Chapter 8 - Process Costing 6q701o

Cost ing CHAPTER 9 – PROCESS COSTING

Definition Process costing is a cost accumulation method that aggregates production costs by departments or by production phases

Objective of Process Costing The objectives of Process Costing is to determines how manufacturing costs incurred should be allocated. To determine the allocation of costs in every departments or process, is the first step, the ultimate objective is to compute the total unit costs of the product for income determination.

Comparison of Process Cost & Job Order Cost Systems Similarities

Differences

1.

Manufacturing cost elements – both costing systems have the same elements of cost – direct materials, direct labors & mfg. overhead.

1. No. of W/P used – in a job order cost system, only one W/P is used; while under process cost system, multiple W/P s is used; and separate s are kept for each production dept.

2.

Accumulation of cost – both costing systems, all raw material purchased are debited to material inventory; factory labor are debited to factory labor; and actual manufacturing overhead costs are debited to factory overhead control.

2. Point at which total cost is determined – under Job order costing, total costs are computed when the job is completed; while in process cost system, total costs are determined at the end of a period of time, usually a month.

3.

Flow of costs – the accumulated 3. Unit cost computations – in a job order costing, the manufacturing costs are assigned unit cost is determined by dividing the total cost per to the same s in both costing job by the unit produced; while under process systems – W/P; FG; and Cost of costing, the unit cost is equal to the total Goods Sold. manufacturing cost for the period divided by the units produced during the period.

Preparation of cost of production report The purpose of a cost of production report is to summarize the total cost charged to a department and the distribution of the total cost between the ending work-in-process inventory and the units completed and transferred to the next department of the finished goods inventory. The cost of production report is composed of 2 sections:  Quantity schedule – which shows the flow of units  Cost analysis – which shows the flow of cost

ing Entries to record manufacturing Costs 1 .

To record direct materials used by Dept. 1 Work in process – Dept. 1

xx

Materials inventory

xx

2. To record distribution of direct labor Work in process – Dept. 1

xx

Work in process – Dept. 2

xx

Payroll

xx

3. To record applied factory overhead in each dept. Work in process – Dept. 1

xx

Work in process – Dept. 2

xx

Applied factory overhead

xx

ing Entries to record manufacturing Costs (continuation) 4.

To record the cost of goods transferred out to the next dept. Work in process – Dept. 2

xx

Work in process – Dept. 1 5.

xx

To record the units completed in the last Dept. to Finished Goods Finished Goods Inventory

xx

Work in process – Dept. 2 6.

xx

To record cost of goods sold Cost of goods sold Finished Goods Inventory

xx xx

Procedures in the preparation of cost of production report Quantity schedule 1) Compute the physical flow of units to determine the stage of completion (work done) of all units 2) Compute the equivalent production (measure of work done in of completed units) of units finished and units in process for material and conversion costs  FIFO – under this method, the stage of completion of the units in process, beginning is determined separately from the units started and finished this month. This means that the Equivalent units of production are calculated only work actually performed during the month.  Weighted Average method – under this method, the unit in process at the beginning is combined with the units started and finished this month. This means that the work performed on the units in process beginning (last month) is treated as if it were performed this month.    Cost analysis 1) Determine the total material cost and conversion cost 2) Compute the unit cost based on the method used:  FIFO – total costs incurred this month divided by the equivalent units of production  Weighted Average method – Cost last month (WIP beg.) plus cost this month (current costs) divided by the equivalent units of production 

Procedures in the preparation of cost of production report  Allocate the total costs between the units finished and the units (Continuation) in process at end. The following are the computations: 

FIFO method Finished units:

Units in processes, beg. (EP x unit cost) Units started (actual units x unit cost) Units in process, end (EP x unit cost) Total Finished units 

xx xx

xx xx xx

Weighted average method

Finished units (Actual units x unit cost) Units in process, end (EP x unit cost) Total

xx xx xx

ing for spoilage (lost units)

Spoilage occurs when there are poor or defective finished units. The following procedures should be applied in the preparation of Cost of Production Report with spoilage:  Normal Spoilage 1) Equivalent production – the computation of the EP depends on the point of discovery  Start of the process – none  During the process – none  End of the process – 100% 2) Cost of lost units – the computation of the cost of lost units are:  If lost units are discovered at the start of the process  First department – no cost  Subsequent department – lost units x unit cost from preceding department  If lost units are discovered during the process  First department – no cost  Subsequent department – lost units x unit cost from preceding department  If lost units are discovered at the end of the process  First department – lost units x unit cost in this department  Subsequent department – lost units x (unit cost from preceding department + unit cost in this department)

ing for spoilage lost units (Continuation) 3) Allocation of cost of lost units – the cost of lost units should be allocated (pro-rata) to the absorbing good units only, the procedures in determining the absorbing good units is as follows:  If lost units are discovered at the start of the process  FIFO – all goods units except work in process, beginning  Average – all goods units If lost units are discovered during the process  FIFO – all goods units except work in process, beginning  Average – all goods units    If lost units are discovered at the end of the process – all goods units except work in process end.    Abnormal Spoilage – the cost of abnormal spoiled units is computed separately from the cost of goods units. Abnormal spoilage is included in the computation of the EP, to the extent of the stage of completion where the spoilage occurs. 

End of Chapter