LECTURE 4: Process Costing

ACC 422: MANAGERIAL ACCOUNTING

BS Operations Management
Learning Objectives:
1. Understand the basic approach in process costing;
2. Record the flow of materials, labor and overhead system through
process costing;
3. Compute the equivalent units and cost per equivalent unit using
the weighted – average method;
4. Assign costs to units using the weighted – average method; and
5. Prepare a cost reconciliation report.
Process Costing
▪ It is used most commonly in industries that convert raw
materials into homogeneous (i.e. uniform) products,
such as bricks, soda, paper.
Job-order Costing vs. Process Costing
Cash Flows in Process Costing
Processing Department
▪ It is an organizational unit where work is performed on
a product and where materials, labor, or overhead costs
are added to the product.
Flow of Raw Materials, Labor
and Overhead Costs
▪ Cost accumulation is simpler in process costing than in
job-order system.
▪ In a process costing system, instead of having to trace
costs to hundreds of different jobs, costs are traced to
only a few processing departments.
T-Accounts of Process Costing Flows
▪ It is an organizational unit where work is performed on
a product and where materials, labor, or overhead costs
are added to the product.
Materials, Labor and Overhead Cost Entries
❑ Materials Cost – materials are drawn from the
storeroom using a materials requisition form.
❑ Materials can be added in any processing department,
although it is not unusual for materials to be added
only in the first processing department, with
subsequent department adding only labor and
overhead cost.
Materials, Labor and Overhead Cost Entries
▪ On Dec. 1, 2022, Delight Cream Soda used P250,000
materials in the formulating department and P100,000
materials in the bottling department. The entries will
be: Account Title Debit Credit
Work in Process - Formulating ₱ 250,000
Raw Materials ₱ 250,000

Work in Process - Bottling ₱ 100,000

Raw Materials ₱ 100,000
Labor Costs
▪ In process costing, labor costs are traced to
departments – not to individual jobs.
▪ On Dec. 15, 2022, Delight Cream Soda incurred labor
cost of P70,000 for formulating department and
P40,000 for bottling department.
Account Title Debit Credit
Work in Process - Formulating ₱ 70,000
Salaries and Wages Payable ₱ 70,000

Work in Process - Bottling ₱ 40,000

Salaries and Wages Payable ₱ 40,000
Overhead Costs
▪ In process costing, predetermined overhead rates are usually used. Manufacturing
overhead cost is applied according to the amount of the allocation base that is incurred
in the department.
▪ On Dec. 20, 2022, Delight Cream Soda incurred an overhead cost amounting to
P90,000 for formulating department and P30,000 for bottling department.

Account Title Debit Credit

Work in Process - Formulating ₱ 90,000
Manufacturing overhead ₱ 90,000

Work in Process - Bottling ₱ 30,000

Manufacturing overhead ₱ 30,000
Completing the Cost Flows
▪ Once the process is completed in the department, the units are
transferred to the next department for processing. The balances of each
account titles are to be presented using T-accounts.
Work in Process - Bottling
Debit Credit The journal entry is made to transfer the cost of
Dec. 1 ₱ 100,000 partially completed units from the Formulating
Dec. 15 ₱ 40,000 Department to the Bottling Department.
Dec. 20 ₱ 30,000
₱ 170,000

Account Title Debit Credit

Work in Process - Bottling ₱ 170,000
Work in Process - Formulating ₱ 170,000
Completing the Cost Flows
▪ After processing has been completed in the Bottling department, the
costs of the completed units are transferred to the Finished Goods
inventory account:

Account Title Debit Credit

Finished Goods ₱ 170,000
Work in Process - Bottling ₱ 170,000
Completing the Cost Flows
▪ Finally, when a customer’s order is filled and units are sold, the cost of
the units is transferred to Cost of Goods Sold:

Account Title Debit Credit

Cost of Goods Sold ₱ 170,000
Finished Goods ₱ 170,000
Equivalent Units of Production
▪ After materials, labor, and overhead costs have been
accumulated in a department, the department’s output must
be determined so that unit product costs can be computed.
▪ The difficulty is that a department usually has some partially
completed units in its ending inventory.
▪ It is not reasonable to count these partially completed units as
equivalent to fully completed units when counting the
department’s output.
▪ Therefore, these partially completed units are translated into
an equivalent number of fully completed units.
Equivalent Units of Production
❑ Equivalent units = Number of partially completed units
x Percentage completion

▪ Equivalent units is the product of the number of

partially completed units and the percentage
completion of those units with respect to the
processing in the department.
Equivalent Units of Production
❑ Example: The Molding department at Double
Diamond has 500 units in its ending work in process
inventory that are 60% complete with respect to the
processing in the department.
❑ The partially complete units is equivalent to 300.
▪ 500 x 60% = 300

• These equivalent units are added to any units completed during the
period to determine the department’s output for the period or the
equivalent units of production.
 Equivalent Units of Production
❑ The FIFO Method of process costing is a method in which
equivalent units and unit costs relate only to work done
during the current period.
❑ The Weighted Average Method blends together units and
costs from the current period with units and costs from the
prior period.
❑ In the weighted average method, the equivalent units of
production for a department are the number of units
transferred to the next department (or to finished goods)
plus the equivalent units in the department’s ending work
in process inventory.
Weighted Average Method ❑ Equivalent units of production = Units transferred to the next
department or to finished goods + Equivalent units in ending
The data shows the activity in the shaping and work in process inventory
milling department.
Weighted Average Method
Shaping and Milling Department
Data for May Operations
Beginning work in process inventory:
Units in process 200
Completion with respect to materials 55%
Completion with respect to conversion 30%
Costs in beginning work in process inventory
Materials cost ₱ 9,600
Conversion cost ₱ 5,575
Total cost in beginning work in process inventory ₱ 15,175

Units started into production during the period 5,000

Units completed and transferred out 4,800
Costs added during the period:
Materials cost ₱ 368,600
Conversion cost ₱ 350,900
Total cost added during the period ₱719,500

Ending work in process inventory:

Units in process 400
Completion with respect to materials 40%
Completion with respect to conversion 25%
Cost per Equivalent Unit – Weighted Average Method
Cost of beginning work in process inventory + Cost added during the period
Cost per Equivalent Unit =
Equivalent units of production

Shaping and Milling Department

Costs per Equivalent Unit

Materials Conversion
Cost of beginning work in process inventory ₱ 9,600 ₱ 5,575
Cost added during the period ₱368,600 ₱ 350,900
Total Cost ₱378,200 ₱ 356,475

Equivalent units of production 4,960 4,900

Cost per equivalent unit ₱ 76.25 ₱ 72.75
Applying Cost – Weighted Average Method
Shaping and Milling Department
Costs of Ending Work in Process Inventory and the Units Transferred Out

Materials Conversion Total

Ending work in process inventory:
Equivalent units of production
400 units x 40% complete - materials 160
400 units x 25% complete - conversion 100
Cost per equivalent unit ₱ 76.25 ₱ 72.75
Cost of ending work in process inventory ₱ 12,200 ₱ 7,275 ₱ 19,475

Units completed and transferred out

Units transferred to the next department 4800 4800
Cost per equivalent unit ₱ 76.25 ₱ 72.75
Cost of units transferred out ₱ 366,000 ₱ 349,200 ₱ 715,200
Cost Reconciliation Report
Shaping and Milling Department
Cost Reconciliation

Costs to be accounted for:

Cost for beginning work in process inventory ₱ 15,175
Cost added to production during the period ₱ 719,500
Total cost to be accounted for ₱ 734,675

Costs to be accounted for as follows:

Cost of ending work in process inventory ₱ 19,475
Cost of units transferred out ₱ 715,200
Total cost to be accounted for ₱ 734,675
THANK YOU! ☺