04/11/2024

Process Costing

 Using a process costing system, costs are accumulated for each department
for a time period and allocate them among all the products manufactured
during the period.

PROCESS COSTING 


They use process costing in ice cream processing, petroleum refining, and
other industries where there is a continuous production process.
Direct material, direct labor, and applied factory overhead are accumulated
for each department for a period, usually a month.
 At the end of the period, departmental cost is divided by the number of units
produced to obtain a cost per unit.

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Process Costing Methods Are Used By Characteristics of a Process Cost System

the Following 1. Costs are accumulated by department or cost center.
2. Each department has its own general ledger Work in
1. Industries producing chemicals, petroleum, textiles, Process Inventory account. This account is debited
steel, rubber, cement, flour, pharmaceuticals, shoes, with the processing costs incurred by the department
plastics, sugar, and coal. and credited with the cost of completed units
2. Firms manufacturing such as rivets, screws, bolts, and transferred to another department or to finished
small electrical parts. goods inventory.
3. Assembly-type industry which manufactures 3. Equivalent units are used to restate – work in
typewriters, automobiles, airplanes, and household process inventory to terms of completed units at the
electric appliances. end of the period.
4. Service industries such as gas, water, and heat.

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Characteristics of a Process Cost System Process Costing

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.

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Process Costing Flows 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
 Manufacturing Overhead 100,000

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

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Job Order Costing vs Process Costing The Flow of Materials, Labor, and
Overhead Costs
Job Order Costing Process Costing
In a process costing system, instead of having to trace
Costs are collected for each unit Costs are accumulated in a department
produced. Products are manufactured for an accounting period (for example, a
costs to hundreds of different jobs, costs are traced to
individually or in a distinct lots, jobs, month), then spread evenly or averaged, only a few processing departments.
contracts or batches. over all units produced that month. A separate Work in Process account is maintained for
each processing department.
The product manufactured are Process costing assumes each unit
heterogeneous or dissimilar products. produced is relatively uniform. Used for The completed production of the first processing
standardized products. department is transferred to the Work in Process
Job order costing has more detailed Process costing has less detailed account of the second processing department. After
recordkeeping of each job done. recordkeeping. further work in the second department –assuming there
are only 2 departments- the completed units are then
transferred to Finished Goods.

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The Flow of Materials, Labor, and

Overhead Costs Example:

Materials, labor, and overhead costs can be  TM Corporation Manufactures office tables in three
departments.
added in any processing department—not just  Department 1 cuts the woods at an average cost of P100
the first. per unit.
 The woods are then transferred to Department 2, where
After materials, labor, and overhead costs they are assembled at an average cost of P200 per unit.
have been accumulated in a department, the  The last stop is in Department 3 where they are painted at
department’s output must be determined so an average cost of P300 per unit. The completed units are
transferred to Department 3 to finished goods inventory.
that unit product costs can be computed.

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The total unit cost of one finished table is P600, EQUIVALENT UNITS OF PRODUCTION
computed as follows: (AVERAGE, FIFO)
Equivalent units = Number of partially completed units x Percentage completion
Department Unit Cost
Added
*Equivalent units is the product of the number of partially completed units and
1 P 100.00 the percentage completion of those units with respect to the processing in the
2 200.00 department.
3 300.00 Equivalent units of production for a period can be computed in different ways,
i.e. weighted-average method and FIFO method.
Total Unit Cost P600.00

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Illustrative Problem Solution

Camia Company manufactures a product that goes through three departments, A,
B, and C. Information relating to activity in department A during October is given  1. Weighted-average Method - Units accounted for as follows:
below:
Percent Completed Equivalent Units
Units Materials Conversion Materials Conversion

Work in process, October 1 50,000 90 60

Started into production 390,000 Units transferred to Department B 410,000 410,000
Completed and transferred to Department B 410,000 Work in process, October 31:
Work in process, October 31 30,000 70 50 30,000 units x 70% 21,000
30,000 units x 50% 15,000
1. Compute the equivalent units for October, assuming that the company uses Equivalent units of production 431,000 425,000
the weighted-average method of accounting for units and costs.
2. Compute the equivalent units of production for October, assuming that the
company uses the FIFO method of accounting for units and costs.

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 2. FIFO Method - Units to be accounted for as follows: Assignment of Manufacturing Costs

Equivalent Units
Materials Conversion  Process cost system accumulates the three elements
of costs using either the following costing procedures:
Work in process, October 1
50,000 units x 10% 5,000  Normal Costing – direct materials and direct labor are
50,000 units x 40% 20,000 applied at actual cost while manufacturing overhead is
Started and completed during October 360,000 360,000 applied at a pre-determined rate.
Work in process, October 31  Standard Costing – direct materials, direct labor and
30,000 units x 70% 21,000
manufacturing overhead are applied at standard cost
30,000 units x 50% 15,000

Equivalent units of production 386,000 395,000

or estimated cost.

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Journal Entries – Normal Costing Journal Entries – Normal Costing

Direct Materials Direct Labor
Usually, direct materials are added to the first department, The distributions of direct labor to the departments are
but they may also be added in the subsequent recorded by the following entry:
departments. The entry to record direct materials used by
each department is: Work in Process – Department 1 xxx
Work in Process – Department 2 xxx

Work in Process – Department 1 xxx Work in Process – Department 3 xxx

Work in Process – Department 2 xxx Factory Payroll xxx
Work in Process – Department 3 xxx
Materials xxx

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Journal Entries – Normal Costing Journal Entries – Normal Costing

Manufacturing Overhead Transfer to Next Department
Manufacturing overhead costs are applied using a predetermined application The entry to record the cost of units transferred out:
rate. The following entry is made to record applied manufacturing overhead in
each department: From Department 1 to Department 2

Work in Process – Department 1 xxx

Work in Process – Department 2 xxx Work in Process – Department 2 xxx
Work in Process – Department 3 xxx Work in Process – Department 1 xxx
Applied Manufacturing Overhead xxx

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Journal Entries – Normal Costing Journal Entries – Normal Costing

Transfer to Next Department Transfer to Finished Goods
The entry to record the cost of units transferred out:
The units completed in the last department (Department 3)
and transferred to stockroom awaiting sale are recorded as
From Department 2 to Department 3
follows:

Work in Process – Department 3 xxx Finished Goods xxx

Work in Process – Department 2 xxx Work in Process – Department 3 xxx

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COST OF PRODUCTION REPORT

 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 the
department.

total costs of costs related

products to the ending
costs incurred average cost completed inventory of
in the per unit of and work-in-
department product transferred process in
out of the each
department department

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