Process costing

John Michael Cedric N. Nalus

Certified Poging Accountant
Process Costing
 It is a product costing
system used by companies that
make a large number of similar
products or maintain a
continuous production flow
Process Costing

Mass Production
Examples:
Production of steel, rubber,
cement, sugar, coals, bolts,
rivets and plastics
Characteristics of Process Costing

1. Costs are accumulated by

department of cost center
2. Each department has its own
general ledger WIP Inventory
account
Characteristics of Process Costing

3. Equivalent units are used to

restate WIP inventory to terms
of completed units
4. Completed units are
transferred to finished goods
inventory
Characteristics of Process Costing

5. Total and unit cost for each

department are calculated and
analyzed using Cost of
Production Report
Costs are accumulated by
department of cost center
 A complete unit of one
department becomes the raw
material of the next department
 The cost a unit grow larger
as it progresses along the
production flow
Product Flow
Sequential Product Flow

 The initial raw materials are

placed into process in the first
department then flow through
every department
Product Flow
Parallel Product Flow
 Certain portions of the work
are done at the same time and
then brought together for
further/final process
Product Flow
Selective Product Flow
 Product moves to different
departments within the factory,
depending upon the desired final
product
Each department has its own general
ledger WIP Inventory account
Equivalent Units
 Refers to the amount of work
actually performed on products
with varying degrees of
completion
Rules on Computing Equivalent Units
Direct Materials
Stage of Completion Equivalent Units
Finished production
100%
Unfinished production, materials are
added at the beginning 100%
Unfinished production, materials are
added at the end 0%
Materials are added continuously in the
production Rate of completion
Rules on Computing Equivalent Units
Conversion Costs

Stage of Completion Equivalent Units

Finished production
100%
Unfinished production
Rate of completion
Rules on Computing Equivalent Units
YOU DO NOTE!
Rules on Computing Equivalent Units
YOU DO NOTE!
If the problem is silent, rate of
completion of overhead is
equal to the rate of completion
of labor
Cost of Production Report
 summarizes the production and cost
activity within a department for a
reporting period. It is simply a formal
summary of the four steps performed to
assign costs to units transferred out and
units in ending work-in-process (WIP)
inventory
Cost of Production Report
Four steps in preparing CPR
1. Quantity Schedule
2. Calculate Equivalent Units
3. Determine costs to be accounted for
4. Account for all cost
1 2

3
4
Problem 3
Problem 5
Problem 5
Problem 5
Defective Units
 Normally charged to FOH
because they are usually result of
an internal failure rather than
customer’s specification
Lost Units
 Lost units are the same with
the spoiled units discussed on Job
Order Costing
 Normal Losses and Abnormal
Losses
Lost Units
Normal Losses
-These are expected or anticipated
losses such as weight losses,
shrinkage, evaporation, etc.
-Charged to product cost
Lost Units
Abnormal Losses
-These are losses beyond expectation
which may cause by bad working
condition, carelessness, low quality RM,
accidents, etc.
-Charged as period cost
Rules for Lost Units
Normal Losses discovered at the beginning
or during the process without inspection

1. Do not assign work done

to the lost units (EU = Zero)
Rules for Lost Units
Normal Losses discovered at the beginning
or during the process without inspection
2. Adjust the unit cost from the preceding
department due to the decreased no. of
units ( cost from preceding department
/ remaining good units)
Rules for Lost Units
Normal Losses discovered at the beginning
or during the process without inspection
3. Apply the total unit cost to
the completed and transferred
units
Rules for Lost Units
Normal Losses discovered at the beginning
or during the process without inspection
4. Apply the adjusted unit cost
from preceding department to
the units in-process, end
Rules for Lost Units
Normal Losses discovered at the beginning
or during the process without inspection
Cost of Lost Units are charged
to both completed and in-
process units
Rules for Lost Units
Normal Losses discovered at the end or during
inspection and the in-process units have not
reached the inspection point

1. Assign work done to the

lost units (EU = 100% / POC)
Rules for Lost Units
Normal Losses discovered at the end or during
inspection and the in-process units have not
reached the inspection point

2. No need to adjust cost

from preceding department
Rules for Lost Units
Normal Losses discovered at the end or during
inspection and the in-process units have not
reached the inspection point

3. Calculate the cost of lost

units ( total unit cost X no. of
lost units)
Rules for Lost Units
Normal Losses discovered at the end or during
inspection and the in-process units have not
reached the inspection point

4. Add the cost of lost units to

the cost of completed and
transferred units
Rules for Lost Units
Normal Losses discovered at the end or during
inspection and the in-process units have not
reached the inspection point

Cost of Lost Units are charged

only to completed units
Rules for Lost Units
Normal Losses discovered upon inspection and
the in-process units have at least reached the
inspection point

1. Assign work done to the

lost units (EU = 100% / POC)
Rules for Lost Units
Normal Losses discovered upon inspection and
the in-process units have at least reached the
inspection point

2. No need to adjust cost

from preceding department
Rules for Lost Units
Normal Losses discovered upon inspection and
the in-process units have at least reached the
inspection point

3. Calculate the cost of lost

units ( total unit cost X no. of
lost units)
Rules for Lost Units
Normal Losses discovered upon inspection and
the in-process units have at least reached the
inspection point

4. Prorate the cost of lost units

to completed and in-process
units based on EU
Rules for Lost Units
Normal Losses discovered upon inspection and
the in-process units have at least reached the
inspection point

Cost of Lost Units are charged

to both completed and in-
process units
Rules for Lost Units
Abnormal Losses
If discovered at the beginning,
no need to assign work done.
Cost from preceding dept. is
charged to abnormal loss
Rules for Lost Units
Abnormal Losses
If discovered at any other point,
with or w/o indicated inspection
point, assign work done and the
cost is charged to FOH control
Rules for Lost Units
YOU DO NOTE!
Rules for Lost Units
YOU DO NOTE!
If the problem is silent regarding
the timing of discovery of lost
units, it assumed to be discovered
at inspection point
Problem 7
Problem 7
Problem 7
Increase in Units
This require an adjustment
(decrease) in the unit cost
from preceding department
Increase in Units

= Total cost from preceding Dept.

Units received + increase in units
Increase in Units

No additional journal entry

need for the increase in units
THANK YOU!