Ambo University / Department of Accounting

Chapter Three
3. Process Costing System
It is a system used in a factory that produces similar or identical units
(lets of units).
 It accumulates costs by department and total cost will be
assigned to the units produced in the department.
 In this system, it is assumed that equal amount of D.M, D.L, MOH
cost are allocated to all units produced.

3.1 Cost accumulation methods in process costing

 In process costing, job cost sheets are not required because,
similar units are to be produced. However, the total cost are
accumulated by department in which the product posses
through.
 Unit cost is determined by dividing the total cost incurred in a
department to the No. of units produced.
 The time period over which the costs are accumulated depends
up on the time gap over which input is needed.
 Cost accumulation is simpler in process costing system than job
casting system.
 The system can be implemented in point manufacture, oil,
refineries salt producers.
 MOH cost is applied to each department on the basis of some
factors. DL, DM, MH, C.C.
 D.L, MOH, DM are reported separately; however, if the MOH and
DL are used uniformly, the two a/c can be aggregated and
named as conversion cost. Thus, two a/c may be reported D.M
and C.C.

Case 1
Process costing with zero beginning and ending WIP (All units are
started and completed in the same period).

Direct Materials: - Material requisition is the base for recording

material used.
[

 Fewer repulsions are required in the process costing system.

 Materials are requested when batch of manufacturing is started
Ex. Assume that ABC salt production produces salt in two department.
The process includes the crushing and sizing department and the
packaging department.

Crushing &

Packaging

1
Ambo University / Department of Accounting
Assume that material issued to the crushing and sizing department is
Br. 240,000. January 1.

WIP Crushing and Sizing 240,000

D. Mat and Supplies Inventory

Direct Labor: Payroll cost is accumulated in each department. Here,

punching in and out is not required unless on employee
works in two department regularly.
Assume also D.L cost of Br. 72,000 is incurred, record it.

WIP – crushing and sizing

Wage payable 72,000

Manufacturing overhead
 It is applied to the department using a normal POR.
 Appropriate allocation base should be selected.
 Under or over applied MOH cost will be disposed at the end of
the period as it had been done in job order costing system.
WIP – crushing and sizing
MOH applied 108,000

Assume also the company produced 100,000 units animal salt.

Total
Total cost for the month Unit cost
cost
D.M cost 240,000 420,000/100,000 = 2.40
D.L incurred 72,000 72,000/100,000 = 0.72
MOH applied 108,000 108,000/100,000 = 1.08
Total cost added in the
420,000 420,000/100,000 = 4.20
cursing & sizing department
When these 100,000 units are transferred to the next department
(packaging department) the following entry is required.

WIP – packaging
420,000
WIP – cursing and Sizing

Case2
Process costing with no beginning WIP but some ending WIP
Assume that during February, the Company has started another
120,000 units bar salt. Since all the products started pre transferred to
packaging department there was no beginning WIP inventory however,
out of the 120,000 units, only 90,000 units are transferred to the
packaging department in February. The remaining 30,000 units are
partially completed; thus it is still WIP inventory.
WIP – February 1 0 units
Units started during February 120,000 units

2
 Ambo University / Department of Accounting
Units during February 90,000 units
WIP – February 28 30,000 units
In the 30,000 partial processed units, Direct Materials are completely
placed. However, since D.L and MOH costs are placed to production
through the production process, they are not complete. Thus, the
production engineer estimated that 75% of D.L cost was placed and
60% of MOH costs are incurred on the partially processed units.
Assume that the Factory allocates MOH applied at a rate of 1.5 of
the Direct Labor cost.
The D.M, D.L and MOH applied is summarized as follows.
Items Cost Total
Direct materials 120,000 units x $2.40 288.00
90,000 units $0.72
Direct labor 81,000
30,000 units x 0.72
MOH cost applied Br. 81,000 x 1.5 121,500
Total cost of the Cushing and sizing department in
490,500
February
 The journal entry to record the issuance of D.M, D.L and MOH
applied is the same as the entry recorded in the month of
January.
 In this month determination of cost of units completed and WIP is
unique by the following steps.
Step 1. Summarize the flow of physical units of output
2. Compute output in terms of equivalent units
3. compute equivalent unit cost
4. summarize total cost to account for
5. assign total cost to units completed and to units in WIP

Physical units and equivalent units (Step 1 and 2)

Although 120,000 are started, only 90,000 units are completed. The
remaining 30,000 is WIP. This WIP does not represent full units with
respect to the three management cost like that of the units completed
and transferred out.
Those units must first be charged in to the equivalent units. Thus, they
are 100% completed with respect to DM, 75% completed with respect
to D.L. and 60% complete with respect to MOH.
Computation of equivalent units
Equivalent units
Physical
D.M D.L MOH
unit
Beginning WIP
Stated during current part 120,000
To account for 120,000
Completed and transferred out 90,000 90,000 90,000 90,000
Ending WIP 30,000 30,000 22,500 18,000

3
 Ambo University / Department of Accounting
Accounted to 120,000
Work done in the current period 120,00 112,50 108,00
0 0 0

Calculation of Product Costs (steps 3,4 & 5)

Br. 288,000 D.M cost is incurred to produce 120,000 equivalent units.
Br. 81,000 D.L cost is incurred to produce 112,000 equivalent unit and
Br. 121,500 MOH cost is incurred to produce 108,000 equivalent units
Production Cost Worksheet
Total
Direct Direct Most
Items production
Mater Labor Costs
cost
Cost added during Feb. Br. Br.
Br. 490,500 Br. 81,000
280,000 121,500
Equivalent units 112,000 112,000 108,500
Cost per unit 2.40 0.72 1.125
Completed and
Br.
transferred out (90,000 Br. 382,050 Br. 64,800 Br. 101,250
216,000
units) cost
WIP Feb. 28 (30,000)
108,450 72,000.00 16,200.00 20,250.00
units
Total Cost to Account for Br. 490,500
The cost of goods transferred out to the packaging department equals
382,050.00 and the unit cost is br. 4.245.

The entry to record the transfer the units completed and transferred
out to the packaging department is as follows.

WIP Packaging department ----------------------382,050

WIP crushing and sizing department ------------------382,050

Case 3
Process costing with some beginning and ending WIP
 February’s ending WIP becomes March’s beginning WIP
inventory.
 Assume also that the Factory started another 150,000 units
during march
 However 140,000 units are completed during the period

Summery of Physical Units in March

WIP March 1 ----------------------- 30,000
D.M 100% Completed
D.L 75 % Completed

4
Ambo University / Department of Accounting
MOH 60% Completed
Units started during March ------ 150,000
Units to account for --------------- 180,000
Completed and transformed out (140,000)
WIP March 31, ---------------------- 40,000
D.M 100% completed
D.L 60% completed
MOH 48% completed

Summery of Total Cost Incurred

WIP-March 1
D.M (30,000 X 2.40)------------------------- 72,000
D.L (22.500 X 0.72)-------------------------- 16,200
MOH (18,000 X 1.125) ---------------------- 20,250
Total cost incurred ----------------------108,450

Manufacturing costs added during March

D.M cost ------------------------------------- 375,000
D.L cost ------------------------------------- 118,080
MOH applied------------------------------- 177,120
Total cost to account for ------------- 670,200

To assign some portion of this costs to the ending WIP (40,000 units)
and units produced (140,000), there are two procedures.
i. Weighted average method
ii. FIFO method

i. The weighted Average Method

This method accumulates costs incurred to date (both in beg. and
current period) then this costs are assigned to the equivalent units
transferred out and ending WIP inventory.
WA Cost = Total cost entered in WIP a/c to date
Total equivalent units of work done today
To determine the unit cost of production uses the following five steps.

Step 1: Summarize the physical flow of outputs:-

It shows the movement of units in the production process (where
the units come and where they go.)
Equivalent units of
Physic
Flow of production Direct Direct MOH
al units
material labor applied
WIP-March 4 30,000
Units stated during March 150, 000
Total units to account for 180,000
Completed and transferred 140,000 140,000 140,000 140,000
5
Ambo University / Department of Accounting
out
WIP – March 31 40,000
D.M 100% 40,000
D.L 60% 24,000
MOH 48% 19,200
Accounted for 180,000
Work done to date 180,000 164,000 159,200

Step 2: Compute output in terms of equivalent units

 All units that entered the manufacturing process are completed
with respect to D.M. However, there are some units (End WIP)
that are partially completed with respect to D.L and MOH.
 Assume that end WIP is 60% complete with respect to D.L and
48% complete with respect to MOH.
 The equivalent units of product ion
i. with respect to D.L = 40,000 units x 0.6 = 24,000 units
ii. with respect to MOH = 40,000 x 0.48 = 19,200 units
iii. with respect to O.M = 40,000 units x 100% = 40,000 units

Steps 3: Compute equivalent unit cost

i. Beginning WIP - D.M + D.M - current
E.U.C of D.M =
period
Equivalent units to date with respect to D.M
ii. E.U.C of D.L = Beginning WIP - D.L + D.L - current period
Equivalent units to date with respect to D.L

iii. Beginning WIP - MOH + MOH - current

E.U.C of D.L =
period
Equivalent units to date with respect to MOH
Steps 4: Summarize total cost to account for
Total cost to account for = Total manufacturing cost in BWIP + Total manufacturing
cost in the month

Steps 5: Assign cost to units completed and WIP units

Cost of units
Completed and = Total equivalent unit cost x total units completed
Transferred out

Equivalent unit of D.M x equivalent unit cost

Cost of E.WIP Equivalent unit of D.L x equivalent unit cost
Equivalent unit of MOH x equivalent unit cost

6
 Ambo University / Department of Accounting
The following table shows the steps 3, 4 and 5
Total
Direct
Pron. Direct labor MOH cost
material
cost
WIP – March 1 108,450.
72,000.00 16, 200.00 20,250.00
00
Cost added during 637,700.
375,000.00 118,080.00 177,120.00
March 00
Cost incurred to 746,15
447,000.00 134,280.00 197,370.00
date 0.00
Equivalent units 180,000 164,000 159,200
Cost per equiv. unit 2.483333 0.8188 1.2398
Tot. cost to account 746,150.
for 00
Assignment of
cost:
Cost of units (140,000*2.48 (140,000*0.8 (140,000*1.2
635,871.
completed & 333) 188) 398)
00
transferred out = 347,667.00 = 114,632.00 = 173,572.00
WIP – March 31 (40,000*2.483 (24,000*0.81 (19,200*1.23
142,788.
33) 88) 98)
00
= 99,333.00 = 19,651.00 = 23,804.00
The journal entry to transfer units completed and transferred out

WIP packing 635,871.00

WIP C & S Dept. 635,871.00

2. First in First out method

This method assumes that the WIP (Beginning) is first to be completed
and then the units started during the period thus, the cost assignment
is started from the Beg-WIP equivalent units then to the equivalent
units stored and completed during the period and then to the end WIP.
The same five steps are used to allocate the total cost incurred to the
units completed and transferred and to the end WIP.
Step 1: Summarize the flow of physical units
The beginning WIP units (30,000) complete first and than out of
150,000 units started during the period, only 110,000 units will be
completed and transferred. The remaining 40,000 units will be left on
hand.
Step 2: Compute output informs of equivalent units
The equivalent units of current month work done consists of
i. The equivalent units used to complete beginning WIP
ii. The equivalent units of goods started and completed in current
month
iii. The equivalent units of end WIP.

Flow of production Physical D.M D.L MOH

7
 Ambo University / Department of Accounting
units
Beginning WIP 30,000
Units started in March 150,000
Total units to account for 180,000
Completed and transferred out 12,00
30,000 7,500
from the beginning WIP 0
Started and completed during 110,0 110,0 110,0
110,000
the Month 00 00 00
Ending WIP 40,000
D.M 100% completed
40,00
D.L 60% completed
0
MOH 48% completed 24,00 19,20
0 0
Accounted to equivalent units
180,000
of
Work done to date 150,0 141,5 141,2
00 00 00

Step 3, 4 & 5: Compute Equivalent unit cost, summarize

total cost to account for and assign costs to units
completed and units in end WIP.

Cost in cured
Equivalent unit cost =
Equivalent
unit

Total cost to account for = cost in B. WIP + cost incurred current period

Cost of units completed = equivalent units completed x equivalent unit cost

Cost of units in WIP = Equivalent units in WIP (D.M) x Equivalent units cost (D.M)
(D.L) x Equivalent unit cost (D.L)
(MOH) x Equivalent unit cost (MOH)

The following table summarizes the lost three steps

Total Direct Direct
Flow of production MOH
prod. cost Method Labor
Beginning WIP Br. 108,450
Cost added during March Br.375,00 Br.118,08
Br. 670,200 Br.177,120
0 0
Equivalent unit of work done in Br.141,50
150,000 Br.141,200
March 0
Cost per equivalent unit for the Br.
Br. 2.50 Br.1.25173
work done in March 0.83449
Total cost to account for Br.
778,650
Assignment of cost to completed
8
 Ambo University / Department of Accounting
and transferred
A. From beginning WIP
Br. 108,450
(30,000)
 Add D.M cost 0 0
 D.L cost (25%) 7,500 units 6,258 6,258
 MOH cost (40%) 12,000
15,021 15,021
units
Total from beg. Inventory Br.
129,729
B. From started &
completed
 D.M cost incurred(110,000
275,000 275,000
unit
 D.L cost incurred(110,000
91,794 91,794
unit
 MOH cost (110,000 unit 123,769 123,769
Total from started and Br.
275,000 91,794 123,769
complete 490,563
Total cost of units completed
&transferred out (A + B) 621,209 275,000 98,969 138,790
End WIP
 D.M cost (2.5 x 40,000) 100,000 100,000
 D.L cost (0.83449 x
20,027 20,027
24,000)
 MOH cost (1.25173 x
24,033 24,033
19,200)
Total cost to account for Br.
375,000 118,996 162,823
765,269

Transferred in costs
Transferred in cost is the cost of units transferred from the previous
department. It is considered as a separate type of D.M added in the
beginning of the process

Transferred in cost  cost of proceeding department

Cost of the next department contains
 Transferred in costs
 D.M cost
 D.L cost
 MOH cost
 Assume the packing department had beginning WIP of 24,000 units
 Units transferred from the C & S department, in March is 140,000
units
 D.M (Packing material) are placed in the department at the
end of the process
 D.L and MOH are applied evenly through out the department &
the year combined and reported together as conversion cost.
9
Ambo University / Department of Accounting

1. Transferred in cost and the weighted average method

The five steps are again used to determine the total cost to account
for and its assignment.
Assume the following percentage of completion
Tran. Unit
D.M CC
cost
Beginning WIP 100% -0-% 50%
Completed finished 100
100% 100%
goods %
End WIP 100% -0-% 80%

Step 1 and 2: Physical and equivalent units

Equivalent Units
Physica
Flow of production Transferr
l units D.M CC
ed in
WIP beginning 24,000
Transferred in March 140,000
Units to account for 164,00
0
Completed and transferred 120,00 120,00
120,000 120,000
out 0 0
End WIP 44,000 44,000 0 35,200
Units Accounted for 164,00
0
Work done to date 120,00 155,20
164,000
0 0

Assume also as the following costs are incurred in March

Transferred in costs (WA from c & s 607,617.0
department) 0
Direct materials cost 60,000.00
Conversion costs 116,400.0
0
The cost of beginning WIP was as follows
Transferred in costs (WA from C & S 105,600.0
department) 0
Direct materials cost 0.00
Conversion costs 9,000.00
Total costs 114,000.
00
10
Ambo University / Department of Accounting
Steps 3, 4 and 5: are summarized below
Total Transferr
prod. ed in D.M CC
units costs
Beginning WIP cost 114,600 105,6000 -0- 9,000
Cost added in current period 784,017 607,617 60,000 116,400
Cost incurred to date Br. Br. Br.
713,217 60,000 125,400
Equivalent units 164,000 120,000 155,200
Equivalent unit-cost to date 4.35 0.50 0.81
Total cost to date Br.
898,617
Cost of units completed Br.678,
521,866 60,000 96,959
(120,000) 825
WIP ending cost Br. Br.
-0- 28,512
219,912 191,400
Total cost accounted for Br.
898,737

Units completed in the packing department are finished goods and

needs the following journal entry then there transferred out.

Finished goods
678,825
WIP-packing

2. Transferred in cost and FIFO method

The determination of equivalent unit and cost flow are the same as the
c and s department

Step 1 and 2 physical units and equivalent units

Transferre
Flow of production D.M CC
d in costs
Beginning WIP 24,000
Transferred in current month 140,000
To account for 164,000
Completed and transferred
120,000
out
From WIP -0- 24,000 12,000
Started and completed 96,000 96,000 96,000
Ending WIP 44,000 -0- 35,200
Work done to data 120,00
140,000 143,200
0

The following costs are incurred in the current period

Transferred in cost (beg. WIP) 105,600

D.M 0.00
C.C 9,000
11
 Ambo University / Department of Accounting
Total 114,600

Step 3, 4 & 5 is given away

Total prod. Transferre
Flow of production D.M CC
cost d in costs
Beginning WIP Br. 114,600
Cost added in current period Br. 810,833 Br. 634,433 Br. 60,000Br. 116,400
Equivalent units 140,000 120,000 Br. 143,200
Equivalent unit cost of current period 4.53 Br. 050 Br. 0.81
Total cost to account for Br. 925,433
Cost assignment to completed and
Br. 136,320 Br. 105,600 Br. 12,000 Br. 9,720
transferred out from B.WIP (24,000)
From started and completed (96,000) Br. 560,640 Br. 434,880 Br. 48,000 Br. 77,760
Total cost of units completed and
Br. 696,960
transferred to W.H
Ending WIP (44,000) Br. 227,832 Br. 199,320 -0- Br. 28,512
Total cost to account for 924,792

The journal entry required to transfer WIP in packaging department to

the warehouse is

Finished goods 696,960

WIP-packing

12