Prince John T.

Guhiling BSA-3

DISCUSSION

PROCESS COSTING

1. What are the two basic systems of cost accounting and under what conditions may each
be used advantageously?

De Leon et al. (2019) stated that the two basic systems of cost accounting are Job order
costing and Process costing. A job order cost accumulation system is most suitable when a single
production of batch or products is manufactured according to a customer's specifications. A
process cost accumulation system is used when products are manufactured by with mass
production techniques or continuous processing Process costing is suitable when homogeneous
products are manufactured in large volume A customized cabinet manufacturer would use a job
order cost system whereas a manufacturer of 8-ounce jars of peanut butter would use a process
cost system.

2. What documents constitute the supporting subsidiary ledger for work-in-process

inventory when using a process costing system?

Under a process cost system, the three basic elements of a product's cost are accumulated
according to department or cost center Individual work in process inventory accounts are set up
for each department and are charged with the costs incurred in the processing of the units that
pass through them Upon completion of the process, the cost of work in process inventory in the
last department is transferred to finished goods inventory (De Leon et al., 2019).

3. What do we mean by the term equivalent units of production? How is such a figure
calculated?

Units of product in work-in-process inventory are assumed to be partially completed;

otherwise, the units would not be in work-in-process inventory. Process costing requires partially
completed units in ending work-in-process inventory to be converted to the equivalent completed
units (called equivalent units). Equivalent units are calculated by multiplying the number of
physical (or actual) units on hand by the percentage of completion of the units. If the physical
units are 100 percent complete, equivalent units will be the same as the physical units. However,
if the physical units are not 100 percent complete, the equivalent units will be less than the
physical units (Saylordotorg, n.d.).

For example, if four physical units of product are 50 percent complete at the end of the period, an
equivalent of two units has been completed (2 equivalent units = 4 physical units × 50 percent).
The formula used to calculate equivalent units is as follows:

Equivalent Units = Number of physical units x Percentage of completion

4. How are the equivalent units of production figure used in connection with a process
costing system?

The concept of equivalent production is basic to process costing. In most cases, not all
units are completed during the period. Thus, there are units still in process at varying stages of
completion at the end of the period. All units must be expressed in terms of completed units in
order to determine unit costs Equivalent production equals total units completed plus incomplete
units restated in terms of completed units. To compute equivalent production, an analysis must
be made of the stage of completion of work in process inventory, subdivided into direct materials,
direct labor, and factory overhead. The unit cost in the department is computed by dividing the
cost incurred in the department, for each clement, by the equivalent production (De Leon et al.,
2019).

5. Explain why it is necessary to estimate the stage or degree of completion of work in

process at the end of the accounting period under the process costing system.

It is necessary to estimate the stage or degree of completion of work in process at the end
of the accounting period under the process cost system because the unfinished goods should not
be given the same weight as given to finished goods while computing the number of units of
production. For one thing, there may be some units in beginning inventory that maybe partially
complete: and the costs of direct materials, direct labor, and factory overhead that were assigned
to these units last period will become the cost of the beginning inventory and must be accounted
for. Also, if the department is not the first department in the production process, it will receive
costs from other departments when the units from these departments are received in its
operations. In addition, each department will incur direct materials, direct labor and factory
overhead in its own processing. The total of these costs must be determined so that they can be
accounted for (De Leon et al., 2019).
6. What would be the effect on the unit cost of finished goods if an inaccurate estimate of
the stage of completion of work in process is made?

If the estimate of the stage of completion of work in process is too high, the figure
representing equivalent production would be overstated, and, therefore, the unit cost for the
month would be too low. As a result, the uncompleted units would absorb more than their
appropriate share of total costs and the goods finished would be charged for less than the correct
amount of costs. The unit cost of finished goods would be understated.

7. What is a cost of production report?

The cost of production report (CPR) is a document used in process costing system that
summarizes information about the flow of units and costs through the work in process account of
a processing department. It is equal to the job cost sheet prepared in a job order costing system.
A separate cost of production report is prepared for each processing department.

The cost of production report is considered a key management document because it

provides managers with the following crucial information about output produced and cost
incurred by a processing department:

1. The number of units transferred in and transferred out by a department during the month.

2. The per unit processing cost incurred by a processing department. It includes total per
unit cost (i.e., total cost incurred divided by total output) as well as per unit cost for
individual cost elements like direct materials, direct labor, and manufacturing overhead.

3. The highest production cost among materials, labor and manufacturing overhead.

4. The impact of a recent improvement in production process on per unit cost in a

processing department.

5. A significant change in per unit cost due to unexpected change in one or more cost
elements like direct materials, direct labor and manufacturing overhead.

6. The hurdles or limiting factors present in one or more processing departments that could
potentially disturb the overall output efficiency of the firm.

Other names used for cost of production report are production cost report and production report
(Javed, 2021).
8. What are the different divisions of a cost of production report?

Javed (2021), stated that a cost of production report consists of the following three sections/parts:

1. Quantity schedule section

2. Cost per equivalent unit section

3. Cost reconciliation section

9. What are spoiled units? In what way are they similar to spoiled units under job order
costing?

According to CFI (2021), Spoilage is wastage or loss of material that occurs during the
manufacturing process. Spoiled units are classified into two types; Normal spoilage units and
abnormal spoilage units. Normal spoilage or loss are expected while abnormal spoilage or loss
are those in excess of what have been predicted. Accounting for scrap and defective units in a
process cost system is essentially the same as in a job order cost system Cost to rework defective
units in a process cost are normally charged to Factory Overhead Control rather than to Work in
Process because defective units in a process cost system are usually the result of an internal
failure rather than customer's specification. The units classified as lost in a process cost system
are actually the same as the spoiled under the job order system The units are still with the
company, but due to imperfections discovered during quality control inspection, they were
removed from the manufacturing process.

10. How are spoiled units accounted for?

The cost of normal lost units are reported as product cost, since eventually they become
part of the cost of good units The cost of abnormal lost units are recognized as period costs as
charges for abnormal lost units are debited to Factory Overhead Control (De Leon et al., 2019).

A. The cost of normal lost units is charged to (a) completed units, and (b) units in process at the
end when:

1) Discovered at the beginning of the process,

2) Discovered during the process and no quality control inspection is indicated,
3) Discovered at the end of the process
B. The cost of the abnormal lost units is charged to a loss account or factory overhead when:

1) Discovered at the beginning

2) Discovered during the process with the point of discovery stated in the problem
4) Discovered at the end of the process

REFERENCES:

CFI. (2021). Spoilage Wastage or scrap that from the manufacturing process or badly damaged
material from processing a product. Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/other/spoilage/

De Leon, N., De Leon, E., & De Leon, G. Jr., (2019). Cost accounting and control 19th Edition.
GIC Enterprises & Co. Inc. Claro M. Recto, Manila, Philippines.

Javed, R. (2021) Cost of production report (CPR) – weighted average method. Retrieved from
https://www.accountingformanagement.org/cost-of-production-report-weighted-average-
method/

Saylordotorg. (n.d.). Determining Equivalent Units. Retrieved from

https://saylordotorg.github.io/text_managerial-accounting/s08-03-determining-
equivalent-units.html