AE 22 – PROCESS COSTING: Nature and Operations

Process Costing

• a system of accumulating costs of production by department or cost center

• Department – a major functional division in a factory where related manufacturing processes are performed
• commonly used by companies where a large number of similar products pass through different departments in a continuous process until
completed in the last department and transferred to finished goods inventory
• Similar products – produced in the same manner and consume the same amount of costs

Objective of Process Costing

• allocation of manufacturing costs in every department to calculate the unit cost of the product for profit determination and inventory
costing purposes

❖ During the production period, some of the units started will not be completed at the end of the period.
❖ Therefore, each department must determine the total costs of the units still in process and the costs of the units completed.

Process Cost System vs Job Order Cost System

Process Cost System Job Order Cost System

• Mass production • Single product or product batches (customer specifications)
Similarities

• Manufacturing cost elements (DM, DL, FOH)

• Cost Accumulation (raw materials > Materials, factory payroll > DL, indirect materials/labor > FOH)
• Cost Flow (WIP > FG > COGS)

Differences

• No. of WIP accounts used – JO cost system > only 1 WIP account; Process cost system > different WIP account / department
• Point at which total cost is determined – JO cost system > when job is completed; Process cost system > at the end of each month
• Unit cost computation
a. JO cost system > Total Cost per Job divided by units produced
b. Process cost system > Total cost for the period divided by units produced for the period

Accumulation of Costs by Department in a Process Cost System

• Units completed in one department are transferred to the next department accompanied by their corresponding costs.
• Completed units of one department becomes the raw materials of the next department until the units are converted into finished
products.
• The cost of units increases as they progress from one department to the next.

Assignment of Manufacturing Costs

Process cost system accumulates the three elements of costs (DM, DL, FOH) using either of the following costing procedures:

a. Normal Costing – DM & DL are applied at actual cost while FOH is applied at a predetermined rate.
b. Standard Costing – DM, DL, & FOH are applied at standard/estimated cost.
 For the purposes of this topic, we will be using the normal costing procedure in process costing since standard costing will be discussed
in a separate chapter.

COMPREHENSIVE ILLUSTRATION

Star Paper Company manufactures high quality paper boxes in three (3) departments:

• Cutting Department
• Assembly Department
• Packaging Department

CUTTING DEPARTMENT

Costs Incurred

Cost Element PHP

Materials 77,280

Labor 95,616

Overhead 156,632
Cutting Department
Monthly Production Report
January 2022

Quantity (units)
Started in Process - Current Month 12,880
Transferred Out to Next Department 9,120
WIP - Ending 3,760
Stage of Completion of Ending WIP
Materials 100%
Labor 40%
Overhead 55%

Equivalent Units of Production

• Equivalent units of production – measure of work done during the month, expressed in fully completed units
• Realistically, not all units are completed during the period. There are units still in process at different stages of completion at the end of
the month.
• All these units must be converted to EUP (equivalent units of production) by multiplying the number of units in process by the
percentage of completion.
Cutting Department
Equivalent Units of Production
January 2022

Materials
Transferred Out to Next Department 9,120
WIP - End (3,760 x 100%) 3,760
EU for Materials 12,880
Labor
Transferred Out to Next Department 9,120
WIP - End (3,760 x 40%) 1,504
EU for Labor 10,624
Overhead
Transferred Out to Next Department 9,120
WIP - End (3,760 x 55%) 2,068
EU for Overhead 11,188
Cutting Department
Cost of Production Report
January 2022
Quantity Schedule Units
Quantity to be accounted for:
Started in Process 12,880
Total units to be accounted for 12,880
Quantity accounted for:
Transferred Out to Next Dept. 9,120
WIP - End 3,760
Total units accounted for 12,880
Total Cost Equivalent Units Costs
Cost Schedule
(Php) Units (Php)
Costs to be accounted for:
Materials 77,280 / 12,880 = 6
Labor 95,616 / 10,624 = 9
Overhead 156,632 / 11,188 = 14
Total costs to be accounted for 329,528 29
Costs accounted for:
Transferred Out 264,480 = 9,120 x 29
WIP - End
Materials 22,560 = 3,760 x 6
Labor 13,536 = 1,504 x 9
Overhead 28,952 = 2,068 x 14
Total WIP 65,048
Total costs accounted for 329,528
ASSEMBLY DEPARTMENT

Costs Incurred

Cost Element PHP

Materials 21,830

Labor 82,954

Overhead 69,856

Assembly Department
Monthly Production Report
January 2022

Quantity (units)
Transferred In from Prior Department 9,120
Transferred Out to Next Department 8,150
WIP - Ending 970
Stage of Completion of Ending WIP
Transferred in Cost 100%
Materials 60%
Labor 60%
Overhead 60%
Assembly Department
Equivalent Units of Production
January 2022

Materials
Transferred Out to Next Department 8,150
WIP - End (970 x 60%) 582
EU for Materials 8,732
Labor
Transferred Out to Next Department 8,150
WIP - End (970 x 60%) 582
EU for Labor 8,732
Overhead
Transferred Out to Next Department 8,150
WIP - End (970 x 60%) 582
EU for Overhead 8,732
Assembly Department
Cost of Production Report
January 2022
Quantity Schedule Units
Quantity to be accounted for:
Transferred In from Prior Dept. 9,120
Total units to be accounted for 9,120
Quantity accounted for:
Transferred Out to Next Dept. 8,150
WIP - End 970
Total units accounted for 9,120
Total Cost Equivalent Units Costs
Cost Schedule
(Php) Units (Php)
Costs to be accounted for:
Cost Transferred In 264,480 / 9,120 = 29.00
Materials 21,830 / 8,732 = 2.50
Labor 82,954 / 8,732 = 9.50
Overhead 69,856 / 8,732 = 8.00
Total costs in this Dept. 174,640 20.00
Total costs to be accounted for 439,120 49.00
Cost accounted for:
Transferred Out 399,350 = 8,150 x 49
WIP - End
Cost Transferred In 28,130 = 970 x 29
Cost in this Dept.
Materials 1,455 = 582 x 2.50
Labor 5,529 = 582 x 9.50
Overhead 4,656 = 582 x 8.00
Total WIP 39,770
Total costs accounted for 439,120
PACKAGING DEPARTMENT

Costs Incurred
Cost Element PHP
Materials 2,172
Labor 24,492
Overhead 14,596

Packaging Department
Monthly Production Report
January 2022

Quantity
Transferred In from Prior Department 8,150
Transferred Out to FG Inventory 5,430
WIP - Ending 2,720
Stage of Completion of Ending WIP
Transferred in Cost 100%
Materials 0%
Labor 20%
Overhead 15%
Packaging Department
Equivalent Units of Production
January 2022

Materials
Transferred Out to FG Inventory 5,430
WIP - End (2,720 x 0%) 0
EU for Materials 5,430
Labor
Transferred Out to FG Inventory 5,430
WIP - End (2,720 x 20%) 544
EU for Labor 5,974
Overhead
Transferred Out to FG Inventory 5,430
WIP - End (2,720 x 15%) 408
EU for Overhead 5,838
Packaging Department
Cost of Production Report
January 2022
Quantity Schedule Units
Quantity to be accounted for:
Transferred In from Prior Dept. 8,150
Total units to be accounted for 8,150
Quantity accounted for:
Transferred Out to FG Inventory 5,430
WIP - End 2,720
Total units accounted for 8,150
Total Cost Equivalent Units Costs
Cost Schedule
(Php) Units (Php)
Costs to be accounted for:
Cost Transferred In 399,350 / 8,150 = 49.00
Materials 2,172 / 5,430 = 0.40
Labor 24,492 / 5,974 = 4.10
Overhead 14,596 / 5,838 = 2.50
Total costs in this Dept. 41,260 7.00
Total costs to be accounted for 440,610 56.00
Cost accounted for:
Transferred Out to Finished Goods 304,080 = 5,430 x 56
WIP - End
Cost Transferred In 133,280 = 2,720 x 49
Cost in this Dept.
Materials 0 = 0 x 0.40
Labor 2,230 = 544 x 4.10
Overhead 1,020 = 408 x 2.50
Total WIP 136,530
Total costs accounted for 440,610
Take note that the total unit cost of Php 56 represents the total manufacturing cost of the completed units for January 2022. It will be used in
costing inventories and computing gross profit on sale.

RECORDING OF MANUFACTURING OPERATIONS

Cutting Department

To record cost incurred:

WIP – Cutting Dept. 329,528

Materials 77,280
Factory Payroll 95,616
FOH – Applied 156,632

To record transfer of completed units to Assembly Department:

WIP – Assembly Dept. 264,480

WIP – Cutting Dept. 264,480

Assembly Department

To record cost added:

WIP – Assembly Dept. 174,640

Materials 21,830
Factory Payroll 82,954
FOH – Applied 69,856

To record transfer of completed units to Packaging Department:

WIP – Packaging Dept. 399,350

WIP – Assembly Dept. 399,350
Packaging Department:

To record cost added:

WIP – Packaging Dept. 41,260

Materials 2,172
Factory Payroll 24,492
FOH – Applied 14,596

To record transfer of completed units to Finished Goods inventory:

Finished Goods 304,080

WIP – Packaging Dept. 304,080

Cutting Assembly Packaging

Materials 77,280.00 21,830.00 2,172.00
Labor 95,616.00 82,954.00 24,492.00
Overhead 156,632.00 69,856.00 14,596.00
Total costs incurred 329,528.00 174,640.00 41,260.00
Transferred In - 264,480.00 399,350.00
Transferred Out (264,480.00) (399,350.00) (304,080.00)

Balance, January 31 65,048.00 39,770.00 136,530.00

RECORDING SALES AND COGS

Assume that 5,300 units were sold for Php 80 each from the January production.

Accounts Receivable (5,300 x Php 80) 424,000

Sales 424,000

COGS (5,300 x Php 56) 296,800

Finished Goods 296,800