Process Costing

Used by manufacturers who mass

produce large quantities of identical
units in a continuous flow.

Process costing involves averaging costs

for a particular period in order to obtain
departmental unit costs.
 Job Order and Process Cost Systems Compared

Job Order Cost System

Direct materials
Job Cost
Direct labor Sheets Finished
Dept. A and goods
Factory overhead
Dept. B

Process Cost System

Direct Finished
materials Dept. A Dept. B
goods

Direct Factory Direct Factory

labor overhead labor overhead
 The cost of production report is used to collect ,
summarize and compute total and unit costs.

 Total costs charged to the 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 a department are

transferred to the next processing department in order
to arrive at the total costs of the finished products
during a period.
 Accumulate materials , labor and factory overheads
costs by departments

 Determine a unit cost for each department

 Transfer costs from one department to the next and

to finished goods

 Assign costs to the inventory of work still in process

.
 Three product flow formats associated with
process costing

 Sequential product flow

 Parallel product flow
 Selective product flow
 In a sequential product flow, each item manufactured goes
through the same set of operations .e.g

 Materials are placed into production in the Blending

department and labor and FOH are added. When the work is
finished in the Blending department , it moves to the Testing
department. The same procedure is applied again and after
the completion of work , it moves to the Terminal
department. After this department the product is completed
and becomes the part of the finished goods.
 In a parallel product flow, certain portions of
the work are done simultaneously and then
brought together in a final process or
processes for completion and transfer to the
finished goods.
 The product moves to different departments
within the plant, depending upon the desired
final product. E.g meat processing
An entry to record direct materials used in a period is as
follows:
 Summary labor charges are made to departments
through an entry which distributes the direct material
payroll:
 Predetermined overhead rates for
producing departments should be used if:
 Production is not stable
 Factory overhead , especially fixed overhead ,
is a significant cost.

 The use of predetermined rates is highly

recommended for improving cost control and
facilitating cost analysis
 A departmental cost of production report shows all
costs chargeable to a department.

 It is the most conveniant vehicle for presenting and

disposing of costs accumulated during the month.
 A cost of production report shows:
 Total and unit costs tranferred to it from a preceding
department
 Materials, labor, and factory overheads added by the
department
 Unit costs added by the department.
 Total and unit costs accumulated to the end of the operations in
the department
 The cost of work in process inventories
 Cost tranferred to the succeeding department or to a finished
goods store room
 Information in the cost of production report is
adjusted for equivalent production.

 To condense the illustrated cost of

production report , only total materials , labor
and factory overhead charged to the
departments are considered.
 The Clonex Corporation
Blending Department
Cost of Production Report
For the month of January , 2010

Quantity Scehdule
Units started in process 50,000
Units tranferred to the next department 45,000
Units still in process(all materials-1/2 labor and factory overhead) 4,000
Units lost in process 1,000
50,000
Cost charged to the department
Cost added by department: Total Cost Unit cost
Materials 24,500 0.50
Labor 29,140 0.62
Factory Overhead 28,200 0.60
Total cost to be accounted for 81,840 1.72
Cost accounted for as follows
Tranferred to the next department (45,000*1.72) 77,400
Work in process-ending inventory:
Materials (4,000*0.50) 2,000
Labor (4,000*1/2*0.62) 1,240
Factory overhead (4,000*1/2*0.60) 1,200 4,440
Total cost to be accounted for 81,840
 The Clonex Corporation
Testing Department
Cost of Production Report
For the month of January , 2009

 Quantity Scehdule
 Units recieved from the preceding department 45,000
 Units tranferred to the next department 40,000
 Units still in process(1/3 labor and factory overhead) 3,000
 Units lost in process 2,000
45,000

 Cost charged to the department
 Cosr from the preceding department: Total Cost Unit cost
 Tranferred in during the month (45,000 units) 77,400 1.72
 Cosrt added by the department:
 Labor 37,310 0.91
 Factory Overhead 32,800 0.80
 Total cost added 70,110 1.71
 Adjustment for lost units 0.08
 147,410 3.51
 Cost accounted for as follows
 Tranferred to the next department (40,000*3.51) 140,400
 Work in process-ending inventory:
 Adjusted cost from preceding department(3,000*(1.72+0.08) 5,400
 Labor (3,000*1/3*0.91) 910
 Factory overhead (3,000*1/3*0.80) 800 7,110
 Total cost to be accounted for 147,510
 Method 1:
 77,400 = 1.80-1.72=0.08 per unit
 43,000

 Method 2:
 2,000 units*1.72= 3,440
 3,440/43,000=0.08 per unit

 The greater the number of units lost , the

greater will be the unit costs.
  The Clonex Corporation
 Testing Department
 Cost of Production Report
 For the month of January , 2009


 Quantity Schedule
 Units received from the preceding department 45,000
 Units transferred to the next department 40,000
 Units still in process(1/3 labor and factory overhead) 3,000
 Units lost in process 2,000
45,000

 Cost charged to the department
 Cost from the preceding department: Total Cost Unit cost
 Transferred in during the month (45000 units) 77,400 1.72

 Cost added by the department:
 Labor 37,310 0.87
 Factory Overhead 32,800 0.76
 Total cost added 70,110 1.63

 147,510 3.35
 Cost accounted for as follows
 Transferred to the next department (40,000*(3.35+0.1675)
140,720
 Work in process-ending inventory:
 cost from preceding department(3,000*1.72) 5,160
 Labor (3,000*1/3*0.67) 870
 Factory overhead (3,000*1/3*0.76) 760 6,790
 Total cost to be accounted for
147,510
 Entry:

 Work in process-Terminal Department xx

 Work in process-Testing Department xx
 Labor:
 $37,310/43,000=$0.87 per unit

 Factory overhead:
 $32,800/43,000=$0.76 per unit

 Lost unit cost:

 3.35*2000 units=$6,700;
 $6,700/40,000= $0.1675 per unit
 Total cost to be transferred:
3.35+0.1675=$3.5175
  The Clonex Corporation
 Terminal Department
 Cost of Production Report
 For the month of January , 2009

 Quantity Schedule
 Units received from the preceding department 40,000
 Units transferred to finished goods storeroom 35,000
 Units still in process(1/4 labor and factory overhead) 4,000
 Units lost in process 1,000
40,000
 Cost charged to the department
 Cost from the preceding department: Total Cost Unit cost
 Transferred in during the month (40,000 units) 140,400 3.51

 Cost added by the department:
 Labor 32,400 0.90
 Factory Overhead 19,800 0.55
 Total cost added 52,200 1.45
 Adjustment for lost units 0.09
 192,800 5.05
 Cost accounted for as follows
 Transferred to the next department (35,000*5.05) 176,750
 Work in process-ending inventory:
 Adjusted cost from preceding department(4,000*(3.51+0.09) 14,400
 Labor (4,000*1/4*0.90) 900
 Factory overhead (4,000*1/4*0.55) 550 15,850
 Total cost to be accounted for
192,800


 Method 1:
 $140,400/39,000= $3.60
 3.60-3.51= $0.09 per unit

 Method 2:
 1000 units * $3.51= $3,510
 $3,510/39,000= $0.09 per unit
 An entry to transfer finished units to the
finished goods store room:

 Finished goods xxx

 Work in process-Terminal Department xxx