Process Costing

AGENA MARIE SAN PABLO, CPA

 Process Costing
Process costing used when there is a mass production or
under a condition of continuous processing of similar
(homogeneous) products, where the costs associated
with the units produced has equal amount of materials,
labor, and overhead.
 Process Costing
In process costing, the costs (material, labor, and
overhead) are accumulated per department or cost
center for a period of time using a cost production
report, instead of job cost sheet that is used under job
order costing system.
Cost of Production Report
 Process Costing
The costs are accumulated on each report per
department and are allocated to work in process ending
units and units transferred to next department or to the
finished goods. The unit cost assigned to each product is
determined by dividing the total cost of the department
by the number of units produced.
Process costing methods are used by the ff.:
1. Industries producing chemicals, petroleum, textiles,
steel, rubber, cement, flour, pharmaceuticals, shoes,
plastics, sugar, and coal.
2. Firms manufacturing items such as screws, bolts, and
small electrical parts.
3. Assembly-type industry which manufactures
automobiles and household electric appliances
4. Service industries such as gas, water, and heat
 Characteristics of a Process Cost System
1. Costs are accumulated by department or cost center.
2. Each department has its own general ledger Work in
Process Inventory account. This account is debited with
the processing costs incurred by the department and
credited with the cost of completed units transferred to
another department or to finished goods inventory.
3. Equivalent units are used to restate - work in process
inventory to terms of completed units at the end of a
period.
 Characteristics of a Process Cost System
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.
 Major Differences between Process and Job Order Costing
Process Costing Job Order Costing

1. Homogeneous units pass through a series 1. Unique jobs are worked on during a
of similar processes. time period.

2. Costs are accumulated by processing 2. Cost are accumulated by individual job.

department.

3. Unit costs are computed by dividing the 3. Unit costs are determined by dividing
individual departments’ costs by the the total costs on the job cost sheet by the
equivalent production. number of units on the job.

4. The cost of production report provides 4. The job cost sheet provides the detail
the detail for the Work in Process account for the Work in Process account.
for each department.
 Process Costing Flow
RM WIP Dept. 1
BEG Issuance BEG Transferred out
Purchase DM
CC
END WIP

WIP Dept. 2 WIP Dept. 3 Finished Goods

BEG Transferred out BEG COGM COGM
Transferred In Transferred In
DM DM
CC CC
END WIP END WIP
 Methods of Process Costing
1. Weighted Average Method
It assumes all cost of materials, labor and overhead,
whether from beginning inventories (costs from preceding
period) and those incurred this period are lumped (average)
together and assigned to completed units. Thus, there is no
differentiation of units started this month and from the
preceding month.
 Methods of Process Costing
2. First-in First-out Method
Under this method, units which are first place in the
production process will be the first one to be completed and
transferred out. FIFO method does not commingle
(combine). costs of the beginning inventory units and started
this month units. The beginning inventory costs are
separately maintained from current month costs and will be
allocated only to completed beginning inventory units, while
the current month costs will be allocated between
completed units this month and work in process end.
 Steps in Process Costing
1. Quantity Schedule
This schedule accounts for the physical flow of units into
and out of departments. All units started in the department
must be accounted for and also the disposition of these
units, that is, whether they transferred to the next
department, lost, or remain in the department (complete or
incomplete). This schedule is concerned only with whole
units, regardless of their stages of completion.
 Quantity Schedule
1. Units to account for
Beginning WIP x
Strated in production x
UTAF x

2. Units as accounted for

Transferred out x
Ending WIP x
UAF x
*TO = BWIP + STARTED AND COMPLETED
*S&C= TO - EWIP
Illustration
Chow Company adds material at the start of production. The following production
information is available for June:
Beginning WIP (45% complete as to conversion) 10,000 units
Started this period 120,000 units
Ending WIP (80% complete as to conversion) 8,200 units

Beginning WIP Inventory Costs

Material P24,500
Conversion 68,905
Current Period Costs
Material 75,600
Conversion 130,053
 Steps in Process Costing
2. Compute for the equivalent units of production
All units must be expressed in terms of completed units in
order to determine unit costs.
 Steps in Process Costing
2. Compute for the equivalent units of production

Weighted Average
Beginning WIP 100%
Started and Completed 100%
Ending WIP % Completed this month
 Steps in Process Costing
2. Compute for the equivalent units of production

FIFO
Beginning WIP % needed to complete
Started and Completed 100%
Ending WIP % Completed this month

*Tranferred in - EUP Always 100%

XPN: BWIP 0%
Illustration
Chow Company adds material at the start of production. The following production
information is available for June:
Beginning WIP (45% complete as to conversion) 10,000 units
Started this period 120,000 units
Ending WIP (80% complete as to conversion) 8,200 units

Beginning WIP Inventory Costs

Material P24,500
Conversion 68,905
Current Period Costs
Material 75,600
Conversion 130,053
 Steps in Process Costing
3. Calculate the cost per EUP

Weighted Average
=BWIP Inventory Cost + Current Period Cost
Weighted Average EUP
 Steps in Process Costing
3. Calculate the cost per EUP

FIFO
= Current Period Cost
FIFO EUP
Illustration
Chow Company adds material at the start of production. The following production
information is available for June:
Beginning WIP (45% complete as to conversion) 10,000 units
Started this period 120,000 units
Ending WIP (80% complete as to conversion) 8,200 units

Beginning WIP Inventory Costs

Material P24,500
Conversion 68,905
Current Period Costs
Material 75,600
Conversion 130,053
 Steps in Process Costing
4. Calculate the total cost to account for

= Cost in BWIP + Current Period Cost

Illustration
Chow Company adds material at the start of production. The following production
information is available for June:
Beginning WIP (45% complete as to conversion) 10,000 units
Started this period 120,000 units
Ending WIP (80% complete as to conversion) 8,200 units

Beginning WIP Inventory Costs

Material P24,500
Conversion 68,905
Current Period Costs
Material 75,600
Conversion 130,053
 Steps in Process Costing
5. Assign costs to inventories
Compute cost of units transferred out (to Finished
Goods or next department) and ending WIP.
Questions
1. How many units must be accounted for?
2. What is the total cost to account for?
3. How many units were started ang completed in the period?
4. What is the equivalent units for material using the WA method?
5. What is the equivalent units for material using the FIFO method?
6. What is the equivalent units for conversion using the WA method?
7. What is the equivalent units for conversion using the FIFO method?
8. What is the material cost per equivalent unit using the WA method?
9. What is the material cost per equivalent unit using the FIFO method?
10. What is the conversion cost per equivalent unit using the WA method?
11. What is the conversion cost per equivalent unit using the FIFO method?
12. What is the cost of all units transferred out using the WA method?
13. What is the cost of all units transferred out using the FIFO method?
The Green Lantern Company makes headdresses in two departments: Forming and
Decorating. Forming began the month with 500 headdresses in process that were
100 percent complete as to material and 40 percent complete as to conversion.
During the month, 6,500 headdresses were started. At month end, Forming had
2,100 headdresses that were still in process that were 100 percent complete as to
material and 50 percent complete as to conversion. Assume Forming Department
uses the weighted average method of process costing: Costs in the Forming
Department are as follows:
Beginning Work in Process Costs:
Material P1,000
Conversion P1,500
Current Costs:
Material P3,200
Conversion P5,045
The Decorating Department had 600 headdresses in process at the beginning of
the month that were 80 percent complete as to material and 90 percent complete
as to conversion. The department had 300 units in ending Work in Process that
were 50 percent complete as to material and 75 percent complete as to conversion.
Decorating uses the FIFO method of process costing, and costs associated with
Decorating are:

Beginning WIP Inventory:

Transferred-in P1,170
Material P4,320
Conversion P6,210
Current Period:
Transferred-in ?
Material P41,395
Conversion P58,620
Questions:
1. Compute the number of equivalent units in forming for material and conversion.
2. How many units were transferred to Decorating during the month?
3. What was the cost transferred out of Forming during the month?
4. What is the cost of ending work in process in the forming department?
5. Compute the number of equivalent units as to costs in Decorating for the
transferred-in cost component.
6. Compute the number of equivalent units in Decorating for material.
7. What is the transferred-in cost per equivalent unit in Decorating?
8. What is the material cost per equivalent unit in Decorating?
9. What is the cost of completing the units in beginning inventory in Decorating?
10. What is the amount of Transferred out cost in beginning inventory in
Decorating?
11. What is the amount of Transferred out cost to the finished goods inventory?
12. What is the amount of Ending work in process cost in decorating?