University of San Jose – Recoletos

School of Business and Management | Accountancy and Finance Department

Cost Accounting and Control

Module 6: Costs Systems and that some costs related to these units were incurred last
period and additional costs will be incurred in the current
Accumulation: Process Costing – Weighted period.
Average • Some units are begun but not completed during the current
period. These partially completed units in the ending Work
in Process Inventory were started in the current period but
Introduction
will not be completed until the next period—meaning that
Process costing is a method of accumulating and assigning costs to costs were incurred in this period and additional costs will
units of production in companies that make large quantities of be incurred next period, due to current production efforts on
homogeneous products. Both job-order costing and process costing the ending Work in Process Inventory.
accumulate costs by cost component in each production department.
However, the tow systems assign costs to departmental output Weighted Average Process Costing Methods
differently.
The weighted average method is a method of process costing that
a. In job-order costing, costs are assigned to specific jobs and computes an average cost per equivalent unit of production; it
then, if possible, to units contained within the job. combines beginning inventory units and costs with current production
b. Process costing uses an averaging technique to assign and costs, respectively, to compute that average.
costs directly to units produced during the period.
c. Cost assignment in any production environment is The weighted average method is not concerned about what quantity
essentially an averaging process. The actual unit cost of a of work was performed in the prior period on the units in beginning
product is found by dividing a period's departmental inventory; it only focuses on units that are completed in the current
production costs by the period's departmental quantity of period and units remaining in ending inventory.
production, the average being expressed by the following
formula: The method does not distinguish between units in beginning inventory
and units entering production during a period.
𝑆𝑢𝑚 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡𝑠
𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 =
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 Average unit cost is found by dividing the total cost to be accounted
for by the total equivalent units of production and is calculated as
follows:
The Numerator
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡𝑠 + 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 𝐶𝑜𝑠𝑡𝑠
𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 =
The numerator in the average product cost fraction is the sum of the 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
actual direct materials cost, actual direct labor cost, and actual or
predetermined overhead cost for the period. 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡𝑠 𝐼𝑛𝑐𝑢𝑟𝑟𝑒𝑑
=
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝐸𝑓𝑓𝑜𝑟𝑡
Cost accumulation in a process costing system differs from job order
costing in two ways:
a. the quantity of production for which costs are being
Weighted Average Process Costing Methods
accumulated at any one time and:
✨ The six steps in a process costing system are:
• in job order costing, the direct materials, direct
labor, and overhead costs are accumulated for
each job; or Step 1: Calculate the physical units to account for;
• in process costing, much larger amounts of direct Step 2: Calculate the physical units accounted for (verify
materials, direct labor, and overhead are that step 1 equals step 2);
accumulated for each department of a production Step 3: Determine the equivalent units of production;
process. Step 4: Determine the total cost to account for;
b. the cost object to which the costs are assigned: Step 5: Calculate the cost per equivalent unit; and
• in job order costing the cost object is the job; or Step 6: Assign the costs to units completed and transferred
out and units in ending work in process (verify that the total
• in process costing, the costs assignable to each
product type are designated and attached to the costs transferred out plus the costs in ending inventory
specific production runs; then the costs are equal step 4).
assigned to the units worked on during the period.
✨ The six steps listed above can be combined into a cost of
production report.
The Denominator
✨ A cost of production report is a process costing document that
• The denominator in the average product cost fraction details all operating and cost information, shows the computation of
represents total departmental production for the period. cost per equivalent unit, and indicates cost assignment to goods
• If all units were 100% complete at the end of the period, we produced during the period.
would simply count the units to obtain the denominator.
• However, WIP at the end of the period represent partially ✨ The total units to account for are the sum of whole and partial
completed units that become beginning inventory for the units worked on in the department during the current period. It is
next accounting period. equal to actual beginning inventory units plus actual units started.
• Process costing assigns costs to both fully completed units
in finished goods inventory and to the partially completed ✨ The total cost to account for is the sum of the balance in WIP at
units in WIP. the beginning of the period plus all current costs for direct material,
• We mathematically convert partially completed units into direct labor, and overhead.
equivalent whole units by calculating equivalent units of
production (EUP). ✨ Cost must be assigned to goods transferred from WIP to Finished
Goods Inventory (or to another
department).

Equivalent Units of Production (EUP) ✨ In addition, at the end of any period, a value must be assigned to
goods still in WIP.
EUP are an approximation of the number of whole units of output that
could have been produced during a period from the actual effort Weighted Average Method Procedures
expended during that period. Two facts are recognized by the use of
equivalent units of production. Step 1: Calculate the total units to account for
• Goods that were incomplete at the end of the last period are Step 2: Calculate the total units accounted for
the first ones completed during the current period. The units • Units fit into one of two categories:
in the beginning Work in Process were started last period o units completed and transferred out,
but will be completed during the current period—meaning o partially completed units remaining in ending WIP.
University of San Jose – Recoletos
School of Business and Management | Accountancy and Finance Department
Cost Accounting and Control

Step 3: Determine EUP (weighted average method).

• EUP is completed separately for:
o Direct materials, and
o Labor and overhead.
Step 4: Determine the total cost to account for.
Step 5: Calculate the cost per equivalent unit.
Step 6: Assign costs to inventories.

Spoilage

• Spoilage represents units from the production process that

does not meet specifications.
• The cost of normal losses are assigned only to units that
have passed the inspection point because assigning loss
costs to units that may be found to be defective in the next
period would not be reasonable. The cost of normal losses
is a product cost.
• Abnormal losses are expensed in the current period.
University of San Jose – Recoletos
School of Business and Management | Accountancy and Finance Department
Cost Accounting and Control

Discussion Problems

Problem 1

Coastal Corporation, which uses throughput costing, began operations at the start of the current year. Planned and actual production equaled 20,000
Viking Sports is a manufacturer of sportswear. It produces all of its products in one department. The information for the current month is as follows:

Beginning work in process 20,000 units

Units started 40,000 units
Units completed 50,000 units
Ending work in process 8,000 units
Spoilage 2,000 units

Beginning work-in-process direct materials P 12,000

Beginning work-in-process conversion P 4,000
Direct materials added during month P 60,000
Direct manufacturing labor during month P 20,00

Beginning work in process was half complete as to conversion. Direct materials are added at the beginning of the process. Factory overhead is applied
at a rate equal to 50% of direct manufacturing labor. Ending work in process was 60% complete. All spoilage is normal and is detected at end of the
process. The company uses the weighted-average method of process costing.

Required:
• Prepare the Cost of Production Report
• Determine the following:
o Units to be accounted
o Units accounted for
o EUP for materials
o EUP for conversion units
o Total costs to be accounted
o Cost per equivalent units for materials
o Cost per equivalent units for conversion
o Cost of units transferred out
o Cost of ending work in process
• Journal Entries
• How will this change if the loss was abnormal