Cost

System
Process Costing

‫حممود حممد بدوي‬

Mahmoud Mohamed Badwi

Process Costing
Case (1): Process Costing with No Beginning or Ending Work-in-Process Inventory:

On January 1, 2012, there was no beginning inventory of SG-40 units in the assembly
department. During the month of January, Pacific Electronics started, completely assembled,
and transferred out to the testing department 400 units.

Data for the assembly department for January 2012 are as follows:

Physical Units for January 2012

Work in process, beginning inventory (January 1) 0 units
Started during January 400 units
Completed and transferred out during January 400 units
Work in process, ending inventory (January 31) 0 units

Physical units refer to the number of output units, whether complete or incomplete. In January
2012, all 400 physical units started were completed.

Total Costs for January 2012

Direct material costs added during January $32,000
Conversion costs added during January $24,000
Total assembly department costs added during January $56,000

Pacific Electronics records direct material costs and conversion costs in the assembly
department as these costs are incurred. By averaging, assembly cost of SG-40 is
$56,000 ÷ 400 units= $140 per unit, itemized as follows:

Page | 2
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Case (2): Process Costing with Zero Beginning and Some Ending Work-in-Process Inventory

In February 2012, Pacific Electronics places another 400 units of SG-40 into production.
Because all units placed into production in January were completely assembled, there is no
beginning inventory of partially completed units in the assembly department on February 1.
Some customers order late, so not all units started in February are completed by the end of the
month. Only 175 units are completed and transferred to the testing department. Data for the
assembly department for February 2012 are as follows:

The 225 partially assembled units as of February 29, 2012, are fully processed with respect to
direct materials, because all direct materials in the assembly department are added at the
beginning of the assembly process. Conversion costs, however, are added evenly during
assembly. Based on the work completed relative to the total work required to complete the SG-
40 units still in process at the end of February, an assembly department supervisor estimates
that the partially assembled units are, on average, 60% complete with respect to conversion
costs.

The five steps of process costing are as follows:

• Step 1: Summarize the flow of physical units of output.

• Step 2: Compute output in terms of equivalent units.
• Step 3: Summarize total costs to account for.
• Step 4: Compute cost per equivalent unit.
• Step 5: Assign total costs to units completed and to units in ending work in process.

Page | 3
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Equivalent units is a derived amount of output units that

(1) takes the quantity of each input (factor of production) in units completed and in
incomplete units of work in process and
(2) converts the quantity of input into the amount of completed output units that could be
produced with that quantity of input.

Note that equivalent units are calculated separately for each input (such as direct materials
and conversion costs). Moreover, every completed unit, by definition, is composed of one
equivalent unit of each input required to make it.

Page | 4
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Case (3): Process Costing with Some Beginning and Some Ending Work-in-Process Inventory

At the beginning of March 2012, Pacific Electronics had 225 partially assembled SG-40 units in
the assembly department. It started production of another 275 units in March. Data for the
assembly department for March are as follows:

• There are two methods for process costing that can be used.
1- Weighted Average method.
2- First In First Out method (FIFO).

Weighted-Average Process-Costing Method

• Weighted-average costs is the total of all costs in entering the work-in-process account
(whether from beg. WIP or from work started during current period) divided by the total
equivalent units of work done to date.

• The beginning balance of the entering the work-in-process account (work done in a prior
period) is blended in with current period costs.

• Calculates cost per equivalent unit of all work done to date (regardless of the accounting
period in which it was done)

• Assigns this cost to equivalent units completed and transferred out of the process, and
to incomplete units in still-in-process

Page | 5
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Except that calculating the units—in this case equivalent units—is done differently. We use the
relationship shown in the following equation:

Page | 6
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

First In First Out Process-Costing Method

• A distinctive feature of FIFO process-costing method is that work done on beginning

inventory is kept separate from work done in the current period.

• Assigns the cost of the previous accounting period's equivalent units in beginning work-in
process inventory to the first units completed and transferred out of the process

• Assigns the cost of equivalent units worked on during the current period first to
complete beginning inventory, next to start and complete new units, and lastly to units in
ending work-in process inventory

Page | 7
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Comparison of Weighted-Average and FIFO Methods

Result of the Process:

Two critical figures arise out of step 5 of the cost-allocation process:

1- The amount of the journal entry transferring the allocated cost of units completed
and sent from work-in-process inventory to finished goods Inventory
2- The ending balance of the work-in-process inventory account that will appear on the
balance sheet
Page | 8
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
‫‪Mahmoud Mohamed Badwi‬‬

‫‪Page | 9‬‬
‫صيل عيل النب من قلبك‪ ،‬واذكر للا‬
‫‪Mahmoud Mohamed Badwi‬‬

‫‪Page | 10‬‬
‫صيل عيل النب من قلبك‪ ،‬واذكر للا‬
Mahmoud Mohamed Badwi

Transferred- In Costs

• Are costs incurred in previous departments that are carried forward as the products cost
when it moves to a subsequent process in the production cycle.
• Also called previous department costs.
• Transferred-in costs are treated as if they are a separate type of direct material added at
the beginning of the process. That is, transferred-in costs are always 100% complete as of
the beginning of the process in the new department.
• Many process-costing systems have two or more departments or processes in the production
cycle. As units move from department to department, the related costs are also transferred
by monthly journal entries.

The following diagram represents these facts:

Page | 11
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Transferred-In Costs and the Weighted-Average Method:

Page | 12
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Transferred-In Costs and the FIFO Method:

Page | 13
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Spoilage
• units of production, either fully or partially completed, that do not meet the specifications
required by customers for good units and that are discarded or sold for reduced prices
• Some examples of spoilage are defective shirts, jeans, shoes, and carpeting sold as
"seconds," or defective aluminum cans sold to aluminum manufacturers for remelting to
produce other aluminum products.
• Accounting for Spoilage
✓ Accounting for spoilage aims to determine the magnitude of spoilage costs and to
distinguish between costs of normal and abnormal spoilage.
✓ To manage, control, and reduce spoilage costs, they should be highlighted, not simply
folded into production costs.

• Types of Spoilage:
1. Normal Spoilage
2. Abnormal Spoilage

Normal spoilage

• Normal spoilage is spoilage inherent in a particular production process that arises under
efficient operating conditions.
✓ Costs of normal spoilage are typically included as a component of the costs of good units
manufactured because good units cannot be made without also making some units that are
spoiled.
✓ Management makes a conscious decision about the production rate per hour which will
generate a certain level of normal spoilage.

Abnormal spoilage

• Abnormal spoilage is spoilage that is not inherent in a particular production process and
would not arise under normal operating conditions.
✓ Abnormal spoilage is considered avoidable and controllable.
✓ Units of abnormal spoilage are calculated and recorded in the loss from abnormal spoilage
account. which appears as a separate line item on the income statement.

Process Costing and Spoilage:

• Units of normal spoilage can be counted or not counted when computing output units
(physical or equivalent) in a process costing system.
• Counting all spoilage is considered preferable.

Page | 14
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

The Five-Step Procedure for Process Costing with Spoilage:

• Step 1: Summarize the flow of physical units of output-identify both normal and abnormal
spoilage.
• Step 2: Compute output in terms of equivalent units. Spoiled units are included in the
computation of output units.

Costing with Spoilage:

• Step 3: Summarize total costs to account for.

• Step 4: Compute cost per equivalent unit.
• Step 5: Assign total costs to:
1. Units completed
2. Spoiled units
3. Units in ending work-in-process

Page | 15
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Example: Wafer Co is a fast-growing manufacturer of computer chips. Direct materials are

added at the start of the production process. Conversion costs are added evenly during the
process. Some units of this product are spoiled as a result of defects not detectable before
inspection of finished goods. Spoiled units are disposed of at zero net disposal value.

Wafer Co uses the weighted-average method of process costing.

Summary data for September 2014 are as follows:

Required:

1. For each cost category, compute equivalent units. Show physical units in the first column
of your schedule.
2. Summarize the total costs to account for; calculate the cost per equivalent unit for each
cost category; and assign costs to units completed and transferred out (including normal
spoilage), to abnormal spoilage, and to units in ending work in process.

Page | 16
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
‫‪Mahmoud Mohamed Badwi‬‬

‫‪Page | 17‬‬
‫صيل عيل النب من قلبك‪ ،‬واذكر للا‬
Mahmoud Mohamed Badwi

Example: Weighted-average method, spoilage, and equivalent units. (CMA, adapted) Consider
the following data for November 2020 from Gray Manufacturing Company, which makes silk
pennants and uses a process-costing system. All direct materials are added at the beginning of
the process, and conversion costs are added evenly during the process. Spoilage is detected
upon inspection at the completion of the process. Spoiled units are disposed of at zero net
disposal value. Gray Manufacturing Company uses the weighted-average method of process
costing.

Required: Compute equivalent units for direct materials and conversion costs. Show physical
units in the first column of your schedule.

Page | 18
‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
‫‪Mahmoud Mohamed Badwi‬‬

‫‪Page | 19‬‬
‫صيل عيل النب من قلبك‪ ،‬واذكر للا‬