Process Costing

Learning Objectives:

After reading and studying topic, you should be able to answer the following questions:

1. How does process costing differ from job order costing?

2. For what reason are equivalent units of production used in process costing?

3. How are equivalent units of production, unit costs, and inventory values
determined using the weighted average method of process costing?

4. How are equivalent units of production, unit costs, and inventory values
determined using the FIFO method of process costing?

5. How can standard costs be used in a process costing system?

6. Why would a company use a hybrid costing system?

Contents:

1. Without Beginning Work-in-Process

a. Even Distribution
b. Uneven Distribution
2. With Beginning Work-in-Process
a. Even Distribution
i. Average (Department 1 and 2)
ii. FIFO (Department 1 and 2)
b. Uneven Distribution
i. Average (Department 1 and 2)
ii. FIFO (Department 1 and 2)
3. Production Losses
a. Normal Spoilage
i. Average (Department 1 and 2)
ii. FIFO (Department 1 and 2)
b. Abnormal Spoilage
i. Average (Department 1 and 2)
ii. FIFO (Department 1 and 2)
4. Comprehensive Problem

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A. Introduction to Process Costing.

1. Introduction to Process Costing.

a. Cost accumulation procedures used by manufacturing concerns are classified as

either (1) job order costing or (2) process costing.

i. Job-order costing is appropriate for companies making products or providing

services in limited quantities that conform to customer specifications.

ii. Process costing is a method of accumulating and assigning costs to units of

production in companies that make large quantities of homogeneous
products. The process costing methods are used for industries producing
chemicals, petroleum, textiles, steel, rubber, cement, flour, pharmaceuticals,
shoes, plastics, sugar, and coal. Thus, process costing is used when products
are manufactured under conditions of continuous processing or products are
manufactured under mass production methods. In fact, process costing
procedures are often termed “continuous or mass production” costing accounting
procedures.

iii. Both job-order costing and process costing accumulate costs by cost component
in each production department. However, the tow systems assign costs to
departmental output differently.

● In job-order costing, costs are assigned to specific jobs and then, if possible,
to units contained within the job.

● Process costing uses an averaging technique to assign costs directly to

units produced during the period.

iv. The characteristics of process costing are:

● A cost of production report is used to collect, summarize, and compute

total and unit costs.
● Production is accumulated and reported by departments.
● Costs are posted to departmental work in process accounts.
● Production in process at the end of a period is restated in terms of completed
units.
● Total cost charged to a department is divided by total computed production of
the department in order to determine a unit cost for a specific period.
● Costs of completed units of department are transferred to the next processing
department in order to arrive at the total costs of the finished products during
a period. At the same time costs are assigned to units still in process.

b. Cost assignment in any production environment is essentially an averaging process.

c. The actual unit cost of a product is found by dividing a period’s departmental

production costs by the period’s departmental quantity of production, the average
being expressed by the following formula:

2. The numerator.

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 a. The numerator in the average product cost fraction is the sum of the actual direct
materials cost, actual direct labor cost, and actual or predetermined overhead cost
for the period.

b. Cost accumulation in a process costing system differs from job order costing in two
ways:

i. the quantity of production for which costs are being accumulated at any one time
and:

● in job order costing, the direct materials, direct labor, and overhead costs are
accumulated for each job; or

● in process costing, much larger amounts of direct materials, direct labor, and
overhead are accumulated for each department of a production process.

ii. the cost object to which the costs are assigned:

● in job order costing the cost object is the job; or

● in process costing, the costs assignable to each product type are designated
and attached to the specific production runs; then the costs are assigned to
the units worked on during the period.

c. Costs are then reassigned at the end of the period (usually monthly) from the
production departments to the units produced.

3. The denominator.

a. The denominator in the average product cost fraction represents total departmental
production for the period.

b. If all units were 100% complete at the end of the period, we would simply count the
units to obtain the denominator.

c. However, Work-In-Process (WIP) at the end of the period represents partially

completed units that become the beginning inventory for the next accounting period.

d. Process costing assigns costs to both fully completed units in finished goods
inventory and to the partially completed units in WIP.

e. We mathematically convert partially completed units into equivalent whole units by

calculating equivalent units of production (EUP).

4. Equivalent units of production (EUP) are an approximation of the number of whole

units of output that could have been produced during a period from the actual effort
expended during that period. Two facts are recognized by the use of equivalent units of
production.

a. Goods that were incomplete at the end of the last period are the first ones completed
during the current period. The units in the beginning Work in Process were started
last period, but will be completed during the current period—meaning that some
costs related to these units were incurred last period and additional costs will be
incurred in the current period.

b. Some units are begun but not completed during the current period. These partially
completed units in the ending Work in Process Inventory were started in the current
period, but will not be completed until the next period—meaning that costs were

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 incurred in this period and additional costs will be incurred next period, due to
current production efforts on the ending Work in Process Inventory.

c. Assuming no beginning inventory, equivalent units of production are calculated using

the following simple example:

The department worked on 220,000 units in November

200,000 units were completed and 20,000 units were 40% complete at the end of
the period

200,000 completed units + (20,000 x 40%) = 208,000 EUP

B. EUP Calculations and Cost Assignments

1. EUP calculations and cost assignments.

a. Cost must be assigned to goods transferred from WIP to Finished Goods Inventory
(or to another department).

b. In addition, at the end of any period, a value must be assigned to goods still in WIP.

c. Sample Problem 1 outlines the six steps in a process costing system.

i. Step 1: Calculate the physical units to account for;

ii. Step 2: Calculate the physical units accounted for (verify that step 1 equals step
2);

iii. Step 3: Determine the equivalent units of production;

iv. Step 4: Determine the total cost to account for;

v. Step 5: Calculate the cost per equivalent unit; and

vi. Step 6: Assign the costs to inventories (verify that the total costs transferred out
plus the costs in ending inventory equal step 4).

d. The total units to account for are the sum of whole and partial units worked on in
the department during the current period. It is equal to actual beginning inventory
units plus actual units started.

e. The total cost to account for is the sum of the balance in WIP at the beginning of the
period plus all current costs for direct material, direct labor, and overhead.

f. The six steps listed above can be combined into a cost of production report.

A cost of production report is a process costing document that details all

operating and cost information, shows the computation of cost per equivalent unit, and
indicates cost assignment to goods produced during the period.

Sample Problem 1. Without beginning work in process – even distribution.

Nakama Company is known for manufacturing a distinct kind of soda. The process
would have to pass three departments. Because of the complexity of the process, the
management of the company decided to use the process costing method to account for the
product cost. Using the information below, prepare the Cost of Production Report for Nakama
Company during January 2014.

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 Quantity:
Work-in-Process, beginning 0
Units Started 15,000
Work-in-Process, Ending 3,000

Costs:
Materials Php 6,400
Labor 8,960
Overhead 10,240

Ending work in process is 40% complete for materials, labor, and overhead.
Prepare Cost of Production Report (CPR) for Nakama Company as of January, 2014.

Solution:

Star Corporation
Cost of Production Report
January 31, 2014

Quantity Schedule Notice that the total of the units to be

Units to be accounted for: accounted for must be equal to the units
WIP, Beginning 0 accounted for. This is because the latter
Started in process 15,000 only represents the production result of the
Total 15,000 total units placed during the period. It can
be interpreted as follows: out of the 15,000
total quantities placed in process, only
Units accounted for: 12,000 units were finished and transferred
Finished and transferred 12,000 to the next department therefore 3,000
WIP, Ending 3,000 units remained in-process.
Total 15,000
Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T 12,000 100% 12,000 100% 12,000 100% 12,000
EWIP 3,000 40% 1,200 40% 1,200 40% 1,200
15,000 13,200 13,200 13,200

Cost Schedule:
Cost to be accounted for: UC
Materials P6,400 / 13,200 = P 0.48
Labor 8,960 / 13,200 = 0.68
Overhead 10,240 / 13,200 = 0.78
Total P25,600 P 1.94

Cost accounted for:

Finished and Transferred (12,000 x 1.94) P23,280
Work-In-Process, Ending
Materials (1,200 x 0.48) P 576
Labor (1,200 x 0.68) 816
Overhead (1,200 x 0.78) 936 2,328
Total with rounding off difference of 8 P25,608

Sample Problem 2. Without beginning work in process – uneven distribution.

Star Manufacturing Corporation is producing Product A. This product passes two departments,
Cutting and Assembly, before it can be sold to the customer. The company decided to use
process costing system as a way to account for the costs of Product X. The following were the
excerpts of the production process.

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 Quantity:
Work-in-Process, beginning 0
Units Started 10,000
Work-in-Process, Ending 2,000

Costs:
Materials Php10,000
Labor 18,800
Overhead 4,700

All materials are added at the beginning of the process and ending WIP is 70% complete as to
conversion. Prepare Cost of Production Report (CPR) and compute for the unit cost of
completed and in process goods.

Solution:

Star Corporation
Cost of Production Report
January 31, 2014

Quantity Schedule
Units to be accounted for:
WIP, Beginning 0
Started in process 10,000
Total 10,000

Units accounted for:

Finished and transferred 8,000
WIP, Ending 2,000
Total 10,000

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T 8,000 100% 8,000 100% 8,000 100% 8,000
EWIP 2,000 100% 2,000 70% 1,400 70% 1,400
10,000 10,000 9,400 9,400

Cost Schedule:
Cost to be accounted for: UC
Materials P10,000 / 10,000 = P1.0
Labor 18,800 / 9,400 = 2.0
Overhead 4,700 / 9,400 = 0.5
Total P33,500 P3.5

Cost accounted for:

Finished and Transferred (8,000 x 3.5) P28,000
Work-In-Process, Ending
Materials (2,000 x 1) P2,000
Labor (1,400 x 2) 2,800
Overhead (1,400 x .5) 700 5,500
Total P33,500

C. Weighted Average and FIFO Process Costing Methods

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1. The weighted average method is a method of process costing that computes an
average cost per equivalent unit of production; it combines beginning inventory units
and costs with current production and costs, respectively, to compute that average.

a. The weighted average method is not concerned about what quantity of work was
performed in the prior period on the units in beginning inventory; it only focuses on
units that are completed in the current period and units remaining in ending
inventory.

b. The method does not distinguish between units in beginning inventory and units
entering production during a period.

c. Average unit cost is found by dividing the total cost to be accounted for by the total
equivalent units of production and is calculated as follows:

2. The FIFO method is a method of process costing that computes an average cost per
equivalent unit of production using only current period production and cost information;
units and costs in beginning inventory are separately sent to the next department or to
Finished Goods Inventory, as is appropriate.

a. The FIFO method separates beginning inventory and current period production and
their costs so that a current period cost per unit can be calculated.

b. The FIFO method more realistically reflects the way in which most goods actually
flow through the production system.

c. The method does not commingle units and costs of different periods, so that
equivalent units and costs of beginning inventory are withheld from the computation
of average current period cost.

d. The focus is specifically on the work performed during the current period, and the
EUP schedule shows only that work.

e. The FIFO average cost per equivalent unit is calculated as follows:

3. Separate EUP calculations must be made for each cost component.

a. Some direct material must be introduced at the start of a production process or there
would be no need for labor or overhead to be incurred. The beginning material is
one hundred percent complete throughout the process regardless of the percentage
of completion of labor and overhead.

b. Additional materials may be added at any point—continuously during processing, or

even at the end of processing.

c. A single materials computation may be made if all materials are at the same degree
of completion, or multiple equivalent unit calculations will have to be made if multiple
materials are used and are placed into production at different points in time.

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 d. One percentage of completion estimate may be made and used for direct labor and
overhead if overhead is applied on a direct labor basis, or direct labor and overhead
are added to the product at the same rate.

e. Overhead costs are more likely to be caused by cost drivers other than direct labor
today, so companies probably will make single computations for “conversion
equivalent units” less often than in the past.

f. The calculation of equivalent units of production requires that a cost flow be

specified—either weighted average or FIFO.

g. The only difference between the calculations under the two methods is that the work
performed in the prior period on beginning inventory is not included in the current
period EUP using FIFO.

4. A detailed example of the calculations of equivalent units of production and cost

assignment for each of the cost flow methods is presented below.

Sample Problem 3. With Beginning Work-In-Process, Even Distribution, Average,

Department 1

The Angel Manufacturing Company uses the process cost system and the average cost
method. The following production data are for the month of April, 2014.

Production Costs

Work in process, beginning of month:

Materials P 5,240
Labor 3,200
Factory overhead  4,260 P  12,700
Costs incurred during month:
Materials P44,213
Labor 34,905
Factory overhead 16,289  95,407
Total P108,107

Production Report
Units
In process, beginning of month 500
Finished and transferred during month 11,300
Work in process, end of month 1,200
Stage of completion for Materials, Labor, and Overhead:
WIP, Beginning 65%
WIP, Ending 55%

Prepare a cost of production summary for the month. Round-off to the nearest two decimal
places.

Solution:

Angel Corporation
Cost of Production Report
Department 1
April, 2014

Quantity Schedule

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Units to be accounted for:
WIP, Beginning 500
Finished and Transferred 11,300
Started in process 12,000 WIP, Ending 1,200
Total 12,500 Total 12,500
Less: WIP, Beg. 500
Units accounted for: Started in Process 12,000
Finished and transferred 11,300
WIP, Ending 1,200
Total 12,500

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T 11,300 100% 11,300 100% 11,300 100% 11,300
WIP, Ending 1,200 55% 660 55% 660 55% 660
EUP 12,500 11,960 11,960 11,960

Cost Schedule
Cost to be accounted for: UC
Materials (P5,240 + P 44,213) P 49,453 /11,960 = 4.13
Labor (P3,200 + P34,905) 38,105 /11,960 = 3.19
Overhead (P4,260 + P16,289) 20,549 /11,960 = 1.72
Total P108,107 9.04

Cost accounted for:

F&T (11,300 x P9.04) P 102,152.00
WIP, Ending
Materials (660 x P4.13) P 2,725.80
Labor (660 x P3.19) 2,105.40
OH (660 x P1.72) 1,135.20 5,966.40
Total *P108,118.40
*rounding-off difference of P11.40.

D. Process Costing in a Multidepartment Setting.

1. Goods are transferred from a predecessor department to a successor department.

2. A successor department may or may not add additional raw materials to the units that
were transferred in or may provide additional labor with a corresponding incurrence of
overhead.

3. Successor departments may change the unit of measure from that of predecessor
departments.

Sample Problem 4. With Beginning Work-In-Process, Even Distribution, Average,

Department 2

To continue the problem in no.3, assume that the products were already finished in
Department 1 and therefore transferred to Department 2 for furnishing. Prepare Cost of
Production Report for Angel Corporation based on the information below:

Quantity:
WIP, Beginning 2,700
Finished and Transferred ?
WIP, Ending 2,500

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Cost:
WIP, Beg. This Month
T-In P 3,460 ?
Materials 2,347 P 13,230
Labor 1,869 9,140
OH 3,240 20,050

Percentage of Completion:
WIP, Beginning 45%
WIP, Ending 75%

Solution:

Angel Corporation
Cost of Production Report
Department 2
May, 2014

Quantity Schedule
Units to be accounted for:
WIP, Beginning 2,700 WIP, Beg. 2,700
Transferred In 11,300 Transferred In 11,300
Total 14,000 Total 14,000
Less: WIP, End 2,500
Units accounted for: F&T 11,500
Finished and transferred 11,500
WIP, Ending 2,500
Total 14,000

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T 11,500 100% 11,500 100% 11,500 100% 11,500
WIP, Ending 2,500 75% 1,875 75% 1,875 75% 1,875
EUP 14,000 13,375 13,375 13,375

Cost Schedule
Cost to be accounted for: UC
Transferred In (P3,460 + 102,152) P105,612 /14,000 = 7.54
Materials (P2,347 + P 13,230) 15,577 /13,375 = 1.16
Labor (P1,869 + P9,140) 11,009 /13,375 = 0.82
Overhead (P3,240 + P20,050) 23,290 /13,375 = 1.74
Total P155,488 11.26

Cost accounted for:

F&T (11,500 x P11.26) P 129,490.00
WIP, Ending
Transferred In (2,500 x P7.54) P18,850.00
Materials (1,875 x P1.16) 2,175.00
Labor (1,875 x P0.82) 1,537.50
OH (1,875 x P1.74) 3,262.50 25,825.00
Total *155,315.00
*rounding-off difference of P173.

Sample Problem 5. With Beginning Work-In-Process, Even Distribution, FIFO,

Department 1

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Using the same information in Sample Problem No. 3 except that the FIFO method was used,
prepare the Cost of Production Report for Angel Manufacturing Company during April, 2014.

Solution:

Angel Corporation
Cost of Production Report
Department 1
April, 2014

Quantity Schedule
Units to be accounted for:
WIP, Beginning 500
Started in process 12,000
Total 12,500

Units accounted for:

Finished and transferred 11,300
WIP, Ending 1,200
Total 12,500

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T: (11,300 units)
WIP, Beg. 500 35% 175 35% 175 35% 175
Started in Process 10,800 100% 10,800 100% 10,800 100% 10,800
WIP, Ending 1,200 55% 660 55% 660 55% 660
EUP 12,500 11,635 11,635 11,635

Cost Schedule
Cost to be accounted for:
WIP, Beginning
Materials P 5,240
Labor 3,200
Overhead  4,260
P 12,700
Cost this month: UC
Materials P 44,213 /11,635 = 3.80
Labor 34,905 /11,635 = 3.00
Overhead 16,289 /11,635 = 1.40
 95,407 8.20
Total P108,107

Cost accounted for:

F&T:
WIP, Beg. P 12,700
Materials (175 x P3.80) 665
Labor (175 x P3.00) 525
OH (175 x P1.40) 245 P 14,135
Started in Process (10,800x P8.20) 88,560 P 102,695
WIP, Ending
Materials (660 x P3.80) P 2,508
Labor (660 x P3.00) 1,980
OH (660 x P1.40) 924 5,412
Total P 108,107

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Sample Problem 6. With Beginning Work-In-Process, Even Distribution, FIFO,
Department 2

Based on the information provided in problem no. 5, the finished products of Department 1 will
be transferred and processed under Department 2. This department is the last step before the
products can be sold to the customers. Quantity and cost schedules are presented below.

Quantity:
WIP, Beginning 2,700
Finished and Transferred ?
WIP, Ending 2,500

Cost:
WIP, Beg. This Month
T-In P 3,460 ?
Materials 2,347 P 13,230
Labor 1,869 9,140
OH 3,240 20,050

Percentage of Completion:
WIP, Beginning 45%
WIP, Ending 75%

Solution:

Angel Corporation
Cost of Production Report
Department 2
May, 2014

Quantity Schedule
Units to be accounted for:
WIP, Beginning 2,700
Transferred In 11,300
Total 14,000

Units accounted for:

Finished and transferred 11,500
WIP, Ending 2,500
Total 14,000

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T: (11,300 units)
WIP, Beg. 2,700 55% 1,485 55% 1,485 55% 1,485
Started in Process 8,800 100% 8,800 100% 8,800 100% 8,800
WIP, Ending 2,500 75% 1,875 75% 1,875 75% 1,875
EUP 14,000 12,160 12,160 12,160

Cost Schedule
Cost to be accounted for:
WIP, Beginning
Transferred In P 3,460

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 Materials 2,347
Labor 1,869
Overhead  3,240
P 10,916
Cost this month: UC
Transferred In P102,695 /11,300 = 9.09
Materials 13,230 /12,160 = 1.09
Labor 9,140 /12,160 = 0.75
Overhead 20,050 /12,160 = 1.65
 145,115 12.58
Total P156,031

Cost accounted for:

F&T:
WIP, Beg. P10,916.00
Materials (1,485 x P1.09) 1,618.65
Labor (1,485 x P0.75) 1,113.75
OH (1,485 x P1.65) 2,450.25 P 16,098.65
Started in Process (8,800x P12.58) 110,704.00 P126,802.65
WIP, Ending
Transferred In (2,500 x P9.09) P22,725.00
Materials (1,875 x P1.09) 2,043.75
Labor (1,875 x P0.75) 1,406.25
OH (1,875 x P1.65) 3,093.75 29,268.75
Total *P156,071.40
*rounding-off difference of P40.40.

Sample Problem 7. With Beginning Work-In-Process, Uneven Distribution, Average,

Department 1

The records of Tan Company reflect the following data:

Work in process, beginning of the month - 2,500 units; 40% completed at a cost of P12,800 for
materials, P9,000 for labor, and P13,200 for overhead.

Production costs for the month - materials – P32,200 labor; - P24,250; overhead – P41,710

Units completed and transferred to finished goods - 17,500

Work in process, end of month - 5,000 units; 30% completed

All materials are added at the beginning of the process.

Solution:

Tan Corporation
Cost of Production Report
Department 1
January, 2014

Quantity Schedule
Units to be accounted for: Finished and Transferred 17,500
WIP, Beginning 2,500 WIP, Ending 5,000
Started in process 20,000 Total 22,500
Total 22,500 Less: WIP, Beg. 2,500
Started in Process 20,000
Units accounted for:

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 Finished and transferred 17,500
WIP, Ending 5,000
Total 22,500

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T 17,500 100% 17,500 100% 17,500 100% 17,500
WIP, Ending 5,000 100% 5,000 30% 1,500 30% 1,500
EUP 22,500 22,500 19,000 19,000

Cost Schedule
Cost to be accounted for: UC
Materials (P12,800 + P 32,200) P 45,000 /22,500 2.00
Labor (P9,000 + P24,250) 33,250 /19,000 1.75
Overhead (P13,200 + P41,710) 54,910 /19,000 2.89
Total P133,160 6.64

Cost accounted for:

F&T (17,500 x P6.64) P 116,200
WIP, Ending
Materials (5,000 x P2.00) P 10,000
Labor (1,500 x P1.75) 2,625
OH (1,500 x P2.89) 4,335 16,960
Total P133,160

Sample Problem 8. With Beginning Work-In-Process, Uneven Distribution, Average,

Department 2

Based on the information presented in problem 7, the following are the cost and quantity
schedules for Tan Corporation’s Department 2 manufacturing process:

Costs incurred:
WIP, Beg. This month
Transferred In P 5,480 P116,200
Materials 4,270 16,500
Conversion Cost 14,940 34,250

Quantity:
WIP, Beg. ?
Transferred In 17,500
Finished and Transferred 18,500
WIP, Ending 4,000
Percentage of completion:
WIP, beginning 65%
WIP, ending 40%

Materials are added during the process based on the specific percentage of completion for
conversion:
20% of materials @ 25% completion
40% of materials @ 50% completion
30% of materials @ 75% completion
10% of materials @ 99% completion

Prepare Cost of Production Report for Department 2.

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Solution:

Tan Corporation
Cost of Production Report
Department 2
February, 2014

Quantity Schedule
Units to be accounted for:
WIP, Beginning 5,000 F& T 18,500
Transferred In 17,500 WIP, end 4,000
Total 22,500 Total 22,500
Less: T-In 17,500
Units accounted for: WIP,beg. 5,000
Finished and transferred 18,500
WIP, Ending 4,000
Total 22,500

Computation of Equivalent Units of Production (EUP)

Materials CC
F&T 18,500 100% 18,500 100% 18,500
WIP, Ending 4,000 20% 800 40% 1,600
EUP 22,500 19,300 20,100

Cost Schedule
Cost to be accounted for: UC
Transferred In (P5,480 +P116,200) P121,680 /22,500 = 5.41
Materials (P4,270+ P16,500) 20,770 /19,300 = 1.08
CC (P14,940 + P34,250) 49,190 /20,100 = 2.45
Total P191,640 8.94

Cost accounted for:

F&T (18,500 x P8.94) P 165,390
WIP, Ending
Transferred In (4,000 x P5.41) P21,640
Materials (800 x P1.08) 864
CC (1,600 x P2.45) 3,920 26,424
Total *191,814
*rounding-off difference of P174.

Sample Problem 9. With Beginning Work-In-Process, Uneven Distribution, FIFO,

Department 1

Using the same information in Sample Problem No. 7 except that FIFO method was used,
prepare for the Cost of Production Report for Tan Company. Round-off to the nearest two
decimal places.

Tan Corporation
Cost of Production Report
Department 1
January, 2014

Quantity Schedule
Units to be accounted for:
WIP, Beginning 2,500
Started in process 20,000
15
Total 22,500

Units accounted for:

Finished and transferred 17,500
WIP, Ending 5,000
Total 22,500

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T: (17,500 units)
WIP, Beg. 2,500 0% 0 60% 1,500 60% 1,500
Started in Process 15,000 100% 15,000 100% 15,000 100% 15,000
WIP, Ending 5,000 100% 5,000 30% 1,500 30% 1,500
EUP 22,500 20,000 18,000 18,000

Cost Schedule
Cost to be accounted for:
WIP, Beginning
Materials P 12,800
Labor 9,000
Overhead  13,200
P 35,000
Cost this month: UC
Materials P 32,200 /20,000 = 1.61
Labor 24,250 /18,000 = 1.35
Overhead 41,710 /18,000 = 2.32
 98,160 5.28
Total P133,160

Cost accounted for:

F&T:
WIP, Beg. P 35,000
Materials (0 x P1.61) 0
Labor (1,500 x P1.35) 2,025
OH (1,500 x P2.32) 3,480 P 40,505
Started in Process (15,000x P5.28) 79,200 P 119,705
WIP, Ending
Materials (5,000 x P1.61) P 8,050
Labor (1,500 x P1.35) 2,025
OH (1,500 x P2.32) 3,480 13,555
Total P *133,260
*rounding-off difference of P100.

Sample Problem 10. With Beginning Work-In-Process, Uneven Distribution, FIFO,

Department 2

Using the information in problem no. 8, prepare Cost of Production Report using FIFO Costing
Method.

Tan Corporation
Cost of Production Report
Department 2
February, 2014

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Quantity Schedule
Units to be accounted for:
WIP, Beginning 5,000
Transferred In 17,500
Total 22,500

Units accounted for:

Finished and transferred 18,500
WIP, Ending 4,000
Total 22,500

Computation of Equivalent Units of Production (EUP)

Materials CC
F&T: (18,500 units)
WIP, Beg. 5,000 40% 2,000 35% 1,750
Started in Process 13,500 100% 13,500 100% 13,500
WIP, Ending 4,000 20% 800 40% 1,600
EUP 22,500 16,300 16,850

Cost Schedule
Cost to be accounted for:
WIP, Beginning
Transferred In P 5,480
Materials 4,270
CC  14,940
P 24,690
Cost this month: UC
Transferred In P116,200 /17,500 = 6.64
Materials 16,500 /16,300 = 1.01
CC 34,250 /16,850 = 2.03
 166,950 9.68
Total P191,640

Cost accounted for:

F&T:
WIP, Beg. P24,690.00
Materials (2,000 x P1.01) 2,020.00
CC (1,750 x P2.03) 3,552.50 P 30,262.50
Started in Process (13,500x P9.68) 130,680.00 P160,942.50
WIP, Ending
Transferred In (4,000 x P6.64) P26,560.00
Materials (800 x P1.01) 808.00
CC (1,600 x P2.03) 3,248.00 30,616.00
Total *P191,558.50
*rounding-off difference of P81.50.

E. Spoilage.

1. Spoilage represents units from the production process that does not meet
specifications.

2. Losses in a production process may occur continuously or at a specific point in the

production process.

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 a. Continuous loss: losses in a production process that occurs fairly uniformly through
the process.

b. Discrete loss: a loss that occurs at a specific point in the production process.

3. Several methods may be used to account for units lost during production.

a. Sample Problems 11 and 12 summarize the account for the cost of lost units.

b. Normal continuous losses.

i. In process costing, the cost of normal continuous losses are handled through the
method of neglect, which excludes the spoiled units from EUP.

ii. This results in smaller EUP and raises the cost per equivalent unit.

iii. Therefore, the cost of the normal spoilage is spread proportionately over good
units transferred and those remaining in WIP.

iv. The cost of normal continuous losses is a product cost.

c. Normal discrete losses.

i. The cost of normal discrete losses are assigned only to units that have passed
the inspection point because assigning loss costs to units that may be found to
be defective in the next period would not be reasonable.

ii. The cost of normal discrete losses is a product cost.

d. Abnormal losses, both continuous and discrete, are expensed in the current period.

e. Sample Problem 13 provides a cost of production report for Ohio Corporation to

illustrate the method of neglect for a normal loss.

Sample Problem 11. With Beginning Work-In-Process, Uneven Distribution, Normal

Spoilage, Average, Department 1

Ohio Company is known for its finest products that are distributed throughout the world. As
part of its cost control management, the company employed process costing and average
method to account the cost of production. During the month of March, 2014, the company
incurred the following costs:

WIP, Beg. This Month

Materials P4,560 P23,400
Labor 3,900 15,000
Overhead 5,000 36,300

The company started processing 20,000 units, of which 3,500 units came from the WIP,
beginning. At the end of the month, a total of 18,000 units were finished and transferred to the
next department. Based on the inspection conducted, it was found out that 500 units were
identified as spoiled and the company considered it as normal. The point of inspection was at
65% completion and WIP, ending is 40% complete. Materials are added at the beginning of the
process.

Prepare Cost of Production Report using average costing.

Solution:

Ohio Corporation
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Cost of Production Report
Department 1
January, 2014

Quantity Schedule
Units to be accounted for:
WIP, Beginning 3,500
Started in process 16,500
Total 20,000

Units accounted for:

Finished and transferred 18,000
WIP, Ending 1,500
Normal Spoilage 500
Total 20,000

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T 18,000 100% 18,000 100% 18,000 100% 18,000
WIP, Ending 1,500 100% 1,500 40% 600 40% 600
Normal Spoilage 500 100% 500 65% 325 65% 325
EUP 20,000 20,000 18,925 18,925

Cost Schedule
Cost to be accounted for: UC
Materials (P4,560 + P23,400) P27,960 /20,000 = 1.40
Labor (P3,900 + P15,000) 18,900 /18,925 = 1.00
Overhead (P5,000 + P36,300) 41,300 /18,925 = 2.18
Total P88,160 4.58

Cost accounted for:

F&T (18,000 x P4.58) P82,440.00
Cost of Normal Spoilage*
Materials (500 x P1.40) 700.00
CC (325 x P3.18) 1,033.50 P84,173.50
WIP, Ending
Materials (1,500 x P1.40) P2,100.00
Labor (600 x P1.00) 600.00
OH (600 x P2.18) 1,308.00 4,008.00
Total P88,181.50

*spoiled goods were assumed to be normal discrete losses.

Sample Problem 12. With Beginning Work-In-Process, Uneven Distribution, Abnormal

Spoilage, Average, Department 1

Using the same information in Sample Problem 11, the Cost of Production Report of Ohio
Corporation for January, 2014 is as follows:

Ohio Corporation
Cost of Production Report
Department 1
January, 2014

Quantity Schedule

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Units to be accounted for:
WIP, Beginning 3,500
Started in process 16,500
Total 20,000

Units accounted for:

Finished and transferred 18,000
WIP, Ending 1,500
Normal Spoilage 500
Total 20,000

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T 18,000 100% 18,000 100% 18,000 100% 18,000
WIP, Ending 1,500 100% 1,500 40% 600 40% 600
Normal Spoilage 500 100% 500 65% 325 65% 325
EUP 20,000 20,000 18,925 18,925

Cost Schedule
Cost to be accounted for: UC
Materials (P4,560 + P23,400) P27,960 /20,000 = 1.40
Labor (P3,900 + P15,000) 18,900 /18,925 = 1.00
Overhead (P5,000 + P36,300) 41,300 /18,925 = 2.18
Total P88,160 4.58

Cost accounted for:

F&T (18,000 x P4.58) P82,440.00
WIP, Ending
Materials (1,500 x P1.40) P2,100.00
Labor (600 x P1.00) 600.00
OH (600 x P2.18) 1,308.00 4,008.00
Abnormal Spoilage
Materials (500 x P1.40) 700.00
CC (325 x P3.18) 1,033.50 1,733.50
Total P88,181.50

Sample Problem 13. With Beginning Work-In-Process, Uneven Distribution, Normal

Spoilage, Average, Department 1 – Method of Neglect

Based on the information provided in Sample Problem 11, the Cost of Production Report of
Ohio Corporation for the month of January 2014 is as follows:

Ohio Corporation
Cost of Production Report
Department 1
January, 2014

Quantity Schedule
Units to be accounted for:
WIP, Beginning 3,500
Started in process 16,500
Total 20,000

Units accounted for:

Finished and transferred 18,000

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WIP, Ending 1,500
Normal Spoilage 500
Total 20,000

Computation of Equivalent Units of Production (EUP)

Materials Labor OH
F&T 18,000 100% 18,000 100% 18,000 100% 18,000
WIP, Ending 1,500 100% 1,500 40% 600 40% 600
Normal Spoilage 500 0% 0* 0% 0* 0% 0*
EUP 20,000 19,500 18,600 18,600
*Spoiled goods were assumed to be normal continuous losses hence method of neglect was
used.

Cost Schedule
Cost to be accounted for: UC
Materials (P4,560 + P23,400) P27,960 /19,500 = 1.43
Labor (P3,900 + P15,000) 18,900 /18,600 = 1.02
Overhead (P5,000 + P36,300) 41,300 /18,600 = 2.22
Total P88,160 4.67

Cost accounted for:

F&T (18,000 x P4.67) P84,060.00
WIP, Ending
Materials (1,500 x P1.43) P2,145.00
Labor (600 x P1.02) 612.00
OH (600 x P2.22) 1,332.00 4,089.00
Total P88,149.00

Credits to: Prof. Michael N. Sison, CPA, MBA

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