PART I

Chapter 10

Process Costing:
Nature and OperationsS

Process costing 1s a
system of accumulating costs
metts or cost cernter. A of production by depart-
department is a major functional division in a fac-
tory where related manufacturing process are
System is commonly used by companies where a
performed. This accounting
large number of similar
nroducts pass through different departments in a continuous until
completed in the last department then transferred to finished process
goods inven-
tory. Under process costing, similar products are
produced in the same
manner and consume the same amount of costs.
is used include
Companies where process
cOsting oil refining, chemical processing and food process-
Ing.

OBJECTIVE OF PROCESS COSTING

The principal objective of process costing is the allocation of manufactur

ing costs in every department to calculate the unit cost of the
profit determination and inventory costing purposes.
product for

During the production period, some of the units started will not be com-
pleted at the end of the period. Therefore, each
department must deter-
nine the total costs of the units still in
process and the costs of the units
Completed.

351
 Chopier ,
For example, that during the month 1,000 units were at
assume
process in the Department 1. During the month, costs were ineud rted in
follows: incurreda
Direct materials8 P150,000
Direct labor 50,000
Manufacturing overhead 100,000
At the end of the
month, 700 units were completed and
transferred
transferred
Department 2. .
to

The objective of process cost

system is to caleulate how much of P150.00
direct materials, P50,000 of direct labor, and PI00,000
of manufacturino
P150,000
overhead costs will be allocated to 700 units completed and
to Department 2 and how much will be allocated to the 300 transfered
units still in
process in Department 1.

COMPARISON OF PROCESS COST AND JOB ORDER COST

SYSTEM
Process cost system is used when
products are manufactured mass
production. Job order cost system is most suitable when a single by
product
or batch of
product is manufactured according to customer's specifica-
tion. The basic similarities and differences between these
two systems
are:

Similarities
Job order cost and process costs
system are similar in three ways as fol-
lows:
Manufacturing cost elements. Both track and record three
ele
ments of costs: direct materials, direct labor and manufacturing
overhead.
Accumulation of costs. Under both costing
rials purchased are debited to system, all raw mate
bor are debited to Materials account; all direct la
Factory Payroll account; and all actual manu
facturing overhead costs debited to Manufacturing Over-
are
head Control account.
Flow of costs. The accumulated
to the same accounts manufacturing costs are assigi
in both costing
Finished Goods, and Cost of Goods systems: Work in Process;
Sold
 Nature and Operations 353
piferences

eual differences between a job order cost and process cost systems
7he usual d
a r eAS f o l l o w s :

Number of Work in Process accounts used. In a job order

cost system, only one Work in Process account is used. While in
ost
process system, multiple Work in Process accounts are used
foreach production department.
Point at which total costs is determined. In a job order cost
system, total costs are computed when the job is completed. Ina
process cost system, total costs are determined at the end or
each month while the units are being processed.
Unit cost computation. In a job order cost system, the unit
costs is determined by dividing the total cost per job by the unis
produced. In a process cost system, the unit cost is equal to the

total manufacturing costs for the period divided by the units

produced during the period.
ACCUMULATION OF COSTS BY DEPARTMENT

The departmental accumulations of costs under process cost system are

Summarized below:

Units completed in one department are transferred to the next

department accompanied by their corresponding costs.
Completed unit of one department becomes the raw materials
of the next department until the units are converted to finished
products.
The output of Department 1 becomes the input of Department
2. Department 2 receives both the units produced in Depart
ment 1 as well as its production costs.
Upon completion of the process in Department 2, the cost of
units completed consists of the costs received in Department 1
and cost incurred in Department 2.
The cost of a unit increases as it progresses from one depart
ment to the next.
 354 Chape
tables in
For examp TM Corporation
manufactures
office

average cost of
three depar
Pl0oep
ple,
Department 1 cuts the woods
at a n
Department Where
they are e
z,
per u
are assembi
ments. transferred to
The llast stop 18 in
is Depa.
In Depar
The woods are then
at an average cost of P200 per
unit. The

a n average
t50
cOst
cost
p
per
of unit. The
P300 per
of PB00 The. artcomplmenteet
goods inventnple
where they are painted at
u n i t s are transferred from Department
3 to
finished
inventory
table is P600,
uted as follo
computed as
finished
The total unit cost of one
Unit Cost Added
Department P100
200
2 300
3
Total unit cost
P600
units follow through ea
Generally, the cost per unit
increases as de.
cost decreases
when volume is added to #the
partment. However, the unit
units that pass through a department.
COSTS
ASSIGNMENT OF MANUFACTURING

Process cost system accumulates the

three elements of costs using eitha
the following costing procedures:
Normal costing. Direct materials and direct labor are applied
at actual cost while manufacturing overhead is applied at a pre
determined rate.
Standard costing. Direct materials, direct labor and manufar
turing overhead are applied at standard cost or estimated cost.
In this chapter and in the following chapter, process costing using the
normal costing will be used. Standard costing is discussed in Chapter
14.

The accounting procedures to record the allocation of the three

elemencOst
(categories) of costs in a process cost system is different from a joD
system as illustrated in the next page. Units are been
assumed to have
processed in three departments until they are
finished
transferred to
goods inventory.
 i/1
to added tments.
partments.
materials a r e
Materials. Usually direct subsequen
epartment is:
may also be added in theeach deparune
nt, but they direct
partme.
record materials used by
ntry to
Department 1
Work in Process
-

2
Work in Process -Department
Department 3
Work in Process-
Materials
are
departments

distributions of direct labor to the

abor.
Direct Lab
Direct
The
recorded by the following entry:

Work in Process Department 1

-

Work in Process Department 2

-

Work in Process Department 3

-

Factory Payroll
appied
overhead costs are m
Manufacturine ade to
Manufacturing Overhead. rate.The following entry
18

a predetermined application
using manufacturing overhead in each department:
record applied
Work in Process Department 1
-

Work in Process
-

Department 2
Work in Process - Department 3
Applied Manufacturing Overhead
units
to record the cost of
Transfer to Nexet Department. The entry
transferred out:
From Department 1 to Department 2:
Work in Pocess Department 2
-

Work in Process Department 1 -

From Department 2 to Department 3:

Work in Process Department 3
-

Work in Process Department 2 -

Transfer to Finished Goods. The units completed in the last depart-

nent (Department 3) and transferred to stockroom awaiting sale a r e ree-
corded as follows:
Finished Goods
Work in Process -

Department 3
 356
Chapter 1
PRODUCTION REPORT
At the end of each month a production report 18 prepared for each a
de
by the cost accountant. A production report shows the num
partment mber
of units that were in process in the department at the start of the
the mo
month
number of during the month, the number of uni
nits
the units started trar
ferred out of the department during the month, the number ot of units
units stil
in work in process at the end of the the of
still
month, and percentage comple.
tion of the units still in process at the end of the month.

Cost of Production Report

Based on the production report and the information about costs incurred
during the month a cost of production report is prepared for each de.
partment at the end of the month. The cost of production report is the
document used by the management to understand and evaluate the on.
erations of a department because it shows the flow of units as well as the
flows of costs related to that department. The report summarizes the
cOSts incurred in the department, the average cost per unit of product,
the total costs of products completed and transferred out of the depart
ment, and the costs related to the ending inventory of work in process in
each department. This report is the source for summary journal entries
for the period.

Warehousing
Cost procedures related to warehousing are almost the same as those
in
job order costing. difference is that the cost of goods completed is trans
A
ferred from the last departmental Work in Process account
to Finished
Goods Inventory by an entry in the general
cost sheet. One summary entry is made at
journal rather than in a job
the end of the month to record
the cost of goods completed
during the month.
Selling
All procedures in
recording sales are similar to those used when
sold from stock under the
order cost system. The Cost of gooas
are
job
Finished Goods Inventory account isGooas
Sold account is debited and the
ited for cost of products sold. cred
 Nature and Operations
357

OMPREH
HENSIVE
ILLUSTRATION
Paper Company
Daper Con
manufactures
nents. The Cutting Departmenthighthatquality paper boxespaper
in three de-
to the
and trims that folds
ired dimensions and sizes; the AssemblycutsDepartment the
r e q u i

the
rr and form
paper
form the boxes; and the Packaging Department that put the
Oxes container for storage. Starting from the Cutting Department,
in a

roduct moves into the Assembly Department and then to the Pack-
the product moves

epartment. As the production moves from lepartment to depart

ing Dex
agng

ment,
the accumulated costs move with it.
med data relating to Star Paper Company for
nth of manufacturing operations are as follows:January, 2018, the first
Assu:

mont

CUTTING DEPARTMENT
Costs Incurred

The three elements (categories) of manufacturing costs: materials, labor

and overhead incurred and charged to the Work in Process Cutting -

Department for the month of January 2018 are presented below:

Materials P77,280
Labor 95,616
Overhead 156,632
Production Report

This report shows the physical flow of units for the

month of January,
2018 which includes the following data:

Number of units started in process.

2 Number of units completed and transterred to the next department.
3 Number of units remaining in process (BEnding Work in Process).
State of Completion of the ending work in process.
The above
ext
data are summarized in the Monthly Production Report on the
page (Illustration 10-1)
 358
Chapter 10
llustration 10-1
Cutting Department
Monthly Production Report
January 2018
Quantity
Started in Process Current Month
Transfered Out to Next Department
12,880
Work in Process Ending
9,120
-

3,760
Stage of Completion of Ending Work in Proces8
Materials 100%
Labor 40%
Overhead 55%
The last section of the report, the stage of the work in
completion of
cess at the end of the month is only estimated. The estimate is
pro.
based on
past experience or formula. It is important for this estimate to be as ac
rate as p08sible, because it directly affects the computation of the num.
ber of equivalent units, which in turn affects unit cost.

Equivalent Units of Production

Once the physical flow of units is determined, the department's produc

tion in terms of equivalent production can now be calculated. Equivoa
lent production is the measure of work done during the month, express
in fully completed units. Normally, not all units are completed during the
period. There are units still in process at different stages of completion
at the end of the month. All these units must be converted to equivalent
units of production by multiplying the number of units in process by the
percentage of completion. Thus, 3,760 units that are estimated to be 40
percent completed as to labor are equivalent to 1,504 completed unts
P3,760 x 40) for labor. This procedure is necessary for the purpo8e 0
computing the unit costs

From the monthly production report of the Cutting Department, shown

in llustration 10-1, the equivalent
production for each elements of cos
(materials, labor, and overhead) is computed as shown in lustration i
2 on the next page.
 Csan ure and tperattons 359

ilusiration 10-2

utting Department
alent Produ Computations
of January 2018
Mont

Materials

Tansferred Out to Next Department 9,120

Work in Process- End (3,760 U
x
100%)
6) 3,760
Equivalent Units for Materials 12,880

Labor
LoTransferred Out to Next
Department
Work in Process- End (3,760 x 40%)
9,120
1,504

Equivalent Units for Labor 10,624

Overhead
Transferred Out to Next Department 9,120
Work in Process-Bnd (3,760x 55%) 2,068
Equivalent Units for Overhead 11,188

Materials
total of the units
The equivalent production for materials, 12,880, is the and the unitss
completed and transferred to the next department (9,120)
materials needed to
remaining in process (3,760). This is because all the
in the Cutting Department have been issued and charged
process the units
to the Work in Process account.

Labor and Overhead

overhead con-
The equivalent production for labor and manufacturing
transferred out to
units
sists of two factors. The first factor is the 9,120
as to labor and over-
the next department, which are 100 percent complete
still in process, which are esti-
head. Tae second factor is the 3,760 units
and 55 percent complete as to
mated to be 40 percent complete as to labor
manufacturing overhead.

equivalent
units is to per-
Completing 40 percent of the work on 3,760
torming 100 percent of the work on 1,504 units (3,760 x .40). The resulting
(9,120 + 1,504). This figure means
equivalent production is 10,624 unitson a total of 12,880 units (some only
that enough labor has been expended The proce
partly finished) to have fully completed 10,624 units.
same
aure of computation is made for overhead (see llustration 10-2).

of comple-
t labor and overhead (conversion costs) are at the same stage
units is necessary.
Don, only one computation of equivalent
 360 Chapter 10
COST OF PRODUCTION REPORT
- CUTTING
PARTMENT
DEPARTMEN
Company's Cutting Dena.
The cost of production report for Star Paper
two sections: the Quans
ment is shown below. The report contains ntity
Schedule and the Cost Schedule.

Illustration 10-3

CUTTING DEPARTMENT
Cost of Production Report
Month of January 2018

Quantity Schedule Units

(a) Quantity to Be Accounted For:
Started in Process 12,880
Total to be accounted for 12,880
(b) Quantity Accounted For:
Transferred Out to Next Dept. 9,120
Work in Process - end 3,760
Total accounted for 12,880

Equivalent Unit
Cost Schedule Total Cost Units Costs
(c) Costs to Be Acounted For:
Materials P 77,280 12,880 P 6.00
Labor 95,616 10,624 9.00
Overhead 156,632 11,188 14.00
Total costs to be accounted for P329,528
(d) CoetAccounted For: P29.00
Transferred Out P264,480= 9,120 X P29.00
Work in process - End
Materials P 22,560 3,760 6.00
Labor 13,536 1,504 X 9.00
Overhead 28,952 =
2,068 X 14.00
Total Work in Process P 65,048
Total costs accounted for
P329,528
ProcessCosfing: Natu and Operations 361

following
should be noted in the cost of production report for Cut
Cut-
ting Department (Tllustrati
(Ilustration 10-3):
Quantity Schedule
The Quantity Schedule
The Quant
section is divided into two parts: The first half,
(a) Quant the
ntity to Be Accounted For, shows the number and s o u r c e of the
(a) proces
units during the month. Since January 2018 is the first month
operation, production of all units was started during the current month.
of opera
of
The secona na, (6) Quantity Accounted For, shows what happenea to
the units presented in the first half of the Quantity Schedule. In this
9.120 units out to the
ca8e,
case, were
completely processed and transferred end of the
next
next
department, and 3,760 units remained on hand at the
The twoparts of the Quantity Schedule complete the reconcilia-
month.
mont

tion of physical units to be accounted for with physical units that are
accounted for.

Cost Schedule
The first part of the Cost Schedule (c) Costs to Be Accounted For, shows
the total cost for which an accounting must be made. It also shows the
cost of each cost element per equivalent unit of production and the total
cost of each equivalent unit.

The unit cost of each element is computed by dividing the total cost
of the element by the related equivalent units shown on the depart-
mental equivalent production report (llustration 10-1). In the case
of material, cost of P77,280 is divided by 12,880 units to give a unit
cost of P6 for materials in the cutting department.
I n the case of labor, the total cest of P95,616 is divided by the 10,624
equivalent units (from the equivalent produetion report) to give the
unit cost of P9.
In the case of overhead, the total cost of 156,632 is divided by the
11,188 equivalent units to givee the unit cost of P14.
After the unit cost for each of the cost elements has been computed,
the unit costs are added to find the total cost per equivalent unit,
P29 (P6+P9 + P14).
 362

Chapter
The second
part of the Cost Schedule, (d) Costs Accounted For, shoes
production costs of the month. 8
the
The total cost of the units
completed and transferred out to the
department is computed first within Section (d). The unit next
cost
cost co
com
puted in the first part of the Cost Schedule, P29, is multiplied by
number of units transferred out, 9,120, from the
uantity the
The result is the total costs of Schedul
P264,480 for units transterred tothee
Assembly Department during the month.
The next part
of Section (d), Work in Process End, shows the cost of
the work
remaining in process at the end of the month. The unit cOst
for each cost
element, computed in Section (c), 18 multphed by the
equivalent units of that cost element in the ending work in process.
The total cost of the materials in work in
process is computed by
multiplying the materials unit cost of P6 by 3,760 equivalent units
for a total of P22,560. The labor cost in
ending work in process, P13,536
is computed by
multiplying the labor unit cost of P9 by the 1.504
equivalent units of production in process. Similarly, overhead in the
ending work in process is omputed to be P28,952 (2,068 equivalent
units multiplied by P14 per unit). When all three elements are
the total cost of the work in process is P65,048.
added,

The Cost Schedule is designed to reconcile total cost

figures. The total
costs incurred in the production process (Section c) must agree with the
total costs related to both the units that were fully completed and those
that were partially completed during the month (Section d). If small
errors occur as a result of rounding off numbers, the cost of units
transferred out of the department, as shown in Section (d) of the
Cost Schedule, is adjusted to absorb the rounding error. Technically,
a portion of the rounding error should be allocated to work in
process,
because usually most of the errors apply to work transferred out of the
department during the month. Since most of the adjustment would be
made to the costs of the units transferred out anyway, all of it is put there.
To eliminate rounding errors either for costing purposes or to determine
if a difference is indeed a rounding error, the unit costs can be carried o
larger decimals.
 gNature
zCIS Nan and Operations 363

EMBLY DEPARTMENT

ompleted in the Cutting Department to tne

/he units

4ssembly
h Department for further processing.
are transferred

Added in
Current Month
o
ast
s t

Work in
he costso f
nsts of materials, labor and overhead ccumulated in
thebelow:
P r o c e s s A

Assembly
s s e m

Department during the month are shown

Materials P21,830
Labor 82,954
Overhead 69,856

Monthly Production Report

is
in Star Paper Company's production sequence
The second department
The s e c o n d

Assembly Department. The 9,120 units transferred out of the Cutting

rhe operations
epartment become the input for the Assembly Department's transferred
Of these units, 8,150 were completed and
uring the month.
and 970 were left in work in process. These units ending
o finished goods
gre shown in the Assembly Department's monthly production report, as

shown below:

Ilustration 10-4

Assembly Department
Monthly Production Report
January 2018

Quantity
Transferred In From Prior Departmentt 9,120
Transferred Out 8,150
Work in Process End 970

ge of Completion of Ending Work in Process

Transferred in Cost 100%
Materials 60%
Labor 60%
Overhead 60%
 364
Chopter I'
Equivalent Units of Production

Department equiva
From the monthly production report of the Assembly Department.
ee elementeuiv
for the three elements
lent units of production must be computed
of 970 units which contain
of costa
Ending work in process consisted an aver.
this departmer
age of 60% materials, labor and overhead from
three elements of costeThe
equivalent units of production for the
sented below:
Pre

Illustration 10-5

Assembly Department
Equivalent Production Computations
Month of January 2018

Materials
Transferred Out to Next Department 8,150
Work in Process -

End (970 x 609%) 582

Equivalent Units for Materials 8.732
Labor
Transferred Out to Next Department 8,150
Work in Process End (970 x 60%) 582
Equivalent Units for Labor 8,732
Overhead
Transferred Out to Next Department 8,150
Work in Process - End (970 x 60%) 582

Equivalent Units for Overhead 8,732

COST OF PRODUCTION REPORT ASSEMBLY DEPARTMENT

The costs accumulated in the account Work in Process - Assembly De

partment and equivalent unit of production provide the data needea
prepare the cost of production report (Illustration 10-6) for this dep
ment. The report is shown on the next page.
 g: Nature and Operations
365

lustration 10-6

MBLY OEPARTMENT
Cost
of Production Report
Month of January 2018
guantity Schedule

uantity to Be Accounted For: Units

(a)
Transferred In From Prior Dept. 9,120
Total to Be Accounted For
b) Quantity Accounted For: 9,120
Transferred
Work in
Out to Next
Dept. 8,150
Process- End
970
Total Accounted For
9,120

Cost Schedule Equivalent Unit

Total Cost Units Costs
(c) Costs to Be Accounted For:
Costs Transferred In
P264,480 + 9,120 P29.00
Costs Incurred in this
Materials
Department
Labor
21,830 8,732 2.50
82,954 8,732 9.50
Overhead 69,856 + 8,732 8.00
Total costs in this Department
P174,640 P20.00
Total Costs to Be Accounted For
) Cost Accounted For P439,120 P49.00
Transferred Out P399,350= 8,150 x P49.00
Work in Process- End
Costs Transferred In P 28,130 = 970
Costs Incurred in this Dept.
X 29.00
Materials 1,455 582 2.50
Labor 5,529 582 9.50
Overhead 4,656 582 8.00
Total Work in Process P 39,770
Total Costs Accounted For
P439,120
 366

in the cost of production report of the Assembly

hur'
following: rtment, observc
Department, oho

Quantity Schedule
This is
prepared in the same way as shown for the Cutting
Cost Schedule Department
The first part of the
Cost Schedule, Cost to be Accounted
the total costs For, inel.
transferred in from the prior department as well aclud
Costs, by as
category, incurred in the current department. The tigures o g
Costs Transferred In are on
the same as those in Section (d) in th
production report of the Cutting Department shown on costthe
he cos
as costs llustration'
transferred out. Current costs data are computed as follow.10-3
The unit cost of each cost element in the current
department is en
puted by dividing the cost of materials, labor and Om
overhead
equivalent units of production. The total cost added per by iits
equivalene
unit of completed units in the
Assembly Department is P20. ent
The costs in the current
department (both unit
added to the transferred in costs to obtain new and total costs) are
are
to be accounted for. The cost of
cumulative total costs
production report shows that total
costs incurred to date amount to P439,124 and that the total
unit
costs incurred to date is P49.
The unit cost for each category and the total unit cost are
used to
complete the second part of Cost Schedule, Costs Accounted For (Sec.
tion 3), as follows:
The cost of goods transferred out (P399,350) to the Packaging
Department is computed by multiplying the cumnulative unit cost
of P49 by the 8,150 units transferred.
The cost of ending work in process in the current department is
computed by multiplying the equivalent units for each cost ele-
ment by the unit cost amount from Section (c). The total cost is
added to the cost transferred in from prior department. When
all amounts are totaled, the cost of the work in process is P39,770.
Observe that in the completed report, the totals of Sections (a) and
(b) are equal as are Sections (C) and (d).
 367
aSL.M Nature and Operations

GING
DEPARTMENT
is
1s
Thisis
the last department, so the units completed
completed in this department
department
red to finished gopde
goods. uts
ransferred
ranst

Cos Added in Current Month

n
he
Thecost of materials, labor and overhead accumulated in the Work
Process- Packaging Department during the month are as follows:
Process-

Materials P2,172
Labor 24,492
Overhead 14,596
Monthly Produetion Report

The 8,150 units transferred out of the Assembly Department were re-
ceived in this department. Of these units, 5,430 were completed and trans
ferred to finished goods and 2,720 were left in ending work in process.
These units and their stage of completion are shown in the following pro-
duction report:

Tllustration 10-7

Packaging Department
Monthly Produetion Report
January 2018

Quantity
Transferred In From Prior Department 8,150
Transferred Out to Finished Go0ds 5,430
Work in Process End 2,720
Stage of Completion of Ending Work in Process
Transferred Out 100%
Materials 0%
Labor 20%
Overhead 15%
368 Chapter 10
Equivalent Units of Production
equivalent units of product..
Based onthe monthly production report, ction
are computed below:

Illustration 10-8

Packaging Department
Equivalent Production Computations
Month of January 2018

Materials
Transferred Out to Finished Goods
5,430
Work in Process - End (2,720 x 0%) 0
Equivalent Units for Materials 5,430
Labor
Transferred Out to Finished Goods
5,430
Work in Process End (2,720 x 20%) 544
Equivalent Units for Labor 5,974
Overhead
Transferred Out to Finished Goods 5,430
Work in Process - End (2,720 x 15%) 408
Equivalent Units for Overhead 5,838

COST OF PRODUCTION REPORT - PACKAGING DEPARTMENT

The cost of production report for Packaging Department is prepared in

the same way as those in previous departments. Note that the Costs Trans
ferred In in Section () is equal to the Costs Transferred Out in Section
(d) of the Assembly Department's cost of production report. Slight differ:
ence in terminology exists between this cost of production report and
those of the previous departments. The cost transferred out is to the Pin-
ished Goods rather than the next department.

The cost of production for the Packaging Department is presented on the

next page (1llustration 10-9).
 ss COsting Nature and Operations 369

tlustration 10.9

CKAGING DEPARTMENT
Cost of Production Report
Month of January 2018
Quantity Schedule
Units
Quantity to Be Accounted For:
(a) Transferred In 8,150
Total to Be Accounted For 8,150
b) Quantity Accounted For:
Transferred Out to Finished Goods 5,430
Work in Process - End
2,720
Total Accounted For 8,150

Equivalent Unit
Cost Schedule Total Cost Units Costs
(c) Costs to Be Accounted For:
Costs Transferred In P399,350 + 8,150 P49.00
Costs Incurred in this Department
Materials 2,172 + 5,430 .40
Labor 24,492 + 5,974 4.10
Overhead 14,596 5,838 2.50

Total costs in this Department P 41,260 P 7.00

Total Costs to Be Acounted For P440,610 P56.00
(d) Cost Accounted For:
Transferred Out to Finished Goods P304,080 =
5,430 X P56.00
Work in Process - End
Costs Transferred In P133,280 2,720 X 49.00
Costs Incurred in this Dept.
MaterialsS 0- 0 40
Labor 2,230= 544 4.10
Overhead 1,020 408 2.50
Total Work in Proces8 P136,530
Total Costs Accounted For P440,610
Take note that the total unit cost of P56 represents the total manufactur-
ng cost of the boxes completed during the month of January 2018. It will
be used in costing inventories and computing gross profit on sale.
 370
Chapter I
RECORDING MANUFACTURING OPERATIONS

The journal entries for Star Paper Company to record manufact

operations for the month of January, 2018 are the following: buring
Cutting Department:
1. To record cost incurred:

Work in Process Cutting Department 329,528

Materials 77,280
Factory Payroll 95,616
Applied Manufacturing Overhead 156,632
To record costs incurred.

2 To record costs of completed units transferred to Assembly Depart.

ment per Section (d) of the cost production report (Illustration 10-3

Work in Process Assembly Department 264,480

Work in Process Cutting Department
-

264,480
To record units transferred to Department 2

Assembly Department:
3. To record cost added:

Work in Process Assembly Department 174,640

Materials 21,830
Factory Payroll 82,954
Applied Manufacturing Overhead 69,856
To record costs added this month.

4 To record costs of units completed transferred to Packaging Depart

ment per Section (d) of the cost of production (llustration 10-6

Work in Process Packaging Department 399,350

Work in Process - Assembly Department
399,350
To record units transferred to Packaging Dept.
 nd Opecralions
37
ackaging Department
ma record cost added in the
current month:
Work in
Process Packaging Department 41,260
Materials 2,172
Factory Payroll 24,492
Applied Manufacturing Overhead 14,596

6. To record cost of completed units transferred to finished goods 1n

6.
ventory per Section (d) of the cost of production report (Ilustrattor
10-9)
Finished Goods 304,080
Work in Process
Packaging Department 304,080

January 31, 2018

The balances of the Departmental Work in Process on
are computed below:

llustration 10-10
Cutting Assembly Packaging
P77,280 P21,830 P 2,172
Materials
82,954 24,492
95,616
Labor
Overhead 156,632 69,856 14,596

329,528 174,640 41,260

Total costs incúrred
264,480 399,350
Transferred In
Transferred Out (264,480) (399,350) 304,080)
Balance January 31 P65,048 P39,770 P136,530

in the departmental cost of produc

The above balances can be verified
the Cost Accounted For.
tion report under Section (d)

OF GOODS SOLD
RECORDING SALES AND COST
related cost of goods sold are exactly the
Entries to record sales and the
cost accounting system. Assume that 5,300
$ame as those in the job order
January for P80 each, for a total selling price of
units were sold during
month of operation of Star Paper Com-
P424,000. Since this is the first production. The 5,300 units
sold came from January
pany, all the units and
Sold had a total cost of P296,800
(5,300 x P'56). Entries to record sales
on the next page.
COst of sales during January are presented
 372 Chapter l
424,000
Jan. 31: Accounts Receivable
Sales
January.
424,000
To record sales during
296,800
Cost of Goods Sold
Finished Goods 296,800
during January.
T6 record cost of units sold
Procedures
Summary of Principles and
manufacture on.
cost system is used by companies that COn
ne process few products that are hom0geneous.
Lous
basis only one or a
in the accounting
1or costS 1n mass-pror
oduc
The system is ideal
tion.
as soft
drink and bottling. no
This is used by companies such paint
refining.
manufacturer, and petroleum cost svata
in manufacturing operations using process
Usually
produced for stock; one
unit
or production is simil
goods are are standardized; and ns
to theothers; factory procedures in a constant stream. goods
processes
move through production overhead are accounted for in
The costs of materials, labor and
the usual manner.
for charging costs to production
in
a process costs svs.
The procedures is no job costs
tem follow those in the order system except thatt there
job
sheet. well as direct labar
as
Direct materials placed in production
Work in Process accounts.
costs are charged to departmental
Indirect materials issued to producing departments and indi
are charged to Manu
rect labor costs in a producing department
facturing Overhead Control account.
is closed into
At the end of the period Manufacturing Overhead
the departmental Work in Process accounts.
data
After costs are accumulated in Work in Process accounts, production
must be assembled to compute the unit cost.
The month production report provides information about the
quantity stated, quantity transterred in and out, and the quan
ot
tity and stage of completion of products in process at the end
the month.
The cost accountant then computes the equivalent units of pro
duction to show the amount of work done on both complete
and partially processed units in each department. Equivalent
units of production reflect the number of units that could have
been completely produced from the costs incurred. COst
Using the costs figures and the equivalent production unit figures, a C
of production report for each department is prepared.
Prxess QSting N
Costing Nafureand Operations 373

cost of production report has two main schedules. The quantity sched
ule and the cost schedule.

The how-
first part of the
Quantity Schedule provides unit data
ing units to be accounted for. The second part explains wna
happened to the units that were handled in that department.
eneraly, the products are either transferred out of the depart
ment or are in the ending work in process inventory in various
stages of completion.

In the first part of the Cost Schedule, total costs are mble
and the Cost per equivalent unit of production for each cost cat-
egory (materials, labor, overhead, and transferred in cost) 18 Con

puted. In unit 13
addition, the cumulative cost per equivalent
calculated.

The second part of the Cost Schedule accounts for the costs.
Some costs relate to units that are transferred to the next de
partment or to finished goods. The total of costs transferred ount
is computed by multiplying the cumulative cost per equivalent
unit by the number of units transferred out. Other costs remain
as part of the work in process. The cost of ending work in pro*
cess is the unit cost of each cost category multiplied by the num-
ber of equivalent units of that cost category still in process.

The total cost of goods transferred from one department to the next or to
finished goods, as shown in the cost of production report, is recorded by a
journal entry and posted to the general ledger.