LEARNING PACKET 5

TOPIC: Process Costing

I. CONCEPT NOTES

PROCESS COSTING
• Process costing is suitable for a large number of mining, manufacturing and public utility industries like
mines and quarries, cotton, wool and jute textiles, chemicals, soap making, paper, plastics, distillation
processes, e.g. alcohol, tanning, oil refining, screws, bolts and rivets, canning, food products, dairy, and
electricity and gas undertakings.

Features of Process Costing

• The production is continuous and the end product is the result of a sequence of processes.
• The product is homogeneous and the units product are identical and standardized.
• The sequence of operations for processing the product is specific and predetermined.
• The finished products of one process works as raw material for the next or process until completion.

Job Order Costing vs. Process Costing

Job Costing Process Costing
Production is by specify orders. Production is in continuous flow, the products being
homogeneous
Costs are determined by jobs or batches of Cost are compiled on time basis, i.e. for production for a
products given accounting period, for each process or departments
The various jobs are separate and Being manufactured in a continuous flow, products lose
independent of each other their individual entity
Unit cost of a job is calculated by dividing The unit cost of a process, which is computed by dividing
the total cost incurred into the units the total cost for the period (after adjustment of the
produced in the lot or batch opening and closing work-in-process), is an average cost for
the period
Costs are calculated when a job is Costs are calculated at the end of the cost period
completed
There may or may not be any Production being continuous there is usually some
work-in-progress at the beginning or end work-in-process at the beginning as well as at the end of
of an accounting period. the accounting period.
There are usually no transfers from one As a product moves from one process to another, transfers
job to another unless it is necessary to of cost from process to process are made.
transfer surplus work or excess
production.
As such product unit is different and Process production is standardized and is more stable.
production is not continuous, more Hence, control of process activities is comparatively easy.
managerial attention is needed if proper
control is to be exercised

Advantages of Process Costing

• Process cost may be determined periodically at short intervals. When predetermined overhead rates are in
use, it may be possible to complete unit cost weekly or even daily. This not always so under the job costing
system, particularly when jobs run for long periods and there are no significant units of completed
production during the various accounting periods, falling between the total period of run of the jobs.
• It involves less efforts and less clerical expenses as the accounting method is simpler than that in job
costing.
• Detailed cost, budgeted as well as actual, are made available for each possible by evaluating the
performance of each process etc.
• Allocation of overhead to departments and processes can be made fairly accurately on definite bases.
• Since the material consumption ass the various operations are more or less standardized, more accurate
cost estimates are available for price quotations.
• It is easier to set effective and fairly stable standards in case of mass production or continuous repetitive
production. Process costing situations are, therefore, more adaptable for installing standard costing
procedures.

Limitations of Process Costing

• Being only average costs for the accounting period, process cost cannot be considered to be very accurate
for the purpose of detailed analysis, evaluation, and control of individual performance efficiency on a
day-to-day basis.
 • Costs obtained at the end of the accounting period are only historical and are not of much use for effective
control unless standard process cost are used. This is, no doubt, true in respect of all other historical
systems but the nature of process accounting with its departmental divisions makes this disadvantage more
prominent.
• When different products come out of one and the same process, the common costs are prorated to the
various products. Such cost of individual products are not reliable as they may, at best, be taken to be only
approximations.
• For the purpose of calculation of unit costs of continuous processes, work-in-process is required to be
determined at the end of an accounting period. This is done mostly on estimated basis which introduces
further inaccuracies in costs.

Steps to Apply Process Costing

•  Summarize the physical flow of the units to produce.
• Calculate production in terms of equivalent units.
• Calculate equivalent unit costs. 
• Summarize total costs to account for
• Assign total costs to the units already completed and to units in ending work in process inventory (WIP).

WEIGHTED AVERAGE VS. FIFO METHOD

The main difference between the FIFO and weighted average method is in the treatment of beginning
work-in-process inventory. The weighted average method includes this inventory in computing process costs, while
the FIFO method keeps it separate.

WA vs FIFO: Equivalent Units

Costs for raw materials and conversions are proportionately allocated to equivalent units, which include finished
and unfinished goods. Conversion costs include direct labor and factory overhead costs. For example, if 100 units of
ending work-in-process inventory used 75 percent of the purchased raw materials and 60 percent of the conversion
costs, then the equivalent units for process costing purposes are 75 units (100 x 0.75) and 60 units (100 x 0.60),
respectively. If 100 additional units were completed and shipped to customers, then the equivalent units are 175
(100 + 75) and 160 (100 + 60) for raw materials and conversion costs, respectively.
The beginning work-in-process inventory is subtracted from the totals in the FIFO method. Continuing with the
example, if the beginning work-in-process inventory consisted of 20 units, and it includes 100 percent of raw
materials and 50 percent conversion costs, then the equivalent units are 20 (20 x 1.00) and 10 units (20 x 0.50),
respectively. Therefore, the ending work-in-process inventory contains 55 (75 - 20) and 50 (60 - 10) equivalent
units for raw materials and conversion costs, respectively. Therefore, using the FIFO method, the total equivalent
units are 155 (100 + 55) and 150 (100 + 50), respectively.

WA vs FIFO: Equivalent Unit Cost

The beginning inventory costs and additional costs incurred in a period are combined in the weighted average
method. Continuing with the example, if the total raw material costs under the weighted average method are
$1,250, then the equivalent unit raw materials costs are about $7.14 ($1,250 / 175). If the conversion costs are
$3,500, then the equivalent unit conversion cost is about $21.88 ($3,500 / 160). Therefore, the total equivalent unit
cost is $29.02 ($7.14 + $21.88).
Under the FIFO method, the beginning work-in-process raw materials and conversion costs are excluded. If these
were $250 and $1,000, respectively, then the equivalent unit costs are about $6.45 [($1,250 - $250) / 155 = $1,000
/ 155 = $6.45] and about $16.67 [($3,500 - $1,000) / 150 = $2,500 / 150 = $16.67]. Therefore, the total equivalent
unit cost using the FIFO method is $23.12 ($6.45 + $16.67).

WA vs FIFO: Assigned Costs

The raw materials and conversion costs are assigned to the completed and work-in-process units. To conclude the
example, under the weighted average method, the completed unit cost is $2,902 (100 x $29.02), the
work-in-process cost is about $1,848 [(75 x $7.14) + (60 x 21.88)] and the total cost is $4,750 ($2,902 + $1,848). In
the FIFO method, the completed unit cost is $2,312 (100 x $23.12), the work-in-process cost is $1,188 [(55 x $6.45)
+ (50 x 16.67)] and the total cost is $3,500 ($2,312 + $1,188).

II. CHECKING FOR UNDERSTANDING

PROBLEM 1:
Instructions: Solve what is required. Place your answers after every requirement. Use only front pages of the
yellow paper for your solution.
POGI Company employs process costing method in accounting for its products. The following data for the year
ended December 31, 20x1 are provided below:

Units Costs
January 1, 20x1 53,500 (30% complete as to DL and OH) DM-P 375,000
DL-P 3,900,000
OH-P 1,600,000
December 31, 20x1 40,000 (35% to complete as to DL and OH) ???
Started during the 346,800 DM-P 2,300,000
period DL-P 12,300,000
OH-P 7,900,000

Assumption 1. If the company employs Weighted Average Process costing, provide the following:

1. Units accounted for (1pt)?

2. EUP for direct materials (2pts)?
3. EUP for conversion costs(2pts)?
4. Cost attributable to direct materials(2pts)?
5. Cost attributable to conversion cost(2pts)?
6. Cost per EUP for direct materials(3pts)?
7. Cost per EUP for conversion costs(3pts)?
8. Transferred-Out Costs(5pts)?
9. Cost of ending WIP inventory(5pts)?

Assumption 2. If the company employs FIFO Process costing, provide the following:

1. Units accounted for (1pt)?

2. EUP for direct materials (2pts)?
3. EUP for conversion costs(2pts)?
4. Cost attributable to direct materials(2pts)?
5. Cost attributable to conversion cost(2pts)?
6. Cost per EUP for direct materials(3pts)?
7. Cost per EUP for conversion costs(3pts)?
8. Transferred-Out Costs(5pts)?
9. Cost of ending WIP inventory(5pts)?

PROBLEM 2:
Rommel Manufacturing Company applies process costing in its production, which consisted of two departments.
The following data were gotten from their operations:

Units Dept 1 Dept 2

Beginning WIP 50,000 70,000
Work to be done for the period 80% 30%
Ending WIP 20,000 17,500
Work completed 2/3 60%
Started 150,000

Costs
Beginning WIP
Transferred In ------ P285,450
Materials P135,000 214,875
Conversion Costs P97,500 280,725
Current
Transferred In ?
Materials P1980,000 P840,000
Conversion Costs P3088,800 P1282,500

Additional Information are as FOLLOWS:

a. Manufacturing starts at Department 1 where all materials are added at start of production and FIFO costing is
used.
b. Units are added in the Department 2 where 50% of direct materials as added when it is 30% complete and
excess when it is ready to be transferred to the storeroom. This department uses weighted average costing
method.

Required:
1. Make a cost of production report for Department 1.
2. Make a cost of production report for Department 2.

PROBLEM 3:
WALANG FOREVER just started operations on January 1, 2017. During its first year, 80,000 units were put into
production and the following costs were incurred:

Raw materials purchased P 130,000

Salaries of workers in production 201,000
Salaries of factory supervisor and security personnel 38,000
Utilities (water and electricity incurred) 20,000

Only 80% of the raw materials purchased were put into production and 20% of those used were indirectly
traceable to the product. As per physical count at December 31, 2017, there are only 5,255 units in the production
are where they are 59% complete, and 60,000 are in the warehouse ready to be sold. The company usually expects
that 10% of those started will be spoiled after the production period.

Direct materials are added 3/5 when unit is 2% complete, 25% when it is 98% complete and excess is added at the
end. Direct labor and overhead is incurred evenly.

Required:
1. If the inspection point is at 30% completion:
a. Make a cost of production report for the period. (10pts)
b. Make the necessary entries to record all the transactions that happened for the period. (10pts)
2. If the inspection point is at 95% completion:
a. Make a cost of production report for the period. (10pts)
b. Make the necessary entries to record all the transactions that happened for the period. (10pts)

PROBLEM 4:
GUSTOKONANGBUMITAW Corporation uses process costing in its two production departments. A separate work in
process account is kept in the general ledger for each production department. The following data relate to
operations for the month of September:
Beginning Added
Inventory During March
Direct materials cost: Department A $ 5,000 $25,000
Department B 3,000 20,000
Direct labor cost: Department A 6,000 40,000
Department B 4,500 35,000
Applied overhead: Department A 12,000 90,000
Department B 4,500 35,000

During September, 45,000 units with a cost of $5 each were transferred from Department A to Department B, and
40,000 units with a cost of $9 each were transferred from Department B to finished goods inventory.

Required: Prepare the appropriate general journal entries to record the cost charged to the producing departments
during September and the cost of units transferred from Department A to Department B and Department B to
finished goods inventory.

PROBLEM 5:
GLEE Company uses process costing to account for the costs of its only product, X. Production takes place in two
departments Sanding and Polishing. On December 31, the inventory for Product X was as follows:

No unused materials.
Work in process
Sanding Department 800 units (3/4 complete as to labor)

Work in process
Polishing Department 1,000 units (1/2 complete as to materials and
 3/4 complete as to direct labor)
Finished Goods 600 units

Required:
1. Compute the equivalent units of materials in all inventories combined on December 31.
2. Compute the equivalent units of the Sanding Department's direct labor in all inventories on December 31.

PROBLEM 6:
Barcelona Beach Products reports the following data for the first department in its production process:

Units in process at beginning of period (all materials; 3/4 labor

and factory overhead) 5,000
Units started in process 35,000
Units transferred out 33,000
Units still in process (all materials; 1/2 labor and factory overhead) 5,000
Units completed but not yet transferred to Finished Goods 2,000

Related data were:

Work in Process at Added During
Beginning of Period Period
Materials $100,000 $ 304,000
Labor 125,400 407,100
Factory overhead 173,500 407,750
Total $398,900 $ 1,118,850

Required: Using the average costing method:

1. Compute the unit cost for materials, labor, and factory overhead.
2. Determine the cost of the work in process ending inventory.

PROBLEM 7:
The following costs were accumulated by Department 2 of H Company during September:
Cost Transferred:
from Dept. 1 Material CC Total
Beginning Inventory $ 17,050 $ 5,450 $ 22,500
Current Period Cost 184,000 $ 34,000 104,000 322,000
$ 201,050 $ 34,000 $ 109,450 $ 344,500

Production for September in Department 2 (in units):

WIP—September 1 2,000 60% complete
Complete period transferred 20,000
WIP—September 31 5,000 40% complete

Materials are not added in Department 2 until the very end of processing Department 2.

Required:
Compute the cost of units completed and the value of ending WIP for:
a. Average inventory assumption
b. FIFO inventory assumption

PROBLEM 8:
The Valentine’s Day Company has two processing departments, Cooking and Packaging. Ingredients are placed into
production at the beginning of the process in Cooking, where they are formed into various shapes. When finished,
they are transferred into Packaging, where the candy is placed into heart and tuxedo boxes and covered with foil.
All material added in Packaging is considered as one material for convenience. Since the boxes contain a variety of
candies, they are considered partially complete until filled with the appropriate assortment. The following
information relates to the two departments for February 2001:

Cooking Department:
Beginning WIP (30% complete as to conversion) 4,500 units
 Units started this period 15,000 units
Ending WIP (60% complete as to conversion) 2,400 units

Packaging Department:
Beginning WIP (90% complete as to material,
80% complete as to conversion) 1,000 units
Units started during period ?
Ending WIP (80% complete as to material
and 80% complete as to conversion) 500 units

Required:
a. Determine equivalent units of production for both departments using the weighted average method.
b. Determine equivalent units of production for both departments using the FIFO method.