CHAPTER 15

CHAPTER 15
Process Costing

1. What is Process Costing? + Cost of ending inventory

Process costing is an averaging technique used to
c. Total Units to Account for:
assign cost to outputs in manufacturing
Beginning inventory
companies. It accumulates costs by production or
+ Units started
by deparment.
It is most often associated with accounting for the d. Total Units Accounted for:
costs of manufacturing inventoriable goods. The Units completed
objective is to determine: + Ending inventory
a. The portion of production cost to be expensed
(because the goods were sold) e. EUP in Units
WAM FIFO
b. The portion of production cost to be deffered
Beginning 100% 100% -
(because the goods were still on hand)
completed
Started and 100% 100%
2. When to use Process Costing? completed
This method is used when the products Ending % %
manufactured in a cost center are homogeneous. completed completed
Total EUP

3. What are Equivalent Units of Production and * Alternative methods can be used to calculate
why is it necessary to calculate them? equivalent units of production?
Equivalent units of production (EUP) are derived
amount of output units that measure the amount i. Alternatively, EUP under the weighted
of work done in each phase in terms of fully average method may be calculated as
processed units during a given period. follows:

The objective of the EUP is to allocate materials, Units transferred out (whole units)
labor and overhead costs to: + Ending WIP (equivalent units)
a. Finished goods, = Weighted average EUP
b. Ending work-in-process, and
c. Possibly lost. ii. Alternatively, EUP under the FIFO method may
The calculation is made separately for cost from be calculated as follows:
preceding departments, materials, and
conversion cost. Weighted average EUP
4. Process Costing Computations. - Beginning WIP (equivalent units)
= FIFO EUP
a. Total Cost to Account for:
Work in Process Inventory at the beginning f. Cost Assignment
of the period WAM FIFO
*Cost in beginning 100% -
+ All current costs for direct material, direct
inventory
labor, and overhead.
Current period cost 100% 100%
Total Cost
b. Total Cost Accounted for: Divided by Total EUP
Cost of units completed

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 CHAPTER 15
Total Cost per EUP discovered at abnormal loss
the start of happens.
production
*Cost in because
beginning difficulties
Transferred might arise
inventory
out finding the
Transferred +
x right stage of
out: (Cost to
Total cost completion of
complete x
per EUP lost units.
Cost per EUP)

Ending EUP x cost EUP x cost per 100% 100%

per EUP EUP End of Because they Because they
Total cost production are already are already
accounted for completed completed
when they when they
were were
g. Accounting for Spoilage discovered. discovered.

Normal Lost Units- the cost of normal lost is a

product cost.
Abnormal Lost Units- the cost of abnormal lost is ii. Costing of Lost Units
expensed in the current period Normal Abnormal
Continuous loss – a loss that occurs fairly 1. First
uniformly through the process. Departmen
Discrete loss - a loss that occurs at a specific point t
in the production process No Cost of No Cost of
Lost Units Lost Units
Because Because
manufacturing manufacturing
i. Equivalent Units of production
costs costs
Stage of Normal Abnormal
Start of the elements elements
Inspection
process were not were not
Zero Zero introduced in introduced in
Under the Since lost units the the
theory of were production. production.
Start of the neglect, any discovered at
process lost units the start of
No Cost of Unit cost this
discovered at production,
Lost Units department
the start of they will be
Because x
production removed from
manufacturing EUP of
are treated as the actual
costs abnormal lost
if they were production
During the elements
never put into and will never
production were not
production be processed.
introduced in
because they
the
are already
production.
expected even
before actual
Unit cost this
production.
Unit cost this department
department x
Zero Depends
x EUP of
Lost units It depends on
End of EUP of normal abnormal lost
discovered the point of
production lost Same as loss
During the during the inspection or
during the
production production what
production.
are assumed particular
to have been percentage

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 CHAPTER 15
2. Second (Unit cost this Lost)
Departmen department +
t x (Unit cost this
Unit cost from Unit cost from EUP of department
the preceding the preceding Normal Lost) x
department department EUP of
Start of the X X Abnormal
process EUP of Actual EUP of Actual Lost)
Normal Lost Abnormal
Lost
Unit cost from (Unit cost
the preceding from the iii. Absorbing Units
department preceding Start/During End
X department
1. FIFO Method
EUP of Actual X
In process, X
Normal Lost EUP of Actual
beginning,
Same as loss Abnormal
Finished and
During the during the Lost)
Transferred
production production. +
Started/Received, X X
(Unit cost this
Finished and
department
Transferred
x
In process, ending X
EUP of
Abnormal
Lost)
Unit cost from (Unit cost 2.Weighted
the preceding from the Average Method
department preceding Finished and
X X
End of X department Transferred
production EUP of Actual X In process, ending X
Normal Lost) EUP of Actual
+ Abnormal

REVIEW PROBLEMS

3
 CHAPTER 15

YTURZAETA Company makes fabrics-covered hat boxes. The At the beginning-At the end-One-fifth completed
company began September with 500 boxes in process that a. 53,000 62,000 58,000
were 100 percent complete as to cardboard, 4/5 complete as b. 53,000 58,000 54,000
to cloth, and 3/5 complete as to conversion costs. During the c. 57,000 58,000 57,000
month, 3,300 boxes were started. On September 30, 350 d. 61,000 66,000 62,000
boxes were in process (100 percent complete as to
cardboard, 30 percent incomplete as to cloth, and 45 percent ANSWERS AND SOLUTIONS
incomplete as to conversion costs).
3. B
1. Using the FIFO method, what are equivalent units for At the At the One-fifth
cloth? beginnin end completed
a. 3,295 c. 3,395 g
b. 3,450 d. 3,595 Inventory, 4, 000 4, 000 4, 000
beg
ANSWERS AND SOLUTIONS Started 45, 000 45, 000 45, 000
and
1. A complete
Inventory, beg (500 x [100% - 4/5]) 100 d
Started and completed (2950 x 100%) 2, 950 Inventory, 4, 000 4, 000 4, 000
Inventory, end (350 x 30%) 245 end
EUP – FIFO 3, 295 Normal - 5, 000 1, 000
FIFO method only includes the EUP for the work done in the Loss
current period. EUP – 53, 000 58, 000 54, 000
FIFO
TAGUIAM Company uses a weighted average process costing
system and started 30,000 units this month. TAGUIAM had
12,000 units that were 4/5 incomplete as to conversion costs PAGUILA Manufacturing Company applies process costing in
in beginning Work in Process Inventory and 3,000 units that the manufacture of its sole product, ”Enermix”.
were 40 percent complete as to conversion costs in ending o Manufacturing starts in Department 1 where materials
Work in Process Inventory. are all added at the start of processing. The good units
are then transferred to department 2 where all thee
2. What are equivalent units for conversion? incremental materials needed for its completion are
a. 37,800 c. 40,800 added after final inspection.
b. 40,200 d. 42,000 o In department 1 units are inspected at the end of
processing while in Department 2, inspection takes
ANSWERS AND SOLUTIONS place when the units are 90% completed.
o Department 1 uses FIFO costing while Department 2
2. B uses the weighted average costing.
Completed (Beg + S&C) 39, 000 x 100% 39, 000 The production data for the month of August show the
Inventory, end (3000 x 40%) 245 following:
EUP – WAM 40, 200 Dept. 1 Dept.2
WAM combines the beginning WIP of previous and current Beginning work in 8,000 4,000
periods. process, August 1
Work to be done 80% 20%
Ending work in 12,000 7,000
SUMIGAD Manufacturing Co. operates two consecutive process, August 31
departments, X & Y and uses FIFO costing. The February, 2013 Work completed 2/3 5/7
production data for department Y are as follows: Started in process 60,000
during August
In process, February: 12,000 units 1/3 incomplete Normal spoilage (4% of units 1,000
Received From Dept. X: 60,000units started in
In process, February 28: 10,000 units, 2/5 completed process)
Normal loss: 5,000 units Abnormal spoilage (1/4 of normal 500
spoilage)
3. What should be the equivalent production assuming
that the normal loss occurred at the beginning? at the Costs
end? When the units were 1/5 completed? Dept. 1 Dept.2

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 CHAPTER 15
Work in Process, Cost to complete (6, 400 x 19.80) 126, 720
August 1: Normal Loss (2, 400 x 33) 79, 200
Transferred in P- P114, 180 Started and completed (45, 000 x 33) 1, 485, 000
Materials P54, 000 P85, 950 Total cost - transferred out 1, 783, 920
Conversion P39, 000 P112, 290
costs Inventory, end
Current costs: Material (12, 000 x 13.20) 158, 400
Materials P792, 000 P336, 000 Conversion (8, 000 x 19.80) 158, 400
Transferred in P- P? Total 316, 800
Conversion P1, 235, 520 P513,000
costs Materials are added at the beginning, thus, units are
already complete as to materials.

4. Total costs transferred to Department 2 and the 5. A

amount to work in-process, end in Department1
a. P1,690,920; P316,800 DEPARTMENT 2
b. P1,783,920;P316,800 T-in Material Conversion
c. P1,704,720;P158,400 Inventory, beg 4, 000 4, 000 4, 000
d. P1,783,920;P219,720 Started and 44, 500 44, 500 44, 500
completed
5. Total costs transferred to Storeroom and the Inventory, end 7, 000 - 5, 000
amount to work in-process, end in Department 2 Normal Loss 1, 000 - 900
a. P2,633,460;P290,100 Abnormal 500 -- 450
b. P2,589,900;P233,100 Loss
c. P2,589,900;P290,100 EUP – WAM 57, 000 48, 500 54, 850
d. P2,633,460;P233,100
Cost Data
T-in Materia Conversion
l
Cost in 312, 420 114, 180 421, 950 112, 290
ANSWERS AND SOLUTIONS the beg.
Inventory
Current 2, 632, 920 1, 783, 920 336, 000 513, 000
4. B Cost
Total Cost 2, 945, 340 1, 898, 100 421, 950 625, 290
DEPARTMENT 1 Divide by 57, 000 48, 500 54, 850
Cost per 53.40 33.30 8.70 11.40
Material Conversion
EUP
Inventory, beg - 6, 400
Started and 45, 000 45, 000 Completed(48500 x 53.40) 5, 589, 900
completed Normal Loss(1, 000 x 33.30) 33, 300
Inventory, end 12, 000 8, 000 (900 x 11.40) 10, 260 43, 560
Normal Loss 2, 400 2, 400 Total cost - transferred out 2, 633, 460
Abnormal Loss 600 600
EUP – FIFO 60, 000 62, 400 Inventory, end
Transferred-in (7, 000 x 33.30) 233, 100
Cost Data Conversion (5, 000 x 11.40) 57, 000
Total 290, 100
Material Conversion
Cost in the 93, 000 - - Materials are added at final inspection, therefore, EUP for
beg. ending inventory is not yet complete as to materials. Refer to
Inventory number 3 for treatment of losses.
Current 2 027, 792, 000 1, 235, 520
Cost 520
Total Cost 2,120,
520
Divide by 60, 62, 400
000
Cost per 33 13.20 19.80
EUP

Inventory, beg 93, 000

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 CHAPTER 15
LUINESS Company employs process cost system. A unit of the The Production data for department 1 of QUEEN BABIES
product passes through two department: Assembly and Company for august 2013 are as follow:
fishing before it is complete. Information regarding Assembly
Department follow :
Work in-process, Aug 1 4,000 units Actual
Spoiled units 3,000 Units
Started in Production 26,000 WIP, August 1:
Transferred out 24,000 (1/4 done as to conversion costs) 40,000
Started in August 246,000
Raw materials are needed at the beginning of processing in Transferred out during August 244,000
the Assembly department without changing the number of Spoiled units 32,000
units being processed. Work Process on August 1 was 90%
complete as to conversion while 80% converted in August 31.
In the Assembly Department, inspection takes place when the Costs of beginning work-in process:
units are 75% converted. The company usually experienced a Material P500, 000
5% loss based on the completed units. Cost data for the Conversion P 60, 000
month of August follow: Current Costs:
Materials Labor Overhead Material P2, 960,000
WIP-beg P 32,400 P26,400 P 28,500 Conversion P1, 884,000
Current cost P111,600 P88,000 P114,750 Unit costs:
Material P10
Using Weighted Average Costing, compute Conversion P6
6. Total cost of units transferred-out and total cost of work
in process, end o Materials are added at the stars of the process.
a. P331,200; P37,376 o Ending inventory is 80% complete as to conversion.
b. P343,684; P37,376 o The company uses the FIFO method of costing.
c. P331,200; P36,000 o Inspection occurs, when production is 100% complete.
d. P343,684; P36,000 o Normal spoilage is 11% of good unit transferred out
during August.
ANSWERS AND SOLUTIONS
7. What are the costs allocated to?
6. C Next Department-WIP,end Dept 1-Period cost
Material Conversion a. P3, 264,000 P1, 370,560 P512, 000
Completed 24, 000 24, 000 b. P4, 456,000 P 888,560 P 82, 560
Inventory, end 3, 000 2,400 c. P3, 944,000 P1, 317,440 P 80, 000
Normal Loss 1, 200 900 d. P4, 433,440 P 888,000 P 82, 560
Abnormal Loss 1, 800 1, 350
EUP – WAM 30, 000 28, 650 ANSWERS AND SOLUTIONS

7. D
Material (32 400+111,600)÷30, 000 4.80
Material Conversion
Conversion(26400+28,500+88,200+114,750)÷28,650 9
13.80 Inventory, beg - 30, 000
Transferred- out Started and 204, 000 204, 000
Completed (24, 000 x 13.80) 331, 200 completed
Normal Loss Inventory, end 60, 000 48, 000
Material (1, 200 x 4.8)5, 760 Normal Loss 26, 840 26, 840
Conversion (900 x 9) 8, 100 13, 860 Abnormal Loss 5, 160 5, 160
Total 345, 060 EUP – FIFO 296, 000 314, 00
Inventory, end
Material (3, 000 x 4.8) 14, 400 Current Cost
Conversion (2, 400 x 9) 21, 600 Material (2, 960, 000 ÷ 296, 000) 10
36, 000 Conversion (1, 884, 000 ÷ 314, 000) 6
16
Any excess over the tolerable or normal loss are considered
abnormal. Inventory, beg 560, 000
Cost to complete (30, 000 x 6) 180, 000
Normal Loss (26840 x 16) 429, 440
Started and completed (204, 000 x 16) 3, 264, 000

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 CHAPTER 15
Total cost- Transferred-out 4, 433, 440

Inventory, end
Material (60, 000 x 10) 600, 000
Conversion (48, 000 x 6) 288, 000
Total 888, 000
Period Cost
Abnormal Loss (5, 160 x 16) 82, 560

The following information is available for AILEN MARTIN

Company for the current year:
Beginning Work in Process
(75%complete) 14,500 units
Started 75,000 units
Ending Work in Process
(60% complete) 16,000 units
Abnormal spoilage 2,500 units
Normal spoilage 5,000 units (continuous)
Transferred out 66,000 units

Costs of Beginning Work in Process:

Material P 25,100
Conversion 50,000
Current Costs:
Material P 120,000
Conversion 300,000

All materials are added at the start of production.

8. Using FIFO, what is the costs per equivalent unit for

conversion costs?
a. P4.46
b. P4.15
c. P4.30
d. P3.84

ANSWERS AND SOLUTIONS

8. A

Inventory, beg (14, 500 x 25%) 3, 625

Started and completed (51, 500 x 100%) 51, 500
Inventory, end (16, 000 x 60%) 9, 600
Normal Loss (5, 000) -
Abnormal Loss (2, 500 x 100%) 2, 500
EUP – FIFO 67, 225

Current cost (300, 000 ÷ 67, 225) 4.46