PROCESS COSTING-SINGLE DEPARTMENT

INTRODUCTION

In process costing system, a large number of homogenous products passed through several production
departments where each department is responsible for one or more operations that bring a product one step closer to
completion. In each department, materials, labor and overhead inputs may be needed and upon completion of a
particular process, the partially completed goods are transferred to another process.

SIMILARITIES AND DIFFERENCES OF JOB ORDER AND PROCESS COSTING SYSTEM

The cost flows for a process cost system are basically similar to those of a job order costing system, both job
order and a process cost system track the same three manufacturing cost elements, the materials, labor and overhead. In
both costing systems, all raw materials received from suppliers are debited to Raw Materials Inventory account, all factory
labor is debited to Factory Payroll and all overhead incurred are debited to Manufacturing Overhead Account. The three
cost elements are then assigned to the same accounts in both costing systems – WIP Inventory, FG Inventory and COGS.

The major differences between a job order and process cost system are summarized below:

Features Job Order Cost System Process Cost System

a.) WIP Accounts * One for multiple jobs * One for each process

b.) Documents Used * Job cost sheets * Cost of Production Reports

c.) Determination of Total

Manufacturing Cost * Each job * Each Period

d.) Unit Cost Computation * Cost of each job / units * Total Manufacturing costs /
produced for the job units produced during the period

PROCESS COST FLOW

MATERIAL COST

All raw materials are debited to Raw Materials Inventory when the materials are purchased. When materials are
issued to production departments, the entry is:

Work-in-Process-Department 1 XXX
Raw Materials Inventory XXX

Materials may be issued to production at different stages. It may be added to production at the beginning of the
process, during the process or at the end of the process. In process cost system, fewer requisitions are generally required
than in a job order cost system, because the materials are used for processes rather than for specific jobs.

FACTORY LABOR COSTS

As in Job Order System, time tickets may be used in determining the cost of labor assignable to the production
department. The entry to assign these costs to the department is:

Work-in-Process-Department 1 XXX
Factory Payroll XXX

MANUFACTURING OVERHEAD COSTS

The overhead applied to production department in the same way as in Job Order Cost System. The entry is:

Work-in-Process-Department 1 XXX
Manufacturing Overhead XXX
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COMPLETION OF A PROCESS

When goods are completed in one process, they are transferred with their cost to the next department. The costs
transferred from a prior process are called Transferred-in costs. They are manufacturing costs incurred in another
department and transferred to a subsequent department in the manufacturing process. These transferred in costs are
treated as raw materials costs in the viewpoint of the receiving department. The following entry is made to record the
cost transferred out of the department:

Work-in-Process-Department 2 XXX
Work-in-Process-Department 1 XXX

COST OF PRODUCTION REPORT- The cost of production report is the key document used in a process cost system.

STEPS TO PREPARE THE COST OF PRODUCTION REPORT:

1. Calculate the Total Units to Account.

Prepare a quantity schedule (the physical flow units) to determine the total units to be accounted
for. These units are then accounted for by the output of the period, which consists of units
transferred and units in process at the end of the period. This amount is referred to as the “Total
Units as Accounted For”.

*Beginning Inventory in Physical Units

+Units started or transferred-in during the period
=Total Units to Account

Units Completed and Transferred

+Ending Inventory in Physical Units
+Units Spoiled or Lost during the process
=Total Units as Accounted for

2. Compute the Equivalent Units of Production

Equivalent Units of Production is an approximation of the number of whole units of output that
could have been produced during a period. EUPs are calculated by multiplying the number of actual
but incomplete units produced by the degree of completion or work done during the period. It
measures the work done during a period expressed in fully completed units.

Weighted Average Method: Alternative Computation of EUP:

* Beginning Inventory in Physical Units * Units Transferred (Whole Units)
+ Units Started and Completed + EUP of ending Work-in-Process
+ Ending Inventory x percentage of completion = Weighted Average EUP
= Equivalent Units of Production

FIFO Method: Alternative Computation of EUP:

* Beginning Inventory x percentage of * Weighted Average EUP
completed this period - EUP of Beginning Work-in-Process
+ Units Started and Completed = FIFO EUP
+ Ending Inventory x percentage
completed this period
= Equivalent Units of Production

3. Find the Total Cost to Account

The total costs to account include the balance of Work-in-Process, beginning plus all current
costs added during the period.

* Cost of Beginning Inventory

+ Added Cost in the current period (Including transferred in costs)
= Total Costs to Account

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 4. Compute the cost per EUP
Unit production costs are costs expressed in terms of equivalent units of production for each cost
element.

Weighted Average Method:

* Cost of Beginning Inventory
+ Costs for the current period
= Total Cost
Divided by EUP .
= Unit Costs

FIFO Method:
* Current period costs
Divided by EUP .
= Unit Costs

5. Assign costs to Inventories (Transferred-out and Ending Work-in-Process)

Weighted Average Method:

(1) Finished and Transferred

Units transferred to next department x Weighted Average Unit Costs.

(2) Work-in-Process-End
EUP for each component x Weighted Average Unit Cost for each element.

FIFO Method:

(1) Finished and Transferred:

Beginning Inventory Costs
+ Current period costs to complete work-in-Process beginning
(Beginning Inventory x percentage not complete at beginning
of period for each component x cost per EUP)
+ Units started and completed x total cost per EUP

(2) Work-in-Process, end

EUP for each component x cost per EUP for each component.

FIFO AND WEIGHTED AVERAGE METHODS

FIFO METHOD assumes that units in beginning work-in-process are completed first, before any new units are
started. FIFO Costing separates current period costs from those in beginning inventory and transfers-out the costs in
beginning inventory in a lump sum rather than mingling them with current period costs. Thus, the finished and
transferred units has two categories, namely:

Work-in-Process beginning which is completed during the period

Units just started and completed during the period

The computation of the Equivalent Units of Production under FIFO ignores work done on beginning work in
process inventory, therefore, the FIFO cost per equivalent unit of production also ignores prior period costs and uses only
costs incurred in the current period.

WEIGHTED AVERAGE METHOD is used to determine an average cost per unit of inventory. It mixes current
period costs of products in beginning inventory. The number of units in the beginning work in process inventory together
with the manufacturing costs attached to it is merged with the current period output and manufacturing costs. The EUP
are computed by adding units completed to equivalent units in ending work-in-process, therefore the weighted average
cost per equivalent unit of production combines beginning costs and current costs divided the EUP.
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STEPS TO FOLLOW IN THE PREPARATION OF THE COST OF PRODUCTION REPORT
1. Determine whether Average or FIFO Costing method is used
2. Calculate the Total units to be accounted for;
3. Find the Total cost to be accounted for;
4. Calculate the Units as accounted for;
5. Compute for the Equivalent Units of Production;
5.1 Even application of cost – the completion stage of a unit may be determined by the processing time it
has undergone. For example, it takes 10 days to complete a unit and the unit has been undergoing
processing for 5 days, the unit is considered ½ completed and ½ of materials, labor and overhead
costs are presumed to been applied.
5.2 Uneven application of cost – materials, labor and factory overhead costs are applied at different
stages of the manufacturing process, equivalent production will have to be computed for each cost
element. If for example, in Dep’t A all materials needed for processing are added at the start of the
process, then equivalent production for materials will differ from equivalent production for labor and
overhead
5.2.1 Stage when materials are added – to be applied to Materials
5.2.1.1 Materials are added at the start/beginning of the process
5.2.1.2 Materials are added at the end of the process
5.2.2 Percentage of completion – to be applied to Conversion Cost
6. Compute for the Cost as accounted for per EUP; and
7. Assign costs to Inventories (Transferred-out, Ending Work-in-Process and Spoiled Units)

Illustrative Problem 1:

Consider the following data for Sanyo Denki Manufacturing Company:

Whole Units RM CC
WIP, July 1 8,000 P 435,000.00 P 201,600.00
Started in July 50,000
Finished and Transferred 46,000
WIP, July 31 ?
Current Costs P3,220,000.00 P1,424,000.00

Sanyo Denki Philippines, Inc. adds materials at the beginning of the process. The work-in-process
beginning is 60% converted while the work-in-process at the end is 40% converted.

REQUIRED:

1. Compute / determine the following below items using both Weighted Average and FIFO method:
a. Units to be accounted for
b. Units as accounted for
c. Equivalent Units of Production for each cost of element
d. Units cost per EUP
e. Cost to be accounted for
f. Cost as Accounted for
2. Give the journal Entries required to record the above.

Illustrative Problem 2:

Consider the following data for Sanyo Denki Manufacturing Company:

Whole Units RM CC
WIP, July 1 8,000 P 201,600.00
Started in July 50,000
Finished and Transferred 46,000
WIP, July 31 ?
Current Costs P3,220,000.00 P1,424,000.00

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 Sanyo Denki Philippines, Inc. adds materials at the end of the process. The work-in-process beginning is
60% converted while the work-in-process at the end is 40% converted.

REQUIRED:

1. Compute / determine the following below items using both Weighted Average and FIFO method:
a. Units to be accounted for
b. Units as accounted for
c. Equivalent Units of Production for each cost of element
d. Units cost per EUP
e. Cost to be accounted for
f. Cost as Accounted for
2. Give the journal Entries required to record the above.

Illustrative Problem 3:

Consider the following data relating to a process for the month of March 2011.

1,800 units were in process at the beginning valued at Php83,200 made up of:
Php38,400 of material cost
Php24,000 of labour/labor cost
Php20,800 of overhead expenditure.

These units were:

1. 80% complete with regard to Direct Materials,
2. 40% complete with respect to Labour/Labor
3. 60% complete with regard to Overhead Expenses

12,000 units of material were introduced into the process during the period.
Total Material Cost incurred for the process is Php211,680.
Direct Wages incurred were - Php273,240.
Overhead Expenditure - Php132,480

There were 2,400 units in process at the end of the period

These units were:

1. 75% complete with regard to Direct Materials,
2. 50% complete with respect to Labour/Labor
3. 30% complete with regard to Overhead Expenses

There were no losses in processing.

REQUIRED:

1. Compute / determine the following below items using both Weighted Average and FIFO method:
a. Units to be accounted for
b. Units as accounted for
c. Equivalent Units of Production for each cost of element
d. Units cost per EUP
e. Cost to be accounted for
f. Cost as Accounted for
2. Give the journal Entries required to record the above.

Prepared by

ALLAN B. SANTOS, CPA, RCA

Instructor
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