600

The Accounting Review, July 1967

Income and what Period I income should

have been:
(20)
25 = 6.7.
(75)
An analogous situation can be found in
the areas of depreciation accounting, overhead accounting, and depletion accounting
in which, when an earlier discrepancy is
found, we are offered the options of correct-

ing and using a new rate (or amount) or

letting the error stand and absorbing it by
an error in the opposite direction over the
remaining time.
The authors have never observed such
optional treatment offered to Construction
in Progress, and yet because of the materiality of the amounts involved the
choice would seem to be of greater significance here than in the similar areas mentioned above.

Graphical Approach to Process Costing

F. S. Luh
Lehigh University

The traditional approach to the determination of equivalent production, unit cost,

and inventory valuation in process costing
often gives a number of students difiiculties. It is common to find some students at
a complete or partial loss in solving a
process costing problem because of the
large number of variables involved in it.
The method proposed in this paper offers
a supplementary approach to assist students in understanding the basic concept of
process costing and provides a visual
display of the interrelationships between
physical data and cost data.
In process costing, each of the three
elements of manufacturing costsdirect
material, direct labor and manufacturing
overheadusually consists of two sets of
data, physical data and cost data, each
with its sub-categories or subsets:
1. Physical data
a. Number of units
Beginning work in process inventory
Units started during current period

Units completed during current period

Ending work in process inventory
b. Percentage of completion
Beginning work in process inventory
Ending work in process inventory
2. Cost data
a. Beginning work in process inventory
b. Cost incurred during current period
c. Ending work in process inventory

Arithmetic operations between the subsets

of physical data determine equivalent production. Proper matching of the subsets
of cost data with the subsets of physical
data determine unit cost and inventory
valuation. The relationships are illustrated
in Figure 1.
Since physical data consist of two basic
categories of dataphysical units and
percentage of completionrequiring arithmetic operations between them, the analysis will be greatly simplified if they are
expressed in a single space. A two dimensional space accomplishes this purpose.
Let the horizontal axis be the number of
units moving from left to right in chrono-

601

Luh: Graphical Approach, to Process Costing

Coat Data

Two cases are presented to illustrate the

details of the approach. The data given
refer to one of the three elements of
manufacturing costs.
CASE I
No BEGINNING WORK IN PROCESS INVENTORY
Number
of Units

FIG. I. Process Costing Data Relationships.

logical order, and let the vertical axis be

the percentage of completion moving from
the bottom to the top in degree of completion. (See Figure 2.) We have a two
dimensional graph or space to specify all
physical data. Such a space enables us to
give precise definitions to all the subsets of
physical data. By placing the subsets of
the cost data by the side of the physical
data, the concept and procedures of
matching cost data with physical data
can be presented on a two dimensional
space.

Physical Data
Started
Completed
Ending inventory
Cost Data
Cost incurred

Percentage of
Completion

100
80
20

25%
$340

The data given above are presented graphically in Figure 2. The shaded area represents production activity of the current
period and hence should be matched
against cost incurred during the current
period. It should be noted that the horizontal axis clarifies the relationships
among different numbers of units. The
subsections of the physical data space,
areas A, B, and C, are further defined as
follows:
Cost Data

Physical Data
100%

(20)

FIG. 2. Case I.

602

The Accotmting Review, July 1967

Physical Data

Cost Data

Befjinning
InventorV
(25)

Ending
Inventory
(20)

Started (90)
Completed (95)
Started and Completed (70)

FIG. 3. Case II.

A: Units started and completed during current period
80 unitsXI00% = 80 units
B: Work already performed on units partially completed as of lie end of current period
20 unitsX25% = 5 units
C: Work yet to be performed on units partially completed as of the end of current period
20unitsX75%=15umts

Referring to Figure 2, necessary computations can be carried out as follows:

Equivalent production:
Sum ofthe shaded area = A-i-B = 80+5 = 85 units
Equivalent cost per unit:
340
Shaded area of cost data
umt
Shaded area of physical data ' 8 5 '
Cost of units completed:
Cost of shaded area A=$4X80=S320
Cost of ending work in process inventory:
Cost of shaded area B=$4X5 = S2O
CASE II
WITH BEGINNING WORK IN PROCESS INVENTORY
Number
Percentage of
of Uniis
Completion

Physical Data
Beginning inventory
Started
Completed
Ending inventory
Cost Data
Beginning inventory
Cost incurred

25
90
95
20

40%

25%
$3.S
$360

The above data are transformed into a

graph in Figure 3. The single-shaded area
represents the production activity of the
current period and the double-shaded area
represents the production activity of the
previous period. Hence, the beginning inventory cost data should be associated
with the double-shaded area and the cost
incurred during the current period should
be associated with the single-shaded area.
The horizontal axis again clarifies the relationships among various numbers of units.
The subsections of the physical data space
are further defined as follows:
A: Work already perfornied prior to the beginning of
current period on units started in previous period
but not completed as of the beginning of current
period:
25 unitsX40% = 10 units
B: Work not yet performed as of the beginning of current period on units started in previous period but
not completed as of the beginning of current period:
25 units X60%= 15 units
C: Units started and completed during current period70 unitsX100%=70 units
D: Work already performed as of the end of current
period on units started during current period but not
completed as of the end of current period:
20 unit3X25% = 5 units

603

Luh: Graphical Approach to Process Costing

Cost Data

Physical Data

0%

Waste, spoilage
or shrinkage
FIG. 4. Case with Waste, Spoilage, or Shrinkage.
E: Work yet to be performed as of the end of current
period OQ units started during current period but
not completed as of the end of current period:
20 unit5X75% = 15 units

Various computations using different inventory valuation methods can be carried

out as follows:
1. Weighted average
Equivalent cost per unit:
Sum of cost data of all shaded areas
Sum of physical units of all shaded areas
Cost of beginning inventory+Cost incurred

35+360
^

A+B+C+D
395

per unit

10+15+70+5 100
Cost of units connpleted:
Equivalent cost per unitXUnits completed
$ 3 5 ( A + E + C ) $395X95 $37525
Cost of ending work in process inventory
Equivalent cost per unitXD
= $3.95X5 = 519.75
2. First-in, first-out
Equivalent cost per unit (current activity):
Single-shaded area of cost data
Single-shaded area of physical data
Cost incurred

360

B+C+D

15+70+5

360 ^,
= - = K 4 per imit

90

"^

Cost of each subsection of the physical data space;

Cost of A: Cost of beginning inventory = $35
Cost of B: Equivalent cost per unitXB = 4X15
= $60

Cost of C: Equivalent cost per unitXC = 4X7O

8280
Cost of D; Equivalent cost per unitXD =
=$20
Cost of units completed:
Cost of A+Cost of B+Cost of C = 35+60+
280 = S375
Cost of ending work in process inventory
Cost of D = $20

The difference between the weightedaverage method and the first-in, first-out
method is that the former considers the
total of all shaded areas because of the
assumption of a pool of cost, while the latter considers single-shaded area apart from
the double-shaded area because of the assumption of an orderly procession of cost.
The method presented can also be applied to cases where waste, spoilage, or
shrinkage exists. A typical graph of such
a case is presented in Figure 4 without
numeric data. Area F represents the factor
of waste, spoilage, or shrinkage. Whether
area F should be included in the denom-

6CM

inator in the computation of the unit cost

depends on whether such waste, spoilage,
or shrinkage should be treated as overhead,
absorbed by the good units, or classed as
a separate loss.
In summary, the method proposed
offers the following advantages over the
traditional method:
1. Data involved in a process costing
problem are more systematically classified
through the use of physical data set and
cost data set and their subset classifications.
2. The relationships among various
number of units are better presented by
use of the horizontal axis.
3. Various components of physical data

The Accounting Review, July 1967

are defined more precisely through the use
of a two dimensional space.
4. The concept of matching cost data
with physical data can be easily understood by matching a pair of data sets.
5. Different concepts of cost flow can be
presented more effectively using a two
dimensional space.
Because our students today are better
prepared in mathematics, it is appropriate
to teach them accounting concepts in
the language with which they are familiar.
In addition, we should be alert to explore the interdisciplinary relationships
of accounting with other fields. The proposed approach seems to accomplish both
of these objectives.