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# 4. Process Costing.

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UNIVERSITY OF THE CORDILLERAS
College of Accountancy
Accounting 24c MAS
___________________________________________________________________
Process Costng
Prepared by: Siegfried M. Erorita, cpa, mba c!"#
___________________________________________________________________
Re\$e% O&'ect\$es
1. Record the flow of materials, labor, and overhead through a process costing
system.
2. Compute the equivalent units of production using the weighted-average
method.
. !repare a quantity schedule using the weighted-average method.
". Compute the costs per equivalent unit using the weighted-average method.
#. !repare a cost reconciliation using the weighted-average method.
\$. Compute the equivalent units of production using the %&%' method.
(. !repare a quantity schedule using the %&%' method.
). Compute the costs per equivalent unit using the %&%' method.
*. !repare a cost reconciliation using the %&%' method.
To(c Su))ary

A* +o&,Or-er Costng \$s* Process Costng* !rocess costing is used in industries
that produce homogenous products such as bric+s, flour, and cement on a
continuous basis.

.* S)lartes &et%een 'o&,or-er an- (rocess costng* ,ob-order and
process costing systems share some characteristics-
a. .oth systems have the same basic purpose/to assign material, labor, and
b. .oth systems use the same basic manufacturing accounts- 0anufacturing
'verhead, Raw 0aterials, 1or+ &n !rocess, and %inished 2oods.
c. 3he flow of costs through the manufacturing accounts is basically the same.
/* Dfferences &et%een 'o&,or-er an- (rocess costng* 3he differences
between 4ob-order and process costing occur because the flow of units in a
process costing system is more or less continuous and the units are essentially
indistinguishable from one another. 5nder process costing-
a. 6 single homogenous product is produced on a continuous basis over a long
period of time. 3his differs from 4ob-order costing in which many different
products may be produced in a single period.
b. Costs in process costing are accumulated by department, rather than by
individual 4ob.
c. 3he department production report is the +ey document in process costing,
showing the accumulation and disposition of cost. &n 4ob-order costing, the
4ob-cost sheet is the +ey document.
0* O\$er\$e% of Process Costng* 0anufacturing costs are accumulated in
processing departments in a process costing system. 6 processing department is
any location in the organi7ation where wor+ is performed on a product and where
departments should also have two other features. %irst, the activity performed in
the processing department should be essentially the same for all units that pass
through the department. 8econd, the output of the department should be
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4. Process Costing.doc
homogeneous. &n process costing, the average cost of processing units for a period
is assigned to each unit passing through the department.
3wo process costing methods are illustrated in the te=t/the weighted-average
method and the %&%' method. 1hile the %&%' method provides more current cost
data for decision-ma+ing and performance evaluation purposes, it is more difficult
for students to grasp. %or that reason, the %&%' method is covered in an appendi=.
C* E1u\$alent Unts of Pro-uct* &n order to calculate the average cost per unit,
the total number of units must be determined. !artially completed units pose a
difficulty that is overcome using the concept of equivalent units. >quivalent units are
the equivalent, in terms of completed units, of partially completed units. 3he
formula for computing equivalent units is-
Number of
Equivalent Percentage
partially completed
units completion
units
= ×
>quivalent units are the number of complete, whole units one could obtain from the
materials and effort contained in partially completed units.
5nder the weighted-average method, the equivalent units for a particular cost
category ?e.g., materials or conversion cost@ is computed by adding together the
number of units completed and transferred out to the ne=t department during the
period and the equivalent units in the ending wor+ in process inventory in the
department.
Units transferred to Equivalent Equivalent units
units of the next department in ending work in
or to finished goods process inventory production
= +

D* Pro-ucton Re(ort* 3he purpose of a production report is to summari7e all of
the activity that ta+es place in a departmentAs wor+ in process account for a period.
6 production report consists of three parts-
B 6 quantity schedule and a computation of equivalent units.
B 6 computation of costs per equivalent unit.
B 6 reconciliation of all cost flows into and out of the department during the
period.
E* Pro-ucton Re(ort2 3eg4te-,A\$erage 5et4o-* >mphasi7e that the
weighted-average method does not attempt to separate units in the beginning
inventory from units started during the current period. Costs and units from
beginning inventory are blended together with costs and units from the current
period.

.* 6uantty Sc4e-ule an- E1u\$alent Unts* 3he first step in preparing a
production report is to prepare a quantity schedule, which shows the physical
flow of units through the department. 3his schedule allows managers to see at
glance how many units moved through the department during the period. 5sing
the quantity schedule, the equivalent units can be easily computed.

/* Costs (er E1u\$alent Unt* 3he second step in preparing a production report
is to calculate the costs per equivalent unit. 3he cost per equivalent unit is
computed for a particular cost category ?i.e., materials, labor, overhead, or
conversion@ by dividing its total cost by its total equivalent units. Cote that
under the weighted-average method the costs include both the costs already in
beginning inventory as well as the costs added by the department during the
current period.
7* Cost Reconclaton* 3he third step in preparing a production report is to
prepare a cost reconciliation. 3he purpose of a cost reconciliation is to show
how the costs from beginning wor+ in process inventory and costs that have
been added during the period are accounted for.
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4. Process Costing.doc
a. Costs come into the department from units in beginning inventory, from
material, labor, and overhead costs that are added during the period, and
from any units that might have been transferred in from a prior
department.
b. 6 departmentAs costs are accounted for by showing the costs that are
transferred out to the ne=t department ?or to finished goods@ and by
specifying the costs that remain in the ending wor+ in process inventory.
F* O(eraton Costng* 3he costing systems discussed in Chapters and "
represent the two ends of a continuum. 'n one end is 4ob-order costing and on the
other is process costing. .etween the two e=tremes, there are many DhybridE
systems. 'peration costing is an e=ample of such a hybrid system. &t is used in
situations where products have some common as well as individual characteristics.
3Fs, for e=ample, have some common characteristics in that all models must be
assembled and tested following the same basic steps. Gowever, each model has
different components with different costs. 3he costs of the components ?materials@
would be charged to a batch of a particular model individually, as in 4ob-order
costing, but the conversion costs may be assigned using process costing.
8* FIFO 5et4o-* 3he %&%' method segregates the units and costs in the
beginning inventory from the units and costs of the current period.

.* 6uantty Sc4e-ule* 3he quantity schedule prepared under the %&%' method is
identical to that prepared under the weighted-average method, e=cept that the
Dunits transferred outE are separated into those units that came from beginning
inventory and those units that were started and completed this period.
/* E1u\$alent Unts* 3he %&%' method differs from the weighted-average method
for computation of equivalent units in two ways.
a. %irst, under the %&%' method the Dunits transferred outE figure is split
between units completed from the beginning inventory and units started
and completed during the current period.
b. 8econd, the equivalent units refers to 4ust the equivalent units for the wor+
performed during the current period. 3he equivalent units under the %&%'
method consist of three amounts- the wor+ needed to complete the units in
the beginning inventoryH the wor+ e=pended on the units started and
completed during the current periodH and the wor+ e=pended on partially
completed units in the ending inventory.
c. 3his method is called the %&%' method because it assumes that the units in
beginning inventory are completed and transferred out before any new units
are started. 3he costs of beginning inventory are segregated from costs
d. 3he only difference in the equivalent unit calculations between the two
methods is that the equivalent units in beginning inventory are included in
the weighted-average method. 5nder the weighted-average method the
costs already in beginning inventory will be added to the costs incurred
during the period to arrive at unit costs. 3o be consistent we must add the
equivalent units already in beginning inventory to the equivalent units for
the wor+ performed during the current period.
7* Costs (er E1u\$alent Unt* &n computing costs per equivalent unit, costs
associated with the beginning wor+ in process inventory are ignored. &t is
assumed that the units in beginning inventory are completed and transferred to
the ne=t department before any new units are wor+ed on. !roviding that more
units are transferred out than were in beginning inventory, all of the costs
associated with beginning inventory will be transferred to the ne=t department.
9* Cost Reconclaton* 6s with the weighted-average method, the purpose of a
cost reconciliation is to show how the costs have been charged to a department
during a period and to show how these costs are accounted for.
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4. Process Costing.doc
a. 3he DCosts to be accounted forE section of the report is the same as for the
weighted-average method.
b. 3he DCost accounted forE section differs from the weighted-average method
in that four layers of cost are involved. 3hese layers are ?1@ the cost in the
beginning inventory, ?2@ the cost required to complete the units in the
beginning inventory, ?@ the cost of units started and completed during the
current period, and ?"@ the cost of the ending wor+ in process inventory.
H* E\$aluaton of 3eg4te-,A\$erage an- FIFO * 3he weighted-average method
is simpler to learn and apply than the %&%' method, but the %&%' method is
generally considered to be superior for cost control. 3he reason is that the %&%'
method helps to isolate current performance by segregating current costs from prior
period costs. 3he weighted-average method mi=es the costs of the current period
with the costs of prior periods.
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