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Lesson 8 Process Costing

Process costing is used when identical units are produced continuously rather than in distinct jobs. Costs are accumulated by department and allocated to units as they are completed. The cost of production report accounts for units and costs in each department to calculate equivalent units and unit costs. It determines costs to be accounted for in each department and ensures all costs are allocated from work in process to finished goods. Methods of costing under process costing include FIFO and weighted average.

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Rohanne Garcia Abrigo
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128 views

Lesson 8 Process Costing

Process costing is used when identical units are produced continuously rather than in distinct jobs. Costs are accumulated by department and allocated to units as they are completed. The cost of production report accounts for units and costs in each department to calculate equivalent units and unit costs. It determines costs to be accounted for in each department and ensures all costs are allocated from work in process to finished goods. Methods of costing under process costing include FIFO and weighted average.

Uploaded by

Rohanne Garcia Abrigo
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Lesson 8: Process

Costing
What is Process Costing?
Process costing system is used when a manufacturing process involves the continuous
production of identical units rather than distinguishable job lots.
 
In using process costing, all manufacturing costs are allocated first to departments or processes.
Departmental or process costs are then allocated to units of product as units are completed.
 
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.
3. Equivalent units are used to restate – work in process inventory to terms of completed units at
the end of a period. Equivalent unit refers to the amount of work actually performed on products
with varying degrees of completion, translated to that work required to complete an equal number
of whole units.
4. Completed units and their corresponding costs are transferred to the last department or to
finished goods inventory.
5. Total costs and unit costs for each department are periodically calculated and analyzed with the
use of department cost of production report.
Major Difference Between Process and
Job Order Costing
Process Costing Job Order Costing
◦ Homogeneous units pass through a series of ◦ Unique jobs are worked on during a time period
similar processes. ◦ Costs are accumulated by individual job.
◦ Costs are accumulated by processing ◦ Unit costs are determined by dividing the total
department. costs on the jo b cost sheet by the number of
◦ Unit costs are computed by dividing the units on the job. The denominator is the actual
individual departments’ costs by the equivalent units
production. The denominator is the equivalent ◦ The job cost sheet provides the detail for the
units of production (EUP) WIP account.
◦ The cost of production report provides the detail
for the WIP account for each department
System Flow
Units to account for = Units accounted for

Units to account for = Beginning units in process + Units started in process or received from
previous department + Increase in units due addition of materials

Units accounted for = Units completed & transferred + Units completed and on hand + Units in
process end
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. Additional materials may or may not be added.
D1 – D2 – D3 – FG – COGS
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 inventory.
Cutting Department (D1) Writing Department (D2)
Combining Department (D3)
3. Selective – the product moves to different departments within the factory depending upon the desired
final product.
Crude oil (D1)
Gasoline (D2) Heating (D3) Kerosene (D4)
Entries for DM, DL and FOH
Direct materials
Work in Process – Department 1 xx
Materials xx
 
Direct labor
Work in Process – Department 1 xx
Payroll xx
 
Factory Overhead
Work in Process – Department 1 xx
Factory overhead applied xx
The Cost of Production Report
It is an analysis of the activity in the department or cost center for the period. All costs
chargeable to a department or cost center are presented according to cost elements.

Step 1. The Quantity Schedule


This schedule accounts for the physical flow of units into and out of departments. This schedule is
concerned only with whole units, regardless of their stages of completion.
 
The Cost of Production Report
Step 2. Calculate Equivalent Units and Unit Costs
All units must be expressed in terms of completed units in order to determine unit costs.
Equivalent production equals total units completed plus incomplete units restated in terms of
completed units. Incomplete units are accounted for in work in process inventory until they are
completed and transferred to finished goods inventory. To compute equivalent production, an
analysis must be made of the stage of completion of work in process.
For example:
 If the materials are added at the beginning, all work in process units will have compete direct
material cost.
 When added at the end of the process, work in process inventory will not have any direct
materials from that department.
 It may also added continuously, in this case the work in process inventory will have direct
materials equal to the stage of completion of the work in process.
The Cost of Production Report
The unit cost in the department is computed by dividing the cost incurred in the department, for
each element, by the equivalent production. The formula is:
 
FIFO METHOD
Equivalent unit cost = cost added during the period/equivalent units (work done this period)
 
WEIGHTED AVERAGE METHOD
Equivalent unit cost = (cost last period + cost added this period) / equivalent units (work done last
period + work done this period)
The Cost of Production Report
Step 3. Determine the costs to be accounted for (costs charged to the department)
Total costs from all departments must be determined so that they can be accounted for.
 
Step 4. Account for all costs
After the costs for which the department is responsible for are determined, an accounting for the
disposition of these costs must be made.
Methods of Costing Under Process
Costing
1. FIFO Method – there is an assumed flow of manufacturing operations and as such it is
considered that 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.
2. Weighted Average Method – there is no assumed flow of manufacturing operations. It involves
merging of the departmental costs and securing a representative average unit costs by dividing
the total elements of costs by the equivalent production based upon the sum of the units in the
initial work in process inventory and the units placed into production during the period.
 
Sample Problem

Sample Problems

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