PROCESS COSTING SYSTEM

PROCESS COSTING SYSTEM

No Lost Units

Single Department
Multiple Departments
With Accretion
With Lost Units
Nature of Process Costing
Nature of Process Cost Systems

Use to apply costs to similar products that are

mass produced in a continuous fashion
Examples include the production of Ice Cream,
Cereal, Paint, and Soft Drinks
Once started, production continues until product
is completed; processing is the same for the
entire run
Comparison of Products Produced
Under Process and Job Order Cost Systems
Job Order Cost and Process Cost Flow

Job Order Cost Systems Process Cost Systems

Costs are assigned to each Costs are tracked through a

job. series of connected
manufacturing processes or
departments.

Products are uniform or

Products have unique relatively homogeneous and
characteristics. produced in a large volume.
Job Order Cost vs Process Cost Flow
Process Cost Flows Illustrated

Example – Tyler Company

Maker of automatic can openers

Manufacturing consists of two processes:

Machining – raw materials are shaped, honed,
and drilled
Assembly – parts assembled and packaged

Materials, labor, and manufacturing overhead

added in both departments
Process Cost Flows Illustrated

Example – Tyler Company

Assignment of Manufacturing Costs

Accumulation of materials, labor, and overhead

costs is the same as in job order costing

Debit Raw Materials Inventory for

purchases of raw materials
Debit Factory Labor for factory labor cost
as incurred
Debit Manufacturing Overhead for overhead
costs as incurred

However, assignment of the three manufacturing

cost elements to Work in Process is different
Assignment of Manufacturing Costs

Materials

A process cost system requires fewer material

requisition slips than a job order cost system
Materials are used for processes and not specific jobs
Requisitions are for larger quantities of materials

The journal entry to record materials used:

Assignment of Manufacturing Costs

Factory Labor Costs

Time tickets can be used in both systems

The labor cost chargeable to a process can also be obtained
from the payroll register or departmental payroll
summaries.
The journal entry to record factory labor costs:
Assignment of Manufacturing Costs

Manufacturing Overhead Costs

Objective of assigning overhead –

allocate overhead to departments on an
objective and equitable basis

Use the activity that “drives”

or causes the costs

Machine time used -

primary driver in continuous manufacturing
operations
Assignment of Manufacturing Costs

Manufacturing Overhead Costs

The entry to allocate overhead to the two

processes is:
Assignment of Manufacturing Costs

Entries to Transfer Costs Through System

Monthly Entry to transfer goods to next department:

Entry to transfer completed goods to Finished Goods:

Entry to record Cost of Goods sold at the time of sale:

Quick Check ✓

Process costing is used for products

that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check ✓

Process costing is used for products

that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
 Equivalent Units of Production

Equivalent units are the

product of the number
of partially completed
units and the
percentage completion
of those units.

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 – The Basic Idea
Two half completed products are
equivalent to one complete product.

+ = 1

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.
Quick Check ✓
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 percent complete. How
many equivalent units of production did Jones
have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check ✓
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 percent complete. How
many equivalent units of production did Jones
have for the period?
a. 10,000
10,000 units + (5,000 units × 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
Process Costing: Single Department
COST OF PRODUCTION REPORT
Calculate the total units to account (TUTA)

Compute the Equivalent Units of Production (EUP)

Find the Total Cost to Account (TCTA)

Compute the Unit Cost per EUP

Assign cost to inventories

 Julian Company transferred 5,500 units to Finished Goods Inventory
during August. On August 1, the company had 300 units on hand (40%
complete as to both materials and conversion costs). On August 30, the
company had 800 units (10% complete as to material and 20% complete
as to conversion cost).
The number of units started and completed during August is _____.
 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.
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more
accurate than the weighted-average method)
differs from the weighted-average method in
two ways:

1. The computation of equivalent units.

2. The way in which the costs of beginning
inventory are treated.
 Joana Corp has a process cost system. All
materials are added at the start of the
process in Department One. The following
information is available for the month of
January.

Using Weighted Average method, determine:

1. EUP for DM
2. EUP for CC
 Joana Corp has a process cost system. All
materials are added at the start of the
process in Department One. The following
information is available for the month of
January.

Using FIFO method, determine:

1. EUP for DM
2. EUP for CC
 Jehan Manufacturing Company presents the
following production data for the month of July:

Using Weighted Average method, determine:

1. EUP for DM
2. EUP for CC
 Jehan Manufacturing Company presents the
following production data for the month of July:

Using FIFO method, determine:

1. EUP for DM
2. EUP for CC
 Kevin Manufacturing Company makes fabric-covered hatboxes.
The company began August with 500 boxes in process that were 100%
complete as to cardboard, 80% complete as to cloth and 60% complete as
to conversion cost. During the month, 3,300 boxes were started. On
August 31, 350 boxes, were in process, which were 100% complete as to
cardboard, 70% complete as to cloth and 50% complete as to conversion
costs). Using the Weighted Average method, EUP for cloth is ____.
 Kevin Manufacturing Company makes fabric-covered hatboxes.
The company began August with 500 boxes in process that were 100%
complete as to cardboard, 80% complete as to cloth and 60% complete as
to conversion cost. During the month, 3,300 boxes were started. On
August 31, 350 boxes, were in process, which were 100% complete as to
cardboard, 70% complete as to cloth and 50% complete as to conversion
costs). Using the FIFO method, EUP for cardboard is _________.
 Matthew Inc. adds materials at Using WA method, the total cost per EUP for August is
the beginning of the process in
department One. Conversion costs
were 75% complete as to the 8,000
units in WIP on August 1 and 50%
complete as to the 6,000 units in
WIP on August 31. During
August, 12,000 units were
completed and transferred to the
next department. An analysis of
the costs relating to WIP on
August 1 and to production
activity for August is as follows:
Costs (P)
Materials Conversion
WIP, August 1 9,600 4,800
Costs added in August 15,600 14,400
 Matthew Inc. adds materials at Using FIFO method, the total cost per EUP for August is
the beginning of the process in
department One. Conversion costs
were 75% complete as to the 8,000
units in WIP on August 1 and 50%
complete as to the 6,000 units in
WIP on August 31. During
August, 12,000 units were
completed and transferred to the
next department. An analysis of
the costs relating to WIP on
August 1 and to production
activity for August is as follows:
Costs (P)
Materials Conversion
WIP, August 1 9,600 4,800
Costs added in August 15,600 14,400
 Papasa Co. operates two departments. In Department 2, materials are applied upon 40% completion
of the process. Below are the information gathered from the production department for the month
ended August 31. 2017. Use WA Method
Units Cost
WIP, 8/1/17, 50% complete 12,000
Direct Materials P 67,500
Conversion Cost 44,400
From preceding department 51,600
Added this period 78,000
Direct Materials P 157,500
Conversion Cost 154,350
From preceding department 218,400
WIP, 8/31/17, 30% complete 15,000
 Papasa Co. operates two departments. In Department 2, materials are applied upon 40% completion
of the process. Below are the information gathered from the production department for the month
ended August 31. 2017. Use FIFO Method
Units Cost
WIP, 8/1/17, 50% complete 12,000
Direct Materials P 67,500
Conversion Cost 44,400
From preceding department 51,600
Added this period 78,000
Direct Materials P 157,500
Conversion Cost 154,350
From preceding department 218,400
WIP, 8/31/17, 30% complete 15,000
Process Costing: Multiple Department
 Multiple Department Processing

Process 1 Wait
Materials

Transferred-In Process 2
Cost

Finished Process 3 Wait

Product
Transferred-In Cost
Are costs incurred in previous departments that
are carried forward as the product cost when it
moves to a subsequent process in the production
cycle.

Also called previous department costs.

Journal entries are made to mirror the progress in

production from department to department.
Transferred-In Cost
 Transferred-in costs are treated as if they are a separate type of
direct material added at the beginning of the process.

 Transferred in cost are always 100% complete as of the

beginning of the process in the new department.

 When successive departments are involved, transferred units

from one department become all or part of the direct materials
of the next department.

 All units whether completed and transferred out during the

period or in ending work in process, are always fully complete
with respect to transferred-in costs.
Aasa Co manufactures only one product that would undergo process in two departments. Below are
important details available for the two departments: Use WA Method

Department 1 Department 2
WIP, beg 30% complete 70% complete
WIP, end 50% complete 30% complete
Stage when materials are added beginning when 60% complete

Department 1 Department 2
Units Cost Units Cost
WIP, beg 20,000 25,000
Direct Materials P 30,000 P 63,500
Conversion Cost 36,500 34,696
Trasferred in 122,250

Added this period 80,000 ?

Direct Materials P 180,000 P 167,500
Conversion Cost 259,500 140,624
Trasferred in - ?

WIP, end 15,000 18,000

Completed & transferred 85,000 ?
Weighted Average Method
Aasa Co manufactures only one product that would undergo process in two departments. Below are
important details available for the two departments: Use FIFO Method

Department 1 Department 2
WIP, beg 30% complete 70% complete
WIP, end 50% complete 30% complete
Stage when materials are added beginning when 60% complete

Department 1 Department 2
Units Cost Units Cost
WIP, beg 20,000 25,000
Direct Materials P 30,000 P 63,500
Conversion Cost 36,500 34,696
Trasferred in 122,250

Added this period 80,000 ?

Direct Materials P 180,000 P 167,500
Conversion Cost 259,500 140,624
Trasferred in - ?

WIP, end 15,000 18,000

Completed & transferred 85,000 ?
FIFO Method
Process Costing: With Accretion
Increase in Quantity of Production When
Materials Are Added

In some production process, the addition of materials

result in an increase in the total volume or number of
units of the product.

For example:
In the manufacture of soft drinks, the syrup is often
produced in one department and carbonated water
added in a subsequent process. The addition of
carbonated water increases the total volume of liquid
product to be accounted for.
 In the manufacture of soft drinks, the syrup is often produced in one
department and carbonated water added in a subsequent process. The
addition of carbonated water increases the total volume of liquid product
to be accounted for. The Mixing Department of Tiger Paint Company
receives paint dye from the Pigment Department; the dye is mixed with a
liquid latex to form paint in the Mixing Department for April are:

Gallons in work in-process, beginning inventory, 25% converted 1,800

Gallons received from Pigment Department 6,000
Gallons of latex base added in mixing Department 3,200
Gallons transferred to Canning Department ???
Gallons in work in-process, ending inventory, 50% converted 1,000

Based on the cost of production report for the month of March, work in-
process beginning was 25% complete as to conversion costs. The departmental
supervisor reported that the ending inventory of work in-process was 50%
complete as to conversion costs. Also, the materials are added here whenever
the process reaches 30% conversion.
WIP, beg.
Cost from preceding department 5,800
Materials -
Conversion costs 4,095
Current period manufacturing cost
Cost from preceding department 18,400
Materials 26,400
Conversion costs 21,105
Accounting for Lost Units
 Three Types of Production Losses

◼ Spoilage
◼ Rework
◼ Scrap
 Three Types of Production Losses

1. Spoilage - refers to units of production – whether fully or partially

completed – that do not meet the specifications required by
customers for good units and that are discarded or sold at
reduced prices.
◼ Examples:
 defectiveshirts, jeans, shoes, towels, sold as “seconds”
 defectivealuminum cans sold to aluminum manufacturers for remelting to
produce other aluminum products
 Three Types of Production Losses

2. Rework - refers to units of production that

do not meet the required specifications of
customers but which are subsequently
repaired and sold as good finished goods.
 Defects are detected during or after the
production process, and are reworked and
sold as good products
 Three Types of Production Losses

3. Scrap – refers to residual material that results from

manufacturing a product
❑ Scrap has low total sales value compared with the total sales
value of the product.
 Accounting for Spoilage
◼ Accounting for spoilage aims to determine the magnitude
of spoilage costs and to distinguish between costs of
normal and abnormal spoilage
◼ To manage, control and reduce spoilage costs, they
should be highlighted, not simply folded into production
costs
Types of Spoilage
◼ Normal Spoilage – is spoilage inherent in
a particular production process that arises
under efficient operating conditions
Management determines the normal spoilage
rate.
Most companies tolerate some level of defects
by establishing an accepted quality level
(AQL) for their production/services.
◼ Ex. If quality goal is 98%, management expects a
2% loss
Normal Spoilage
 Costs of normal spoilage are typically included as a component
of the costs of good units manufactured because good units
cannot be made without also making some units that are
spoiled
 Reported as product cost since eventually they become part of
the cost of the good units
Types of Spoilage
◼ Abnormal Spoilage – is spoilage that is
not inherent in a particular production
process and would not arise under
normal operating conditions
 Any loss in excess of the normal loss
 Abnormal spoilage is considered avoidable and
controllable
 Units of abnormal spoilage are calculated and
recorded in the Loss from Abnormal Spoilage
account, which appears as a separate line item in the
income statement
 Inspection point
◼ Inspection point—the stage of the production process at
which products are examined to determine whether they
are acceptable or unacceptable units.
◼ Spoilage is typically assumed to occur at the stage of
completion where inspection takes place.
 Inspection point
◼ Regardless of where in the process the units were truly lost, the
loss point is always deemed to be the inspection point.
◼ Units that have passed the inspection point are good units,
whereas units that have not passed the inspection point may be
good or defective/spoiled.
◼ In deciding on the number of inspection points, management must
weigh the costs against the benefits.
 Reason of Lost Units

Some of these losses, such as evaporation, leakage, or

oxidation, are inherent in the production process.

For example:
When Starbucks roasts coffee beans, Approximately 20 percent
of the original weight is lost from water evaporation. This situation
results in shrinkage.

Modifying the production process to reduce or eliminate the causes

of shrinkage may be difficult, impossible, or simply not cost
beneficial.
Spoilage of some food products occurs simply by exposure to the
atmosphere wherever perishable foods are processed or stored.

For example:
Spoilage of meats and other perishable foods awaiting customer
purchases in supermarkets can be further prevented by covering
refrigeration cases each night.
At other times, errors in the production process (either by
humans or machines) cause a loss of units through rejection at
inspection for failure to meet appropriate quality standards or
designated product specifications.
Whether these lost units are considered defective or spoiled
depends on their ability to be economically reworked.

The method of accounting for the cost of lost units depends

on whether the loss is considered normal or abnormal and
whether the loss occurred continuously in the process or at a
discrete point.
 Normal and Abnormal Loss
An abnormal loss is a loss in excess of the normal, predicted
tolerance limits. Thus, when an abnormal loss occurs, so does
a normal loss (unless zero defects have been set as the AQL).

Abnormal losses generally arise because of human or machine error

during the production process.
 Continuous and Discrete Losses
Realistically, units are lost in a production process at a specific
point. However, accounting for lost units requires that the loss be
specified as being either continuous or discrete.

For example:
The weight loss in roasting coffee beans and the relatively
continual breakage of fragile glass ornaments can be considered
continuous losses because they occur fairly uniformly throughout
the production process.
 Continuous and Discrete Losses
In contrast, a discrete loss is assumed to occur at a specific point.

For example:
Adding the wrong amount of vinegar to a recipe for salad dressing
or attaching a part to a motor upside down. The units are only
deemed lost and unacceptable when a quality check is performed.

Therefore, regardless of where in the process the units were truly

“lost,” the loss point is always deemed to be an inspection point.
Summary of Handling Lost Units in a Process Costing System

NORMAL ABNORMAL
Do not include equivalent lost Must include equivalent lost units
units in EUP schedule. Units in EUP schedule. Assign cost to
CONTINUOUS effectively “disappear”; unit lost units and charge as loss of
costs of good production are period.
increased.
Must include equivalent lost Must include equivalent lost units
units in EUP schedule. Assign in EUP schedule. Assign cost to
cost to lost units. Determine lost units and charge as loss of
point of ending work in process: period.
a. if before inspection point,
DISCRETE assign cost of lost units only to
units transferred.
b. if after inspection, prorate
cost of spoiled units between
units transferred and units in
ending inventory.
 Continuous versus Discrete Losses
Type Assumed to Occur May Be Cost handled Now? Cost Assigned To?

Absorbed by all units in

ending inventory and
Normal Product
transferred out on an EUP
Uniformly basis
Continuous
throughout process
Or

Written off as a loss

Abnormal Period
on an EUP basis

Absorbed by all units

past inspection point in
Normal ending inventory and Product
At inspection point transferred out on an
Discrete or EUP basis
at end of process
Or

Written off as a loss

Abnormal Period
on an EUP basis
The Five-Step Procedure for Process
Costing with Spoilage

◼ Step 1: Summarize the flow of physical

units of output—identify both normal and
abnormal spoilage.
◼ Step 2: Compute output in terms of
equivalent units. Spoiled units are
included in the computation of output units.
The Five-Step Procedure for Process
Costing with Spoilage
◼ Step 3: Summarize total costs to account
for .
◼ Step 4: Compute cost per equivalent unit.
◼ Step 5: Assign total costs to:
1. Units completed
2. Spoiled units
3. Units in ending work-in-process
End of the chapter
Thank you!