BALIUAG UNIVERSITY

CPA Review Program

Advanced Financial Accounting and Reporting
Luisito V. Correa Jr., CPA, CAT, MBA
Module 9: Cost Accounting Part 2 LVC

I. Process Costing
In contrast to job-order costing, process costing is applicable to a continuous process of production of the same or similar
goods, for example, oil refining and chemical production. Since the product is uniform, there is no need to determine the
costs of different groups of products and each processing department becomes a cost center.

✓ Equivalent units of production (EUP)

• An EUP is the amount of work equivalent to completing one unit from start to finish.
• In a process costing system, products are assigned costs periodically (usually monthly). At any one moment some
units are incomplete which makes the EUP calculations necessary to allocate manufacturing costs between (a)
Goods finished during the period (cost of goods manufactured) and (b) Ending work in process.
• The two primary EUP methods used for process costing are first-in, first-out (FIFO) and weighted-average.

✓ Differences between FIFO and weighted-average method

FIFO Weighted Average
EUP Work done on beginning WIP is considered Work done on beginning WIP is ignored in
computation in computing EUP. EUP for beginning WIP is computing EUP. All units completed is
computed separately from units started and assumed to be started in the current period.
completed.
Unit cost Current costs or costs added this period ÷ Costs of beginning WIP plus costs added this
EUP period ÷ EUP
Elements of 1. Cost from prior department 1. Cost of beginning WIP
costs to be 2. Cost added in the department 2. Cost from prior department
accounted for 3. Cost added in the department
Cost of units Aggregate of the following: Units transferred out times weighted average
transferred out a. Costs of beginning WIP unit cost.
b. Costs added to complete beginning WIP
c. Costs of units started and completed
Cost of ending EUP of ending WIP times current unit cost. EUP of ending WIP times weighted average
WIP unit cost.

✓ Lost units
Classification Discovery Accounting
Beginning of the process. • Need not assign work done to lost units.
During the process and • Adjust unit cost from prior department due to decreased
no quality control. number of units.
• Completed units and WIP ending are automatically charged
with cost of normal lost units.
Upon inspection, ending • Assign work done to lost units.
Normal WIP have reached • No need to adjust the unit cost from prior department.
inspection point. • Compute costs of lost units and prorate the costs to
completed units and to ending WIP using EUP or whole units.
End of the process. • Assign work done to lost units.
Upon inspection, ending • No need to adjust the unit cost from prior department.
WIP have not yet reached • Compute costs of lost units and charge the same to the
inspection point. completed units.
Beginning of the process. • Need not assign work done to lost units.
• Costs from preceding department is charged to abnormal loss.
Abnormal
Any other point with or • Assign work done to lost units.
without inspection point • Costs charged to factory overhead control account.

✓ Cost of production report

Cost of production report is an analysis of the activity in the department or cost center for the period.
The steps in preparation of cost of production report:
1. Prepare quantity schedule – Accounts for the physical flow of units in and out of a department.
2. Compute EUP.
3. Determine cost to be accounted for.
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4. Compute unit cost
5. Allocate the costs to completed and transferred units and ending WIP units.

II. Backflush Costing

✓ Definition
• Backflush costing – A costing system that omits recording some or all of the journal entries to track the purchase
and production of goods. Goods are costed after they have been completed.
• Just in Time System – Manufacturing system that attempts to acquire components and produced products only
as needed.

✓ JIT Purchasing
• JIT is a demand-pull inventory system which may be applied to purchasing so that raw material arrives just as it is
needed for production. The primary benefit of JIT is reduction of inventories, ideally to zero.
• Because of its non-value-added nature, inventory is regarded as undesirable. In a JIT system, suppliers inspect
their own goods and make frequent deliveries of materials, which are placed into production immediately upon
receipt. This process eliminates the need for incoming inspection and the storeroom.

✓ JIT Production
• JIT production is a “demand pull” system in which each component of a finished good is produced when
needed by the next production stage.
• The production process is driven by the demand. It begins with an order by the customer triggering the
need for a finished good and works its way back through each stage of production to the beginning of
the process.
• A JIT system strives to produce high-quality products that meet the customer’s needs on a timely basis
and at the lowest possible cost. Obviously, JIT production reduces inventories to a minimal level. To
accomplish JIT production, management must emphasize on reducing production cycle time and setup
time.

✓ Advantages of JIT
a. Lower investments in inventories and in space to store inventory.
b. Lower inventory carrying and handling costs.
c. Reduced risk of defective and obsolete inventory.
d. Reduced manufacturing costs.

✓ JIT systems can break down with disastrous results if

a. Suppliers do not provide timely delivery of quality materials.
b. Employers are not well trained or supervised.
c. Technology and equipment are not reliable.

❖ Multiple Choice Questions

1. A true process costing system could make use of each the following except
a. Standard cost c. Variable costing
b. Individual lots d. Responsibility accounting
2. In a process cost system, the application of factory overhead usually is recorded as an increase in
a. Cost of goods sold c. Factory overhead control
b. Work-in-process inventory control d. Finished goods inventory control
3. Which of the following characteristics applies to process costing but not to job-order costing?
a. Identifiable batches of production c. Averaging process
c. Equivalent units of production d. Use of standard cost
4. An equivalent unit of direct materials or conversion cost is equal to
a. The amount of direct materials or conversion cost necessary to complete one unit of production.
b. A unit of work-in-process inventory.
c. The amount of direct materials or conversion cost necessary to start a unit of production in work-in-process.
d. 50% of the direct materials or conversion cost of a unit of finished goods inventory (assuming a linear production
pattern).
5. In the computation of manufacturing cost per equivalent unit, the weighted-average method of process costing
considers
a. Current costs only.
b. Current cost plus cost of beginning work-in-process inventory.
c. Current cost plus cost of ending work-in-process inventory.
d. Current cost minus cost of beginning work-in-process inventory.
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6. An error was made in the computation of the percentage of completion of the current year’s ending work-in-process
(EWIP) inventory. The error resulted in assigning a lower percentage of completion to each component of the
inventory than actually was the case. Consequently, the following were misstated:
1) The computation of total equivalent units.
2) The computation of costs per equivalent unit.
3) Cost assigned to cost of goods completed for the period.
What were the effects of the error?
____1____ ____2____ ____3____
a. Understate Overstate Overstate
b. Understate Understate Overstate
c. Overstate Understate Understate
d. Overstate Overstate Understate
7. A valid reason for using predetermined overhead rate for process costing is
a. The unrepresentative unit cost that will otherwise result when total factory overhead fluctuates significantly from
period to period.
b. The non-comparability of the degree of completion of units in work-in-process from 1 month to the next when
predetermined rates are not used.
c. The non-comparability of FIFO and weighted-average equivalent units of the production for overhead when
predetermined rates are not used.
d. The difference in transfer prices that will occur between two different plants of a company when predetermined
rates are not used.
8. In developing a predetermined factory overhead application rate for use in a traditional process costing system,
which of the following could be used in the numerator and denominator?
______Numerator______ ____Denominator___
a. Actual factory overhead Actual machine hours
b. Actual factory overhead Estimated machine hours
c. Estimated factory overhead Actual machine hours
d. Estimated factory overhead Estimated machine hours
9. The completion of goods is recorded as a decrease in work-in-process control when using
Job Order Costing Process Costing
a. Yes No
b. Yes Yes
c. No Yes
d. No No
10. Three commonly employed systems for product costing are job-order costing, operation costing, and process costing.
Match the type of production environment with the costing method used.
Job-Order Costing Operation Costing Process Costing
a. Auto repair Clothing manufacturing Oil refining
b. Loan processing Drug manufacturing Custom printing
c. Custom printing Paint manufacturing Paper manufacturing
d. Engineering design Auto assembly Motion picture prod’n
11. In a production cost report using process costing, transferred in costs are similar to
a. Direct materials added at a point during the process.
b. Conversion costs added during the process.
c. Costs transferred to the next process.
d. Costs included in beginning inventory.
12. What are transferred-in costs in a process costing system?
a. Labor costs incurred from transferring employees from another department within the same plant instead of
hiring temporary workers from the outside.
b. Costs of product of a previous internal process that is subsequently used in a succeeding internal process.
c. Supervisory salaries that are transferred from an overhead cost center to a production cost center.
d. Ending work-in-process inventory of a previous process that will be used in a succeeding process.
13. In a process costing system, how is the unit cost affected in a production cost report when direct materials are added
in a department subsequent to the first department and the added materials result in additional units?
a. The first department’s unit cost is increased, which necessitates an adjustment of the transferred-in unit cost.
b. The first department’s unit cost is decreased, which necessitates an adjustment of the transferred-in unit cost.
c. The first department’s unit cost is increased, which does not necessitates an adjustment of the transferred-in unit
cost.
d. The first department’s unit cost is decreased, which does not necessitates an adjustment of the transferred-in
unit cost.
14. Purchased direct materials are added in the second department of a three-department process. This addition
increases the number of units produced in the second department and will
a. Always change the direct labor cost percentage in the ending work-in-process inventory.
b. Never cause an adjustment to the unit cost transferred-in from the first department.
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c. Always increase total unit costs.
d. Always decrease total ending work-in-process inventory.
15. Purchased direct materials are added in the second department of a three-department process. This addition does
not increase the number of units produced in the second department and will
a. Not change the peso amount transferred to the next department.
b. Decrease total work-in-process inventory.
c. Increase the factory overhead portion of the ending work-in-process inventory.
d. Increase total unit cost.
16. In process 2, material G is added when a batch is 60% complete. Ending work-in-process units, which are 50%
complete, would be included in the computation of equivalent units for
Conversion Costs Material G
a. Yes No
b. No Yes
c. No No
d. Yes Yes
17. In a process cost system, the application of factory overhead usually would be recorded as an increase in
a. Finished goods inventory control. c. Cost of goods sold.
b. Factory overhead control. d. Work in process inventory control.
18. In computing the current period’s manufacturing cost per equivalent unit, the FIFO method of process costing
considers current period costs
a. Only. c. Plus cost of beginning work in process inventory.
b. Plus cost of ending work in process inventory. d. Less cost of beginning work in process inventory.
19. In process 2, material G is added when a batch is 60% complete. Ending work in process units, which are 50%
complete, would be included in the computation of equivalent units for Conversion costs or Material G
a. Yes No c. No No
b. No Yes d. Yes Yes
20. A process costing system was used for a department that began operations in January Year 1. Approximately the
same number of physical units, at the same degree of completion, were in work in process at the end of both January
and February. Monthly conversion costs are allocated between ending work in process and units completed.
Compared to the FIFO method, would the weighted-average method use the same or a greater number of equivalent
units to calculate the monthly allocations? January and February
a. Same, Same c. Greater number, Same
b. Greater number, Greater number d. Same, Greater number
21. A department adds material at the beginning of a process and identifies defective units when the process is 40%
complete. At the beginning of the period, there was no work in process. At the end of the period, the number of work
in process units equaled the number of units transferred to finished goods. If all units in ending work in process were
66 2/3% complete, then ending work in process should be allocated
a. 50% of all normal defective unit costs.
b. 40% of all normal defective unit costs.
c. 50% of the material costs and 40% of the conversion costs of all normal defective unit costs.
d. None of the normal defective unit costs.
22. Department Z of the CAPRICORN Manufacturing Corporation had the following data for the month of October, 2016:
Beginning work-in-process, 70% complete 40,000 units
Started in process during the month 300,000 units
Ending work-in-process, 80% complete 60,000 units
The cost of the beginning work-in-process was P140,000, and the production costs for the month amounted to
P1,172,000. How many equivalent production units were completed in October, 2016?
a. 280,000 c. 320,000
b. 300,000 d. 340,000
23. Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information
summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31:
Units Direct Materials:
Work in process inventory, January 1 (P70,000) 100 units
Started during the quarter 500
Completed during the quarter 400
Work-in-process inventory, March 31 200
Costs added during the quarter P750,000
Beginning work in process inventory was 50% complete for direct materials. Ending work in process inventory was
75% complete for direct materials. What were the equivalent units of production with regard to materials for March
using the FIFO unit cost, inventory valuation method?
a. 450 c. 550
b. 500 d. 600
24. Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information
summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31:
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Units Direct Materials:
Work in process inventory, January 1 (P50,000) 100 units
Started during the quarter 500
Completed during the quarter 400
Work in process inventory, March 31 200
Costs added during the quarter P720,000
Beginning work in process inventory was 50% complete for direct materials. Ending work in process inventory was
75% complete for direct materials. What is the total value of material costs in ending work in process inventory using
the FIFO unit cost, inventory valuation method?
a. 183,000 c. 210,000
b. 194,000 d. 216,000
25. The following information pertains to Lap Co.’s Palo Division for the month of April:
Number of units Cost of materials
Beginning work in process 15,000 P 5,500
Started in April 40,000 18,000
Units completed 42,500
Ending work in process 12,500
All materials are added at the beginning of the process. Using the weighted-average method, the cost per equivalent
unit for materials is
a. P0.59 c. P0.45
b. P0.55 d. P0.43
26. The Forming Department is the first of a two-stage production process. Spoilage is identified when the units have
completed the Forming process. Costs of spoiled units are assigned to units completed and transferred to the second
department in the period spoilage is identified. The following information concerns Forming’s conversion costs in May
2012:
Units Conversion costs:
Beginning work in process (50% complete) 2,000 units P10,000
Units started during May 8,000 75,500
Spoilage—normal 500
Completed and transferred 7,000
Ending work in process (80% complete) 2,500
Using the weighted-average method, what was Forming’s conversion cost transferred to the second production
department?
a. 59,850 c. 67,500
b. 64,125 d. 71,250
27. In its April 2012 production, Hern Corp., which does not use a standard cost system, incurred total production costs of
P900,000, of which Hern attributed P60,000 to normal spoilage and P30,000 to abnormal spoilage. Hern should
account for this spoilage as
a. Period cost of P90,000.
b. Inventoriable cost of P90,000.
c. Period cost of P60,000 and inventoriable cost of P30,000.
d. Inventoriable cost of P60,000 and period cost of P30,000.
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The
following information pertains to operations for the month of May 2012:
Units Beginning work in process inventory, May 1 16,000 Started in production during May 100,000 Completed
production during May 92,000 Ending work in process inventory, May 31 24,000 The beginning inventory was 60%
complete for materials and 20% complete for conversion costs. The ending inventory was 90% complete for materials
and 40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
The beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
28. Using the first-in, first-out (FIFO) method, the equivalent units of production for materials are
a. 97,600 units. c. 107,200 units.
b. 104,000 units. d. 108,000 units.
29. Using the FIFO method, the equivalent units of production for conversion costs are
a. 85,600 units. c. 95,200 units.
b. 88,800 units. d. 98,400 units.
30. Using the FIFO method, the equivalent unit cost of materials for May is
a. P4.12 c. P4.60
b. P4.50 d. P4.80
31. Using the FIFO method, the equivalent unit conversion cost for May is
a. P5.83 c. P6.00
b. P5.65 d. P6.20
32. Using the FIFO method, the total cost of units in the ending work in process inventory at May 31 is
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a. 153,168 c. 155,328
b. 145,800 d. 156,960
33. Using the weighted-average method, the equivalent unit cost of materials for May is
a. P4.12 c. P4.60
b. P4.50 d. P5.03
34. Using the weighted-average method, the equivalent unit conversion cost for May is
a. P5.65 c. P6.00
b. P5.83 d. P6.41
35. Using the weighted-average method, the total cost of the units in the ending work in process inventory at May 31 is
a. P86,400 c. P155,328
b. P154,800 d. P156,960
Jannete Company employs a process costing system. A unit of product passes through three departments: molding,
assembly and finishing. Finishing Department had the following information for the month of May:
Work-in-process 1,400 units
Units started in from Assembly Department 14,000
Units spoiled 700
Units transferred out to finished goods 11,200
Raw materials is added at the beginning of the process in the Finishing department without changing the number of
units being processed. Work-in-process was 70% complete as to conversion on May 1 and 40% complete as to
conversion on May 31. All spoilage was discovered at final inspection before units were transferred to finished goods;
560 of the units spoiled within the considered normal range.
The company employs weighted average costing method. The equivalent units of production and the current costs
per equivalent unit of production for each cost factor are as follows:
Cost Item EUP Current Cost per EUP
Transferred-in 15,400 P5.00
Raw materials 15,400 1.00
Conversion cost 13,300 3.00
Total cost per EUP P9.00
36. The cost of production transferred to the finished goods
a. 100,800 c. 107,100
b. 105,840 d. 102,060
37. The cost assigned to work-in-process on May 31 would be
a. 25,200 c. 30,240
b. 28,000 d. 31,000
A manufacturing company employs a process cost system. The product passes through Department 1 and
Department 2. Conversion cost are incurred uniformly in Department 2. The direct material is added in Department 2
when the conversion costs is 80% complete. This direct material is a preservative that does not change the volume.
Spoiled units are discovered at the final inspection and are recognized then for costing purposes. The physical flow of
units of Department 2 for the current month follows:
Beginning WIP (90% complete as to conversion costs) 14,000 units
Transferred in from Department 1 76,000
Completed and transferred to finished goods 80,000
Spoiled units (all normal) 1,500
Ending WIP (60% complete as to conversion costs) 8,500
38. The EUP for direct materials in Department 2 for the current month if the company uses weighted-average method
a. 81,500 c. 67,500
b. 80,000 d. 90,000
39. The EUP for direct materials in Department 2 for the current month if the company uses FIFO method
a. 72,500 c. 85,200
b. 74,000 d. 86,600

“Wisdom is the power to put our time and our knowledge to the proper use.” Thomas J. Watson

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