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
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 -used when products
batch of products accdg are manufactured by
to customer’s mass production or
specifications continuous processing
-used for customized -manufacturer of 8oz
cabinet 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 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

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
 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
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
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.