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CHAPTER FOUR
Process costing
4.1 Introduction
Cost accounting system should be designed to fit the nature of manufacturing operation.
The job-order costing system is designed to trace costs to a job, while a process costing
system traces the costs to the processes, instead of the job. A process costing system is
used where there is a mass production of like units which usually pass in a continuous
fashion through a series of uniform production stages called process or operations. In
process costing system, it is necessary to establish specific process costing centers which
are usually called processing departments. The basic approach to process costing is to
accumulate costs in a particular operation or processing department for the entire period
(a month, a quarter, a year) and then divide the total accumulated cost by the total number
of units completed (produced) during the Period to determine the unit cost of the product.
This unit cost is an average unit cost for all units produced since all units are the same
and indistinguishable. Firms which employee a process costing system is petroleum
refineries, textile factories, flourmills, paint factories and etc.

4.2 Nature (Characteristics) and procedures of process costing

The characteristics of process costing are:

1) A cost of production report is used to collect, summarize, and compute total and
unit costs.
2) Production is accumulated and reported by departments or processes.
3) Costs are posted to departmental work in process accounts.
4) Production in process at the end of a period is restated in terms of completed
units.
5) Total cost charged by a department is divided by total production units of the
department to determine the unit cost for a specific period.
6) Costs of completed units of a department are transferred to the next processing
department in order to arrive at the total costs of the finished products during a
period.

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Procedures of process costing

The procedures of process costing are designed to:

1) Accumulate materials, labor, and factory overhead costs by departments.
2) Determine a unit cost for each department.
3) Transfer costs from one department to the next and to finished goods.
4) Assign costs to the inventory of work still in process

Costing by departments
The nature of manufacturing operations in firms using process or Job-order cost
procedures usually takes production tasks from different departments. For that matter,
whatever the cost procedure is applied, each department is responsible to perform a
specific operation or process towards the completion of production. In processing, each
department may consume (charge) a certain amount of materials, labor and factory
overhead for the accomplishment of its tasks. For example, have a look at the diagram
below (sequential product flow), it is clearly depicted that just after a Blending
department has completed the starting phase of work on the product, units are transferred
to Testing department after which they may go to Terminal department for completion
and transfer to finished goods store room. When units are transferred from one
department to the other the associated cost incurred in each department will also be
transferred along with the physical flow of products. Finally, the cost of completed units
is determined by dividing the total cost of a period by the total units produced during the
same period. Departmental total and unit costs are determined by the use of the cost of
production report.
4.2.1 Product Flow Methods
A product can flow through a factory in many ways. Three product flow formats
associated with process costing; sequential, parallel, and selective are discussed below:
a) Sequential product flow
Sequential processing is a method of processing manufacturing in which units pass from
one process to another in a sequential pattern and each unit is processed using the same
series of steps as illustrated below:

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Work in process Work in Process Work in Process Finished

Blending Department Testing Department Terminal Department
Goods
Materials Labor Labor
Labor FOH FOH
FOH

FOH= Factory overhead

Materials are placed into production in the Blending department, and labor and factory
overhead are added. When work is finished in Blending department, it moves to the
Testing department. The second process and any succeeding processes may add more
materials or simply work on the partially completed input from the preceding processes
(department), adding only labor and factory overhead, as in this example. After the
product has been processed by the Terminal department, it is a completed product and
becomes a part of finished goods inventory.
b) Parallel Product Flow
Two examples of parallel processing (product flow) are:
i. Two different products emerge from a common process, and then each flows
through its own separate series of processes for completion.

Department 2 Department 4 Finished

Or Or Product
Process 2 Process 4 (Good) x
Department 1
Or
Process 1
Department 3 Department 5 Finished
Or Or Product
Process 3 Process 5 (Good) x

ii. The products flow through their separate series of processes and then
eventually flow through a common department.

Department 1 Department 3
Or Or
Process 1 Process 3
Department 5 Finished
Or Goods
Process 5
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C) Selective Product Flow

In this method, the product moves to different departments with in the plant, depending
up on the desired final product.

Work in process Work in process finished

Butchering Packaging Department Goods
Material Material
Labor Labor
FOH FOH

Work in process
Smoking Department
Labor
FOH
FOH = Factory Overhead

Work in process
Grinding Department
Labor
FOH

For example in meat processing, after the initial butchering process, some of the product
goes directly to the packaging department and then to finished goods inventory; some
goes to the smoking department and then to the packaging department and finally to
finished goods inventory, and some goes to the grinding department, then to the
packaging department, and lastly to finished goods inventory.

4.3 Procedures for Materials, Labor and Factory overhead Costs

In process costing, materials, labor and factory overhead costs are accumulated in the
usual accounts, using normal cost accounting procedures. Costs are then analyzed by

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department or processes and charged to departments by appropriate journal entries. In

process costing, materials are issued only to the process in originating department;
subsequent departments add labor and factory overhead. If materials are needed in a
department other than the first, they are charged to the department performing the
specific operation.
For control purposes materials need not always be priced individually or by requisition
forms. The cost of materials used can be determined at the end of the production period
through inventory difference procedures, i.e., adding purchases to beginning inventory
and then deducting ending inventory. Or consumption reports which state the cost of
materials or quantity of materials put into process by various departments can be used.
Journal entries in process-costing systems are basically like those made in job-costing
systems with respect to direct materials and conversion cost. The main difference is that,
in process costing, there is often more than one work-in-process account, one for each
process. As direct materials and direct labor are used in production department one (1),
these costs are added to the work in process inventory account for department one (1).
Overhead is applied using a predetermined overhead rate. The predetermined overhead
rate is computed in the same way in job-order and process costing.
The appropriate journal entry to be maintained when materials are charged for production
in Blending department during a period is:
Work in process-Blending Department ***
Materials ***
In process costing, labor costs are identified by and charged to departments, and thus
eliminating the detailed clerical work of accumulating labor costs by jobs. Summary of
labor charges are made to departments through an entry which distributes the direct
manufacturing payroll as shown below:
Work in process-Blending Department ***
Work in process-Testing department ***
Work in process-Terminal Department ***
Payroll ***
Factory overhead incurred in process costing as well as in job order costing should be
accumulated in factory overhead subsidiary ledger for producing and service

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departments. This procedure is consistent with requirements for responsibility accounting

and responsibility reporting.
In process costing, either the predetermined overhead or the actual overhead can be
charged to products. However, charging actual overhead to products is feasible when
production remains comparatively stable from period to period, since factory overhead
will then remain about the same from one month to the next. Predetermined overhead
rates for producing departments should be used if;
1. Production is not stable
2. Factory overhead, especially fixed overhead is a significant cost.
The use of predetermined rates is highly recommended for improving cost and facilitating
cost analysis. Prior to charging factory overhead to departments via their respective work
in process accounts, expenses must be accumulated in a factory overhead control account.
As expenses are incurred, the appropriate entry to be maintained is:
Factory overhead control ***
Accounts payable ***
Accumulated depreciation-machinery ***
Prepaid insurance ***
Materials ***
Payroll ***
As the end of the period, the predetermined rates are multiplied by the respective actual
activity base (e.g. Direct labor hours) for each producing department, the entry charging
these expenses to work in process is as follows:
Work in process-Blending Department ***
Work in process-Testing Department ***
Work in process-Terminal Department ***
Factory overhead control ***

4.4 The cost of production report

The key document in a typical process-costing system is the departmental production
report, prepared for each production department at the end of every accounting period. It
shows all costs chargeable to a department. This report replaces the job-cost record,
which is used to accumulate costs by job in a job-order costing system. The departmental
production report summarizes the flow of production quantities through departments, and
it shows the amount of production cost transferred out of the department’s work in

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process inventory account during the period. It is not only the source for summary journal
entries at the end of the month, but also a most convenient vehicle for presenting and
disposing of costs accumulated during the month.
A cost of production report shows:
1. Total and unit costs transferred to it from a preceding department.
2. Materials, labor and factory overhead added by the department.
3. Unit costs added by the department.
4. Total and unit costs accumulated to the end of operations in the department.
5. The cost of the beginning and ending work in process inventories, and
6. Cost transferred to a succeeding department or to a finished goods store room.

It is customary to divide the cost section of the report into two parts: One showing costs
for which the department is accountable, including departmental and cumulative total and
unit costs, the other showing the disposition of these costs. A quantity schedule showing
the total number of units for which a department is accountable and the disposition made
of these units is also part of each department’s cost of production report. Information on
this schedule, adjusted for equivalent production unit, is used to determine the unit costs
added by a department, the costing of the ending work in process inventory, and the cost
to be transferred out of the department.

A cost of production report determines periodic total and unit costs. As controlling
demands detailed presentation of cost data, showing total figures by it self mean very
little. Therefore in most instances, the total cost is broken down by cost element for each
department responsible for the costs incurred. Furthermore, detailed departmental figures
are needed because of the various completion stages of the work in process inventories.
Either in the cost of production report it self or in the supporting schedule, each item of
material used by a department is listed; every labor operation is shown separately; factory
overhead components are noted individually; and a unit cost is derived for each item.

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Illustration 4.1
ABC Company manufactures a single product in three producing departments namely,
Blending, Testing and Terminal. The originating (Blending) department put 50,000 units
in process during the month of January, 2007. Of which 45,000 units are completed and
transferred to the next department .4, 000 units are still in process and 1,000 units are lost
during production. Materials, labor and factory overhead added by the department are
amounted $24,500, $29,140 and $28,200 respectively. In addition, the ending work in
process for the department is fully complete with respect to materials and ½ complete
with respect to labor and factory overhead.
Required: Prepare the cost of production report for Blending department.

Solution
Supportive computation:
Equivalent unit of production: Equivalent production represents the production of a
process in terms of completed units, work in process at the end of an accounting period
are converted into equivalent units. This is done by the following formula

Equivalent completed units

Equivalent production:
Materials=45,000+4,000=49,000 units
Labor and factory overhead=45,000+4000(1/2) =47,000 units.
NB: All materials needed for the completion of production are added at the beginning
of the process in the originating department. Therefore, the equivalent production
for materials is 49,000 units.
All the units completed and transferred to the next department are fully complete
with respect to materials and conversion costs in this department.
Unit costs: unit costs are determined for each cost component based on the respective
computed production units.
Materials =$24,500 49, 000=$0.50 per unit

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Labor =$29,140 47, 000=$0.62 per unit

Factory overhead = $28,200 47, 000 = $0.60 per unit
ABC Company
Blending Department
Cost of production report
For the month of January, 2007
Quantity schedule:
Units started in process 50, 000
Units transferred to the next department 45, 000
Units still in process (all materials, ½ labor and factory overhead) 4, 000
Units lost in process 1, 000 50, 000
Cost charged to the department:
Cost added by the department Total cost unit cost

Materials $24, 500 $0.50

Labor 29, 140 0.62
Factory overhead 28, 200 0.60
Total coast to be accounted for $81,840 1.72
Cost accounted for as follows:
Transferred to next department (45, 000 x$ 1.72) $77, 400
Work in process-ending inventory:
Materials (4, 000 x $ 0.50) $2,000
Labor (4, 000 x ½ x $ 0.62) 1,240
Factory over head (4, 000 x ½ x 0.60) 1,200 4,440
Total cost accounted for $81, 840

NB: figures in bracket represent equivalent units in work in process inventory for each
cost components and unit costs of the respective cost components.
Equivalent units of production: In many manufacturing processes all materials are
issued at the start of production but all conversion costs are generally added to the
processes uniformly through time. Therefore, the 4,000 units still in process for Blending
department of ABC Company have all the materials needed for their completion but of
labor and factory overhead are charged only 50% or (1/2). And we can infer that, the total
amount of labor and factory overhead charged into units still in process can be converted
(stated) into the amount of completed out put units that could be made with the quantity
of input. For example, if 50 units of a product in ending work in process inventory are
70% complete with respect to conversion costs there are 35 (70% 50 units) equivalent
units of production for conversion costs. This restatement of uncompleted work in terms

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of completed units is called computation of equivalent units of production. That is, if all
the conversion costs input in 50units inventory were used to make complete out put units,
the company would be able to make 35 units of output. Therefore, in light with the above
example we can say that (in terms of equivalent units of production) the balances of labor
and factory overhead added to work in process inventory of the Blending department are
sufficient to complete 2,000 units. Equivalent units are computed separately for each cost
categories of materials, labor and factory overhead.
Unit cost:
Departmental cost of production report indicated the cost of units as they leave each
department. These individual unit costs are accumulated into a completed unit cost for the
period. Unit costs are determined for each cost components based on the respective
computed equivalent production units.

Disposition of Departmental costs:

In the departmental cost report, the section titled “cost charged to the department”
shows a total cost charged to the production under the custody the department ($81,840).
The section titled “cost Accounted for as follows” shows the disposition of this cost as
transferred to the next department ($77,400) and work in process ($4,440). The work in
process figure must be broken down into its component parts of materials, labor and
factory overhead
Lost Units:
Continuous processing leads to the possibility of waste shrinkage and other factors which
cause loss or spoilage of production units.
Units lost in the first department:
Lost units reduce the number of units over which total costs can be spread, causing an
increase in unit costs. The 1.000 units lost in the Blending department increase the unit
cost of materials, labor and factory overhead. Had these units not been lost, the
equivalent production figure would be 50,000 units for materials and 48,000 for labor and
factory overhead. The unit cost for materials would be $0.49 instead of $0.50; labor
$0.607 instead of $0.62; and factory overhead $0.588 instead of $0.60. In the first

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department, the only effect of losing units is an increase in the unit cost of the remaining
good units.

Cost of production report for second (Testing) Department:

The Blending Department transferred 45,000 units to the Testing Department, where
labor and factor overhead were added before the units were transferred to the Terminal
(third) department. Costs incurred by the Testing department resulted in additional
departmental as well as cumulative unit costs.

The cost of production report of the Testing department differs from that of the Blending
department in several respects. Several additional calculations are made, for which space
has been provided on the report. The additional information deals with:
1. costs received from the preceding department,
2. an adjustment of the preceding department’s unit cost because of lost units, and
3. cost received from the preceding department to be included in the cost of the
ending work in process inventory.
The Testing department is responsible for labor and factory overhead used as well as for
the cost of units received from the Blending department.
The journal entry that has to be maintained by Testing department when processes are
received from Blending department is shown below:
Work in process- Testing department 77,400
Work in process –blending department 77,400
Illustration: 4.2
Assume that the quantity schedule for the Testing department shows that the 45,000 units
received from the Bending department were accounted for as follows: 40,000 units sent
to the Terminal department, 3,000 units still in process, and 2,000 units lost. An analysis
of work indicated that units in process are one – third (1/3) complete as to labor and
factory overhead. Labor and factory overhead charged to the department are $37,310 and
$32,800 respectively.
Required: prepare the cost of production report for testing department:
ABC Company
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Testing Department
Cost of production Report
For the month of January 2007
Quantity schedule:
Units received from preceding department 45,000
Units transferred to the next department 40,000
Units still in process (1/3 labor and factory overhead) 3000
Units lost in process 2,000 45,000
Cost charged to the department:
Cast from preceding department Total cost unit cost
Transferred in during the month (45,000 units) $77,400 $1.72
Cost added by department:
Labor $37,310 $0.91
Factory overhead 32,800 0.80
Total cost added $70,110 $1.71
Adjustment for lost units - 0.08
Total cost to be accounted for: - $147,510 $3.51
Cost accounted for as follows
Transferred to next department (40,000x$3.51) $140,400
Work in process- ending inventory:
Adjusted cost from preceding department (3,000x ($1.72+$0.08) $5,400
Labor (3,000x1/3 x $ 0.91) 910
Factory overhead (3,000x1/3 x $ 0.80) 800 7,110
Total cost accounted for $147,510

Additional computations:
Equivalent production:
Labor and factory overhead = 40,000+ 3,000 x 1/3 = 41,000 units
Unit costs:
Labor= $37,310 41, 000=$0.91 part unit
Factory overhead =$32,800 41,000= $0.80 per unit
Adjustment for lost units: this is part of the additional computation and computed after
the following discussion.
Units lost in departments subsequent to the first department
The Blending department’s unit cost was $ 1.72 when 45,000 units were transferred to
the Testing department. However, because 2,000 of these 45,000 units were lost during
processing in Testing department, the $1.72 unit cost figure no longer applies and must
be adjusted. The total cost of the units transferred remains at $ 77,400 but 43,000 units

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must now absorb this total cost, causing an increase of $0.08 in the cost per unit due to
the loss of 2,000 units in the Testing department.
The lost unit cost can be computed by one of two methods:
Method 1: Here we determine a unit cost of work done in the preceding department and
subtract the preceding department’s old unit cost figure from the adjusted unit cost figure.
The difference between the two figures is the additional cost due
to lost units.
New unit cost= $ 77,400 = $ 1.80 per unit
43,000
Old unit cost = $77,400 = $ 1.72 per unit
45,000
Additional cost due to lost unit = $1.80 - $1.72=$0.08 per unit
Method 2: Here we determine the lost units’ share of total cost and this cost will be
allocated over the remaining good units. Total cost previously absorbed by the units lost
is $3,440 (2,000 units x $ 1.72) must now be absorbed by the remaining good units.
The additional cost to be picked up by each remaining good unit is $ 0.08 ($3,440
43,000 units)
NB. The lost unit cost adjustment must be entered in the cost production report on the
adjustment for lost units line.
In short the adjustment for lost units is computed as follows under the two methods:
Method no.1: $77,400 43,000= $1.80; $1.80- $1.72=$0.08 per unit
Method no.2: 2000 units x $ 1.72=$3,440; $3,440 43,000=$0.08 per unit

4.4.1 Timing of lost units

Lost units may occur at the beginning, during, or at the end of a process. For purposes of
practicability and simplicity, it is ordinarily assumed that units lost at the beginning or
during process were never put in process. The cost of units lost is spread over the units
completed and units still in process.
When units are lost or are identified as lost at the end of a process, the cost of lost units is
charged to completed units only. Assume that the 2,000 units lost by the Testing
department found at the final inspection and all lost units are normal lost units, their cost
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would be charged only to the 40,000 finished units. The cost of production report for this
case would be the following.
ABC Company
Testing Department
Cost of Production Report
For the month January, 2007
Quantity schedule:
Units received from preceding department 45,000
Units transferred to next department 40,000
Units still in process (1/3 labor and factory over head) 3,000
Units lost in process (at end of process) 2,000 45,000
Cost charged to the department:
Cost from preceding department Total cost unit cost
Transferred in during the month (45,000 units) $77,400 $1.72
Cost added by department
Labor $37,310 $0.87
Factory overhead 32,800 0.76
Total cost added $70,110 $1.63
Total cost to be accounted for $147,510 $3.35
Cost accounted for as follows:
Transferred to next department (40,000 units x($3.35 + $ 0.1675) $140,720
Work in process ending inventory:
From preceding department (3,000 x $1.72) $5,160
Labor (3,000x1/3 x $0.87) 870
Factory overhead (3,000x1/3x$0.76) 760 6,790
Total cost accounted for $147,510

Additional computations:
Equivalent production:
Labor and factory overhead = 40,000 + 3,000 x 1/3 + 2,000 lost Units = 43,000 units
Unit costs:
Labor = $ 37,310 43,000 = $0.87 per unit
Factory overhead = $ 32,800 43,000 = $ 0.76 per unit
For similarity and to absorb the error in determination of fractions, the cost to be assigned
to units transferred out is computed by subtracting the ending work in process balance
from total cost accounted to figure i.e., $140,720 = $ 147,510-$6,790

Normal versus Abnormal loss of Units

Normal loss: units might be lost through evaporation, shrinkage, substandard yields,
spoiled work, or inefficient equipment. Such loss is quite expected under normal

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conditions. In many instances the nature of operations makes certain losses normal or
unavoidable, because they are considered within normal tolerance limits for human and
machine errors. The cost of these normally lost units does not appear as a separate item of
cost but is spread over the remaining good units.

Abnormal loss: This type of loss consists of loss due to carelessness, machine
breakdown, accident, use of detective materials, etc. A different situation is created by
abnormal or avoidable spoilage or losses that are not expected to arise in normal efficient
operating conditions. The cost of such abnormal spoilage or losses is charged either to
factory overhead, or directly to the current period expenses account and reported as a
separate item in the cost of goods sold statement. The following is the appropriate journal
entry to charge cost of abnormal lost units to Factory over head account.
Factory overhead control 6,700
Work in process- Testing department 6, 700
The cost of production report would show the abnormal spoilage or losses as follows:
Transferred to next department (40,000x $3.35) ---------- $134,020*
Transferred to factory overhead (40,000 units x
$0.1675) or (2,000 lost units x $ 3.35) 6,700
*$134,020 = $147,510 - $6,790 ending inventory - $6,700.

If the lost units were only partially complete, equivalent units of production calculation
should consider their stage of completion when lost or spoiled, and the costing of the
abnormal loss should be weighted accordingly. If one part of the loss is normal and
another part abnormal, each portion must be treated in accordance.

Cost of production report for third (Terminal) department

Total and unit cost figures were derived by using procedures discussed for the cost of
production report of the second (Testing) department. The work completed is transferred
to the finished goods store room; thus, the title “Transferred to finished goods store
room” is used in place of the title “Transferred to next department”.
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The journal entry to be maintained by Terminal department for costs transferred from
testing department would be:
Work in process terminal department 140,400
Work in process testing department 140,400

Illustration 4.3
Among the 40,000 units transferred from the Testing department, 35,000 units are
transferred to finished goods store room; 4,000 units are still in process and 1,000 units
are lost during production. Ending work in process balance is ¼ complete as to labor and
factory overhead. Besides, the labor and factory overhead balances charged to the process
in this department are $ 32,400 and $19,800 respectively.
Required: - prepare a cost of production report for Terminal department
ABC Company
Terminal department
Cost of production report
For the month of January, 2007
Quantity schedule:
Units received from preceding department 40,000
Units transferred to finished goods storeroom 35,000
Units still in process (1/4 labor and factory overhead) 4,000
Units lost in process 1,000 40,000
Cost charged to the department:
Cost from preceding department Total cost unit cost
Transferred in during the month (40,000 units) $140,400 $3.51
Cost added by department:
Labor 32,400 $0.90
Factory overhead 19,800 0.55
Total cost added $52,200 $1.45
Adjustment for lost units - 0.09
Total cost to be accounted for $192,600 $5.05

Cost accounted for as follows:

Transferred to finished goods storeroom (35,000x$5.05) $176,750
Work in process – ending inventory:
Adjusted cost from preceding department (4,000x ($3.51+$0.09) $14,400
Labor (4,000 x ¼ x $0.90) 900
Factory overhead (4000x1/4 x $0.55) 550 15,850
Total cost accounted for $192,600

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Additional computations:
Equivalent production:
Labor and factory overhead =35,000 + 4000 x ¼ = 36,000 units
Unit costs:
Labor=$32,400 36,000=$0.90 per unit
Factory overhead = $19,800 36,000=$0.55 per unit
Adjustment for lost units:
Method no.1: $140,400 39,000 = $3.60; $3.60- $3.51 = $0.09 per unit
Method no. 2= 1,000 units x $ 3.51 = $3,510 = $3,510 39,000=$0.09 per unit
The entry to transfer finished units to the finished goods store room would be:
Finished Goods 176,750
Work in process - Terminal department 176,750

4.5 Additions of Materials in Subsequent Departments

In numerous industries, all materials needed for the product are put in process in the first
department. However, additional materials might be required in subsequent departments
in order to complete the units. The addition of such materials has two possible effects on
units and costs in process.
1) The additional materials increase the unit cost, since these materials become a
part of the product manufactured, but do not increase the number of final units.
For example, in an automobile assembly plant additional parts, these materials are
needed to give the product certain specified quantities, characteristics, or
completeness.
2) The added materials increase the number of units and also cause a change in unit
cost. In processing chemical, water is often added to a mixture, causing an
increase in the number of units and a spreading of costs over a greater number of
units.
4.5.1 Increase in units cost due to addition of materials
In the simplest case, added materials such as parts of an automobile do not increase the
number of units but increase total cost and unit costs. A materials unit cost must be
computed for the department, and a materials cost must be included in the work in
process inventory.
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Illustration 4.4
Assume the additional materials costing $ 17,020 are placed in process and charged to the
Terminal department. Assume further that the materials in work in process are sufficient
to complete 2,000 of the 4,000 units; that is, units are 50% complete as to materials cost.
The effect of the additional materials cost is shown in the cost report be below.

ABC COMPANY
Terminal Department
Cost of production Report
For the month of January, 2007
Quantity Schedule;
Units received from preceding department 40,000
Units transferred to finished goods store room 35,000
Units still in process (½ materials, ¼ labor and factory overhead) 4,000
Units lost in process 1,000 40,000
Cost charged to the Department:
Cost from preceding department Total cost unit cost
Transferred in during the month (40,000 units) $140,400 $3.51
Cost added by department:
Materials $17,020 $0.46
Labor 32,800 0.90
Factory overhead 19,800 0.55
Total cost added $69,220 $1.91
Adjustment for lost units - 0.09
Total cost to be accounted for $209,620 $5.51
Cost accounted for as follows:
Transferred to finished goods storeroom (35,000x$5.51) $192,850
Work in process ending inventory
Adjusted cost from preceding department (4,000x$3.60) $14,400
Materials (4,000 x 1/2 x $0.46) 920
Labor (4,000 x ¼ x $ 0.90) 900
Factory overhead (4000 x ¼ x $0.55) 550 16,770
Total cost accounted for $209,620

Additional computations:
Equivalent production:
Materials = 35,000 + 4000 2 = 37,000 units
Labor and factory overhead = 35,000 + 4000 4 = 36,000 units
Unit costs:
Materials = $ 17,020 37,000 = $0.46 per unit
Labor = $32,400 36,000 = $0.90 per unit
Factory overhead = $19,800 36,000 = $0.55 per unit

Adjustment for lost units:

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Method No. 1 = $140,400 39,000 = $3.60; $3.60 - $3.51 = $0.09 per unit
Method No. 2 = 1,000 units x$3.51=$3,510, $3,510 39,000=$0.09 per unit

The only differences in the two cost reports (the report for the third department(Terminal)
and the above report) are the $17,020 materials cost charged to the department and $0.46
materials unit cost ($17,020 . 37,000). The additional materials cost is also reflected in
the total cost to be accounted for, and in the ending work in process inventory.
4.5.2 Increase in units and change in unit cost Due to Addition of Materials
When additional materials result in additional units different computations are necessary.
The greater numbers of units cause a decrease in unit cost which necessitates an
adjustment of the preceding department’s unit cost; since the increased number of units
will absorb the same total cost transferred from preceding department.
Illustration 4.5
Assume Terminal department costs for labor and factory overhead of $32,400 and
$19,800 respectively, an additional materials cost of $17,020 and an increase of 8,000
units as the result of added materials.
Required: - Prepare the cost of production report for Terminal Department

ABC COMPANY
Terminal Department
Cost of Production Report
For the Month of January, 2007
Quantity Schedule:
Units received from preceding department 40,000
Additional units put into process 8,000 48,000
Units transferred to finished good, storeroom 44,000
Units still in process (1/2 materials, ¼ labor and factory overhead) 4,000 48,000
Cost charged to the department:
Cost from preceding department Total cost unit cost
Transferred in during the month (40,000 units) $140,400 $3.510
Cost added by department
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Materials $17,020 $0.370

Labor 32,400 0.720
Factory overhead 19,800 0.440
Total cost added $69,220 $1.530
Adjusted unit cost of units transferred in during the month _-__ 2.925
Total cost to be accounted for $209,620 $4.455
Cost Accounted for as Follows:
Transferred to finished goods Storeroom (44,000 x $4.55) $196,020
Work in process – ending inventory
Adjusted cost from proceeding department (4,000x$2.925) $11,700
Materials (4,000 x 1/2 x $0.370) 740
Labor (4,000 x ¼ x $0.720 720
Factory overhead (4,000 x ¼ x $0.440) 440 13,600

Total cost Accounted for $209,620

Additional Computations:
Equivalent production:
Materials = 44,000 + 4000 2 = 46,000 units
Labor and factory overhead = 44,000 + 4,000 4 = 45,000 units
Unit costs:
Materials = $17,020 46,000 = $0.370 per unit
Labor = $32,400 45,000 = $0.720 per unit
Factory overhead = $19,800 45,000 = $0.440 per unit
Adjustment for additional units = $140,400 48,000 = $2.925 per unit
The additional 8,000 units are entered in the department’s quantity schedule as
“Additional Units put into process”. The quantity schedule reports that 44,000 units were
complete and transferred to the finished goods store room and that 4,000 units are still in
process, 50% complete as to materials and 25% complete as to labor and factory
overhead. Therefore, equivalent production is 46,000 units for materials and 45,000 units
for labor and factory overhead. Dividing departmental materials, labor and factory
overhead costs for the period by these production figures results in a new unit cost for all
cost components. Total cost charged to the Terminal department as cost transferred in
from preceding department must now be allocated over a greater number of units, there
by, reducing the unit cost of work done in the preceding department.

Initially the $140,400 cost transferred to the Terminal department was absorbed by
40,000 units, resulting in a unit cost of $3.51. Because of the 8,000 increase in units, the
$140,400 cost must now be spread over 48,000 units resulting in a unit cost for the

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preceding department of $2.925. This adjusted cost is inserted in the production report as
“Adjusted cost of units transferred in during the month” and is added to departmental
unit costs to arrive at the unit cost accumulated to the end of operations in the Terminal
department. When additional materials increase the number of units being processed, it is
still possible to have lost units. However, should increased and lost units occur, no
separate calculation is required for the lost units; only net units added are used.

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