COST ACCOUNTING AND CONTROL SYSTEM

1
PROCESS COSTING

Module 004 Process Costing

LEARNING OBJECTIVES

After completing this module, the student should be able to:

1. Define equivalent units of production

2. Determine the methods of accounting fo
for cost flows in process costing
3. Calculate equivalent units of production and multi-departments
multi
production site
4. Compute unit costs under process costing, under first-in,
first first-out method
and under weighted av
average
erage method of process costing

Course Module
 As mentioned in the previous module, process costing is the cost accumulation system being used
by companies who produce similar units and go through continuous production flow. Thus, total
costs are being spread-out to all identical units produced, requiring the use of averaging process.

Generally speaking, cost per unit is being calculated by dividing the total costs incurred to the total
units produced. However, it is critical to note that finish products go through multiple
departments. With this, costs are being incurred in each department and it is being passed on in
the next department as goods still in-process, so for purposes of calculation of unit costs, the
denominator to be used are not the total units produced, but rather, equivalent units of
production.

LO No. 1 Equivalent Units of Production (EUP)

These are partially completed units which are being estimated based on the total number of units
to be produced. It measures the quantity of production completed during a period and is being
used to allocate production costs to units during the production process

Example:

ABCManufacturing Company startedproducing 100 units for the period of January. At the end of
the month, it was determined that these 100 units are only 70 percent the way through the
production process. Thus, the company’s equivalent units of production for the period is 70 EUP.

LO No. 2

Methods of Accounting for Cost Flows in Process Costing

1. Weighted Average Method

Under this method, costs that are incurred from different periods are being consolidated
and divides it by the EUP which is based on the aggregate of work-in-process beginning
inventory and units placed on production during the period.
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

2. First-in First-out
out (FIFO) Method

FIFO Method is the method wher

wherein
ein an assumption of those units which are first used to
production are the first ones to be completed, thereby completed first and the ones to be
transferred-out
out to the next department.

LO No. 3 to 9

Steps in Process Costing

Prior to proceeding to calculation of costs, it is important to determine first which method of

cost flow in process costing is being used by the company.

The following are the step-by

by-step
step procedures in each method of cost flow in process costing
system for allocating the costs to units completed and to those which are still in the work-in-
work
process inventory:

 Weighted Average Method

Department 1 Department 2 and to succeeding departments

Step 1: Calculate the units to account for: Step 1: Calculate the units to account for:

Work-in-process, beginning inventory(WIP-BI)xxx WIP-BI xxx

+ Units Started _______xxx + Transferred-in units (T-in)xxx
Units to account for xxx Units to account forxxx

*Transferred-in units are completed units in previous department

Step 2: Calculate the units as accounted for: Step 2: Calculate the units as accounted for:

Completed units** xxx Completed units xxx

+ Work-in-process, ending inventory (WIP-EI)xxx + WIP-EIxxx
Units as accounted for xxx Units as accounted for xxx

*Completed units are the sum of:

 work-in-process inventory, beginning and,
 started and completed

Step 3: Calculate the equivalent units of production Step 3: Calculate the equivalent units of production (EUP)
(EUP)
Course Module
 Units as Materials Labor & Units as Materials Labor & Transferred-
accounted Overhead accounted Overhead in (T-in)
for Percentage Percentage for (WD%) EUP (WD%) EUP (WD%) EUP
of work EUP of work EUP Completed xxx 100% xxx 100% xxx 100%* xxx
done done
+ WIP-EI xxx %* xxx %* xxx 100%* xxx
(WD%) (WD%)
EUP xxx xxx xxx xxx
Completed xxx 100% xxx 100% xxx
+ WIP-EI xxx %* xxx %* xxx
*Transferred-in units are always 100% completed both in
EUP xxx xxx xxx
materials and conversion phase (labor and overhead),
so it always 100% in its work done section
*If materials are added at:
 beginning = 100% work done
 end = 0% work done
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

Step 4: Calculate the costs to account for Step 4: Calculate the costs to account for

Work-in-process, beginning (WIP, beg) Work-in-process,

process, beginning (WIP, beg)
+ Current period costs (CC) + Current period costs (CC)
Costs to account for Costs to account for
DM + DL + OH = Total Costs (TC) DM + DL + OH + T-in = TC
WIP, beg xxx + xxx + xxx = xxx WIP, beg xxx + xxx + xxx + xxx = xxx
+ CC xxx + xxx + xxx = xxx___ + CC xxx+ xxx + xxx+ xxx= xxx
Costs to account for xxx + xxx + xxx = xxx___ Costs to account for xxx+ xxx + xxx + xxx= xxx

Step 5: Calculate the costs per equivalent unit of Step 5: Calculate the costs per equivalent unit of production
production DM + DL + OH + T-in = TC

DM + DL + OH = Total Costs (TC) WIP, beg xxx + xxx + xxx+ xxx = xxx

WIP, beg xxx + xxx + xxx = xxx + CC xxx + xxx + xxx+ xxx= xxx
+ CC xxx + xxx + xxx = xxx___ Costs to account for xxx + xxx + xxx+ xxx = xxx

Costs to account for xxx + xxx + xxx = xxx Divided by EUP xxxxxxxxx+ xxx= xxx

Divided by EUP xxxxxxxxx = ___ Costs per EUP xxx + xxx + xxx+ xxx = xxx
Costs per EUP xxx + xxx + xxx = xxx___

Step 6: Allocate the costs to each inventory accounts Step 6: Allocate the costs to each inventory accounts
(Costs as accounted for) (Costs as accounted for)

Equivalent Units of Production (EUP) Equivalent Units of Production (EUP)

DM + DL + OH = TC DM + DL + OH + T-in
T = TC
Completed xxx + xxx + xxx = xxx Completed
ompleted xxx + xxx + xxx + xxx = xxx
+WIP-EI xxx + xxx + xxx = xxx +WIP-EI xxx + xxx + xxx +xxx = xxx
xxx + xxx + xxx = xxx xxx + xxx + xxx + xxx = xxx
Multiply by Multiply by
Cost per EUP xxx xxxxxx = xxx Cost per EUP xxx xxxxxxxxx=
= xxx
xxxxxxxxx = xxx xxx xxxxxxxxx = xxx

Basically speaking, Step 6 is Step 3 multiply by Step 5

(Step 6 = Step 3 x Step 5)

Illustrative Problem:

Course Module
 Units Department I Department II
Work-in-process, beginning 10,000
Stage of completion 75%
Started 125,000
Completed and transferred 110,000 95,000
Work-in-process, end 25,000 15,000
Stage of completion 40% 50%

Direct materials are added in the following manner:

Department I - added at the beginning of the process
Department II - added at the end of the process

Costs
Direct Materials P 500,000 P 270,000
Direct Labor 330,000 190,000
Overhead 220,000 95,000
1,050,000 555,000
Work-in process, beginning
Direct Materials 47,650
Labor 31,400
Overhead 20,950
100,000

Total Costs 1,150,000 555,000

DEPARTMENT I

Step 1: Calculate the units to account for

WIP-BI 10,000
Units Started 125,000
Units to account for 135,000 NOTE:
Total units to
Step 2: Calculate the units as accounted for account for
Completed 110,000 and
Total units as
WIP-EI 25,000 accounted for
Units as accounted for 135,000
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

Step 3: Calculate the equivalent units of production (EUP)

Units as
Materials Labor and Overhead
accounted
for
WD % EUP WD % EUP
Completed 110,000 100% 110,000 100% 110,000
WIP-EI 25,000 100% 25,000 40% 10,000
EUP 135,000 135,000 120,000

Step 4: Calculate the costs to account for

DM DL OH TC
WIP, beg 47,650 31,400 20,950 100,000
CC 500,000 330,000 220,000 1,050,000
Costs to account for 547,650 361,400 240,950 1,150,000

Step 5: Calculate the costs per equivalent unit of production

DM DL OH TC
WIP, beg 47,650 31,400 20,950 100,000
CC 500,000 330,000 220,000 1,050,000
Costs to account for 547,650 361,400 240,950 1,150,000
Divided by EUP 135,000 120,000 120,000
Cost per EUP 4.06 3.01 2.01 9.08

Step 6: Costs as accounted for

DM DL OH TC
EUP - Completed units 110,000 110,000 110,000
EUP - WIP-EI 25,000 10,000 10,000
Total EUP 135,000 120,000 120,000 -
Multiply by Cost per EUP 4.06 3.01 2.01 9.08
Costs as accounted for 547,650 361,400 240,950 1,150,000

Course Module
 or

DM DL OH TC
EUP - Completed units 110,000 110,000 110,000
Multiply by Cost per EUP 4.06 3.01 2.01 9.08
Costs as accounted for
completed units 446,233 331,283 220,871 998,388

or

DM DL OH TC
EUP - Completed units 110,000
Multiply by Cost per EUP 9.08
Costs as accounted for
completed units - - - 998,388

DM DL OH TC
EUP - WIP-EI 25,000 10,000 10,000
Multiply by Cost per EUP 4.06 3.01 2.01
Costs as accounted for
work-in-process, end 101,417 30,117 20,079 151,613

Costs as accounted for DM DL OH TC

Completed units 446,233 331,283 220,871 998,388
Work-in-process, end 101,417 30,117 20,079 151,613
Total costs as accounted for 547,650 361,400 240,950 1,150,000

NOTE:
This amount must always be equal to
costs to account for, as calculated in Step 4
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

or

DM DL OH T-in TC
EUP - Completed units 95,000
Multiply by Cost per EUP 14.70
Costs as accounted for
completed units - - - - 1,396,390

DM DL OH T-in TC
EUP - WIP-EI - 7,500 7,500 15,000
Multiply by Cost per EUP 2.84 1.85 0.93 9.08 -
Costs as accounted for
work-in-process, end - 13,902 6,951 136,144 156,997

Costs as accounted for DM DL OH T-in TC

Completed units 270,000 176,098 88,049 862,244 1,396,390
Work-in-process, end - 13,902 6,951 136,144 156,997
Total costs as accounted for 270,000 190,000 95,000 998,388 1,553,388

Course Module
 DEPARTMENT II

DEPARTMENT II
Step 1: Calculate the units to account for
WIP-BI -
T-in 110,000
NOTE:
Units to account for 110,000 Transferred-in units
are the completed units
Step 2: Calculate the units as accounted for of Department I
Completed 95,000
WIP-EI 15,000
Units as accounted for 110,000
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

Step 3: Calculate the equivalent units of production (EUP)

Units as
Materials Labor and Overhead Transferred-in
accounted
for
WD % EUP WD % EUP WD % EUP
Completed 95,000 100% 95,000 100% 95,000 100% 95,000
WIP-EI 15,000 0% - 50% 7,500 100% 15,000
EUP 110,000 95,000 102,500 110,000

Step 4: Calculate the costs to account for

DM DL OH T-in TC
WIP, beg - - - -
CC 270,000 190,000 95,000 998,388 1,553,388
Costs to account for 270,000 190,000 95,000 998,388 1,553,388

Step 5: Calculate the costs per equivalent unit of production

DM DL OH T-in TC
WIP, beg - - - -
CC 270,000 190,000 95,000 998,388 1,553,388
Costs to account for 270,000 190,000 95,000 998,388 1,553,388
Divided by EUP 95,000 102,500 102,500 110,000
Cost per EUP 2.84 1.85 0.93 9.08 14.70

Step 6: Costs as accounted for

DM DL OH T-in TC
EUP - Completed units 95,000 95,000 95,000 95,000
EUP - WIP-EI - 7,500 7,500 15,000
Total EUP 95,000 102,500 102,500 110,000 -
Multiply by Cost per EUP 2.84 1.85 0.93 9.08 14.70
Costs as accounted for 270,000 190,000 95,000 998,388 -

or

DM DL OH T-in TC
EUP - Completed units 95,000 95,000 95,000 95,000
Multiply by Cost per EUP 2.84 1.85 0.93 9.08 14.70
Costs as accounted for
completed units 270,000 176,098 88,049 862,244 1,396,390

Course Module
 or

DM DL OH T-in TC
EUP - Completed units 95,000
Multiply by Cost per EUP 14.70
Costs as accounted for
completed units - - - - 1,396,390

DM DL OH T-in TC
EUP - WIP-EI - 7,500 7,500 15,000
Multiply by Cost per EUP 2.84 1.85 0.93 9.08 -
Costs as accounted for
work-in-process, end - 13,902 6,951 136,144 156,997

Costs as accounted for DM DL OH T-in TC

Completed units 270,000 176,098 88,049 862,244 1,396,390
Work-in-process, end - 13,902 6,951 136,144 156,997
Total costs as accounted for 270,000 190,000 95,000 998,388 1,553,388
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

 First-in, First-out (FIFO) Method

Department 1 Department 2 and to succeeding departments

Step 1: Calculate the units to account for: Step 1: Calculate the units to account for:

Work-in-process, beginning inventory(WIP-BI)

BI)xxx WIP-BI xxx
+ Units Started _______xxx + Transferred-in units (T-in)xxx
in)xxx
Units to account for xxx Units to account for xxx
Step 2: Calculate the units as accounted for: Step 2: Calculate the units as accounted for:

Completed units** Completed units**

WIP-BI xxx WIP-BI
BI xxx
Started and Completed (S&C) xxx Started and Completed (S&C) xxx
+ Work-in-process, ending inventory (WIP-EI)
EI)xxx + Work-in-process, ending inventory
nventory (WIP-EI)xxx
Units as accounted for xxx Units as accounted for xxx

*Under FIFO Method, completed units are separately accounted for as to:
 work-in-process
process inventory, beginning and,
 started and completed

Step 3: Calculate the equivalent units of production (EUP) Step 3: Calculate the equivalent units of production (EUP)
Materials Labor & Overhead Materials Labor & Transferred-
Percentage Percentage Overhead in (T-in)
of work EUP of work EUP (WD%) EUP (WD%) EUP (WD%) EUP
done done
Completed
(WD%) (WD%)
WIP-BI % xxx % xxx 100% xxx
Completed
S&C 100% xxx 100% xxx 100% xxx
WIP-BI** %** xxx %** xxx
+ WIP-EI % xxx % xxx xxx
S&C 100% xxx 100% xxx
EUP xxx xxx xxx
+ WIP-EI % xxx % xxx
EUP xxx xxx

*Transferred-in
in units are always 100% work done
**EU
P of WIP-BI
BI should only be accounted for the portion of work
completed during the current period, so, percentage of work done of
WIP-BI
BI is calculated as 100 less percentage work done of previous
period (100 - %WD from previous period)
Step 4: Calculate the costs to account for Step 4: Calculate the costs to account for

Course Module
Work-in-process, beginning (WIP, beg) Work-in-process, beginning (WIP, beg)
+ Current period costs (CC) + Current period costs (CC)
Costs to account for Costs to account for
DM + DL + OH = Total Costs (TC) DM + DL + OH + T-in = TC
WIP, beg xxx + xxx + xxx = xxx WIP, beg xxx + xxx + xxx + xxx = xxx
+ CC xxx + xxx + xxx = xxx___ + CC xxx + xxx + xxx+ xxx = xxx
Costs to account for xxx + xxx + xxx = xxx___ Costs to account for xxx + xxx + xxx + xxx = xxx

Step 5: Calculate the costs per equivalent unit of production Step 5: Calculate the costs per equivalent unit of production
DM + DL + OH = Total Costs (TC) DM + DL + OH + T-in = TC
CC xxx + xxx + xxx = xxx CC xxx + xxx + xxx+ xxx = xxx
Divided by EUP xxxxxxxxx = xxx___ Divided by EUP xxxxxxxxx+ xxx= xxx
Costs per EUP xxx + xxx + xxx = xxx___ Costs per EUP xxx + xxx + xxx+ xxx = xxx
Note: Under FIFO method, only the current period costs are being
considered in calculating the cost per EUP.
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

Step 6: Allocate the costs to each inventory accounts Step 6: Allocate the costs to each inventory accounts
(Costs as accounted for) (Costs as accounted for)

DM + DL + OH = TC DM + DL + OH + T-in
T = TC
Completed Completed
WIP-Beg WIP-Beg
EUP of WIP-BI xxx + xxx + xxx = xxx EUP of WIP-BI xxx + xxx + xxx + xxx = xxx
x Cost per EUPxxx xxxxxx = xxx x Cost per EUPxxx xxxxxxxxx= xxx
Cost of Current Period (CCP)xxx + xxx + xxx xxx Cost of Current Period (CCP)xxx + xxx + xxx + xxx = xxx
Cost of Previous Period (CPP) xxx Cost of Previous Period (CPP) xxx
Cost as accounted for WIP-BI
BI xxx Cost as accounted for WIP-BI xxx

S&C S&C
EUP of WIP-BI xxx + xxx + xxx = xxx EUP of WIP-BI xxx + xxx + xxx + xxx = xxx
x Cost per EUPxxx + xxx + xxx = xxx x Cost per EUPxxx xxxxxxxxx= xxx
Cost as accounted for S&Cxxx xxxxxxxxx Cost as accounted for S&Cxxx + xxx + xxx + xxx = xxx

Total Costs as accounted for Completed Unitsxxx* Total Costs as accounted

nted for Completed Unitsxxx
Units

* Cost as accounted for WIP-BI DM DL OH T-in TC

WIP-EI
Add: Cost as accounted for S&C EUP- S&C xxx xxx xxx xxx xxx
Total Costs as accounted for Completed Units x Cost per EUP xxx xxx xxx xxx xxx
Cost as accounted for WIP-EI xxx xxx xxx xxx xxx

DM DL OH TC
WIP-EI
EUP- S&C xxx xxx xxx xxx
x Cost per EUP xxx xxx xxx xxx
Cost as accounted for WIP-EI xxx xxx xxx xxx

Course Module
Illustrative Problem:

UNITS Department I Department II

Work-in-process, beginning 6,000 5,000
Stage of completion 2/3 3/5
Started 44,000 -
Transferred-out 40,000 37,000
Work-in-process, end ? ?
Stage of completion 3/5 7/8

Direct materials are added in the following manner:

Department I - all added at the beginning of the process
Department II - 70% at the beginning and 30% at the end of the process

COSTS Department I Department II

Work-in process, beginning 5,200 10,000

Costs added this period

Direct Materials P 19,800 P 34,799
Direct Labor 14,200 27,470
Overhead 2,600 18,450
36,600 80,719

Total Costs 41,800 90,719

 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

Solution:

DEPARTMENT I

Step 1: Calculate the units to account for

WIP-BI 6,000
Units Started 44,000
Units to account for 50,000

Step 2: Calculate the units as accounted for

Completed
WIP-BI 6,000
S&C 34,000
WIP-EI 10,000
Units as accounted for 50,000

Step 3: Calculate the equivalent units of production (EUP)

Units as
Materials Labor and Overhead
accounted
for
WD % EUP WD % EUP
Completed
WIP-BI 6,000 0% - 1/3 2,000
S&C 34,000 100% 34,000 100% 34,000
WIP-EI 10,000 100% 10,000 60% 6,000
EUP 50,000 44,000 42,000

Step 4: Calculate the costs to account for

DM DL OH TC
WIP, beg 5,200
CC 19,800 14,200 2,600 36,600
Costs to account for 19,800 14,200 2,600 41,800

Step 5: Calculate the costs per equivalent unit of production

DM DL OH TC
CC 19,800 14,200 2,600
Divided by EUP 44,000 42,000 42,000
Cost per EUP 0.45 0.34 0.06 0.85

Course Module
Step 6: Costs as accounted for
DM DL OH TC
Completed units
WIP-BI
EUP- WIP-BI - 2,000 2,000
x Cost per EUP 0.45 0.34 0.06
Cost of Current Period (CCP) - 676 124 800
Cost of Previous Period (CPP) 5,200
Cost as accounted for WIP-BI 6,000

DM DL OH TC
S&C
EUP- S&C 34,000 34,000 34,000 34,000
x Cost per EUP 0.45 0.34 0.06 0.85
Cost as accounted for S&C 15,300 11,495 2,105 28,900

Total Costs as accounted for Completed Units 34,900

DM DL OH TC
WIP-EI
EUP- S&C 10,000 6,000 6,000
x Cost per EUP 0.45 0.34 0.06
Cost as accounted for WIP-EI 4,500 2,029 371 6,900

Costs as accounted for DM DL OH TC

Work-in-process, beg 6,000

Started and Completed units 15,300 11,495 2,105 28,900
Completed Units 15,300 11,495 2,105 34,900
Work-in-process, end 4,500 2,029 371 6,900
Total costs as accounted for 19,800 13,524 2,476 41,800
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

DEPARTMENT II

Step 1: Calculate the units to account for

WIP-BI 5,000
Transferred-in 40,000
Units to account for 45,000

Step 2: Calculate the units as accounted for

Completed
Started and Completed (S&C)
WIP-BI 5,000 = Total Completed Units less Work-in-process, beginning
S&C 32,000 (37,000-5,000)=32,000units
WIP-EI 8,000 NOTE: Transferred out is the completed units that is readily
transferable to another department
Units as accounted for 45,000

Step 3: Calculate the equivalent units of production (EUP)

Units as
Materials Labor and Overhead Transferred-in
accounted
for
WD % EUP WD % EUP WD % EUP
Completed
NOTE:
WIP-BI 5,000 30%* 1,500.00 2/5** 2,000 - - Always accounted as zero
S&C 32,000 100% 32,000 100% 32,000 100% 32,000
WIP-EI 8,000 70% 5,600 7/8 7,000 100% 8,000
EUP 45,000 39,100 41,000 40,000

*WIP-BI is 30% as to work done on materials since 70% of materials are already added at the beginning of the process, therefore, only 30%
will be added to the current period

**EUP of WIP-BI should only be accounted for the portion of work completed during the current period.
WD of current peiod = (1 - (3/5)))= 2/5

Step 4: Calculate the costs to account for

DM DL OH T-in TC
WIP, beg 10,000
CC 34,799 27,470 18,450 28,900 74,820
Costs to account for 34,799 27,470 18,450 28,900 84,820

Step 5: Calculate the costs per equivalent unit of production

DM DL OH T-in TC
CC 34,799 27,470 18,450 34,900
Divided by EUP 39,100 41,000 41,000 40,000
Cost per EUP 0.89 0.67 0.45 0.8725 2.8825

Course Module
Step 6: Costs as accounted for
DM DL OH T-in TC
Completed units
WIP-BI
EUP- WIP-BI 1,500 2,000 2,000 -
x Cost per EUP 0.89 0.67 0.45 0.8725 2.8825
Cost of Current Period (CCP) 1,335 1,340 900 - 3,575
Cost of Previous Period (CPP) 10,000
Cost as accounted for WIP-BI 13,575

DM DL OH T-in TC
S&C
EUP- S&C 32,000 32,000 32,000 32,000 32,000
x Cost per EUP 0.89 0.67 0.45 0.8725 2.8825
Cost as accounted for S&C 28,480 21,440 14,400 27,920 92,240

Total Costs as accounted for Completed Units 105,815

DM DL OH T-in TC
WIP-EI
EUP- S&C 5,600 7,000 7,000 8,000
x Cost per EUP 0.89 0.67 0.45 0.8725 2.8825
Cost as accounted for WIP-EI 4,984 4,690 3,150 6,980 19,804

Costs as accounted for DM DL OH T-in TC

Work-in-process, beg 13,575

Started and Completed units 28,480 21,440 14,400 27,920 92,240
Completed Units 28,480 21,440 14,400 27,920 105,815
Work-in-process, end 4,984 4,690 3,150 6,980 19,804
Total costs as accounted for 33,464 26,130 17,550 34,900 125,619

End of Module
 COST ACCOUNTING AND CONTROL SYSTEM
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PROCESS COSTING

References and Supplementary Materials

Books and Journals

1. Brewer P., Garrison, R., and Eric Noreen (2016). Introduction to Managerial
Accounting(7th ed). New York City: Mc Graw Hill Eudcation.

2. Horngren, C. T., Datar, S. M., and Madhav V. Rajan (2018). Cost Accounting: A
Managerial Emphasis (16th ed). New Jersey: Prentice Hall.

Course Module