FINAL MODULE

1. Process Costing - is a special branch of costing commonly used by the manufacturing industries which
process involves the continuous production of products.
2. Production report – the document that summarizes the manufacturing activity that takes place in a
process department over a given period of time.
3. Process- is a series of activities (operations) that are linked to perform a specific objective.
4. Equivalent units – are the units in production multiplied by the percentage of those units that are
complete (100 percent) or those that are in process.

COST FLOW
The cost flows for a process-costing system are similar to those for a job-order costing system. The primary
difference is that a job-order costing system accumulates manufacturing costs by job, and a process-costing
system accumulates manufacturing costs by process. See below for the difference.

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

A job-order costing system assigns manufacturing costs to jobs and transfers these costs directly to the finished
goods account when the job is completed whereas in a process-costing system, when units are finished for a
process, manufacturing costs are transferred from one process department’s account to the next. The last
process transfers the costs to Finished Goods.
In a process-costing system, each process is a subsidiary account of the work-in process control account. In the
previous lesson regarding job-order costing system, each job is a subsidiary account of the work-in-process
control account. A process-costing system is a simpler and less expensive system to operate than a job-order
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costing system. Another reason that a process-costing system is simpler is that laborers tend to specialize in
particular processes. Although time tickets are still used to track direct labor hours of any particular laborer,
there is no need to allocate them to various processes. Below illustrates the cost flows in a process-costing
system.
For example, the journal entries for the tableting department.
1. Work in Process—Tableting 600
Work in Process—Mixing 600
To transfer goods to tableting.

2. Work in Process—Tableting 400

Materials 100 Payroll 125
Overhead Control 175
To record additional manufacturing costs.

3. Work in Process—Bottling 800

Work in Process—Tableting 800
To transfer goods to bottling.

When goods are completed in one process, they are transferred with their costs to the subsequent
process.

For example, mixing transferred Php600 of its costs to tableting, and tableting (after further processing)
transferred Php800 of costs to bottling. A cost transferred from a prior process to a subsequent process is
referred to as a transferred-in cost. These transferred-in costs are (from the viewpoint of the process receiving
them) a type of direct materials cost. This is true because the subsequent process receives a partially completed
unit that must be subjected to additional manufacturing activity, which includes more direct labor, more
overhead, and, in some cases, additional direct materials.

For example, the second journal entry for the tableting department reveals that Php400 of additional
manufacturing costs was added after receiving the transferred-in goods from mixing. Thus, while mixing sees
the active and inert powders as a combination of direct materials, direct labor, and overhead costs, tableting
sees only the powder—a direct material, costing Php600.

Comparison Using Work-in Process Accounts

2
 (Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Illustrative Problem:

Happy Corporation uses process costing in its two production departments. A separate work in process account
is kept in the general ledger for each production department. The following data relate to operations for the
month of June:

Beginning Added
Inventory During March
Direct materials cost: Department A Php 4,000 Php24,000
Department B 2,000 19,000
Direct labor cost: Department A 5,000 39,000
Department B 3,500 34,000
Applied overhead: Department A 11,000 89,000
Department B 3,500 34,000

During June, 40,000 units with a cost of Php5 each were transferred from Department A to Department B, and
35,000 units with a cost of Php9 each were transferred from Department B to finished goods inventory.

Required: Prepare the appropriate general journal entries to record the cost charged to the producing
departments during June and the cost of units transferred from Department A to Department B and
Department B to finished goods inventory.

SOLUTION

Work in Process — Department A....................................................... 24,000

Work in Process — Department B....................................................... 19,000
Materials....................................................................................... 43,000

Work in Process — Department A....................................................... 39,000

Work in Process — Department B....................................................... 34,000
Payroll ........................................................................................... 73,000

Work in Process — Department A....................................................... 89,000

Work in Process — Department B....................................................... 34,000
Applied Factory Overhead ............................................................ 123,000

Work in Process — Department B....................................................... 200,000

Work in Process — Department A ................................................ 200,000

Finished Goods Inventory.................................................................... 315,000

Work in Process — Department B ................................................ 315,000

The Cost Production Report

In process-costing systems, costs are accumulated by process department for a period of time. The
production report is the document that summarizes the manufacturing activity that takes place in a process
department over a given period of time. The production report also serves as a source document for
3
transferring costs from the work-in-process account of one department to the work-in-process account of the
next department. In the department that handles the final stage of processing, the production report serves as
a source document for transferring costs from the work-in-process account to the finished goods account. A
production report provides information about the physical units processed in a department and also about the
manufacturing costs associated with them. Thus, a production report is divided into a unit information section
and a cost information section. The unit information section has two major subdivisions: (1) units to account for
and (2) units accounted for. Similarly, the cost information section has two major subdivisions: (1) costs to
account for and (2) costs accounted for.
In summary, a production report traces the flow of units through a department, identifies the costs
charged to the department, shows the computation of unit costs, and reveals the disposition of the
department’s costs for the reporting period.

An equivalent unit of production is an expression of the amount of work done by a manufacturer on units of
output that are partially completed at the end of an accounting period.

Illustrative Problem:

Unit Information Section

1. Units to account for:
Units in process, beg. (40% complete) 5,000
Units started 20,000
---------
Total units 25,000 units
==========
2. Units accounted for:
Units completed 18,000
Units in process, end (80%) completed 7,000
------------
Total units 25,000 units
======
Cost Information Section
1. Cost to account for:
FIFO Costing Method
Star Company Mixing Department Production and Cost Data: October

4
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Physical Flow Schedule: Mixing Department

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Equivalent Units of Production: FIFO Method

5
 (Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Star Company Mixing Department Production Report for October (FIFO Method) Unit Information

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

6
WEIGHTED AVERAGE COSTING METHOD

Physical Flow Schedule: Mixing Department

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Equivalent Units of Production: Weighted Average Method

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Star Company Mixing Department Production Report for October (Weighted Average Method) Unit Information

7
 (Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

The use of process costing is complicated by the presence of beginning or ending work-in-process
inventories. When work-in-process inventories are present, equivalent units must be used to measure output.
Also, with beginning work-in-process inventories, we must decide what to do with prior-period work and prior-
period costs. Two methods were described for dealing with beginning work-in-process inventories: the FIFO
method and the weighted average method. The FIFO approach is theoretically appealing because it follows the
process-costing principle: a period’s unit cost is computed by dividing the costs of the period by the output of the
period. To accomplish this, prior-period work and costs must be excluded. This work and its costs must be tracked
separately, creating some complexity in the approach. The weighted average approach is less complicated but
poses some problems when control and accuracy issues are important.

8
Let’s Check 8. To compute equivalent units of production using the FIFO
Activity 1. Please choose the best answer on the following questions. method of process costing, the work for the period must be
1. An equivalent unit of material means: broken down to units which were:
a. material and labor cost
b. the amount of material cost necessary to complete one A. started and completed during the
unit of production period
c. a unit of work in process inventory
B. completed during the period and
d. the amount of material cost necessary to start a unit of
units in ending inventory
production into work in process
C. competed from beginning
inventory, started and completed
2. On a cost of production report the following items are
during the month, and units in
included, except:
ending inventory
a. work in process—beginning inventory
D. started during the period and
b. cumulative costs through the end of departmental
units transferred out during the
production
period
c. finished goods—ending inventory
9. FIFO method of process costing will produce the same cost of
d. materials used in the department
goods manufactured amount as the average cost method
when there is no beginning inventory.
3. One of the characteristics of a process costing system: a. True
a. Costs are accumulated by order b. False
b. It is used by a company 10. The FIFO method of process costing differs from that of the
manufacturing custom machinery average cost method because it considers the stage of
c. It requires a lot more detailed completion of beginning work in
accounting than does a job order in process in computing equivalent units of production,
system whereas the average cost method does not consider the
d. Work in process inventory is stage of completion of beginning work in process.
restated in terms of completed a. True
units. b. False

4. Assuming that a company has no beginning work in process

inventory and the ending work in process inventory is 50%
complete as to conversion costs, the number of equivalent
units as to conversion costs would be:
a. less than the units completed
b. more than the units completed
c. less than the units placed in process
d. the same as the units completed

5. What is the first step in applying the average cost method?

a. add the beginning work in process
costs to the current period’s
production costs
b. divide the current period’s
production costs by the
equivalent units
c. subtract the beginning work in
process costs from the current
period’s production costs
d. a and b
6. The beginning work in process as to conversion costs was 60%
complete and the ending work in process as to conversion
costs was 45%. The amount of the conversion cost included in
the ending work in process (using the average cost method) is
determined by multiplying the average unit conversion costs
by what percentage of the total units in ending work in
process?
a. 60%
b. 55%
c. 45%
d. 50%
7. Assuming that company Y reports two different unit costs for
goods transferred to the next department, it is reasonable to
assume that :
a. the department accounts for lost
units at the end of the process
b. a FIFO costing method I used
c. lost unit costs are computed
separately
d. an average costing method is used

9
Let’s Analyze
1. Harana Company uses process costing to account for the costs of its only product, X. Production takes place
in two departments—Sanding and Polishing. On December 31, the inventory for Product X was as follows:

No unused materials
Work in process—
Sanding Department ................. 700 units (3/4 complete as to labor)
Work in process—
Polishing Department ................ 900 units (1/2 complete as to materials and
3/4 complete as to direct labor)
Finished Goods ................................... 500 units

(1) Compute the equivalent units of materials in all inventories combined at December 31.
(2) Compute the equivalent units of the Sanding Department's direct labor in all inventories at December 31.

(1) Work in process - Sanding Department 800

Work in process - Polishing Department (1,000 units x 1/2) 500

Finished goods 600

Units of materials in all inventories, Dec. 31 1,900

(2) Work in process - Sanding Department (800 units x 3/4) 600

Work in process - Polishing Department 1,000*

Finished goods 600*

Units of Sanding Dept.'s direct labor in all inventories, December 31 2,200

* All Sanding Department direct labor would be in all of these units or else they never
would have been transferred.

2. Karren Beach Products reports the following data for the first department in its production process:

Units in process at beginning of period (all materials; 3/4 labor

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 and factory overhead) .......................................................................................... 5,000
Units started in process .................................................................................................. 35,000
Units transferred out ...................................................................................................... 33,000
Units still in process (all materials; 1/2 labor and factory overhead) ............................. 5,000
Units completed but not yet transferred to Finished Goods ......................................... 2,000

Related data were:

Work in Process at Added During

Beginning of Period Period
Materials ............................................................................ Php100,000 Php304,000
Labor .................................................................................. 125,400 407,100
Factory overhead ............................................................... 173,500 407,750
Total............................................................................. Php398,900 Php 1,118,850

Required: Using the average costing method:

(1) Compute the unit cost for materials, labor, and factory overhead.
(2) Determine the cost of the work in process ending inventory.

(1) Materials: ($100,000 + $304,000) / 40,000 units* = $10.10 per unit

Labor: ($125,400 + $407,100) / 37,500 units* = $14.20 per unit
Factory overhead: ($173,500 + $407,750) / 37,500 units = $15.50 per unit

*Equivalent production:
Materials: 33,000 + 2,000 + 5,000 = 40,000 units
Labor and factory overhead: 33,000 + 2,000 + (1/2 x 5,000) = 37,500 units

(2) Units in process at end of period:

Completed and on hand (2,000 x $39.80) $ 79,600
Materials (5,000 units x $10.10) 50,500
Labor (5,000 units x 1/2 x $14.20) 35,500
Factory overhead (5,000 units x 1/2 x $15.50) 38,750
$ 204,350

In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives, arguments and ideas from the
unit lesson. I will supply the first item and you will continue the rest.

1. The weighted-average method is most appropriate to use when work-in-process is relatively small, or its
direct material costs , conversion costs and inventory levels are stable whereas FIFO method is used when
direct material costs, conversion costs, or inventory levels fluctuate significantly.
Your turn

2.

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Keywords Index

Cost flow Job order costing Weighted

average method
Cost information section Physical flow
Cost production report Process
Equivalent units Process costing
First in first out method Unit information section

Cost Production Report

Under the process costing system the production cost report is prepared at the end of each period for
each production process or department. This document summarizes the number of physical units and
equivalent units of a department, the costs incurred during the period, and the costs assigned to both units
completed and transferred out and ending work-in-process inventories.
There are five steps in process costing:
1. Analyze the physical flow of production units
2. Calculate equivalent units for each manufacturing cost element (materials, labor and overhead)
3. Determine total costs for each manufacturing cost element
4. Compute cost per equivalent unit for each manufacturing cost element
5. Assign total manufacturing costs to units completed and ending Work in Process (WIP)

Step 1: You analyze the physical flow of production units. Determine the number of units on hand in beginning
work-in-process, the number of units started into production (or received from a prior department), the number
of units completed, and the number of units in ending work-in-process inventory. The analysis of physical units
includes accounting for both input and output units. Input units include beginning work-in-process inventory and
all units that enter a production department during an accounting period. Output units include units that are
complete and transferred out from a production department and units in the ending work-in-process inventory.

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 Input Physical units
Work-in-process inventory, beg 10,000
Units started 40,000
Total units to account for 50,000

Output Physical Units

Units completed and transferred out during the month 44,000
Work –in-process inventory, end 6,000
Total units accounted for 50,000

Step 2: In this step, you calculate the equivalent units for each manufacturing cost element. The purpose of
calculating equivalent units of production for direct materials, direct labor, and factory overhead is to measure
the total work expended on production during an accounting period. The partially complete physical units are
converted into the equivalent number of whole units.

Step 3: You determine the total costs for each manufacturing cost element. The total manufacturing costs for
each cost element (materials, labor, and overhead) include the current costs incurred and the costs of the units
in work-in-process beginning inventory. The amount of these costs is obtained from material requisitions, labor
time cards, and factory overhead allocation sheets. The total manufacturing cost for each cost element is also
called total cost to account for. Be sure that the total cost determined in this step must agree with the total cost
assigned in step five.

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Step 4: The purpose of computing direct materials, direct labor, and factory overhead costs per equivalent unit
of production is to have a proper product costing and income determination for an accounting period, which
includes both complete and incomplete units.

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7 th Ed

Step 5: This is the last step wherein you assign total manufacturing costs to units completed and ending work-in-
process. The objective of the production cost report is to assign total manufacturing costs incurred to the units
completed during the period and the units that are still in process at the end of the period. The total costs assigned
in step five should equal the total costs to be accounted for in step three.

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7 th Ed

14
 PRODUCTION COST REPORT

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7th Ed

FIFO Costing Method

The process-costing principle requires that the costs of the period be divided by the output of the period.
Thus, theoretically, only current-period costs and current-period output should be used to compute current-
period unit costs. The first-in, first-out (FIFO) costing method attempts to follow this theoretical guideline.

Under the FIFO costing method, the equivalent units and manufacturing costs in beginning work in
process are excluded from the current-period unit cost calculation.
Thus, the FIFO method recognizes that the work and costs carried over from the prior period legitimately
belong to that prior period.
Since FIFO excludes prior-period work and costs, we need to create two categories of completed units.
FIFO assumes that units in beginning work in process are completed first, before any new units are started.
Thus, one category of completed units is that of beginning work-in-process units. The second category is
for those units started and completed during the current period. These two categories of completed units are
needed in the FIFO method so that each category can be costed correctly. For the units started and completed,
the unit cost is obtained by dividing total current manufacturing costs by the current-period equivalent output.
However, for the beginning work-in-process units, the total associated manufacturing costs are the sum of the
prior-period costs plus the costs incurred in the current period to finish the units. Thus, the unit cost is this total
cost divided by the units in beginning work in process.
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Illustrative Problem:
Dalitay Tool Company manufactures a product in two departments, Shaping and Assembly. The product is cut
out of sheet metal, bent to shape, and painted in the Shaping Department. Then, it is transferred to the Assembly
Department where component parts purchased from outside vendors are added to the unit. A process cost
system with a FIFO cost flow assumption is used to account for work in process inventories. Data related to
November operations in the Assembly Department follow:

Units in beginning inventory (90% materials, 80% labor and overhead) ......................... 1,000
Units received from the Shaping Department this period ............................................... 3,000
Units transferred to Finished Goods Inventory this period .............................................. 2,800
Units in ending inventory (50% materials, 40% labor and overhead) .............................. 1,200

Costs charged to the department: ........................................................ Inventory This Period

Costs from the preceding department ........................................... Php23,600 Php29,250
Materials......................................................................................... 7,700 13,375
Direct labor ..................................................................................... 3,500 9,672
Factory overhead............................................................................ 4,900 16,616

Required: Prepare a November cost of production report on a FIFO basis for the Assembly Department.

Dalitay Tool Company

Assembly Department
Cost of Production Report
For November, 2019

Quantity Schedule ....................................... Materials Labor Overhead Quantity

Beginning inventory .................................... 90% 80% 80% 1,000
Received from Shaping Department ........... 3,000
4,000

Transferred to Finishing Department .......... 2,800

Ending inventory ......................................... 50 40 40 1,200
4,000

Total Equivalent Unit

Cost Charged to Department ...................... Cost Units* Cost
Beginning inventory:
Cost from preceding department .......... Php23,600
Materials .......................................... 7,700
Labor ................................................ 3,500
Factory overhead ............................. 4,900
Total cost in beginning inventory........... Php39,700
Cost added during period:
Cost from preceding department .......... Php29,250 3,000 9.75
Materials .......................................... 13,375 2,500 5.35
Labor ................................................ 9,672 2,480 3.90
Factory overhead ............................. 16,616 2,480 6.70
Total cost added during period .............. Php68,913
Total cost charged to the department ........ Php108,613 Php 25.70
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 % Unit Total
Cost Accounted for as FollowsUnits Complete Cost Cost

Transferred to Finished Goods:

Beginning inventory .................... Php39,700
Cost to complete:
Materials .......................... 1,000 10% Php 5.35 535
Labor ................................ 1,000 20 3.90 780
Factory overhead ............. 1,000 20 6.70 1,340 42,355
Started and completed this
period ............................... 1,800 100 25.70 46,260

Total cost transferred to

Finished Goods ...................... Php 88,615
Work in process,
ending inventory:
Cost from preceding
department ...................... 1,200 100% $ 9.75 11,700
Materials .......................... 1,200 50 5.35 3,210
Labor ................................ 1,200 40 3.90 1,872
Factory overhead ............. 1,200 40 6.70 3,216 19,998
Total cost accounted for ............. Php 108,613

* Number of equivalent units of cost added during the current period determined as follows:

Prior
Dept. Cost Materials Labor Overhead
To complete beginning inventory ............... 0 100 200 200
Started and completed this period.............. 1,800 1,800 1,800 1,800
Ending inventory ......................................... 1,200 600 480 480
Total equivalent units .................................. 3,000 2,500 2,480 2,480

Weighted average method

Illustrative Problem:
Cove Corporation manufactures a product in three departments. The product is cut out of lumber in the Cutting
Department, then transferred to the Planing Department where it is shaped and certain parts purchased from
outside vendors are added to the unit, and finally transferred to the Finishing Department where it is primed,
painted, and packaged. Since only one product is manufactured by the company, a process cost system is used.
The company adopted the average cost flow assumption to account for its work in process inventories. Data
related to September operations in the Planing Department follow:

Units in beginning inventory ..................................................................................... 3,000

Units received from the Cutting Department this period ......................................... 7,500
Units transferred to Finishing Department this period ............................................. 8,500
Units in ending inventory (75% materials, 50% labor and overhead) ....................... 2,000
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 Beginning Added
Costs charged to the department: Inventory This Period
Costs from the preceding department ...................................... Php15,500 Php63,250
Materials.................................................................................... 7,800 20,700
Direct labor ................................................................................ 3,200 16,750
Factory overhead....................................................................... 9,975 39,900

Required: Prepare a September cost of production report for the Planing Department.

Cove Corporation
Planing Department
Cost of Production Report
For September, 2019

Quantity Schedule ............................................. Materials Labor Overhead Quantity

Beginning inventory........................................... 3,000
Received from Cutting Department .................. 7,500

10,500

Transferred to Finishing Department ................ 8,500

Ending inventory ............................................... 75% 50% 50% 2,000
10,500

Total Equivalent Unit

Cost Charged to Department ............................ Cost Units* Cost
Beginning inventory:
Cost from preceding department ................ Php15,500
Materials ............................................... 7,800
Labor ..................................................... 3,200
Factory overhead .................................. 9,975
Total cost in beginning inventory ................ Php 36,475
Cost added during period:
Cost from preceding department ................ Php63,250 10,500 7.50
Materials ............................................... 20,700 10,000 2.85
Labor ..................................................... 16,750 9,500 2.10
Factory overhead .................................. 39,900 9,500 5.25
Total cost added during period ................... Php140,600
Total cost charged to the department .............. Php 177,075 Php 17.70

% Unit Total

Cost Accounted for as Follows Units Complete Cost Cost

Transferred to Finishing
Department ................................ 8,500 100% Php17.70 Php150,450
Work in process,
ending inventory:
Cost from preceding
department .......................... 2,000 100 7.50 Php15,000
Materials .............................. 2,000 75 2.85 4,275
Labor .................................... 2,000 50 2.10 2,100
Factory overhead ................. 2,000 50 5.25 5,250 26,625
Total cost accounted for................... Php177,075

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* Total number of equivalent units required in the cost accounted for section determined as follows:

Prior
Dept. Cost Materials Labor Overhead
Equivalent units transferred out ................. 8,500 8,500 8,500 8,500
Equivalent units in ending inventory ........... 2,000 1,500 1,000 1,000
Total equivalent units .................................. 10,500 10,000 9,500 9,500

19
Let’s Check
1. Department A is the first stage of Tine Company's production cycle. The following information is
available for conversion costs for the month of April:
Units
Beginning work in process (60% complete) 20,000
Started in April 340,000
Completed in April and transferred to Department B 320,000
Ending work in process (40% complete) 40,000

Using the FIFO method, the equivalent units for the conversion cost are:

a. 336,000
b. 360,000 (20,000 x .4) + 300,000 + (40,000 x .4) = 324,000
c. 324,000
d. 320,000

2. The Aper Company computed the physical flow of units for Department A for the month of April as
follows:

Units completed:
From work in process on April 1 10,000
From April production 30,000
Total 40,000

Materials are added at the beginning of the process. Units of work in process at April 30 were 8,000.
The work in process at April 1 was 80% complete as to conversion costs, and the work in process at
April 30 was 60% complete as to conversion costs. What are the equivalent units of production for the
month of April using the FIFO method?

Materials Conversion Costs

a. 48,000 48,000 Materials = 30,000 + 8,000 = 38,000
b. 40,000 47,600 Conversion = (10,000 x .2) + 30,000 + (8,000 x .6) = 36,800
c. 36,800 38,000
d. 38,000 36,800

3. Cord Company computed the flow of physical units completed for Department M for the month of March
as follows:
Units completed:
From work in process on March 1 15,000
From March production 45,000
Total 60,000
Materials are added at the beginning of the process. The 12,000 units of work in process at March 31 were 80%
complete as to conversion costs. The work in process at March 1 was 60% complete as to conversion costs. Using
the FIFO method, the equivalent units for March conversion costs were:
a. 60,600 b. 55,200 c. 57,000 d. 54,600 (15,000 x .4) + 45,000 + (12,000 x .8) = 60,600

20
 4. Season Co. adds materials at the beginning of the process in Department P. The following information
pertains to Department P's work in process during May:
Units
Work in process on May 1
(60% complete as to conversion cost) 3,000
Started in May 25,000
Completed in May 20,000
Work in process on May 31
(75% complete as to conversion cost) 8,000

Under the average costing method, the equivalent units for conversion cost are:
a. 26,000 20,000 + .75(8,000) = 26,000
b. 25,000
c. 24,000
d. 21,800

5. During March, Z Company's Department Y equivalent unit product costs, computed under the average
cost method, were as follows:
Materials Php1
Conversion 3
Transferred-in 5
Materials are introduced at the end of the process in Department Y. There were 4,000 units (40% complete as
to conversion costs) in work in process at March 31. The total costs assigned to the March 31 work in process
inventory should be:
a. Php36,000 $5(4,000) + $3(4,000 x .4) = $24,800
b. Php28,800
c. Php27,200
d. Php24,800

6. Kent Company adds materials in the beginning of the process in the Forming Department, which is the
first of two stages of its production cycle. Information concerning the materials used in the Forming
Department in March is as follows:

Materials
Units Costs
Work in process, March 1 6,000 Php 3,000
Units started 50,000 25,560
Units completed and transferred out 44,000

Using the average cost method, what was the materials cost of work in process at March 31?
a. Php3,000 ($3,000 + $25,560) (44,000 + 12,000) = $.51
$.51 x 12,000 = $6,120
b. Php6,120

7. Darao Processing Co. uses the average costing method and reported a beginning inventory of 5,000 units
that were 20% complete with respect to materials in one department. During the month, 11,000 units
were started; 8,000 units were finished; ending inventory amounted to 8,000 units that were 60%
complete with respect to materials. Total materials cost during the period for work in process should be
spread over:
a. 7,200 units 8,000 + .60(8,000) = 12,800 units
b. 12,800 units
c. 11,200 units
d. 13,200 unit
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 8. Dader Corporation's production cycle starts in the Mixing Department. The following information is
available for April:
Units
Work in process, April 1 (50% complete) 40,000
Started in April 240,000
Work in process, April 30 (60% complete) 25,000

Materials are added at the beginning of the process in the Mixing Department. Using the average cost method,
what are the equivalent units of production for the month of April?
Materials Conversion
A. 255,000 255,000 Materials = 40,000 + 240,000 = 280,000
B. 270,000 280,000 Conversion = (280,000 - 25,000) + .6(25,000) = 270,000
C. 280,000 270,000
D.305,000 275,000

9. Information concerning Department A of Gardo Company for June is as follows:

Materials
Units Costs
Beginning work in process 17,000 Php12,800
Started in June 82,000 69,700
Units completed 85,000
Ending work in process 14,000

All materials are added at the beginning of the process. Using the average cost method, the cost per equivalent
unit for materials is:
a. Php0.825 ($12,800 + $69,700) (85,000 + 14,000) = $.833
b. Php0.833

10. Coode Manufacturing has three producing departments in its factory. The ending inventory in the
Milling Department consisted of 3,000 units. These units were 60% complete with respect to labor and
factory overhead. Materials are applied at the end of the milling process. Unit costs for the complete
process in the Milling Department are: materials, Php1; labor, Php2; and factory overhead, Php3. The
appropriate unit cost for each unit in the ending inventory is:
a. Php2 60% ($2 + $3) = $3
b. Php5
c. Php3
d. Php6

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Let’s Analyze

Activity 1. At this point in time, you are now familiar with the preparation of the cost production report. Please
provide an answer to the following questions.

1. Handsome Tool Company manufactures a product in two departments, Shaping and Assembly. The
product is cut out of sheet metal, bent to shape, and painted in the Shaping Department. Then, it is
transferred to the Assembly Department where component parts purchased from outside vendors are
added to the unit. A process cost system with a FIFO cost flow assumption is used to account for work
in process inventories. Data related to September operations in the Assembly Department follow:

Units in beginning inventory (90% materials, 80% labor and overhead) ............... 1,000
Units received from the Shaping Department this period ..................................... 3,000
Units transferred to Finished Goods Inventory this period .................................... 2,800
Units in ending inventory (50% materials, 40% labor and overhead) .................... 1,200

Beginning Added
Costs charged to the department: .............................................. Inventory This Period
Costs from the preceding department ....................................... Php23,600 Php29,250
Materials ..................................................................................... 7,700 13,375
Direct labor ................................................................................. 3,500 9,672
Factory overhead............................................................................ 4,900 16,616

Required: Prepare a September cost of production report on a FIFO basis for the Assembly
Department.

2. Corte Corporation manufactures a product that is processed in two departments: Mixing and Cooking.
At the beginning and end of October, there were no inventories of unfinished work. During the month of
October, 50,000 units of this product were completed. Materials used during the month amounted to
Php28,000, of which one half were used in the Mixing Department and one half were used in the Cooking
Department. Direct labor wages totaled Php60,000, with Php40,000 applicable to Mixing and Php20,000
to Cooking. The amounts for direct factory overhead incurred for each department and for general factory
overhead apportioned to each department were:

Mixing Cooking
Department Department
Factory overhead incurred ................................................. Php7,500 Php9,000
General factory overhead apportioned ............................... 5,000 6,000

Required: Prepare a partial cost of production report, showing the total cost to be accounted
for in each department.

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24
In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives, arguments and ideas from the unit
lesson. I will supply the first item and you will continue the rest.

1. The two methods of preparing the departmental production cost report in process costing are the weighted-
average method and first-in, first-out (FIFO) method. The weighted-average method includes costs incurred
in both current and prior periods that are shown as the beginning work-in-process inventory of this period.
The FIFO method includes only costs incurred during the current period in calculating unit cost

Your turn

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Keywords Index

Cost flow Job order costing Weighted

average method
Cost information section Physical flow
Cost production report Process
Equivalent units Process costing
First in first out method Unit information section

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Metalanguage and Essential Knowledge

There are two types of spoilage—normal and abnormal. Normal spoilage occurs under normal operating
conditions. It is uncontrollable in the short term and is considered a part of product cost. That is, the costs of lost
units are absorbed by the good units produced. Abnormal spoilage exceeds expected losses under efficient
operating conditions and is charged as a loss to operations in the period detected.

Two approaches are used to account for normal spoilage in process costing systems. The first approach is
to count the number of spoiled units, prepare a separate equivalent unit computation with the cost per unit of
the spoiled goods, and then allocate the cost to the good units produced.

The second approach is to omit the spoiled units in computing the equivalent units of production; the
spoilage cost is thus included as part of total manufacturing costs. The first approach provides more accurate
product costs because it computes the costs associated with normal spoilage and spreads them over the good
units produced. The second approach is less accurate because it spreads the costs of normal spoilage over all
units—good completed units, units in ending work-in-process inventory, and abnormal spoiled units.

Weighted Average Method

Following the five-step procedure described earlier, we just need to add normal spoilage and abnormal spoilage
components in the calculations. Please see calculations below.

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 * Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7th Ed

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7 th Ed
27
FIFO method

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7th Ed

28
Let’s Check
1. Which one of the following is an example of spoilage?
a. Short lenghts from wood work
b. Defective aluminum cans recycled by manufacturer
c. Detection of defective pieces before shipment
d. All of above
2. The units of normal spoilage are divided to total completed units
a. Normal spoilage rates
b. Abnormal spoilage rates
c. Normal scrap rates
d. Abnormal scrap rates
3. An amount of spoilage that is not natural in a specific production process is catergorized as:
a. Normal scrap
b. Normal spoilage
c. Abnormal spoilage
d. Weighted spoilage
4. The sum of beginning work in process inventory units and started units is subtracted from the sum of ending work
in process inventory units and transferred out units of goods to calculate
a. Gross weighted spoilage
b. Inventoriable spoilage
c. Partial spoilage
d. Total spoilage
5. The production units that do not meet customer specification, but can be sold to othe customers as finished goods
a. Reduced work
b. Spoilage
c. Rework
d. scrap
6. An example of rework is

29
 a. Short lenghts from wood work
b. Defective aluminum cans recycled by manufacturer
c. Detection of defective pieces before shipment
d. All of above

7. The normal spoilage is subtracted from total spoilage to include

a. Abnormal spoilage
b. Gross weighted spoilage
c. Inventoriable spoilage
d. Partial spoilage
8. If the beginning work in process inventory units are 2,600, units started are 9,000 ending work in process units are
2,300 and the completed good units are 8,000 then total spoilage will be
a. 1,200 units
b. 990 units
c. 1100 units
d. 1000 units
9. The residual material which results from manufaturing products is called
a. Reduced work
b. Spoilage
c. Rework
d. Scrap
10. The costing which explains how and when scrap affects the operting income of a company
a. Inventory costing
b. Conversion costing
c. Normal scrap costing
d. Abnormal scrap costing

Let’s Analyze

Activity 1. At this point in time, you are now familiar with how spoilage is treated in a process costing system.
Please provide an answer to the problem below.

1. Leny Corporation produces a product through a continuous process in two departments. Materials in this
department are added at the beginning of the process. The production and cost data were taken from
Department B during the month of August 2019.

Production data:
Received from Dept. A 70,000 units
Completed and transferred 50,000 units
In process, end (50% complete) 5,000 units
Lost 5,000 units

Cost data:
Received from Dept. A P460,000
Materials 75,000
Labor 21,875
Overhead 143,750

Required: Cost of Production Report under the following assumptions:

30
 a. Lost units, normal, discovered at the beginning
b. Lost units, normal discovered at the end

In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives, arguments and ideas from the
unit lesson. I will supply the first item and you will continue the rest.

1. The treatment of spoilage as abnormal is more in keeping with an emphasis on total quality management
where there is no tolerance allowed for waste. At a minimum, the product cost of spoiled goods is tracked in
a separate account 1-4

Keywords Index

Abnormal spoilage Production quantity

information
Cost assignment Unit cost determination
First in first out method Weighted average method
Normal spoilage
Process costing

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