Process costing

CHAPTER FIVE
PROCESS COSTING SYSTEM
5.1 Learning objectives
After completing this course you will be able to
 Record the flow of material, Labor, and overhead through a process costing system
 Compute the equivalent units of production using the weighted-average and Fifo method.
 Compute the cost per equivalent unit using the weighted-average method and Fifo method.
 Assign costs to units using the weighted –average method and Fifo method
 Prepare a cost reconciliation report
5.2 Definition
Process costing is method of costing used mainly in manufacturing where units are continuously mass
produced through one or more processes. Examples of this include the manufacture of erasers, chemicals or
processed food.
Process costing system applies when standardized goods are produced to series of interconnected operations.
When standardized goods or services result from a sequence of repetitive & continuous operations, it is useful
to work out the cost of each operations and
Every unit produced may be assumed to have involved the same amount of work, cost for a period are charged
to process or operations
And unit costs are ascertained by dividing process costs by the quantity of output units produced, this is known
as process costing.
In process costing it is the process that is costing (unlike job costing where each job is costing separately). The
method used is to take the total cost of the process and average it over the units of production.
Cost per unit = Cost inputs
Expected output in units

5.3. Similarities and Difference between Job order and process costing
Similarities between Job order and process costing
 Both systems assign material, labor, and overhead cost to products and they provide a mechanism for
computing unit product costs
 Both systems use the same manufacturing account, including Manufacturing overhead, raw material,
Work in process and Finished Good.
 The flow of cost through the manufacturing account is basically the same in both systems.
Differences between Job-order and process costing

 Process costing is used when a single product is produced on a continuing basis or for a long
period of time.
 Job-order costing is used when many different jobs having different production requirement are worked
on each period
 Process costing system accumulate costs by departments
 Job order costing accumulates costs by individual jobs.
 Process costing systems compute unit costs by department
 Job-order costing system compute unit costs by job on the job cost sheet

5.4 The Flow of material, labor and overhead

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Materials Cost:-As in job –order costing. Materials are drawn from the storeroom using a materials requisition
form. Materials can be added in any processing department, although it is not unusual for materials to be added
only in the first processing department, with subsequent departments adding only labor and overhead costs.
At Morgan’s Classic Cream soda, some materials (i.e., water, flavors, sugar, and carbon dioxide) are added in
the Formulating Department and some materials (i.e., bottles, caps, and packing materials) are added in the
Bottling Department and some material) are added in the Bottling Department.
The journal entry to record the materials used in the first processing department, the formulating Department is
as follows
Work in process –Formulating ………………………………….. xxx
Raw materials ………………………………………………………………….……..xxx
The same entries pass for Bottling department
Labor Costs:- in process costing labor costs are traced to departments –not to individual jobs.
The following journal entry records the labor costs in the formulating department at Megan Classic Cream soda
Work in process –formulating …………………………………….xxx
Salaries and wages payable ……………………………………………..xxx
A similar entry would be made to record labor costs in the Bottling Department
Overhead Cost: - in process costing, as in job-order costing, predetermined overhead rates are usually used.
The Journal entry will be:-
Work process –Formulating ……………………………………..xxx
Manufacturing Overhead …………………………………………………xxx
Similar for the next Bottling Department
Completing the Cost Flows: - once processing has been completed in a department & the units are transferred
to the next department for further processing
The following Journal entry transfers the cost of partially completed units from the Formulating Department to
the Bottling Department.
Work in process-Bottling ……………………………………………xxx
Work in process –Formulating …………………………………….xxx
After processing has been completed in the Bottling Department, the costs of the completed units are
transferred to the Finished Goods inventory account
Finished Goods ……………………………………………..xxx
Work in process _Bottling ………………………………….xxx
Finally, when a customer’s order is filled and units are sold, the cost of the units is transferred to cost of Goods
sold:
Cost of Goods Sold …………………………………………….xxx
Finished Goods ………………………………………………….xxx
5.5 Equivalent Units of production
After material, labor & overhead costs have been accumulated in a department, the department’s output must
be determine so that unit product cost can be computed
The difficulty is that a department usually has some partially completed units in its ending inventory.
- Those partially completed units are translated into an equivalent number of fully completed units
- This translation is done using the following formula:
Equivalent units = number of partially percentage
Completed unit X Completion

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These equivalent unit are added to any unit completed during the period to determine the dep’t output for the
period –called the equivalent units of production

Equivalent unit of production = 100% completed unit +% completed of the

in process unit

The equivalent unit of production for a period can be computed on weighted-average method & FIFO method.

5.5.1Weighted –Average method (WAM) of process costing

The weighted –average method blends (mix) together unit & costs from the current period with unit & cost from
the prior period.
In this method, the equivalent units of production for a department are the number of units transferred to the
next department plus the equivalent units in the department’s ending WIP inventory.
Formula
Under the WAM, a department’s equivalent units are computed as follows:-

The equivalent unit of production unit transferred Equivalent unit

Using the weighted average method = to the next dep’t + in ending WIP
Finished goods inventory

In the weighted-average method, the cost per equivalent-unit is computed as follow:-

Cost per equivalent unit Cost of begs. Cost added during
(Using weighted-Average Method)= WIP inventory + the period
Equivalent –unit of production

Cost per equivalent unit used to value ending WIP & Finished goods inventories under weighted average
method
Example
Shaping and milling department data are for May operations
Shaping & milling department:
Beginning WIP unit ----------------------------------------200
Completion with respect to materials ---------------- -55%
Completion with respect to conversion ----------------30%
Cost in the beginning inventory
Material cost -------------------------------------------------- $9,600
Conversion cost -----------------------------------------------5,575
Total cost in the beginning inventory ------------------- 15,175

Unit started into production during the period -------- 5,000

Unit completed & transferred out ----------------------- 4,800
Cost Added to production during the period:
Material cost ---------------------------------------------------368,600
Conversion cost ----------------------------------------------350,900

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Total cost added in the department -----------------------719,500

Work in process ending
Unit in process ---------------------------------------------------400
Completion with respect to materials -------------------------40%
Completion with respect to conversions ----------------------25%
Instruction
1. The company uses the weighted-average method
a) Compute the equivalent unit of production
b) Compute the cost per equivalent units for the month
c) Determine the cost of Ending WIP inventory and unit transferred out to the next department.
d) Prepare a cost reconciliation report for the month

Solution
Computation of equivalent unit of production
a/ Shaping and milling department: material conversion Total
Unit transferred to the next department --------------------------4800 -----------------4800
Ending work in process:
Materials:400 unit X40% complete ----------------------------- 160
Conversion: 400 unit X25% complete -------------------------------------------------- 100
Equivalent unit units of production ---------------------------------- 4960 --------------- 4900
b/ computation of cost per equivalent : material conversion
Cost of beginning WIP inventory --------------------------------- $9,600 ------------- -$5,575
Cost Added during the period --------------------------------------368,600 ------------ 350,900
Total Cost (a) -----------------------------------------------------$ 378,200 ----------- 356,475
Equivalent unit of production (b) -------------------------------- 4960 ------------------ 4900
Cost per equivalent unit = (a) ÷ (b) ------------------------------$76.25 ---------------72.75
c/ Computation of cost of end WIP & unit transferred out:
Ending WIP inventory: material conversion
Equivalent unit of production
Materials: 400 unit X 40% complete --------------------------160
Conversion: 400 unit x 25% complete -----------------------------------------------100.00
Cost per equivalent unit (b) ------------------------------------ 76.25 ----------------72.75
Cost of ending wip inventory = (a) X (b) ---------------------$12,200 ------------ 7,275.00 = ------------19,475
Unit completed &Transferred out:
Unit transferred to nex dep’t (a) ----------------------------------------$4800 ------------- 4800.00
Cost per equivalent unit (b) ----------------------------------------76.25------------------72.75
Cost of unit transferred out = (a) X (b) ------------------------$366,000 ----------349,200.00 =-----------715,200
Shaping & milling Department cost Reconciliation Report
Cost to be accounted for:
Cost of beginning wip inventory --------------------------------- 15,175
Cost added to production during the period ------------------719,500
Total cost to be accounted for ----------------------------------$ 734,675
Cost accounted for as follow:
Cost of ending wip inventory --------------------------------------$ 19,475
Cost of units transferred out ----------------------------------------715,200
Total cost accounted for: ---------------------------------------------737,675
Class Work I

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Mega Home Paint Company produces exterior latex paint, which it sells in one gallon containers
The company has two processing departments Base Fab & finishing. White paint, which is used as a base for
all the company’s paints, is mixed from raw ingredients in the base Fab dep’t.
Pigments are then added to the to the basic white paint, the pigmented paint is squired under pressure into one
gallon containers, & the containers are labeled & packed for shipping in the finishing dep’t.
Information relating to the company’s operations for April follows:
a) Issued raw materials for use in production : Fab Dep’t, $851,000 and finishing dep’t $ 629,000
b) Incurred Direct labor costs: Base Fab Dep’t, $330,000 & Finishing department $ 270,000.
c) Applied most cost: Base Feb. Dep’t $665,000 & finishing Dep’t $405,000
d) Transferred base white paint from the base Fab dep’t to the finishing dep’t $ 1,850,000
e) Transferred paint that had been prepared for shipping from the finishing dep’t to finished good,
$3,200,000
Instruction
1. Prepare Journal entries to record (a) through 2 (e) above
2. Post the journal entries from (1) above to T- Account
3. The balance of wip on April 1 in the base Fab & Finishing dep’t account was $150,000 & 70,000
Respectively
4. Determine the ending wip inventory of both dep’t
Class work II
The following additional information is available regarding production in the base fab departments during April.
Production Data
Unit (gallons) in process, April 1, material 100% complete:
Labor & overhead 60% complete ----------------------------------------------30,000
Unit (gallons started into production during April ------------------------ 420,000
 Unit (gallons) completed & transferred to the finishing dep’t----370,000
 Unit (gallons) in process, April 30: material 50% complete:
 Labor & overhead 25% complete -------------------------------------80,000
Cost Data
Work in process inventory April 1:
Materials ---------------------------------------------------------------------- $ 92,000
Labor ----------------------------------------------------------------------------- 21,000
Overhead ------------------------------------------------------------------------- 37,000
Total cost of work in process -----------------------------------------------------$150,000
Cost Added during April
-materials ----------------------------------------------------------------------851,000
- labor -------------------------------------------------------------------------- 330,000
- Overhead ---------------------------------------------------------------------- 665,000
Total cost Added during April ---------------------------------------------------$ 1,846,000
Instruction
Companies used weighted Average method
a) Compute the equivalent unit of production
b) Compute cost per equivalent unit for the month
c) Determine the cost of ending inventory of work in process & unit transferred out to the next department.
d) Prepare a cost reconciliation report

5.5.2The FIFO Method of process costing

A method in which equivalent units & unit cost related only to work done during the current period
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The FIFO method of process costing differs from the weighted-average method in two ways: (1) the
computation of equivalent units, and (2) the way in which costs of beginning inventory are treated. The FIFO
method is generally considered more accurate than the weighted-average method, but it is more complex. The
complexity is not a problem for computers, but the FIFO method is a little more difficult to understand and to
learn than the weighted-average method.
Equivalent Units-FIFO Method
The computation of equivalent units under the FIFO method differs from the computation under the weighted –
average method in two ways.
First the “units transferred out” is divided into two parts. One part consists of the units from the beginning
inventory that were completed and transferred out, and the other part consists of the units that were both started
and completed during the current period.
Second, full consideration is given to the amount of work expended during the current period on units in the
beginning work in process inventory as well as on units in the ending inventory. Thus, under the FIFO method,
both beginning and ending inventories are converted to an equivalent units basis.
The formula for computing the equivalent units of production under the FIFO method is more complex than
under the weighted-average method.
FIFO Method
(a separate calculation is made for each cost category in each processing department)
Equivalent units of production = Equivalent unit to complete beginning work in process inventory
+ Units started and completed during the period
+ Equivalent units in ending work in process inventory

Equivalent units to Units in beginning percentage completion

Complete beginning work in = work in process x { 100% _ of beginning work in process In process }
inventory inventory inventory

Or, the equivalent units of production can also be determined as follows.

Equivalent units of productions = Units transferred out

+ Equivalent units in ending work in process inventory
_ Equivalent units in beginning work in process inventory

Cost per Equivalent Unit-FIFO method

In the FIFO method, the cost per equivalent units is computed as follows
FIFO method
(A separate calculation is made for each cost category in each processing department)
Cost per equivalent unit = Cost added during the period
Equivalent units of production

Unlike the weighted –average method, in the FIFO method the cost per equivalent unit is based only on the
costs incurred in the department in the current period.
The costs per equivalent unit for materials and for conversion are computed below for the shaping and Milling
Department for may:

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Example
Shaping and milling department data are for may operations
Shaping & milling department:
Beginning wip unit ----------------------------------------200
Completion with respect to materials ---------------- --55%
Completion with respect to conversion ----------------- 30%
Cost in the beginning inventory
Material cost ------------------------------------------- $9,600
Conversion cost ---------------------------------------- 5,575
Total cost in the beginning inventory ------------------- 15,175
Unit started into production during the period --------- 5,000
Unit completed & transferred out ------------------------- 4,800
Cost Added to production During the period :
Material cost ------------------------------------------368,600
Conversion cost --------------------------------------350,900
Total cost added in the department ----------------------719,500
Work in process ending
Unit in process -------------------------------------------------400
Completion with respect to materials ---------------------- 40%
Completion with respect to conversions ------------------- 25%
Instruction
2. The company uses the FIFO method
e) Compute the equivalent unit of production
f) Compute the cost per equivalent units for the month
g) Determine the cost of Ending WIP inventory and unit transferred out to the next department.
h) Prepare a cost reconciliation report for the month

Shaping and Milling Department

1. Equivalent unit of production –FIFO method
Materials conversion
Equivalent units _ weighted average method -------- - 4960----------------- 4900
Less equivalent units in beginning inventory:
200 Units x 55%----------------------------------------------110
200 Units x 30%------------------------------------------------------------------------60
Equivalent units of production _ FIFO method-----------4850------------------4840
2. Costs per Equivalent unit –FIFO method
Materials conversion
Cost added during the period (a) ------------------------$ 368,600 -------------$350,900
Equivalent units of production (b) ------------------------ 4,850 ------------------ 4,840
Cost per equivalent unit (a) ÷ (b) --------------------------$76.00 ------------------ $72.50

3. Costs of Ending work in process inventory and units Transferred out –FIFO method
Materials conversion Total
Ending work in process inventory:
Equivalent units of production
(see Exhibit 4A -1) (a) ………………………………………… .160 ………………… 100
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Cost per equivalent unit (b)……………………… …………… $76.00 ………….. $ 72.50

Cost of end work in process inventory(a)X (b) …………….…$12,160 …………. $7,250 ………….. $19,410

Units transferred out:

Cost in beginning work in process inventory ……………..…$ 9,600 ……………. $5,575…………$15,175
Cost to complete the units in beginning work in
Process inventory:
Equivalent units of production required to
Complete the units in beginning inventory (a) ………….……90 ………………… 140
Cost per equivalent unit……………………... (b) ………..……$76.00 …………….$72.50

Cost to complete the units in beginning

Inventory (a) X (b) …………………………………………$6,840 …………$10,150….… ….$16,990
4. Cost of units started and completed this period:
Units started and Completed this period (a) ………………….….4,600 …………….4,600
Cost per equivalent unit (b)………………………… …………….$76.00 …………….$72.50

Cost of units started and completed this period

(a) X (b) ………………………………………………………$349,600 …………$333,500……. .$683,100
Total cost of units transferred out ………………………………………………………………… …….. $715,265

Again, note that the cost of the units transferred out consists of three distinct components-the cost of beginning
work in process inventory, the cost to complete the units in beginning inventory, and the cost of units started
and completed during the period. This is a major difference between the weighted –average and FIFO methods.
Cost Reconciliation Report –FIFO Method
The costs assigned to ending work in process inventory and to the units transferred out reconcile with the costs
we started as shown below:
Shaping and milling Department
5. Cost Reconciliation
Cost to be accounted for:
Cost of beginning work in process inventory ………………………. ……………………$15,175
Cost added to production during the period ………………………………………………719,500
Total cost to be accounted for ……………………………………………………………….$734,675
Cost accounted for as follows.
Cost of ending work in process inventory (see above) ……………………………………$ 19.410
Cost of units transferred out (see above) ………………………………………………… …715, 265
Total cost accounted for ……………………………………………………………………… $ 734,675

5.6 Spoilage, Rework and Scrap

5.6.1 Distinction among spoilage, rework, and scrap
Three categories of cost that result from defects in the manufacturing process are: spoilage, rework, and scrap. The term
spoilage refers to units that do not meet the required production specifications. Spoiled units would typically be recycled or
sold as seconds. The term rework also refers to units that do not meet the required production specifications, but rework

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unit are being repaired (reworked) so that they can be sold as normal finished units. The term scrap refers to left –over or
residual materials that results from the
5.6.2 Accounting procedures for normal and abnormal spoilage
A key element of accounting for spoilage is distinguishing between normal and abnormal spoilage. Normal spoilage is
spoilage inherent in a particular production process also referred to expected spoilage, and arises even under efficient
operating conditions. Cost of normal spoilage are typically treated as a component of the costs good units manufactured
because good units cannot be made without the simultaneous appearance of spoiled units
In contrast abnormal spoilage is unusual and unexpected spoilage that should not occur under normal operating
conditions. It is not an inherent result of the particular production process and is usually regarded as avoidable and
controllable. Abnormal spoilage costs are written off as losses of the accounting period in which detection of the spoiled
units occurs.
The questions to ask to account for spoilage are as follows
1) What is the flow of the process (FIFO or weighted average)?
2) Where are the quality control inspection points? It is assumed that all spoilage occurs at the inspection point.
3) How much spoilage is considered “normal”? All spoiled units are the same? , what makes one” normal” and one
“abnormal” is a function of acceptable or expected levels of occurrence-A company may determine that from a
particular production process three spoiled units should occur.
Spoiled Units are detected, then there are three normal and two abnormal’ spoiled units, if only spoiled units are detected,
then both are considered to be normal spoilage
Allocation of Normal and Abnormal Spoilage Costs:

Department Good Units of product or

Work in process Service
 Cost transferred in Equivalent Transferred out
 Direct Materials Units of
 Conversion costs : product or service
Direct labor procedure Abnormal spoilage loss
Overhead

Allocation of Normal and Abnormal Spoilage Costs:

5.6.3 Spoiled Materials charged to total production
The Waa Mara products company has monthly capacity to manufacture 125,000 three inch coil springs for use in
mechanical brakes production is scheduled in response to orders received. Spoilage is caused by a variety of
unpredictable factors and average $ 0.05 per spring. During November, 100,000 springs were produced with a materials
cost of $0.40 per unit, a labor cost of $0.50 per unit, and factory overhead charged to production at a rate of 150% of the
direct labor cost. This rate is based on an estimate that includes $ 0.05 per spring for spoilage. The entry to record work
put into production during the month is:
Work in process –materials ----------------40,000
Work in process – labor - - - - - - - - - --- 50,000
Work in process – FOH - - - - - - - - - - 75,000
Materials - - - - - - - - - - - - - - - - -- - - - - 40,000
Payroll - - - - - - - - - - - - - - --- - - - -- - 50,000
Applied Factory overhead - - - - - - - - - - 75,000
On the last working day of the month the entire day’s production of 4,000 units is spoiled due to improper heat treatment
however, these units can be sold for $ 0.50 each in the second hand market. To record this normal loss on spoiled goods
and the possible resale value, the entry that charges all production during the period with a proportionate share of the
spoilage is:
Subsidiary
Spoiled good Record 2000
Factory overhead control - - - - - - - 4600
Loss on spoiled goods ---- 4600

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Work in process materials - - - - - - -- - - - - - -- - - 1600

Work in process – labor - - - - - - -- - - - - --- - - - -2000
Work in process FOH - - - - - - - - - -- - -- ---- - - -3000
The materials, labor and factory overhead in the spoiled units reduced by the recovery or sales value of these units
( $1600 materials + $2000 labor + $3000 factory overhead - $2000 cost recovery = $4600 spoilage loss) is reallocated or
transferred from work-in- process to factory overhead control. Each of the 96,000 good units produced during the month
has a charged in cost of $0.05 for spoilage (96,000 x $0.05 = $4,800). The actual spoilage during the period is $4,600.
The good units produced during the week or on the order where spoilage did occur carry a cost of $0.40 for materials,
$0.50 for labor ,and $0.75 for overhead because spoilage is charged to all production-not to the lot or order which
happens to be in process at the time of spoilage .in other words, the $165,000 monthly production cost less the $6,600
credit resulting from spoiled units leaves $158,400 to be divided by the 96,000 good units manufactured during the month
at a cost of $1.65 per good unit. The entry transferring the good units to finished good is:
Finished Goods-------------------------------158,400
Work-in process –materials --------------------------------------38,400
Work-in-process-labor---------------------------------------------48,000
Work-in-process-factory overhead-------------------------------72,000
During the month ,the amounted charged to factory overhead control represent the depreciation, insurance, taxes, indirect
materials, and indirect labor actually experienced, along with the $4600 spoilage cost. All production during the month is
charged with overhead of $0.75 per unit.
Overhead analysis reveals a $ 200 favorable variance ($4,600 actual minus $ 4,800 applied) attributable to the spoilage
units any difference between the price when the inventory was recorded and the price realized at the time of sale would be
a plus or minus adjustment to factory overhead control (loss on spoiled goods)
5.6.4 Spoiled materials charged to a particular job.
The Waa Mara products company has a contact to manufacture 10,000 heavy duty coil spring for the Turaf- state supply
company. This order requires a steel wire that is harder and slightly heavier than stock normally used, but the production
process, as well as labor time and overhead factors, is identical with the standard product. Material cost for each of these
springs is $0.60. This special order required exacting specification, and normal spoilage is to be charged to the order. The
$0.05 per unit spoilage factor is now eliminated from the overhead rate, and 140% of direct labor cost, or $0.70 per unit, is
the rate used on this job . the order is put into production the first day of December, and sampling during the first hour of
production indicates that eleven units of production are required to secure ten good springs.
Entries to recorded costs placed into production for 11.000 units are:
Work in process – Materials -------- 6,600
Work in process – labor ------------ 5,500
Work in process- FOH ------------- 7,700
Materials -- - --------------------------------------------6,600
Payroll -------------------------------------------------5,500
Applied Factory overhead --------------------------- 7,700
One thousand units did not meet specifications and are spoiled but can be sold as second for $0.45 per unit. The entry to
record the spoilage is:
Spoiled Goods ------------------450
Work in process – Materials ---------------------------------150
Work in process – labor ----------------------------------------125
Work in process – Factory overhead -----------------------175
$ 450 sales recovery = 25%
$ 1,800 costs of 1,000 units

25% $ 600 materials = $ 150

$ 500 Labor = $ 1R5
$ 700 Factory overhead = 175

OR

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$6 ,600 materials
*$ 450 sales re cov ery =$ 150
$ 19, 800 total job cost
$5 , 500 Labor
X $450 sales re cov ery=$ 125
$ 19, 800 total job cost
$ 7 ,700 Factory overhead
X 450 sales re cov ery =$175
$ 19 , 800 total Job cost
The entry transferring the completed order to finished goods would be:
Finished Goods -- - - - - - - - - - - - - - - - - - - - - 19,350
Work process – Materials - - - - - -------------------- 6,450
Work in process – Labor - - - - - - ---------------------5,375
Work in process – FOH--------------------------- ----7,525
The net result of this treatment is to charge the spoilage loss of $ 1,350 ($ 1800-450 cost recovery) to the 10,000 good
units that are delivered at the original contract price. The unit cost of completed spring is $ 1.935 ($19,350 ¿ 10,000
units).
Any difference between the price when the inventory was recorded and the price realized at the time of sale should be an
adjustment to work in process, finished goods, or cost of goods sold, depending on the completion status of the particular
job order. As an expedient, the difference might be closed to Factory overhead control.
5.7 Account for Detective work (Reworked units)
Reworked units are unacceptable units of production that are subsequently reworked into good units and sold completed
reworked units should be indistinguishable from non – reworked good units.
In manufacturing process, imperfection may arise because of faults in materials, labor, or machines. If the unit can be
reprocessed in one or more stages and made into a standard
Salable product, it is often profitable to rework the defective unit.
Two methods of accounting for the added cost to upgrade defective work are appropriate, depending upon
circumstances.
1. If the defective work is experienced in regular manufacturing, the additional cost to correct defective units (based
on previous experience) is included in the predetermined factory overhead and in the resulting factory overhead
rate. Actual rework cost is charged to Factory overhead control.
To illustrate, assume that Waa Mara Company has an order for 500 units of a product that has direct production costs of
$5 for material and $ 3 for labor, with factory overhead charged to production at 200 % of labor cost. Fifty units are found
to be defective and are to be reworked at a total cost of $30 for materials, $60 for Labor, and overhead at 200% of direct
labor cost. The entries are:
Work in process – Materials - - - - - - - - - - - - ------- 2,500
Work in process – labor - - - - - - - - - - - - - - - - - --- 1,500
Work in process factory overhead - - - - - - - - - ---- 3,000
Materials - - - - - - - - - - - - - - - - - - - - - - - - - - 2,500
Payroll - - - - - - - - - - - - - - - - - -- - - - - - - - - 1,500
Applied factory overhead - - - - - - -- - -- - - - -- 3,000
Factory overhead control - - - - - - - - - - - - -- - -- - 210
Defective work - - - - - - - - - - - 210
Materials - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - 30
Payroll - - - - - - - - -- - -- - - - -- - - - - - -- - - - - -- - - - - - - - - 60
Applied Factory over head - - - - - - - - - - - - - - - - - - - - - - - - 120
Finished goods - - - - - - - - - - - - - - - - - - - - - - - 7000
Work in process -materials - - - - - - - - - - - - - - - - - -- - - - - - - 2500
Work in process – Labor - - - - - - - - - - - - - - - - - - - - - - - - - 1,500
Work in process - FOH - - - - - - - - - - - - - - - - - - - - - - - - - -- 3,000
The unit cost of the completed units is $ 14 ($ 7000 ¿ 5000 units)

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2. Suppose, however, that the same company received special order for 5000 units with the agreements stating that any
defective work is chargeable to the contract. During production, so units are improperly assembled. The total cost to
correct these defective units is $ 30 for materials, $60 for labor, and 200% of the direct labor cost for factory overhead.
The entries in this case are:
i. Work in process – Materials - - - - - - - - 2500
Work in process – Labor - - - - - - - - - 1,500
Work in process – FOH - - - - - - - - -- 3,000
Materials - - - - - - - - - - - - - - - - - - - - - - 2,500
Payroll - - - - - - - - - - - - - - - - - -- - - - - 1,500
Applied factory over head - - - - - - - - ---- 3,000
ii. Work in process – materials - - - - - - - 30
Work in process - Labor - - - - - - - - --60
Work in process - FOH - - - - - - - - -- ---120
Materials - - - - - - - - - - - - - - - - - - - - - - - - - - 30
Payroll - - - - - - - - - - - - - - - - - - - - - - - - - - 60
Applied Factory over head - - - - - - - - - - - - - - 120
iii. Finished goods - - - - - - - - - -- 7,210
Work in process – materials - - - - - - - - - - - - - - - 2,530
Work in process – Labor - - - - - - - - - - - - - - - - 1,560
Work in process – FOH - - - - - - - - - - - - - - - - 3,120
The unit cost in this case is $ 14.42 instead of $ 14. Whenever the defective work cost is charged directly to the job, a
slight over charge of factory overhead results because of the inclusion of rework cost in the factory overhead rate. One
remedy /action / to correct this discrepancy would be either to create a new independent overhead rate or to separate
costs for the special job.
5.7.1 Costing procedures for scrap and waste
In manufacturing process, waste and scrap result from:
1. the processing of materials,
2. defective and broken parts
3. obsolete stock
4. revisions or abandonment of experimental projects, and
5. worn out or obsolete machinery. This scrap should be collected and placed in storage for sale to
scrap dealers. At the time of sale, the following entry may be made :
Cash (or Account Receivable) - - - - - - - - - x xx
Scrap sales /or Factory overhead control / - - - - xxx
The amount realized from the sale of scrap and waste can be treated in two way with respect to the income statement:
1. The amount accumulated in scrap sales may be closed directly to Income summary and shown on the Income
statement under other Income.
2. The amount may be credited to FOH control, thus reducing the total factory overhead expense and there by the cost
of goods manufactured.
When Scrap is collected from a job or department, the amount realized from the sale of scrap is often treated as a
reduction in the materials cost charged to the individual job or product. In this case, the entry to record the sale would be:
Cash (or Account Receivable) - - - - - - xxx
Work in process - - - - - - - - - - - - - --- - - --- - -xxx
When the quantity and value of scrap material is relatively high .it should be stored in a designated place under the
supervision of a storekeeper. A scrap report (as shown below) is generally prepared in duplicate to authorize transfer
receipt of the scrap.

Assignment
Submit Before final Exam Date
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 Process costing

Problem I
Assume that GH Company has three production departments and one service department the following
transaction occurred in the month of September Year 2012

1. Purchased raw materials for $300,000 on credit

2. Issued Raw materials from store room to:
- Shaping department -------------------------------- 120,000
- Painting ---------------------------------------------- 90,000
- Finishing ---------------------------------------------- 50,000
- Service ------------------------------------------------- 30,000
3. Recorded labor costs of birr 470,000 at the payroll dates
4. Charged Labor costs to production as following
- Shaping dep’t ------------------------------------------- birr 70,000
- Painting -------------------------------------------------------130,000
- Finishing ------------------------------------------------------110,000
- Service --------------------------------------------------------- 70,000
5. Incurred $ 160,000 in Miscellaneous Manufacturing costs (credit to other accounts)
6. Advocated MOH costs to the three production dep’t as following
- Shaping -------------------------------------------- Br70,000
- Painting ---------------------------------------------- 40,000
- Finishing ---------------------------------------------- 50,000
7. Transferred goods costing birr 300,000 from shaping dep’t to the painting dep’t
8. Transferred goods costing birr 480,000 from painting to finishing dep’t
9. Transferred goods costing birr 600,000 from finishing to warehouse
10. Sold goods for birr 720,000 on credit whose cost is birr 560,000
Required
I- Prepare entry for each of the above transactions
II- Determine ending balances for the following accounts
a- Raw Materials
b- Factory payroll clearing
c- Work in process-shaping
d- Work in process-painting
e- Work in process- Finishing
f- Finished Goods
g- Cost of goods sold

Problem II
The beginning of September 2003, XYZ Inc., had 1250 units partially assembled units in the Assembly
Department. During September 2003, XYZ inc. Placed another 4000 units into production. Data for the
Assembly Department for Sept, 2003 are:

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 Process costing

Physical units for September, 2003

Work in process, beginning inventory (Sep 1) --------------- 1250 unit
Direct Materials (90% complete)
Conversion cost (80% Complete)
Started during September --------------------------------------- 4000unit
Completed and transferred out During September ---------- 4250unit
Work in process, ending inventory (Sep 30) ------------------ ?
Direct Materials (80% complete)
Conversion costs (60% complete)
Total costs for Sep 2003
Work in process, beginning inventory
Directs materials ------------------------------------------------41,250
Conversion cost -------------------------------------------------25,000
Total beg. WIP cost 66,250
Direct Materials costs added during September ------------ 110,000
Conversion costs added during September------------------ 82,300
Cost added during the period ---------------------------------192,300
Required
Compute the above problem using Weighted Average method FIFO method:
A) Equivalent unit of production
B) Cost per equivalent unit
C) Cost of end. WIP, cost of beg. WIP required to complete & cost of unit transferred out
D) Reconciliation

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