Cost Accounting

CHAPTER 9 PROCESS COSTING

Definition
Process costing is a cost accumulation
method that aggregates production costs
by departments or by production phases

Objective of Process Costing

The objectives of Process Costing is to determines
how manufacturing costs incurred should be
allocated. To determine the allocation of costs in
every departments or process, is the first step, the
ultimate objective is to compute the total unit costs of
the product for income determination.

Comparison of
Process Cost & Job Order Cost Systems
Similarities

Differences

1.

Manufacturing cost elements both

costing systems have the same
elements of cost direct materials,
direct labors & mfg. overhead.

1. No. of W/P Account used in a job order cost

system, only one W/P is used; while under process
cost system, multiple W/P accounts is used; and
separate accounts are kept for each production
dept.

2.

Accumulation of cost both costing

systems, all raw material purchased
are debited to material inventory;
factory labor are debited to factory
labor; and actual manufacturing
overhead costs are debited to
factory overhead control.

2. Point at which total cost is determined under Job

order costing, total costs are computed when the
job is completed; while in process cost system, total
costs are determined at the end of a period of time,
usually a month.

3.

Flow of costs the accumulated

3. Unit cost computations in a job order costing, the
manufacturing costs are assigned
unit cost is determined by dividing the total cost per
to the same accounts in both costing
job by the unit produced; while under process
systems W/P; FG; and Cost of
costing, the unit cost is equal to the total
Goods Sold.
manufacturing cost for the period divided by the
units produced during the period.

Preparation of
cost of production report
The purpose of a cost of production report is to summarize
the total cost charged to a department and the distribution of
the total cost between the ending work-in-process inventory
and the units completed and transferred to the next
department of the finished goods inventory. The cost of
production report is composed of 2 sections:
Quantity schedule which shows the flow of units
Cost analysis which shows the flow of cost

Accounting Entries to record

manufacturing Costs
1
.

To record direct materials used by Dept. 1

Work in process Dept. 1

xx

Materials inventory

xx

2. To record distribution of direct labor

Work in process Dept. 1

xx

Work in process Dept. 2

xx

Payroll

xx

3. To record applied factory overhead in each dept.

Work in process Dept. 1

xx

Work in process Dept. 2

xx

Applied factory overhead

xx

Accounting Entries to record

manufacturing Costs (continuation)
4.

To record the cost of goods transferred out to the next dept.

Work in process Dept. 2

xx

Work in process Dept. 1

5.

xx

To record the units completed in the last Dept. to Finished Goods

Finished Goods Inventory

xx

Work in process Dept. 2

6.

xx

To record cost of goods sold

Cost of goods sold
Finished Goods Inventory

xx
xx

Procedures in the preparation of

cost of production report
Quantity schedule
1) Compute the physical flow of units to determine the stage of completion (work done) of all units
2) Compute the equivalent production (measure of work done in terms of completed units) of units
finished and units in process for material and conversion costs

FIFO under this method, the stage of completion of the units in process, beginning is determined
separately from the units started and finished this month. This means that the Equivalent units of
production are calculated only work actually performed during the month.

Weighted Average method under this method, the unit in process at the beginning is combined
with the units started and finished this month. This means that the work performed on the units in
process beginning (last month) is treated as if it were performed this month.

Cost analysis
1) Determine the total material cost and conversion cost
2) Compute the unit cost based on the method used:

FIFO total costs incurred this month divided by the equivalent units of production

Weighted Average method Cost last month (WIP beg.) plus cost this month (current costs) divided
by the equivalent units of production

Procedures in the preparation of

cost of production report
Allocate the total costs between the units finished and the units
(Continuation)
in process at end. The following are the computations:

FIFO method
Finished units:

Units in processes, beg. (EP x unit cost)

Units started (actual units x unit
cost)
Units in process, end (EP x unit cost)
Total Finished units

xx
xx

xx
xx
xx

Weighted average method

Finished units (Actual units x unit cost)

Units in process, end (EP x unit cost)
Total

xx
xx
xx

Accounting for spoilage (lost

units)

Spoilage occurs when there are poor or defective finished units. The following procedures should
be applied in the preparation of Cost of Production Report with spoilage:
Normal Spoilage
1) Equivalent production the computation of the EP depends on the point of
discovery

Start of the process none

During the process none

End of the process 100%

2) Cost of lost units the computation of the cost of lost units are:

If lost units are discovered at the start of the process

First department no cost

Subsequent department lost units x unit cost from preceding department

If lost units are discovered during the process

First department no cost

Subsequent department lost units x unit cost from preceding department

If lost units are discovered at the end of the process

First department lost units x unit cost in this department

Subsequent department lost units x (unit cost from preceding department + unit
cost in this department)

Accounting for spoilage lost units (Continuation)

3) Allocation of cost of lost units the cost of lost units should be allocated (pro-rata) to the
absorbing good units only, the procedures in determining the absorbing good units is as follows:
If lost units are discovered at the start of the process

FIFO all goods units except work in process, beginning

Average all goods units

If lost units are discovered during the process

FIFO all goods units except work in process, beginning

Average all goods units

If lost units are discovered at the end of the process all goods units except work in process end.

Abnormal Spoilage the cost of abnormal spoiled units is computed separately from the cost of
goods units. Abnormal spoilage is included in the computation of the EP, to the extent of the stage
of completion where the spoilage occurs.

End of Chapter