PROCESS COSTING

Weighted-Average Method
Process Costing

Process costing is a method of accumulating and

assigning costs to units of production in companies
which produced a large number of identical or
standardized unit employing consistent processes.

Under this method, costs are accumulated and

assigned first to production departments before they
are traced to the units of outputs as they move
through the departments.
Process Costing

Information about the flow of units and costs through

the work in process account of a processing
department is recorded in a Cost of Production Report
(CPR). The report is divided into three sections: The
Quantity Schedule, the Costs Charged to the
Department, and the Cost Reconciliation.
Process Costing

Quantity Schedule
Quantity schedule summarizes the flow of units
through the processing department, and presents the
total units to be accounted, and how those units are
accounted.
Process Costing

Costs Charged to the Department

This section presents the total costs accumulated in
the processing department which include the
beginning inventory cost and costs added during the
period.
Process Costing

Costs Accounted for as Follows (Cost Reconciliation)

This section shows the accounting of the total costs,
identified and recorded in the preceding section, to
the units in the inventories.
Process Costing

The total costs to be accounted consists of the

following: cost of the beginning inventory; cost of
materials; labor and overhead incurred by the
department during the current period; and cost
transferred in from the preceding department during
the period – if the reporting department is a
succeeding department.
THE FLOW OF MATERIALS, LABOR, AND
OVERHEAD COSTS
Materials, Labor, and Overhead Cost
Entries

A separate work-in-process account is maintained for

each processing department.

The completed production of the first processing

department is transferred to the work-in-process
account of the second processing department.
Materials, Labor, and Overhead Cost
Entries

After further work until the last department, the

completed units are then transferred to finished goods.
Materials, labor and overhead costs can be added in any
processing department.

Costs in succeeding department’s work-in-process

account consist of the materials, labor, and overhead costs
incurred in the said department plus the costs attached to
partially completed units transferred in from preceding
department.
Materials Costs

Materials can be added in any processing department.

Entry to record materials used in the processing

department:
Work in process – Dept. A xx
Work in process – Dept. B xx
Raw materials xx
Materials Costs

T-account:
Labor Costs

Labor costs are traced to departments.

Entry to record labor costs:

Work in process – Dept. A xx
Work in process – Dept. B xx
Salaries and wages payable/Cash xx
Labor Costs

T-account:
Overhead Costs

Predetermined overhead rates are usually used.

Manufacturing overhead cost is applied according to the

amount of the allocation base that is incurred in the
department.

Entry to record overhead cost applied:

Work in process – Dept. A xx
Work in process – Dept. B xx
Manufacturing overhead xx
Overhead Costs

T-account:
Completing the Cost Flows

Once processing has been completed in a department,

the units are transferred to the next department for
further processing.

Entry to record transferring of cost of partially

completed units to another department:
Work in process – Dept. B xx
Work in process – Dept. A xx
Completing the Cost Flows

T-account:
Completing the Cost Flows

Entry to record transfer of completed units to finished

goods:
Finished goods xx
Work in process – Dept. B xx
Completing the Cost Flows

T-account:
Completing the Cost Flows

Entry to record the cost of units sold:

Cost of goods sold xx
Finished goods xx
Completing the Cost Flows

T-account:
Equivalent Units of Production

Equivalent unit is the product of the number of

partially completed units and the percentage
completion of those units with respect to the
processing in the department.

These partially completed units complicate the

determination of a department’s output for a given
period and the unit cost that should be assigned to
that output.
Equivalent Units of Production

Equivalent units of production can be computed in

two ways:
1. FIFO method of process costing is a method in
which equivalent units and unit costs relate only to
work done during the current period.
2. Weighted-average method blends together units
and costs from the current period with units and
costs from the prior period.
Equivalent Units – The Basic Idea

Two half completed products are equivalent to one

complete product.

So, 10,000 units 70% complete are equivalent to 7,000

complete units.
Equivalent Units of Production
Weighted-Average Method

The weighted-average method . . .

1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.
Illustration 1

Smith Company reported the following activity in the

Assembly Department for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

Illustration 1

The first step in Materials Conversion

calculating the
equivalent units is Units completed and transferred
to identify the out of the Department in June 5,400 5,400
units completed
and transferred
out of Assembly
Department in
June (5,400 units)
Illustration 1

The second step is

to identify the Materials Conversion
equivalent units of Units completed and transferred
production in out of the Department in June 5,400 5,400
ending work in
process with Work in process, June 30:
respect to materials 900 units × 60% 540
for the month (540
units) and adding
this to the 5,400
units from step one. Equivalent units of Production in
the Department during June 5,940
Illustration 1

The third step is to

identify the Materials Conversion
equivalent units of
production in Units completed and transferred
ending work in out of the Department in June 5,400 5,400
process with Work in process, June 30:
respect to
conversion for the 900 units × 60% 540
month (270 units) 900 units × 30% 270
and adding this to
the 5,400 units Equivalent units of Production in
from step one. the Department during June 5,940 5,670
Illustration 1

Equivalent units
of production Materials Conversion
always equals: Units completed and transferred
Units completed out of the Department in June 5,400 5,400
and transferred Work in process, June 30:
+ Equivalent
units remaining 900 units × 60% 540
in work in 900 units × 30% 270
process Equivalent units of Production in
the Department during June 5,940 5,670
 Compute and Apply Costs

Beginning Work in Process Inventory: 300 units

Materials: 40% complete P 6,119
Conversion: 20% complete P 3,920

Production started during June 6,000 units

Production completed during June 5,400 units

Costs added to production in June

Materials cost P 118,621
Conversion cost P 81,130

Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete
Compute and Apply Costs

Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit
Equivalent units of production
Compute and Apply Costs

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 10,039 6,119 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790 124,740 85,050

Equivalent units 5,940 5,670

Compute and Apply Costs
Applying Costs

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Applying Costs

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit ₱21.00 ₱15.00
Applying Costs

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit ₱21 ₱15
Cost of Ending WIP inventory ₱11,340 ₱4,050 ₱15,390
Computing the Cost of Units Transferred
Out

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit ₱21 ₱15
Cost of Ending WIP inventory ₱11,340 ₱4,050 ₱15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Computing the Cost of Units Transferred
Out

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit ₱21 ₱15
Cost of Ending WIP inventory ₱11,340 ₱4,050 ₱15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit ₱21 ₱15
Computing the Cost of Units Transferred
Out

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit ₱21 ₱15
Cost of Ending WIP inventory ₱11,340 ₱4,050 ₱15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit ₱21 ₱15
Cost of units transferred out ₱113,400 ₱81,000 ₱194,400
Reconciliation Report

Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory ₱10,039
Costs added to production during the period 199,751
Total cost to be accounted for ₱209,790
Reconciliation Report

Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory ₱10,039
Costs added to production during the period 199,751
Total cost to be accounted for ₱209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory ₱15,390
Cost of units transferred out 194,400
Total cost accounted for ₱209,790
Cost of Production Report

QUANTITY SCHEDULE
Physical Materials Conversion
units
Units to account for:
Beginning WIP 300
Received from preceding -
departments
Stated in production 6,000
Total units to account for 6,300
Cost of Production Report

Units accounted for: Percent Completed

Total Materials Conversio
n Cost
Transferred to the next 5,400 100% 100%
department
Ending WIP 900 60% 30%
Total units accounted for 6,300
Cost of Production Report

COST CHARGED TO THE

DEPARTMENT
Direct Conversion Total
materials Costs
Beginning work in process 6,119 3,920 10,039
Cost added during the period 118,621 81,130 199,751
Total cost to account for 124,740 85,050 209,790
Equivalent units 5,940 5,670
Cost per EUP 21.00 15.00 36.00
Cost of Production Report

COST TO BE ACCOUNTED FOR AS

FOLLOWS:
Total
Beginning work in process 10,039
Cost added during the period 199,751
Total cost to be accounted for 209,790
 Cost of Production Report

COST ACCOUNTED FOR AS FOLLOWS

Direct materials Conversion Costs Total
Ending work in process - EUP 540 270
Cost per EUP P 21 P 15
Total cost 11,340 4,050 15,390

Units completed and transferred out 5,400 5,400

Cost per EUP P 21 P 15
Total cost 113,400 81,000 194,400
Total cost accounted for 209,790
End