AFAR

PROCESS COSTING

LECTURE NOTES
Process Costing- a system applicable to a continuous completed and those that are first completed are the
process of production of the same or similar goods. It is ones transferred cost.
used in those industries such as bricks, flour, and
2. AVERAGE METHOD- under this method there is no
cement. The method is also employed in assembly-type
assumed flow of manufacturing operations. It
operations, as well as in utilities producing gas, water,
involves the merging of departmental costs, by
and electricity.
elements of the initial work in process inventory with
Process costing is similar to job order costing in the costs incurred in the current month and securing
three ways. a representative average unit cost by dividing the
1. The same basic purposes exist in both systems, total element of costs by the equivalent production
which are: based upon the sum of units in the initial work in
a. to assign material, labor and overhead costs to process inventory and the units placed into
products; production during the period.
b. to provide a mechanism for computing unit costs;
Cost of Production Report
c. to provide data essential for planning, control,
The cost of production report is used to summarize the
and decision making.
total cost charged to a department and the distribution of
2. Both systems maintain and use the same basic
the total cost between the ending work in process
manufacturing accounts including Manufacturing
inventory and the units completed and transferred to the
Overhead, Raw Materials, Work in Process, and
next department or the finished goods inventory.
Finished Goods.
3. Cost flows through the manufacturing accounts in (2) Steps in preparing the cost of production report:
move in basically the same way in both systems. 1. Compute the physical flow to determine the stage of
Process costing differs from job-order costing in completion of all units.
four ways. 2. Compute the equivalent units of production
1. A single product is produced on a continuous basis, separately for beginning work in process, raw
and each unit is identical. materials and conversion cost.
2. Costs are accumulated by department, rather than by 3. Determine the total costs for materials and
job. conversion cost.
3. The cost of production report (rather than the job 4. Compute the unit cost depending on the method
cost sheet) is the key document showing the used in accounting for the beginning inventory.
accumulation and disposition cost. a. FIFO method- current period cost only divide by
4. Unit costs are computed by department (rather than the equivalent production
by job). This computation is made on the cost of b. WEIGHTED AVERAGE method- costs in the
production report. beginning inventory plus costs of the current
period divided by the equivalent production.
Methods of costing under process costing 5. Account for the cost of the units completed and
1. FIFO METHOD- under this method there is an transferred and the units remaining in process at the
assumed flow of manufacturing operations and as end of the period.
such it is considered that those units which are first
placed into process are presumed to be the first ones

STRAIGHT PROBLEMS

EQUIVALENT PRODUCTION Materials in this department are added 100% at the

Problem 1 beginning of the process.
In process, beginning (60% incomplete) 6,000 units
Received from preceding department 44,000 units Required: Equivalent production for materials and
Completed and transferred 40,000 units conversation costs using (a) Weighted Average method
In process, end (30% complete) 5,000 units and (b) FIFO method.
Materials in this department are added at the end of the
process after quality control inspection. COST OF PRODUCTION REPORT
I – FIFO COSTING
In process, beginning (30% complete) 10,000 units Problem 2
Received from preceding department 30,000 units Beyond Borders Corporation operates two departments in
Completed and transferred 32,000 units its operations, namely Department I and Department II.
In process, end (40% complete) 6,000 units Inventories, cost, and production data for the month of
Lost units (normal-discovered at the 2,000 units March, 2019 are as follows:
beginning) QUANTITY: Dept I Dept II
Materials in this department are added 100% at the Units in-process, 6,000 5,000
beginning. beginning
Stage of completion 2/3 3/5
In process, beginning (50% complete) 5,000 units Started in process 44,000 -
Received from preceding department 25,000 units Units transferred out 40,000 37,000
Completed and transferred 22,000 units Units in-process, ending ? ?
In process, end (80% complete) 5,000 units Stage of completion 3/5 7/8
Lost units (abnormal-discovered when 3,000 units
60% completed) COST:
In process, beginning P5,200 P10,000
Added this month:

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 Materials 19,800 34,799
Labor 14,200 27,470 Required:
Overhead 2,600 18,450 1. Cost of production report for January, 2019
2. All journal entries
Conversion costs are applied evenly in all the 3. Statement of cost of goods sold
departments. Materials are applied as follows:
Dept I – all at the START of the process; DEPT II – 30% COST OF PRODUCTION REPORT (WITH NORMAL
at the START, 40% at MID-POINT, and 30% at the END LOST UNITS)
of the process. FIFO COSTING AND AVERAGE COSTING
Problem 5
Required: Prepare a Cost of Production Report for Dept I Mesmerized, Inc. uses three departments to produce a
and Dept II for March of 2019. hair tonic. The Finishing department is the third and last
step before the product is transferred to finished goods
II – AVERAGE COSTING storage.
Problem 3
Doha Q, Incorporated has the following production data All materials needed to give the hair tonic its final
for the month of April 2019. composition are added at the beginning of the process in
the Finishing department. Quality control inspection is
QUALITY SCHEDULE Dept I Dept II done at the end of the process in this department, and
In process, beginning – lost units, if any, are discovered only at this point.
2/3 complete: 15,000 1/3 complete: 9,000 The following data for the Finishing department for May,
Transferred to next 2019 have been made available.
department 30,000 ?
In process, ending 2/5 Quantity Data:
complete: 5,000 7/8 complete: 8,000 In process, May 1 (labor and 10,000 units
overhead, ¾ complete)
COST ANALYSIS Received from the preceding
Units in process, beginning: department 40,000 units
Cost from preceding Finished and transferred to
department - P9,000 storage 35,000 units
Costs from this department: In process, May 31 (labor and
Materials P8,145 P3,996 overhead, ½ complete) 10,000 units
Labor 3,315 1,998
Overhead 1,050 1,332 Cost Data:
Inventory work-in-process –
Costs added this month:
May 1:
Materials P10,860 P30,636
Cost from preceding
Labor 7,309 23,310
Overhead 2,534 15,540
department P 38,000
Cost from this
In Dept I, all materials are added at the START of the department:
process, while labor and overhead are applied evenly Materials 21,500
throughout the process. In Dept II, 50% of materials are Labor 39,000
added at the START of the process and the balance is Overhead 42,000
added when the process is ¾ completed. Conversion Total Inventory work-in-
costs are applied uniformly to the process. process, May 1 P 140,500
Received from the preceding
Required: Prepare a Cost of Production Report for Dept I department during May 140,000
and Dept II for April, 2019. Costs added in this
department this month:
Problem 4 Materials P 70,000
Candace Company manufactures a product through a Labor 162,500
continuous process in two departments. Materials in both Overhead 130,000 362,500
departments are added at beginning. Materials Inventory Total cost to be accounted for P 643,000
as of January 1, 2019 amounted to P20,000. Materials
purchased for the month is P180,000. Materials issued to Required: Prepare a Cost of Production Report for May,
Department 1 amounted to P100,000 and to Department 2019 using (a) FIFO Costing, and (b) AVERAGE Costing.
2 – P60,000. Indirect materials amounted to P10,000.
Payroll for the period amounted to P250,000 consisting of COST OF PRODUCTION REPORT WITH NORMAL AND
direct labor of P138,000 for Department 1 and P97,500 ABNORMAL LOST UNITS
for Department 2, the balance representing indirect labor. FIFO COSTING
Factory overhead is applied at the rate of 80% of DLC. Other Problem 6
Factory overhead costs amounted to P167,500. The Hispanic Manufacturers, Inc. uses process costing in its
production data (units) are shown below manufacturing operations. In Dept 2, conversion costs
Department 1 Department 2 are incurred uniformly throughout the process. Materials
Units started 50,000 are added following inspection, which occurs at the 90%
Units completed and stage of completion. Normal spoilage is expected to be
transferred 40,000 35,000 5% of good output.
Units in process, end 10,000 5,000 The following information relates to Department 2 for
Percentage of June, 2016.
completion 60% 80% Units Pesos
Received from Department 1 12,000 P84,000
Finished goods inventory at the beginning consisted of 5,000 Transferred to finished product 9,000
units at a total cost of P65,000. Units sold – 25,000 units Ending inventory (70%
at P40.00 per unit. complete) 2,000
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 Costs incurred during the current month: Required: Prepare a Cost of Production Report for Dept
Materials 18,000 2 for June, 2019.
Labor and overhead 45,200

MULTIPLE CHOICE

The following data for the month of September were taken b. P 5.75 P 10,395
from the cost records of Department A of NLP which uses c. P 5.90 P 2,000
average costing: d. P 5.90 P 10,395
Opening inventory of work in process
Units- (all materials and 50% 500 Beginning inventory:
converted) Prior department costs P 4,800 3,000 units
Cost-Materials P2,400 Materials 1,080 20% complete
Labor 1,500 Conversion costs 600 25% complete
Factory overhead 760 Current work:
Prior department costs P 9,600 8,000 units
Put into production: Materials 20,460
Units- 5,000 Conversion costs 7,640
Cost- Materials 25,100 8,000 units were started this period
Labor 19,380 The ending inventory has 2,000 units, which are 45%
Factor Overhead 14,900 complete as to materials, 65% complete with respect to
Completed and transferred 4,800 units conversion costs. FIFO costing is used
Ending inventory of work in
process: 6. How many units were started and completed this
Units- (all materials and 60% period?
converted) 700 a. 6,000 units
b. 8,000 units
1. The equivalent production for labor is: c. 10,000 units
a. 5,000 c. 5,220 d. 11,000 units
b. 4,970 d. None of the given
7. What are the equivalent units produced for conversion
2. The unit cost of material for the month is: costs?
a. P5.00 c. P5.50 a. 8,000 units
b. P4.00 d. None of the given b. 9,300 units
c. 9,550 units
Cost and statistics for Dept. B of a company manufacturing d. 10,300 units
a single product in three departments follow:
Work in process, Oct. 1 Production in July resulted in 100 lost units of which 60
Cost in Dept. A P11,380 was considered normal and 40 abnormal. The 100 units
Cost in Dept. B were complete with respect to materials but only 40
Materials None percent complete with respect to labor and overhead. Unit
Labor P 500 cost for materials, labor and overhead were P10, P15 and
Factory overhead 50 P9 respectively. The unit costs have been determined after
Cost added in Department B in October: including normal and abnormal lost units separately in the
Labor 13,000 computation of total equivalent units.
Factory overhead 450 8. The cost of lost units charged to factory overhead
Units in process, Oct. 1 (60% converted) 500 would be:
Units received from Dept. A at P2.60/unit 6,700 a. P2,040 c. P1,360
Units completed and transferred 6,800 b. P1,176 d. P 784
Units in process, Oct. 31 (50% 400
converted) Summer Company makes a single product in two
The company uses average costing method. departments. The production data for Department B for
3. The equivalent production for labor was: 2012 follows:
a. 7,200 c. 7,000
b. 6,800 d. None of the given Units
In process, August 1 (40% completed) 4,000
4. The conversion costs per unit in Dept. B was: units
a. P2.00 c. P6.00 Received from Department 1 30,000 units
b. P5.00 d. None of the given Completed and transferred 25,000 units
In process, August 31 (60% completed) 6,000 units
Charlene Casuals, Inc. uses a process costing system to Costs In process, May 1 Added during May
accumulate costs related to silk scarf produ-ction. Received from Dept. 1 P 14,400 P 97,200
Selected data for scarf production for last quarter is Materials 3,800 67,500
provided below: Conversion costs 1,940 81,000
Materials Conversion Cost
Units cost, FIFO method ? P 2.25 Materials are added at the start of the process and losses
FIFO equivalent units 4,200 4,500 normally occur during the early stages of the operation.
Cost in WIP, beg P 630 P 270
Total cost to be accounted for P24,780 ?? 9. Cost of goods manufactured using FIFO method
5. What are the unknown amounts above? a. P 195,250 c. P 211,040
? ?? b. P 193,040 d. P 218,440
a. P 5.75 P 2,270

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Roy Co. manufactures product X in a two-stage production b. 125,000 105,000 105,000
cycle in Dept. A and B. Materials are added at the c. 125,000 105,000 121,000
beginning of the process in Dept. B. Roy uses the weighted d. 125,000 125,000 121,000
average method. Conversion costs for Dept. B were 50%
complete as to the 6,000 units in the beginning WP and Information concerning Dept. B of the Abbey Co. is as
75% complete as to the 8,000 units in the ending work in follows:
process. 12,000 units were completed and transferred out Units Costs
of Dept. B during February. An analysis of the costs Beg. work in process 5,000 P 6,300
relating to work in process and production activity in Dept. Units transferred in 35,000 58,000
B for February is as follows: Units completed 37,000
Trans-in Materials Conversion
WP, Feb.1 P12,000 P2,500 P1,000 Costs
Feb- costs added 29,000 5,500 5,000 Transf. Material Conversio Total
10. The total cost per equivalent unit transferred out for In s n
February of Product X, rounded to the nearest centavo Beg. WP P2,900 P- P3,400 P 6,300
a. P2.75 c. P2.78 Units transf.
b. P2.82 d. P2.85 In 17,500 25,500 15,000 58,000

The Wiring Dept. is the second stage of Fern Company’s Conversion costs were 20% complete as to the beginning
production cycle. On May 1, the beginning work in process work in process and 40% complete as to the ending work
contained 25,000 units which were 60% complete as to in process. All materials are added at the end of the
conversion costs. During May, 100,000 units were process. Toby uses average method.
transferred in from the first stage of Fern’s production 12. The cost per equivalent unit for conversion costs, is
cycle. On May 31, the ending work in process contained a. P0.44 c. P0.46
20,000 units which were 80% complete as to conversion b. P0.48 d. P0.50
costs. Material costs are added at the end of the process.
11. Using the weighted-average method, equivalent units 13. The portion of the total cost of ending WP attributable
were: to transferred-in costs is
Transf.-in Materials Conversion a. P0 c. P1,530
costs cost b. P1,530 d. P1,650
a. 100,000 125,000 100,000

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