Process Costing

Evaporation Loss

Evaporation loss is typical in the manufacture of liquid or chemical products, which, because of the
effect of heating or chemical contents of the product being manufactured, decreases the quantity
started. Unlike normal lost units, evaporation loss takes place gradually from start of the process to final
completion.

The average loss suffer by a department is usually estimated by production engineers. This
percentage of evaporation loss is applied proportionately as production progresses.

Sample Problem:
A. Department B manufactures alcohol products which undergo processing for 10 days during
which period, the products suffers 20% evaporation loss. Production report of Department B for the
month of March 2020 below:
Quantity
Work in process, beginning 3,600 liters 5 days processed
Started in process 26,000 liters
Work in process, end 4,800 liters 2 days processed

Cost Incurred:
Work in process, beginning P26,400
Materials 96,800
Labor 58,080
Overhead 38,720

Required: Under FIFO method prepare cost of production report

Cost of Production Report

For the month of March 31, 2020
Department B

QUANTITY SCHEDULE Actual Units Net of Evaporation Work Done EUP

Work in process, beg 4,000 3,600 (50% X20%=10% EL 50%

Received from Dept. A 26,000
Total units to be
‘accounted for 30,000

Finished and transferred

Beg 4,000 3,200 50% 1,600
Received 21,000 16,800 100% 16,800
Work in process, end 5,000 4,800 20% 960
Total units as accounted 30,000 19,360

COST SCHEDULE Total Cost Units Unit Cost

W/P-Beg P26,400
Current Cost 193,600 19,360 PP10.00
Total costs to be accounted for P220,000

Cost Accounted for:

Completed and transferred

Work in process, Beg P26,400
Current cost (1,600X P10) 16,000 P42,400
Received from Dept B (16,800X P10) 168,000
Total cost of Completed and transferred P210,400

Work in process, end (960X P10) P 9,600

Total cost as accounted for P220,000

Explanation:
a. The work in process beginning (3,600 liters were already processed for 5 days (50% completed), hence,
it already suffered evaporation loss of 10% (20% X 5/10). The original units are then equal to 4,000 liters ( 3,600 /
90%
 b. The net of evaporation for those units completed and transferred durinh the month is equa; to the
actual units minus 20% evaporation loss. The EUP is equal to the units (net of evaporation) multiplied by the work
done during the period.

c. The work in process at the end already processed for 2 days (20% completed), hence, it already suffered
evaporation loss of 4% (20% X 2/10). The original units are then equal to 5,000 liters ( 4,800 liters/ 96%)

B. Consider the following data. Department B of Ethel Manufacturing Corp. suffers an average of
evaporation loss of 10%. The following data were obtained for the month of October, 2019:
Units:
In process, October 1 (2/5 completed) 9,600 gallons
Received from Department A 30,000 gallons
Finished and transferred 25,200 gallons
In process, October 31 (1/4 complete) 11,700 gallons
Costs:
In process beginning P5,760
Received from Department A 30,000
Current costs
Materials 19,440
Labor 7,290
Overhead 2,430
Required: Under FIFO
a. Calculate the evaporation loss
b. Calculate the EUP and the cost per EUP
c. Calculate the costs of finished and transferred units
d. Calculate the costs of the in process at the end

Accounting for Increased in Units

Increases in units processed usually encountered at the start of the process when additional materials are applied,
thereby increasing the quantities handled.
Increases encountered in the first department will have no effect except the decrease of the unit cost of
production since a bigger divisor shall be applied to compute the unit cost. However, increases in subsequent
departments affect the unit cost from prior departments since the unit quantity will be greater. A revision for the
cost from prior department will be necessary to account for the costs of the units in subsequent departments.

Sample Problem

Assume that during the month of January 2020, Department X received 40,000 units from Department W with a
total cost of P152,000. At the start of the process, Department X added materials which increased the total
quantity received by 25%.
Quantity
Completed and transferred 42,000
Work in process, end (1/2 completed 8,000
Costs incurred
Materials P75,000
Labor 46,000
Overhead 23,000
Total P144,000

Required: Prepare Cost of Production Report for the month of January 31, 2020

Cost of Production Report

For the month of March 31, 2020
Department X

QUANTITY SCHEDULE Actual Units

Received from Dept. W 40,000
Increase in units 10,000
Total units to be
‘accounted for 50,000

Work Done Materials Work Done C.C

Finished and transferred 42,000 100% 42,000 100% 42,000
Work in process, end 8,000 100% 8,000 50% 4,000
Total units as accounted 50,000 46,000

COST SCHEDULE Total Cost Units Unit Cost

Received from Dept W P152,000 50,000 P3.04
Current Costs
 Materials 75,000 50,000 1.50
Conversion Cost 69,000 46,000 1.50

Total costs to be accounted for P296,000 P6.04

Cost Accounted for:

Completed and transferred

Received from Dept W (40,000X P3.04) P127,680
Current Cost ( 40,000 X P3) 126,000
Total cost of Completed and transferred P253,680

Work in process, end

Cost from Dept W (20,000X P3.04 P24,320
Current cost
Materials ( 20,000X P1.50) 12,000
Conversion Cost (4,000 X 1.50) 6,000

Total cost as accounted for P296,000

Explanation:
The original unit cost of the units received from Department W is P3.80 (P152,000/ P40,000).
However, Department X increased the quantity to 50,000 units. Accordingly, the cost of P152,000 should
be reapportioned over the new quantity (50,000 units). Thus, the adjusted unit cost from Dept. W is P3.04
(P152,000/50,000 units)