials

Work in process, beg. ///////////////////////////////

///////////////////////////////
Work in process, end ///////////////////////////////////
///////////////////////////////////

- Equivalent production for work in process at the beginning is equal to 30%.

o Reason: inasmuch as they were placed in process last month, 70% of the materials were added last month.
o For this month, 10% was added when it reached the middle of the process and the remaining 20%, upon
completion.
- For ending work in process, which is 7/10 done, equivalent production is 80%.
o Inasmuch as they were placed in process during the current month, 70% of the materials were
immediately added and 10%, when it reached the middle of the process.

Cost of Production Report – Uneven Application of Costs

In preparing the cost of production report, bear in mind the different equivalent units of production in the
computation and assignment of unit costs.

ILLUSTRATIVE PROBLEM D: UNEVEN APPLICATION OF COST, TWO-DEPARTMENT FACTORY

Laguna Mfg. Co. provides the following data on its May, 2014 production:

Dept. I Dept. II
Quantity data:
In process, May 1, 2014 3,000 units 5,000 units

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 COST ACCOUNTING AND COST MANAGEMENT 2
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Stage of completion 30% 25%
Placed in process, May 2014 20,000 units
In process, May 31 5,000 units 7,000 units
Stage of completion 20% 5/7

Cost data:
Work in process, May 1 P 3,450 P 21,750
Prime costs, May 2014 50,000 24,000
Materials 18,100 11,850
Labor

- In Department I, all the materials are added at the start of the process and factory overhead rate is 50% of labor
cost.
- In Department II, 60% of the materials are added at the start of the process with the remainder applied when the
goods are 4/5 done. Factory overhead rate in Department II is P .40 per equivalent unit of production.

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SUMMARY OF PRINCIPLES AND PROCEDURES

The process cost system is used by companies that manufacture on a continuous basis only one or a few products that
are homogeneous.
o The system is ideal in the accounting for costs in mass-production.
o This is used by companies such as soft drink and bottling, paint manufacturer, and petroleum refining.
o Usually in manufacturing operations using process cost system, goods are produced for stock; one unit of
production is similar to the others; factory procedures are standardized; and goods move through
production processes in a constant stream.
o The costs of materials, labor and overhead are accounted for in the usual manner.
The procedures for charging costs to production in a process costs system follow those in the job order system except
that there is no job costs sheet.
o Direct materials placed in production as well as direct labor costs are charged to departmental Work in
Process accounts.
o Indirect materials issued to producing departments and indirect labor costs in a producing department
are charged to Factory Overhead Control Account.
o At the end of the period Factory Overhead is closed into the departmental Work in Process accounts.
After costs are accumulated in Work in Process accounts, production data must be assembled to compute the unit
cost.
o The month production report provides information about the quantity stated, quantity transferred in and
out, and the quantity and stage of completion of products in process at the end of the month.
o The cost accountant then computes the equivalent units of production to show the amount of work done
on both completed and partially processed units in each department. Equivalent units of production
reflect the number of units that could have been completely produced from the costs incurred.
Using the costs figures and the equivalent production unit figures, a cost of production report for each department is
prepared.

The cost of production report has two main schedules. The quantity schedule and the cost schedule.
o The first part of the Quantity Schedule provides unit data showing units to be accounted for. The second
part explains what happened to the units that were handled in that department. Generally, the products
are either transferred out of the department or are in the ending work in process inventory in various
stages of completion.

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o In the first part of the Cost Schedule, total costs are assembled and the cost per equivalent unit of
production for each cost category (materials, labor, overhead, and transferred in cost) is computed. In
addition, the cumulative cost per equivalent unit is calculated.
o The second part of the Cost Schedule accounts for the costs. Some costs relate to units that are transferred
to the next department or to finished goods. The total of costs transferred out is computed by multiplying
the cumulative cost per equivalent unit by the number of units transferred out. Other costs remain as part
of the work in process. The cost of ending work in process is the unit cost of each cost category multiplied
by the number of equivalent units of that cost category still in process.
The total cost of goods transferred from one department to the next or to finished goods, as shown in the cost of
production report, is recorded by a journal entry and posted to the general ledger.

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