PROCESS COSTING

Process cost system determines how manufacturing

costs incurred during each period will be allocated.

The ultimate goal of this costing system is to

compute the total cost per unit for income
determination.
CHARACTERISTICS OF A PROCESS COST
SYSTEM
- Costs are accumulated by department/cost center.

- Each department has its own general ledger Work In

Process Inventory account (This account is debited
with processing costs incurred by department and
credited with the cost of completed units transferred to
another department or to Finished goods.
CHARACTERISTICS OF A PROCESS COST
SYSTEM
- Completed units and their corresponding costs are
transferred to the last department or to finished
goods inventory.
- Total costs and unit costs are periodically calculated
and analyzed with the use of department cost of
production report.
 SAMPLE OF COMPANIES
WHICH USE PROCESS COSTING
1. Industries producing chemicals, petroleum,
textiles, steel, rubber, cement
2. Firms manufacturing bolts, nuts and small
electrical parts
3. Service industries such as gas, water and heat.
 COMPARISON OF JOB ORDER
VS PROCESS COSTING
JOB ORDER PROCESS COSTING
-for single production or batch -used when products are
of products accdg to customer’s manufactured by mass
specifications production or continuous
-used for customized cabinet processing
-manufacturer of 8oz jars of
peanut butter
 JOB ORDER COSTING
SYSTEM

JOB 101

MATERIALS JOB 102 FINISHED

LABOR COGS
GOODS
FACTORY OH
JOB 103
INVENTORY LEDGER FLOW (T-ACCOUNTS)

WORK IN PROCESS FINISHED GOODS COST OF GOODS SOLD

XXX XXX XXX XXX XXX

 PROCESS COSTING SYSTEM

PROCESS A

MATERIALS
LABOR PROCESS B
FACTORY OH

PROCESS C FGOODS COGS

 INVENTORY LEDGER FLOW (T-ACCOUNTS)

In a process cost system per above illustration, a product may flow through several
operations on its way to completion.

WP-DEPT A WP-DEPT B WP-DEPT C FINISHED GOODS COGS

XXX XXX XXX XXX XXX XXX
XXX XXX XXX

In each department, the unit cost will be computed by dividing costs incurred by the equivalent
production in the department.

To simplify, a complete unit of 1 department becomes the raw materials of

the next department until the units reach finished goods.
SYSTEM FLOW
-flow of units and costs together through a process cost system

UNITS TO ACCOUNT FOR UNITS ACCOUNTED FOR

Beginning units in process Units completed and transferred

+ +
Units started in process or Units completed and on hand
Received from previous dept. +
+ Units in process, end
Increase in units due to addition of
Materials
 3 TYPES OF PRODUCT FLOW

1. Sequential product flow – the initial raw materials are placed into process in the first
department and flow through every department in the factory.

Dept 1 Dept 2 Finished Goods

Inventory
 3 TYPES OF PRODUCT FLOW

2. Parallel product flow – certain portions of the work are done at the same time and then
brought together for the final process and upon completion transferred to finished goods.
Cabinet Training Dept
Cutting Dept Combining Dept

Staining Dept Resting Dept

Packaging Dept

Finished Goods
 3 TYPES OF PRODUCT FLOW

3. Selective product flow– the product moves to different departments within the factory,
depending upon the desired final product. Several products are produced from the same
initial raw materials.

Gasoline Dept Kerosene Dept

Crude Oil Dept

Finished Goods
Heating Oil Dept Finished Goods

Finished Goods
COST OF ACCOUNTING PROCEDURES

Use of process cost system does not alter the manner of

accumulating product costs. Process costing is concerned with

the assignment of these costs to appropriate departmental

Work In Process inventory.

JOURNAL ENTRIES:

Issuance of Direct Materials:

Work In Process-Dept1 XXX

Materials XXX

Entry to distribute direct labor costs:

Work In Process-Dept1 XXX

Work In Process-Dept2 XXX
Payroll XXX
JOURNAL ENTRIES:

Applying Factory overhead:

Work In Process-Dept1 XXX

Work In Process-Dept2 XXX
Factory overhead applied XXX
 COST OF
PRODUCTION
REPORT
COST OF PRODUCTION REPORT

This is an analysis of the activity in the

department or cost center for the period.

Total and unit costs are determined and

summarized on a cost of production report.
STEPS ON HOW TO PREPARE COST
OF PRODUCTION REPORT
STEP 1: THE QUANTITY SCHEDULE

This schedule accounts for the physical flow

of units into and out of departments.

Units started, the disposition into next

department, whether they are transferred,
lost or remain in the department (complete
or incomplete, shall be accounted for.
STEP 2: CALCULATE EQUIVALENT UNITS
AND UNIT COSTS
All units taken into process must be
expressed in terms of completed units, in
order to determine unit costs.

Equivalent Production = Total Units

Completed + Incomplete Units (in%)
 STEP 2: CALCULATE EQUIVALENT UNITS
AND UNIT COSTS
Completed units are always equal to a 100% equivalent
production costs. (Materials, Labor & Overhead)

The problem lies in the restatement of incomplete units in

terms of completed units.

These units will remain in the Work In Process Inventory

until they are completed and transferred to next dept or to
Finished Goods.
 STEP 2: CALCULATE EQUIVALENT UNITS
AND UNIT COSTS
These Incompleted units are analyzed according to their stage of
completion subdivided into Materials, Direct labor and
Overhead costs.

Typical example in the case of issuance of materials:

1. Added at the beginning of the process – all work in process
units will have 100% direct material cost.
 STEP 2: CALCULATE EQUIVALENT UNITS
AND UNIT COSTS

Typical example in the case of issuance of materials:

2. Added at the end of the process – Work in Process Inventory
will not have any direct materials from that department (0%)
 STEP 2: CALCULATE EQUIVALENT UNITS
AND UNIT COSTS

Typical example in the case of issuance of materials:

3. Continuously added into process – Work in Process Inventory
will be equal to the stage of completion of the Work In Process.
 STEP 2: CALCULATE EQUIVALENT UNITS
AND UNIT COSTS

Unit cost formula:

Cost incurred in the dept/Equivalent production

Using FIFO Method:

Equivalent Unit costs = Cost added during the period /
Equivalent units (Work done this period)
 STEP 2: CALCULATE EQUIVALENT UNITS
AND UNIT COSTS
Unit cost formula:

Cost incurred in the dept/Equivalent production

Using Weighted Average Method:

Equivalent Unit costs = Cost last period plus Cost added during
this period / Equivalent units (Work done last period plus work
done this period)
STEP 3: DETERMINE THE COSTS TO BE ACCOUNTED
FOR (COSTS CHARGED TO THE DEPARTMENT

Costs in the beginning inventory (costs assigned to materials,

labor, overhead last period) will be accounted for.

If the department is not the first department in the production

process, all costs received from the preceding department will
be their costs.
STEP 3: DETERMINE THE COSTS TO BE ACCOUNTED
FOR (COSTS CHARGED TO THE DEPARTMENT

In addition, each department will incur direct materials, direct

labor and factory overhead in its own processing.
STEP 4: ACCOUNT FOR ALL COSTS

After costs are determined, an accounting for the disposition of

these costs must be made.

Some costs are assigned to receiving units transferred out of the

department, some for incompleted units, and for any units lost.
COMPUTATION OF EQUIVALENT PRODUCTION
ILLUSTRATION 1:

Units received from preceding department 10,000 units

Units completed and transferred 8,000 units
Units in process, end (60% completed) 2,000 units
**Materials are added 100% at the beginning of the process**

Solution:
Actual WD Materials WD Labor&Overhead
Units received 10,000
Units completed 8,000 100% 8,000 100% 8,000
Units in process 2,000 100% 2,000 60% 1,200
10,000 10,000 9,200
METHODS OF COSTING UNDER PROCESS COSTING

FIFO Method

There is an assumed flow of manufacturing operations, those

units which are first placed in process are presumed to be the
first ones completed and those that are first completed, are the
ones transferred out.
METHODS OF COSTING UNDER PROCESS COSTING

FIFO Method Characteristics:

1. There is a separate Work in process beginning computation

for its equivalent production.
2. Units started, completed and transferred will also have its
own computation for equivalent production.
METHODS OF COSTING UNDER PROCESS COSTING

Weighted Average Method:

Under this method, there is no assumed flow of manufacturing

operations.

Characteristics:

Stage of completion of the work in process beginning is ignored

and total units completed is considered to have 100%
completion.
METHODS OF APPLICATION OF ELEMENTS OF COST
TO PRODUCTION
1. Even application – at any stage during the process of
production, the application of three cost elements are equal
with one another.

2. Uneven application – elements of cost to production varies

at any stage of the process, hence, there should be separate
computations of equivalent production of these cost
elements.
COMPUTATION OF EQUIVALENT PRODUCTION
ILLUSTRATION 2:

Units received from preceding department 10,000 units

Units completed and transferred 8,000 units
Units in process, end (60% completed) 2,000 units
**Materials are added 100% at the END of the process**

Solution:
Actual WD Materials WD Labor & Overhead
Units received 10,000
Units completed 8,000 100% 8,000 100% 8,000
Units in process 2,000 - 60% 1,200
10,000 8,000 9,200
COMPUTATION OF EQUIVALENT PRODUCTION
ILLUSTRATION 3:

Units received from preceding department 10,000 units

Units completed and transferred 8,000 units
Units in process, end (60% completed) 2,000 units
**Materials are added 50% at the beginning of the process and the remaining 50% when the
units are 40% completed.**

Solution:
Actual WD Materials WD Labor & Overhead
Units received 10,000
Units completed 8,000 100% 8,000 100% 8,000
Units in process 2,000 100% 2,000 60% 1,200
10,000 10,000 9,200
COMPUTATION OF EQUIVALENT PRODUCTION
ILLUSTRATION 4:

Units received from preceding department 10,000 units

Units completed and transferred 8,000 units
Units in process, end (60% completed) 2,000 units
**Materials are added as follows:** 50% at the beginning of the process, 30% when the units
are 20% complete, & 20% at the end of the process*
Solution:
Actual WD Materials WD Labor & Overhead
Units received 10,000
Units completed 8,000 100% 8,000 100% 8,000
Units in process 2,000 80% 1,600 60% 1,200
10,000 9,600 9,200
ILLUSTRATIVE PROBLEM
The following data were taken from the books of Mima Co. for the month of
March.

Units Dept1 Dept2

Started 25,000
Completed & transferred 20,000 18,000
In Process, end 5,000 2,000
Stage of completion 40% 50%
Costs
Materials P100,000 P54,000
Labor 66,000 38,000
Overhead 44,000 19,000

In Department 1, materials are added at the beginning of the process while in Department 2, materials are added at
the end of the process.
NORMAL/ABNORMAL LOSSES IN PRODUCTION

Normal losses are expected while abnormal losses are those in

excess of what have been forecasted.

The cost of normal lost units are reported as product cost, since
eventually they become part of the cost of good units.

While for the cost of abnormal lost units, they are recognized as
period costs and debited to Factory Overhead control.
NORMAL LOSSES IN PRODUCTION

The cost of normal lost units is charged to (a) completed units,

and (b) units in process at end when:
1) Discovered at the beginning of the process
2) Discovered during the process and no quality control
inspection is indicated
3) Discovered upon inspection and the units in process at the
end have at least reached the inspection point
NORMAL LOSSES IN PRODUCTION

Suggested procedures for normal lost units -

Discovered at the beginning and during the process and no
quality control inspection is indicated

a. Do not assign work done to the lost units

b. Adjust the unit cost from the preceding department due to the
decreased number of units
c. The above procedures automatically charge the cost of the normal
lost units to both completed and units in process at the end.
NORMAL LOSSES IN PRODUCTION

Suggested procedures for normal lost units -

Discovered at the end of the process or upon inspection and the
units in process at the end have not yet reached the inspection
point, **shall be charged to completed units only**

a. Assign work done to lost units

b. No need to adjust the unit cost from the preceding department
despite the lost units
c. Calculate the cost of lost units and charge as additional cost of
completed units
ABNORMAL LOSSES IN PRODUCTION

Suggested procedures for abnormal lost units –

a. If discovered at the beginning of the process, no need to assign

work done. Any cost from the preceding department is charged as
an abnormal loss.
b. If discovered at any other points in the process, with or without
indicated inspection point, assign work done and the cost is charged
to Factory Overhead Control as a Period Cost.
INCREASE IN UNITS DUE TO ADDITION OF MATERIALS

To some products, the addition of materials in the subsequent

departments may cause the units to increase.

Thus, this requires an adjustment in the unit cost from the preceding
department because the total cost will remain the same while the units to
absorb the same cost will increase and this will result in a decrease in
the unit cost from preceding department.
INCREASE IN UNITS DUE TO ADDITION OF MATERIALS

Formula of adjusted cost from preceding department

= Total cost from preceding department

Units received + increase in units
INCREASE IN UNITS DUE TO ADDITION OF MATERIALS

Formula of adjusted cost from preceding department if lost units are

discovered in the same department:

a. Lost units normal, discovered at the beginning

Adjusted Cost = Cost from preceding department

Total units received less loss units
b. Lost units normal, discovered at the end and (c) Lost units abnormal,
discovered at any point of the process

Adjusted Cost = Cost from preceding department

Total units received
AVERAGE
AND FIFO
COSTING
INTRODUCTION OF METHODS OF INVENTORY
COSTING TO PROCESS COSTING

Process costing in a company will have a problem if

there is no costing method used most especially with
the integration of the beginning inventories (In
process units in the previous periods of different
departments)
 THUS, QUESTIONS BELOW MAY ARISE:

1. Should there be a distinction between completed

units from beginning work in process and completed
units from the current period?
 THUS, QUESTIONS BELOW MAY ARISE:

2. Should all the units completed during the current

period be included at 100% in equivalent production
regardless of the stage of completion of beginning
work in process inventory?
 THUS, QUESTIONS BELOW MAY ARISE:

3. Should the cost of the beginning work in process

inventory be added to costs which have been added
to production during the current period to arrive at
Costs added during the period?
METHODS OF COSTING UNDER PROCESS COSTING

FIFO Method

There is an assumed flow of manufacturing operations, those

units which are first placed in process are presumed to be the
first ones completed and those that are first completed, are the
ones transferred out.
METHODS OF COSTING UNDER PROCESS COSTING

FIFO Method

Under FIFO method, units in the beginning work in process

inventory are reported separately from units of the current
period.
METHODS OF COSTING UNDER PROCESS COSTING

Weighted Average Method:

Under this method, there is no assumed flow of manufacturing

operations.

Also, under this method, there is no distinction made between

completed units from beginning work in process and completed
units from the current period.
A. Computation of equivalent production

1. FIFO METHOD – work done last month on the units in

process, beginning is considered. The work done needed to
make the work in process 100% is the work done assigned for
the current month. (100% - work done last month)
A. Computation of equivalent production

2. AVERAGE – work done last month on the units in process,

beginning is ignored and not considered in the computation of
the equivalent production.
A. Computation of unit cost

1. FIFO
Current Period Costs
Equivalent units of current work done

2. AVERAGE
Costs in beg. Invty. + Current period cost
Equivalent units in beg invty. + Equivalent units of current work
done
 FIFO Method
Using this method, cost of goods transferred out equals the sum
of the ff:
a. The costs already in the beginning inventory at the
beginning of the period
b. The current period costs to complete beginning inventory,
which equals the equivalent units to complete beginning
inventory times the current period unit cost computed for
FIFO.
c. The costs to start and complete units, calculated by
multiplying the number times the current units cost
computed.
FIFO Method

Using this method, the cost of goods in ending inventory equals

the equivalent units ending inventory times the current units cost
computed.
Steps for Assigning Process costs to units

1. Summarize the flow of physical units.

2. Compute the equivalent units produced. Using FIFO, this means
adding the equivalent units work done to:
a. Complete units in beginning inventory
b. Start and complete units
c. Work on units still in ending inventory
*Using weighted average, this means adding the equivalent units
of work done in the current period to the equivalent units of work
already done in the beginning inventory from the previous period.
Steps for Assigning Process costs to units

3. Summarize the total costs to be accounted for. – The total costs to be

accounted for are the costs in the beginning work in process inventory
and current period costs.
4. Compute costs per equivalent unit.