Chapter 10 - Cost of Production Report: Average Costing

Accounting for Beginning Work in Process

In the preparation of a cost of production report, the existence of beginning work in process inventories
poses a problem because of the following questions that must be considered:

1. Should distinction be made between completed units from the beginning work in process
inventory and completed units from the current period?¹
2. Should the equivalent production of all the units completed during the current period be
considered as 100% complete regardless of the stage of completion (work done) of the
beginning work in process inventory?¹
3. Should the costs of beginning work in process inventory be included to costs that have been
added to production during the current period to arrive at the equivalent unit costs?¹

The answers to these questions will depend on the inventory costing method used to account for
beginning work in process inventory: the average costing method or the first in, first out (FIFO) method.

Average Costing

According to Pedro P. Guerrero, the average cost method combines rather than separates completed
units from beginning work in process and from new production.¹

a. All the completed units are given 100% equivalent production regardless of the stage of
completion of the beginning work in process inventory.¹
b. The average unit cost is computed by adding the cost of each category (materials, labor,
overhead, and transferred in cost) to the cost incurred for that category in the current month
and dividing the resulting total by equivalent units of production.¹
c. Both completed units and ending work in process inventory are valued using the same average
unit cost.¹

First In, First Out Costing

Under the first in, first out (FIFO) method, the units in the beginning work in process inventory are
presented separately from the units started in the current month.¹
a. The units in process at the beginning are assumed to have been completed first.¹
b. The work done on the beginning work in process last month is kept separate from the work
done during the current month.¹
c. Two equivalent units of production for completed units are computed, ( 1 ) units in process
beginning completed this month and ( 2 ) units started in process completed this month.¹
d. Costs incurred in the current month and units produced in the current month are used to
compute equivalent unit cost.¹

¹Pedro P. Guerrero, Cost Accounting – Principles and Procedural Applications, 2018 Edition
Comprehensive Illustration:
Average Cost Method – Star Paper Company
The manufacturing operations of Star Paper Company will be continued to illustrate the application of
the average cost method of accounting for beginning work in process inventories and costs added
during the month.

Cutting Department
Before recording the costs of the units transferred out to the Assembly Department, the Work in
Process – Cutting Department in the general ledger shows a balance of P351,294 on February 28, 200X
as shown below:
Work in Process – Cutting Department
Date Explanation Debit Credit Balance
200X
Jan. 31 Materials 77,280 77,280
31 Labor 95,616 172,896
31 Overhead 156,632 329,528
31 Transferred to Assembly Dept. 264,480 65,048
Feb. 28 Materials 69,944 134,992
28 Labor 82,416 217,408
28 Overhead 133,886 351,294

Cost Data
The balance of P351,294 is broken down into cost categories as follows:

The cost last month of the beginning work in process is broken as follows:
Materials P 22,560
Labor 13,536
Overhead 28,952
Total Last Month’s Costs P 65,048

The costs incurred in the current month for each category per work in process postings above are:
Materials P 69,944
Labor 82,416
Overhead 133,886
Total Current Month’s Costs P 286, 246
Production Report
The production report for the month of February is shown below. Note that the stage of completion of
the beginning work in process is not necessary in the average method.

Cutting Department
Monthly Production Report
February 200X

Quantity
Work in Process – Beginning 3,760
Started in Process 11,160
Transferred Out to Next Department 9,600
Work in Process – Ending 5,320
Stage of Completion of Work in Process Beginning Ending
Materials 100% 100%
Labor 40% 45%
Overhead 55% 55%

Equivalent Units of Production

The computation of the equivalent production for February is shown as follows:

Cutting Department
Equivalent Production Computations
Month of February 200X

Materials
Transferred Out to Next Department 9,600
Work in Process – Ending (5,320 x 100%) 5,320
Equivalent Units for Materials 14,920
Labor
Transferred Out to Next Department 9,600
Work in Process – Ending (5,320 x 45%) 2,394
Equivalent Units for Labor 11,994
Overhead
Transferred Out to Next Department 9,600
Work in Process – Ending (5,320 x 55%) 2,926
Equivalent Units for Overhead 12,526
Cost of Production Report – Cutting Department
The cost of production report for February is shown as follows:

Cutting Department
Cost of Production Report
Month of February 200X

Quantity Schedule Units

a. Quantity to Be Accounted For:
Work in Process – Beginning 3,760
Started in Process – Current Month 11,160
Total to Be Accounted For 14,920
b. Quantity Accounted For:
Transferred Out to Next Dept. 9,600
Work in Process – Ending 5,320
Total Accounted For 14,920

Equivalent Unit
Cost Schedule Total Cost Units Costs
c. Costs to Be Accounted For:
Costs Incurred in this Department
Materials: Beginning Work in Process P 22,560
Added this Month 69,944
Total Materials P92,504 / 14,920 = P 6.20

Labor: Beginning Work in Process P 13,536

Added this Month 82,416
Total Labor P 95,952 / 11,994 = 8.00

Overhead: Beginning Work in Process P 28,952

Added this Month 133,886
Total Overhead P 162,838 / 12,526 = 13.000
Total Costs to be Accounted For P 351,294 P 27.20

d. Cost Accounted For:

Transferred Out to Next Department P 261,120 = 9,600 x P 27.20
Work in Process – Ending
Costs Incurred in this Department
Materials 32,984 = 5,320 x P 6.20
Labor 19,152 = 2,394 x P 8.00
Overhead 38,038 = 2,926 x P 13.00
Total Work in Process 90,174
 Total Costs Accounted For P351,294

The journal entry to record the cost of the units transferred out to Assembly Department is taken from
Section (d) of the cost of production report. The entry is as follows:
Work in Process – Assembly Department 261,120
Work in Process – Cutting Department 261,120
To record transfer of 9,600 units to Assembly Department.

Assembly Department
The February costs for the Assembly Department are determined by using the procedures similar to
those used for the Cutting Department. Since the Assembly Department is the second department in
the production sequence, the costs from the prior department must be considered.

Cost Data
On February 28, the Work in Process – Assembly Department account shows a balance of P469,391. This
amount is composed of the following:

Costs Last Month

Costs Transferred In From Prior Department P 28, 130
Costs Incurred in this Department:
Materials 1,455
Labor 5,529
Overhead 4,656
Total Costs Last Month P 39,770

Costs Incurred During the Current Month

Costs Transferred In From Prior Department P 261,120
Costs Incurred in this Department:
Materials 23,128
Labor 70,638
Overhead 74,735
Total Current Month’s Costs P 429,62
Production Data
The production report for the month of February is presented below:

Assembly Department
Monthly Production Report
February 200X

Quantity:
Work in Process – Beginning 970
Transferred In – Current Month 9,600
Transferred Out to Next Department 9,470
Work in Process – Ending 1,100
Stage of Completion of Work in Process Beginning Ending
Transferred in Cost 100% 100%
Materials 60% 55%
Labor 60% 55%
Overhead 60% 55%

Equivalent Production Data

The computation of the equivalent units of production is as follows:

Assembly Department
Equivalent Production Computations
Month of February 200X

Transferred In Cost from Prior Department

Transferred Out to Next Department 9,470
Work in Process – Ending (1,100 x 100%) 1,100
Equivalent Units for Transferred in Costs 10,570
Materials
Transferred Out to Next Department 9,470
Work in Process (1,100 x 55%) 605
Equivalent Units for Materials 10,075
Labor
Transferred Out to Next Department 9,470
Work in Process (1,100 x 55%) 605
Equivalent Units for Labor 10,075
Overhead
Transferred Out to Next Department 9,470
Work in Process (1,100 x 55%) 605
Equivalent Units for Overhead 10,075
Cost of Production Report
The February cost of production report of the Assembly Department is shown as follows. The unit
computations have been rounded to two decimal places because the number of equivalent production
is not evenly divisible by the total cost.

Assembly Department
Cost of Production Report
Month of February 200X

Quantity Schedule Units

a. Quantity to be Accounted For:
Work in Process – Beginning 970
Transferred In – Current Month 9,600
Total to Be Accounted For 10,570
b. Quantity Accounted For:
Transferred Out to Next Dept. 9,470
Work in Process – Ending 1,100
Total Accounted For 10,570

Equivalent Unit
Cost Schedule Total Cost Units Costs
c. Costs to be Accounted For:
Costs Transferred In From
Prior Dept.
Work in Process – Beginning P28,130
Transferred In – Current Month 261,120
Total Transferred In Costs P289,250 / 10,570 = P 27.37
Costs Incurred in this Department
Materials: Beginning WIP P 1,455
Added this month 23,128
Total Materials P 24,583 / 10,075 = 2.44

Labor: Beginning WIP P 5,529

Added this month 70,638
Total Labor P76,167 / 10,075 = 7.56

Overhead: Beginning WIP P 4,656

Added this month 74,735
Total Overhead P79,391 / 10,075 = 7.88
Total Costs in this Department P180,141 P17.88
Cost to Account For P 469,391 P45.25
 d. Costs Accounted For:
Transferred Out to Next Department P428,467 = 9,470 x P45.25
Work in Process – Ending
Costs From Prior Department 30,107 = 1,100 x 27.37
Costs Incurred in this Department
Materials 1,476 = 605 x 2.44
Labor 4,574 = 605 x 7.56
Overhead 4,767 = 605 x 7.88
Total Work in Process 40,924
Total Costs Accounted For P 469,391

The entry to record the cost of the units completed and transferred to the Packaging Department is
shown below:
Work in Process – Packaging Department 428,467
Work in Process – Assembly Department 428,467
To record the transfer of 9,470 units from Assembly Department to Packaging
Department.

Packaging Department

Cost Data
The cost data for the month of January and February are as follows:

Beginning Work in Process (Cost Last Month):

Costs Transferred In From Prior Department P 133,280
Costs in this Department
Materials 0
Labor 2,230
Overhead 1,020
Account Balance, January 31 P 136,530
Cost this Month
Costs Transferred In From Prior Department P 428,467
Costs in this Department
Materials 2,560
Labor 20,480
Overhead 16,885
Total Costs this Month P 468,392
Production Data
The monthly production report is presented below:

Packaging Department
Monthly Production Report
February 200X

Quantity
Work in Process – Beginning 2,720
Transferred In – Current Month 9,470
Transferred Out to Finished Goods 6,370
Work in Process – Ending 5,820
State of Completion of Work in Process Beginning Ending
Transferred In Cost 100% 100%
Materials 0% 0%
Labor 20% 20%
Overhead 15% 15%

Equivalent Production Data

The computations of the equivalent units of production are as follows:

Packaging Department
Equivalent Production Computations
Month of February 200X

Transferred In Cost from Prior Department

Transferred Out to Finished Goods 6,370
Work in Process – ending (5,820 x 100%) 5,820
Equivalent Units for Transferred In From Prior Dept. 12,190

Materials
Transferred Out to Finished Goods 6,370
Work in Process – Ending (5,820 x 0%) 0
Equivalent Units for Materials 6,370

Labor
Transferred Out to Finished Goods 6,370
Work in Process – Ending (5,820 x 20%) 1,164
Equivalent Units for Labor 7,534
Overhead
Transferred Out to Finished Goods 6,370
Work in Process – Ending (5,820 x 15%) 873
Equivalent Units for Overhead 7,243

Cost of Production Report

The cost of production report for the Packaging Department for February 200X is presented as follows:

Packaging Department
Cost of Production Report
Month of February 200X

Quantity Schedule Units

a. Quantity to Be Accounted For:
Work in Process – Beginning 2,720
Transferred In – Current Month 9,470
Total to Be Accounted For 12,190
b. Quantity Accounted For:
Transferred Out to Finished Goods 6,370
Work in Process – Ending 5,820
Total Accounted For 12,190

Equivalent Unit
Cost Schedule Total Cost Units Cost
c. Costs to Be Accounted For:
Costs Transferred In From Prior Dept.
Work in Process – Beginning P133,280
Transferred In – Current Month 428,467
Total Transferred In Costs P561,747 / 12,190 = P46.08
Costs Incurred in this Department
Materials: Beginning WIP P 0
Added this month 2,560
Total Materials P 2,560 / 6,370 = .40

Labor: Beginning WIP P 2,230

Added this month 20,480
Total Labor 22,710 / 7,534 = 3.01

Overhead: Beginning WIP P 1,020

Added this month 16,885
Total Overhead P 17,905 / 7,243 = 2.47
Total Costs in this Department P 43,175 P5.88
 Cost to Account For: P604,922 P 51.96
d. Cost Accounted For:
Transferred Out to Finished Goods P 331,076 = 6,370 x 51.96
Work in Process – Ending
Costs From Prior Department 268,186 = 5,820 x 46.08
Costs Incurred in this Department
Materials 0 = 0 x .40
Labor 3,504 = 1,164 x 3.01
Overhead 2,156 = 873 x 2.47
Total Work in Process 273,846
Total Costs Accounted For P604,922

The cost of 6,370 units completed on February is recorded by the following entry:
Finished Goods 331,076
Work in Process – Packaging 331,076
To record transfer of 6,370 units to Finished Goods.

Recording Sales and Cost of Goods Sold

Assume that Star Paper Company sold 6,300 units in February at P80 per unit or at a selling price of
P504,000.
Since this is the second month of operation for Star Paper Company, not all of the units produced in
January were sold. Therefore, cost of goods sold under the weighted average method is to be
computed. Each unit produced in January had a cost of P56. In January there are 130 units left in
Finished Goods Inventory with a total cost of P7,280 (130 x P56). When these units are added to the
6,370 units produced in February with a unit cost of P51.96, the total is 6,500 units available for sale
with a total cost of P338,356 (P7,280 + P331,076). Using the weighted average cost method, the
average unit cost is P52.06 (P338,356/ 6,500). With these, the 6,300 units sold has a total cost of
P327,978 (6,300 x P52.06 rounded), and the ending inventory has a total cost of P10,412 (200 x P52.06).

The entries to record sales and cost of goods sold during February are:
Feb. 28 Accounts Receivable 504,000
Sales 504,000
To record sales of 6,300 units.

Cost of Goods Sold 327,978

Finished Goods 327,978
To record cost of units sold.

SOURCE AND REFERENCE:

Pedro P. Guerrero, Cost Accounting – Principles and Procedural Applications, 2018 Edition