Lecture: 6, and 7

Chapter -5
Process costing
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Process Costing system
A process costing system is used in such situations where the
company produces homogeneous products or identical products in
bulk quantities on continuous basis for a long period of time. i.e.,
the same products are produced repeatedly on large quantities.
The products produced are either homogeneous in nature (e.g., a
liquid or powder) or discrete, but identical units (e.g., a particular
automotive part, particular medicine, etc.).
Examples: Oil, Chemicals, Cement, Paint, Soft drinks, Wine,
medicines, Bricks, paper, Plastics etc.

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The journal entries in process costing are similar to the job order costing system. The main difference is that, in process costing
there is more than one work in process accounts.i.e, one for each process/department, where as in job order costing there will
be one work in process account for all jobs.
In process costing the costs are recorded and accumulated in production Report (departmental wise) as compared to job order
costing, where costs are recorded & accumulated in Job order cost sheet (Job order wise).
Cost of production report is made for each department/process. This report contains the following four sections.
1.Quantity Schedule.
2.The calculations for Equivalent units, and unit cost, etc.
3.The cost charged to the department
4.The cost accounted for the department.
 Now we elaborate, briefly about each section one by one under two separate assumptions (see next pages)

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

Assumption: 1

(i).Very first department

(ii).WIP beginning inventory is Nil

(iii).Lost units are normal and occurred at the beginning of the period

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Format under above Assumption #1:

ABC Corporation
Cost of Production Report
Department name
For the month of February, 2019
1.Quantity Schedule
Units put into process xx
Units completed & transferred to finished goods Store
or to next department xx
Units in process at the end of month. xx
Units lost in process xx xx

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2. Calculations for Equivalent units, and unit cost

(i). Equivalent production:

Direct Material = Transferred units + WIP units X completion stage %
as per as per direct material = xx
Direct Labor = Transferred units + WIP units X completion stage % as
per as per direct labor = xx
Factory overhead = Transferred units + WIP units X completion stage %
as per FOH = xx

(ii).
Unit cost for direct material, labor, and Factory
overhead.
Direct material = Direct Material cost ÷ Equivalent units =Rs xx
Direct Labor = Direct labor cost ÷ Equivalent units = Rs xx
Factory overhead = Factory overhead cost ÷ Equivalent units = Rs xx

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3. The cost charged to the department
Cost added by department:
Total cost Unit cost
Direct Material Rs xx Rs xx
Direct labor xx xx
Factory overhead xx xx
Total cost added and to be accounted for Rs xx Rs xx
===== ====

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4. Cost accounted for as follows
Costs Transferred to next departmental or finished goods Store.[Units X unit cost] = Rs xx
Work in process - ending inventory:

Direct Materials [WIP units X Completion stage % Material cost per unit] =xx

Labor [WIP units X Completion stage % X Labor cost per unit] =xx

Factory overhead [WIP units X Completion stage% X Factory overhead cost per u nit]= xx xx

Thus Total cost accounted for Rs xx

= ====

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Assumption: 2
 
(i). Subsequent department (i.e. subsequent to the
first department)

(ii). WIP beginning inventory is Nil

(iii). Lost units are normal and occurred at the

beginning of the period

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Format under above Assumption:2

ABC Corporation
Cost of Production Report
Department name
For the month of --------
1. Quantity Schedule
Units received from preceding department xx
Units completed & transferred to finished goods Store or to
next department. xx

Units in process at the end of month. xx

Units lost in process xx xx
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 2. Calculations for Equivalent units, unit cost

(i). Equivalent production.

Material = Transferred units + WIP units X completion stage % as per as
per direct material = xx
Direct labor = Transferred units + WIP units X completion stage % as
per as per labor = xx
Factory overhead = Transferred units + WIP units X completion stage
% as per FOH = xx

(ii). Unit cost for direct material, Direct labor, and Factory overhead.
Direct Material = Direct Material cost ÷ Equivalent units = Rs xx
Direct Labor = Direct labor cost ÷ Equivalent units = Rs xx
Factory overhead = Factory overhead cost ÷ Equivalent units = Rs xx

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3. The cost charged to the department.
Total cost Unit Cost
Rs Rs
Cost from preceding department:
Transferred in during the month xx xx
Adjustment of unit cost of preceding department due to lost units:
((Cost of preceding department ÷ (units recd – units lost) - Unit cost of preceding dept)) xx
Adjusted rate of previous department xx
Cost added by the department:
Direct material xx xx
Direct labor xx xx
Factory overhead xx xx
Total cost added during the month xx xx
Total cost to be accounted for xx xx
=== ===

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4. Cost accounted for as follows
Transferred to next departmental or finished goods Store.[Units X unit cost] Rs xx
Work in process - ending inventory:
Adjusted cost from preceding department [WIP Units X Adjusted .unit cost] xx
Direct material [WIP units X Completion stage % X direct labor cost per unit] xx
Labor [WIP units X Completion stage % X Labor cost per unit] xx
Factory overhead [WIP units X Completion stage % X FOH cost per unit] xx
xx

Total cost accounted for Rs

xx
=====
 

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Any Questions?

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Thanks

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