PROCESS COSTING-MULTIPLE DEPARTMENT

CHARACTERISTICS OF PROCESS COSTING

1. A cost of production report is used to collect, summarize and compute total and
unit cost.
2. Production is accumulated and reported by department.
3. Costs are posted to departmental work in process accounts.
4. Production in process at the end of a period is restated in terms of completed units.
5. Total cost charged to a department is divided by total computed production of the
department in order to determine a unit cost for a specific period.
6. Costs of completed units of a department are transferred to the nest processing
department in order to arrive at the total costs of the finished products during a
period. At the same time, costs are assigned to units still in process.

PROCEDURES OF PROCESS COSTING

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The procedures of process costing are designed to:

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1. Accumulate materials, labor and factory overhead costs by departments.
2. Determine a unit cost for each department.

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3. Transfer costs from one department to the next and to finished goods.
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4. Assign costs to the inventory of work still in process.
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If accurate unit and inventory costs are to be established by process costing procedures, costs
of a period must be identified with units produced in the same period.
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PROCESS COST FLOW

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RAW MATERIALS DIRECT LABOR OVERHEAD

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WIP – DEPARTMENT 1 WIP – DEPARTMENT 2 WIP – DEPARTMENT 3

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FINISHED GOODS COST OF GOODS SOLD

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 COST OF PRODUCTION REPORT

Shows all cost chargeable to a department. It is not only the source for summary
journal entries at the end of the month but also a most convenient vehicle for presenting and
disposing of cost accumulated during the month.

A COST OF PRODUCTION REPORT shows:

1. Total and unit costs transferred to it from a preceding department;

2. Materials, labor and factory overhead added by the department;
3. Unit costs added by the department;
4. Total and unit costs accumulated to the end of operations in the department;
5. The cost of the beginning and ending work in process inventories; and
6. Cost transferred to a succeeding department or to a finished goods storeroom.

It is customary to divide the cost section of the report into two parts: 1one showing
costs for which the department is accountable, including departmental and cumulative total

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and unit costs, 2the other showing the disposition of these costs. A quantity schedule showing
the total number of units for which a department is accountable and the disposition made of

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these units is also part of each department’s cost of production report. Information in this
schedule, adjusted for equivalent production, is used to determine the unit costs added by a

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department, the costing of the ending work-in-process inventory, and the cost to be
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transferred out of the department.
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A cost of production report determines periodic total and unit costs. However, a report
that would merely summarize the total costs of materials, labor and factory overhead and
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show only the unit cost for the period would not be satisfactory for controlling costs. Total
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figures mean very little; cost control requires detailed data. Therefore, in most instances, the
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total cost is broken down by cost elements for each department head responsible for the cots
incurred. Furthermore, detailed departmental figures are needed because of the various
completion stages of the work in process inventories.
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Either in the cost of production report itself or in the supporting schedules, each item
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of material used by the department is listed; every labor operation is shown separately;
factory overhead components are noted individually; and a unit cost is derived for each item.
To condense the illustrated cost of production reports, only total materials, labor and factory
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overhead charged to departments are considered; and unit costs are computed only for each
cost element rather that for each item.
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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

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5.2.1.1 Materials are added at the

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start/beginning of the process

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5.2.1.2 Materials are added at the end of the

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process
5.2.2 Percentage of completion – to be applied to

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Conversion Cost
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6. Compute for the Cost as accounted for per EUP; and
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7. Assign costs to Inventories (Transferred-out, Ending Work-in-Process and
Spoiled Units)

Illustrative Problem:
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The following production data were taken from the books of Ulan Manufacturing
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Co. Inc. which manufactures its products in 3 successive departments namely, Molding,
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Assembly, and Finishing:

Units: Molding Assembly Finishing

In Process, March 1 2,000 5,000 7,000
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% of completion 1/4 2/5 1/7

Transferred-out 15,000 15,000 20,000
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In Process, March 31 5,000 5,000 2,000

% of completion 1/2 2/5 1/2
Costs:
WIP, March 1
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Materials Php2,500 Php6,750 Php39,496

Labor 1,500 40,500 59,250
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Overhead 1,000 20,250 19,754

Cost Added in March:
Materials Php85,000 Php7,500 Php40,000
Labor 51,000 45,000 60,000
Overhead 34,000 22,500 20,000

REQUIRED:
1. Determine the equivalent units of production for each cost of element and
compute the cost per EUP using both method
2. Assign the cost to Finished and Transferred and Work-in-Process, End.
3. Give the Journal Entries required to record the above.

Prepared by:

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 ALLAN B. SANTOS, CPA, RCA
Instructor

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