CHAPTER5PROCESS COST ACCOUNTING

GENERAL PROCEDURES
Review Summary
1. Process costing is used when goods of a similar nature are manufactured in a continuous
production operation. Costs are accumulated by department and divided by units produced to
obtain the departmental average cost per unit. In a process cost system, materials and labor costs
are charged to the departments in which they are incurred. Indirect materials and indirect labor
that cannot be identified with a specific department are charged to Factory Overhead. Actual
overhead costs are collected in a control account in the general ledger that is supported by a
subsidiary ledger consisting of factory overhead analysis sheets showing the detailed allocation
of costs to the various departments. Predetermined overhead rates are used in process costing to
apply factory overhead to departments.
2. The primary problem in process costing is the allocation of production costs between the units
finished during the period and the units still in process at the end of the period. Under the average
cost method of assigning costs to inventories, the cost of the work in process at the beginning of
the period is added to the production costs for the current period, and the total is divided by the
equivalent production to determine the average unit cost. Equivalent production is the number of
whole units that could have been completed given the production costs incurred. To determine
equivalent units using the average cost method, the stage of completion of units in process at the
end of the period must be ascertained. Equivalent units for a period may be computed as follows
under the average cost method:
Units completed this period + (Units in Ending WIP x % of completion this period)
3. In cases where there is no beginning work in process inventory, the equivalent units of production
can be divided into the total production costs for the period to obtain the average cost per unit:
Total production cost / Equivalent units of production
The inventory costs can then be allocated between Work in Process and Finished Goods as
follows:

Cost of finished goods=

Units transferred
to finished goods

Average cost per

unit
Cost of work
Number of units in
Average cost
in process = ending work in process % of completion
per unit
When production costs are not incurred evenly throughout the production process, the amount of
materials, labor, and overhead have to be evaluated separately in estimating the stage of
completion.
4. A cost of production summary accumulates the materials, labor, and factory overhead costs for
which a department is accountable. It contains the calculation of equivalent production for the
period that consists of the units finished during the month plus the equivalent units of work in
process. It also includes the computations for the unit costs for material, labor, and factory
overhead that are obtained by dividing the equivalent production into the respective production
costs for each element. Last, it summarizes the disposition of the production costs to either the
cost of goods finished during the period or the cost of work in process at the end of the period.

The total costs to be accounted for during the period must equal the total production costs
accounted for during the period.
46

5. A production report submitted by the departmental supervisor to the cost accountant lists the
number of units in process at the beginning of the month, the number of units finished during the
month, the number of units in process at the end of the month, and the estimated stage of
completion of the ending work-in-process inventory. After receiving the production report, the cost
accountant prepares the cost of production summary by first collecting the periods production
costs from summaries of materials requisitions, payroll, and factory overhead analysis sheets. The
units in process are then converted to equivalent units. The cost of production summary can be
completed with the computation of the unit costs and the ending inventory costs. After preparing
the cost of production summary, the accountant can debit Finished Goods and credit Work in
Process for the cost of the goods finished during the period, and the statement of cost of goods
manufactured can be prepared.
6. If there is beginning work-in-process inventory, the accountant considers not only the current
months cost of material, labor, and factory overhead in determining the unit costs for the month
but also the cost of each element carried over from the prior month. When there are two
departments, the costs accumulated in the first department for those units completed and
transferred are transferred to the next department. Although still in process, the transferred units
and their related costs are treated as completed production in the first department and as raw
materials added at the beginning of the process in the second department. The calculation of unit
cost for the month in the second department considers only those costs incurred in that department
and the equivalent units produced in the department. The transferred-in costs and units from the
first department are not included in the computation. In determining the cost transferred to
finished goods and the cost of the ending work in process, however, the prior department costs
must be considered.
7. If finished goods have been completed in a department but not yet transferred at the end of the
month, they are accounted for as goods completed and on hand and priced out at the full unit
cost. For financial statement purposes, the goods still are considered to be work in process
because they are complete as to the department but not as to the factory. Often the cost from prior
departments will change from one month to the next, and these costs will have to be averaged on a
subsequent departments cost of production summary for the purpose of assigning total costs.

47

Chapter Five

Name________________________________________

Part I
Instructions:Indicate your answer in the Answers column by writing a T for True or an F for

False.
Answers

1. Job order costing is appropriate when goods are manufactured in a continuous or

mass production operation...........................................................................
_________
2. The focal point of process costing is the job.................................................
_________
3. The main difference between job order and process costing is the manner in
which costs are accumulated........................................................................
.................................................................................................._________
4. A process cost system requires less clerical effort than a job order cost system
because costs are charged to departments rather than to individual jobs........
.................................................................................................._________
5. In a process cost system, overhead is applied on the basis of products rather
than departments.........................................................................................
.................................................................................................._________
6. To compute average unit cost, the cost of the work in process at the beginning
of the period is added to the production costs for the period, and the total is
divided by total equivalent production..........................................................
.................................................................................................._________
7. The calculation of equivalent production under the average cost method requires
the restatement of goods in process at the end of the period in terms of completed
units............................................................................................................
.................................................................................................._________
8. The primary purpose of process costing is to determine the cost of units finished
and transferred out of a department during the period and the cost of the units in
work in process at the beginning of the period..............................................
.................................................................................................._________
9. In computing equivalent production under average costing, the number of units in
ending work in process is multiplied by the percentage of their completion and
then added to the units finished this period...................................................
.................................................................................................._________
10. A cost of production summary presents the necessary information for
inventory valuation and serves as the source for summary journal entries.....
_________
11. The cost accountant prepares the cost of production summary by first collecting
the periods production costs from summaries of material requisitions, payroll,
and factory overhead analysis sheets............................................................
_________
12. When the cost of production summary is completed, the total costs to be
accounted for should be equal to the total production costs accounted for.......
_________
13. In computing unit cost for the month when there is beginning inventory, the cost
of the beginning inventory is added to the monthly production costs before
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dividing by equivalent production................................................................

_________
14. In computing the unit cost of production in a department subsequent to the first,
the transferred-in costs and units from the prior department are included in the
computation................................................................................................
_________
15. If at the end of the period, goods are completed and on hand in the first
department of a production process that requires two departments, they would be
included as finished goods for financial statement purposes...........................
_________

Part II
Instructions:In the Answers column, place the letter from the list below that identifies the term that

best matches the statement. No letter should be used more than once.
a.
b.
c.
d.
e.

Average cost method

Production report
Cost center
Work in process
Equivalent production

f.
g.
h.
i.
j.

Cost of production summary

Process cost system
Transferred-in cost
Stage of completion
Job order cost system

Answers

_____

1. This cost system is appropriate when products are manufactured on a special-order basis.

_____

2. This is a unit of activity within the factory to which costs may be assigned practically and
equitably.

_____

3. Under this method of process costing, the cost of the beginning work in process is added
to the production cost for the current period in the unit cost calculation.

_____

4. This is the number of units that could have been completed during a period using the
production costs incurred during the period.

_____

5. This represents the fraction or percentage of materials, labor, and overhead costs of a
completed unit that has been applied during the period to goods that have not been
completed.

_____

6. This is submitted by the department head indicating the number of units in process at the
beginning of the period, the number of units completed during the period, and the number
of units in process at the end of the period and their stage of completion.

_____

7. The cost of units received from a prior department.

_____

8. This cost system is appropriate when goods of a similar or homogeneous nature are
manufactured in a continuous or mass production operation.

_____

9. This presents the necessary information for inventory valuation and can also serve as the
source for summary journal entries.

_____ 10. This is what units finished but still on hand in a department at the end of the period are
considered for financial statement purposes.
49

Chapter Five

Name________________________________________

Part III
Instructions:In the Answers column, place the letter of the choice that most correctly completes

each item.
Answers

_____ 1. For a process cost system, procedures must be designed to:

a. Value inventory of work still in process
b. Determine a unit cost for each department
c. Accumulate materials, labor, and factory overhead costs by departments
d. All of the above
_____

2. A cost of production report for a department shows all of the following except:
a. Total and unit costs transferred from a preceding department
b. The cost per job
c. Unit costs added by the department
d. Costs transferred to a successor department or to finished goods

_____

3. The beginning work-in-process inventory was 40 percent complete and the ending workin-process inventory was 60 percent complete. The dollar amount of the production cost
included in the ending work-in-process inventory (using the average cost method) is
determined by multiplying the average unit costs by what percentage of the total units in
the ending work-in-process inventory?
a. 100 percent
c. 50 percent
b. 60 percent
d. 40 percent

_____

4. An error was made in the computation of the percentage-of-completion of the current

years ending work-in-process inventory. The error resulted in assigning a higher
percentage-of-completion to each component of the inventory than actually was the
case. What is the resultant effect of this error on:
1. The computation of equivalent units in total?
2. The computation of costs per equivalent unit?
3. Costs assigned to cost of goods completed for the period?
a.
b.
c.
d.

1
Understate
Understate
Overstate
Overstate

2
overstate
understate
understate
overstate

3
overstate
overstate
understate
understate

_____

5. Cruz Company had 10,000 units in work in process at January 1 that were 40 percent
complete. During January, 30,000 units were completed. At January 31, 12,000 units
remained in work in process and were 40 percent complete. Using the average cost
method, the equivalent units for January were:
a. 28,000
c. 37,200
b. 34,800
d. 26,800

_____

6. Using the data given for (5) above, determine how many units were started during
January:
a. 20,000
c. 42,000
b. 28,000
d. 32,000

_____

7. What are the transferred-in costs as used in a process cost accounting system?
50

a. Labor that is transferred from another department within the same plant instead of
hiring temporary workers from the outside
b. Costs of the product of a previous internal process that is subsequently used in a
succeeding internal process
c. Supervisory salaries that are transferred from an overhead cost center to a
production cost center
d. Ending work-in-process inventory of a previous process that will be used in a
succeeding process
_____

8. An equivalent unit of material or conversion cost is equal to:

a. The amount of material or conversion cost necessary to complete one unit of
production
b. A unit of work-in-process inventory
c. The amount of material or conversion cost necessary to start a unit of production in
work in process
d. Fifty percent of the material or conversion cost of a unit of finished goods inventory

_____

9. Which of the following characteristics applies to process costing but not to job order
costing?
a. Identifiable batches of production
b. Equivalent units of production
c. Work-in-process inventories
d. Factory overhead applied to production

_____ 10. In the computation of manufacturing cost per equivalent unit, the weighted average
method of process costing considers:
a. Current costs only
b. Current costs plus cost of beginning work-in-process inventory
c. Current costs plus cost of ending work-in-process inventory
d. Current costs less cost of beginning work-in-process inventory

Part IV

Journal entries using process costing.

From the following list of accounts, record the account(s) to be debited and credited for each of the
transactions below. Assume that these transactions occur in a company that utilizes a process cost
accounting system.
Accounts
Cost of Goods Sold
Factory Overhead
Factory OverheadMixing
Factory OverheadBlending
Finished Goods
Materials

51

Accounts
Payroll
Various Credits
Accounts Payable
Work in ProcessMixing
Work in ProcessBlending

Chapter Five

Transaction
1. Materials and supplies
purchased on account...

Name________________________________________

Debit

Credit

2. Direct materials issued to

both departments and
supplies issued to the
factory.........................
3. Direct labor cost
incurred in both
departments and indirect
labor in the factory.......
4. Other factory costs
incurred.......................
5. Factory overhead
distributed to both
departments..................
6. Factory overhead applied
to production in both
departments..................
7. Units transferred from
Mixing to Blending......
8. Units completed in
Blending and transferred

9. Units sold (ignore

recording the revenue on
the sale).......................

52

Part V
Cost of production summary using average costing.
Cobb Manufacturing Company uses a process cost system and average costing. The following
production data is for the month of June 2011.
Production Costs
Work in process, beginning of month:
Materials.....................................................................
Labor..........................................................................
Factory overhead.........................................................
Costs incurred during month:
Materials.....................................................................
Labor..........................................................................
Factory overhead.........................................................
Total.....................................................................

$3,000
1,500
500
$50,000
30,000
20,000

$5,000

100,000
$105,000

Production Report
In process, beginning of month................................................................
Finished and transferred during month.....................................................
In process, end of month..........................................................................
Stage of completion for materials, labor, and overhead (ending)...............
Stage of completion for materials, labor, and overhead (beginning)..........

Units
1,000
18,000
4,000
One-half
One-fourth

Instructions:Complete the following cost of production summary for Cobb Manufacturing

Company. Show computations in spaces provided and round unit costs to three decimal places.
Cobb Manufacturing Company
Cost of Production Summary
For the Month Ended June 30, 2011
Cost of work in process, beginning of month:
Materials..................................................................
...........................................................................$
Labor........................................................................
Factory overhead......................................................
.............................................................................
.............................................................................
...........................................................................$
Cost of production for month:
Materials..................................................................
...........................................................................$
Labor........................................................................
Factory overhead......................................................
.............................................................................
.............................................................................
.............................................................................
.............................................................................
Total costs to be accounted for.......................................
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Chapter Five

Name________________________________________

.............................................................................
.............................................................................
...........................................................................$
.............................................................................
Unit output for month:
Finished during month...............................................
Equivalent units of work in process, end of month
(____________________)...................................
.............................................................................
.............................................................................
.............................................................................
.............................................................................
Total equivalent production...................................
.............................................................................
.............................................................................
.............................................................................
.............................................................................
Unit cost for month:
Materials (____________________)........................
.............................................................................
.............................................................................
...........................................................................$
Labor (____________________).............................
Factory overhead (____________________)............
.............................................................................
.............................................................................
.............................................................................
.............................................................................
Total.....................................................................
.............................................................................
.............................................................................
...........................................................................$
.............................................................................
Inventory costs:
Cost of goods finished during month
(____________________)...................................
.............................................................................
.............................................................................
...........................................................................$
Cost of work in process, end of month:
Materials (____________________)....................
...........................................................................$
Labor (____________________).........................
Factory overhead (____________________)........

54

.............................................................................
.............................................................................
.............................................................................
.............................................................................
Total production costs accounted for..............................
.............................................................................
.............................................................................
...........................................................................$
.............................................................................

Part VI
Cost of production summary using average costing with two departments.
Hilton Products manufactures one product in two departments on a continuous basis and uses the
average method of process cost accounting. The following information was reported for the month of
May 2011.
Production Costs
Machining
Work in process, beginning of month:
Cost in Machining.................................
Materials...........................................
Labor................................................
Factory overhead...............................
Cost incurred during month:
Materials...........................................
Labor................................................
Factory overhead...............................
Total.............................................

$4,000
3,000
2,000
$68,000
51,000
34,000

Assembly
0

$9,000

153,000
$162,000

$ 800
400
600
$44,000
22,000
33,000

$27,000
1,800

99,000
$125,560

Production Report
In process, beginning of month...............................................
Finished and transferred during month....................................
In process, end of month........................................................
Stage of completion as to materials, labor, overhead...............

55

Machining
(Units)
1,000
5,000
2,000
One-half

Assembly
(Units)
1,000
4,000
2,000
One-half

Chapter Five
Name________________________________________
Instructions:Prepare a cost of production summary for each department for the month. Show

computations in the spaces provided.

Hilton Products
Cost of Production SummaryMachining
For the Month Ended May 31, 2011
Cost of work in process, beginning of month:
Materials..................................................................
...........................................................................$
Labor........................................................................
Factory overhead......................................................
.............................................................................
.............................................................................
...........................................................................$
Cost of production for month:
Materials..................................................................
...........................................................................$
Labor........................................................................
Factory overhead......................................................
.............................................................................
.............................................................................
.............................................................................
.............................................................................
Total costs to be accounted for.......................................
.............................................................................
.............................................................................
...........................................................................$
.............................................................................
Unit output for month:
Finished and transferred to Assembly during month. . .
Equivalent units of work in process, end of month
(____________________)...................................
.............................................................................
.............................................................................
.............................................................................
.............................................................................
Total equivalent production...................................
.............................................................................
.............................................................................
.............................................................................
.............................................................................
Unit cost for month:
Materials (____________________)........................
.............................................................................
.............................................................................
...........................................................................$
Labor (____________________).............................
Factory overhead (____________________)............
56

.............................................................................
.............................................................................
.............................................................................
.............................................................................
Total.....................................................................
.............................................................................
.............................................................................
...........................................................................$
.............................................................................
Inventory costs:
Cost of goods finished and transferred to Assembly during
month (____________________).........................
.............................................................................
.............................................................................
...........................................................................$
Cost of work in process, end of month:
Materials (____________________)........................
...........................................................................$
Labor (____________________).............................
Factory overhead (____________________)............
.............................................................................
.............................................................................
.............................................................................
.............................................................................
Total production costs accounted for..............................
.............................................................................
.............................................................................
...........................................................................$
.............................................................................
.............................................................................

57

Chapter Five

Name________________________________________

Hilton Products
Cost of Production SummaryAssembly
For the Month Ended May 31, 2008
Cost of work in process, beginning of month:
Cost in Machining.........................................................
...............................................................................$
Cost in Assembly:
Materials......................................... $
Labor..............................................
Factory overhead.............................
.......................................................
$
Cost of goods received from Machining during month........
Cost of production for month:
Materials.......................................................................
...............................................................................$
Labor............................................................................
Factory overhead...........................................................
.................................................................................
.................................................................................
.................................................................................
.................................................................................
Total cost to be accounted for............................................
.................................................................................
.................................................................................
...............................................................................$
.................................................................................
Unit output for month:
Finished and transferred to stockroom during month......
Equivalent units of work in process, end of month
(____________________)........................................
.................................................................................
.................................................................................
.................................................................................
.................................................................................
Total equivalent production.......................................
.................................................................................
.................................................................................
.................................................................................
.................................................................................
Unit cost for month:
Cost from prior department:
Beginning inventory
(_____ units).........................
...............................................................................$
Transferred in this month (_____ units).........................
..........................................................____________
.................................................................................
.................................................................................
Average cost per unit
(_____ units).........................
58

.................................................................................
.................................................................................
...............................................................................$
..............................
Cost in Assembly:
Materials (____________________)............................
.................................................................................
.................................................................................
...............................................................................$
Labor (____________________)..................................
Factory overhead (____________________).................
.................................................................................
.................................................................................
.................................................................................
.................................................................................
Total.........................................................................
.................................................................................
.................................................................................
...............................................................................$
.................................................................................
Inventory costs:
Cost of goods finished and transferred to stockroom during
month:
Cost in Machining (____________________)...............
...............................................................................$
Cost in Assembly (____________________)................
.................................................................................
.................................................................................
...............................................................................$
Cost of work in process, end of month:
Cost in Machining (____________________)...............
...............................................................................$
Cost in Assembly:
Materials (____________________)
$
Labor (____________________)....
Factory overhead (____________________)
...................................................
...................................................
Total production costs accounted for..................................
.................................................................................
.................................................................................
...............................................................................$
.................................................................................

59