PROCESS COSTING SYSTEM

- the PRODUCTION of MANUFACTURED PRODUCTS is EASILY DIVISIBLE INTO SPECIFIC JOBS,

and JOB ORDER COSTING is APPROPRIATE.
- However, the JOB ORDER COSTING SYSTEM does NOT WORK WELL when the PRODUCTION
CYCLE involves a CONTINUOUS FLOW OF RAW MATERIALS through various PROCESSING
DEPARTMENTS, and the FINISHED
OUTPUT is CHARACTERIZED as HOMOGENOUS UNITS, EACH displaying the SAME BASIC
CHARACTERISTICS.
- WOOD PULP is PROCESSED INTO GIANT ROLLS OF PAPER, REFINERIES PROCESS CRUDE OIL
INTO GASOLINE, IRON ORE IS PROCESS INTO STEEL, SAND IS PROCESS INTO GLASS, AND SO
FORTH.
- The physical nature of these processes makes it hard to identify & associate
specific units of direct labor & direct material with the final output.

JOB ORDER COSTING SYSTEM is being USED more on those that are UNIQUE or CAN BE
SEPARATED INTO BATCHES.

If the products are HOMOGENOUS and WENT THROUGH SERIES OF PROCESSES & DEPARTMENTS,
you will USE PROCESS COSTING SYSTEM.

PROCESS COSTING SYSTEM is a methodology USED in COST ACCOUNTING to allocate the

TOTAL COSTS OF PRODUCTION TO HOMOGENOUS UNITS PRODUCED VIA A CONTINUOUS PROCESS
that usually INVOLVES MULTIPLE
STEPS or DEPARTMENTS.

In the process costing system, EVERY ONE PROCESS or STEP that the product went
through in a PRODUCTION PROCESS has ITS WORK IN PROCESS ACCOUNT

In the PROCESS COSTING SYSTEM, we have DIFFERENT WORK IN PROCESS, LEDGER ACCOUNTS,
DEPENDING ON HOW MANY PROCESS that the PRODUCT WENT THROUGH.

STEPS IN THE PROCESS COSTING SYSTEM

STEP 1
ANALYZE THE COST-FLOW MODEL by DETERMINING the INVENTORY LEVELS on:
1. BEGINNING BALANCE OF WORK-IN-PROCESS INVENTORY for a SPECIFIC DEPARTMENT (which
was NOT COMPLETED in the PREVIOUS PERIOD that's why it's been brought to the next
accounting cycle).
2. Units started during the period in the department.
3. How many of the BEGINNING WIP UNITS & units started during the period were
completed in the same period.
4. UNITS NOT YET FINISHED (WIP, ENDING which will be BROUGHT to the NEXT PERIOD as
WIP, BEGINNING).

STEP 2
Determine the number of EQUIVALENT UNITS PRODUCED in the process called EQUIVALENT
UNITS OF PRODUCTION (EUP).

Ex: if the ending work-in-process inventory in a specific department is 1,000 units

& all the materials are added at the beginning of the process & labor & overhead
applied to the units is
60% complete as to conversion, the EUP will be:
MATERIALS 1,000 x 100% = 1,000 units
LABOR & OVERHEAD 1,000 x 60% = 600 units

STEP 3
CALCULATE ALL OF THE APPLICABLE DIRECT COSTS & INDIRECT COSTS that were INCURRED IN
the PRODUCTION PROCESS so that THESE COSTS will be ASSIGNED later to the EQUIVALENT
UNITS as to COMPLETED
UNITS & IN-PROCESS UNITS.
RELEVANT COSTS in this scenario INCLUDES ALL COSTS ASSOCIATED WITH BEGINNING
INVENTORIES & CURRENT PERIOD COSTS ADDED to continue the production process.

STEP 4
CALCULATE THE COST PER EQUIVALENT UNIT OF PRODUCTION (COST PER EUP)

COST PER EUP = APPLICABLE COSTS IN THE PRODUCTION PROCESS/EUP (DIVIDE)

STEP 5
When cost PER EUP IS AVAILABLE, ALLOCATE ALL RELEVANT COSTS TO ALL PRODUCTS
COMPLETED & ALL PRODUCT STILL IN PROCESS.

TWO METHODS
WEIGHTED AVERAGE
This type of process costing GROUPS TOGETHER ALL THE COSTS ASSOCIATED WITH
PRODUCTION & ASSIGNS THEM TO THE UNITS the company produced. This type of method
may NOT TAKE INTO ACCOUNT THE
TIME PERIOD OF PRODUCTION & can be the SIMPLEST TYPE OF PROCESS COSTING TO
CALCULATE.

FIRST-IN, FIRST-OUT
This method of process costing focuses on ASSIGNING COSTS TO UNITS IN THE that they
are PRODUCED. Products that are PRODUCED FIRST are ASSIGNED a COST FIRST & then
they are the FIRST
PRODUCTS TO SHIP or otherwise PUT OUT. FIRST-IN, FIRST-OUT ASSIGNS ONE SET OF COSTS
to PRODUCTS STARTED IN PRIOR ACCOUNTING PERIODS but NOT FINISHED, & another set of
costs for PRODUCTS
STARTED IN THE CURRENT ACCOUNTING PERIOD.

PROCESS COSTING SAMPLE PROBLEM

ASSEMBLY DEPARTMENT
SAMPLE QUESTIONS:
In the Assembly Department, how much are the total costs of all competed goods that
were transferred to the finishing department? $188,570
How much is the cost of the ending WIP inventory in the Assembly Department? $7,732

FINISHING DEPARTMENT
KABALIGTARAN; ILANG PERCENT PA GGAWIN KO? (MINUS)