COST ACCOUNTING AND CONTROL

PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

Module 96
Process Costing – FIFO: Even and Uneven Application of Costs

Process Costing Defined

Process costing refers to the product costing procedure whereby products are assigned costs by departments or
processes.

- Cost accumulation and unit cost computation are by departments or processes.

- As goods are completed in one department and transferred to the succeeding department, their assigned costs
go with the physical transfer until their completion and transfer to the finished goods stockroom.
- Emphasis: Production for a given period, say, a week or a month instead of by orders or lots.
- Used for goods produced using the continuous type of manufacturing process or under mass production
methods.
- Products are homogeneous or do not have individual identities.
- Nature of operations to which process costing is applicable varies as indicated in the following types of
business activities in which it is used:

Manufacturing Mining Public Utilities

Petroleum products Gold Power and electricity

All other types of Copper Gas
chemical products Coal Water
Bakeries
Textiles
Sugar refineries
Plastics
Beverages

OBJECTIVE OF PROCESS COSTING

Allocation of manufacturing costs in every department to calculate the unit cost of the product for profit
determination and inventory costing purposes.

- During the production period, some of the units started will not be completed at the end of the period.
Therefore, each department must determine the total costs of the units still in process and the costs of the
units completed.

Example:
Assume that during the month 1,000 units were started in process in the Department 1. During the month, costs
were incurred as follows:
Direct materials P 150,000
Direct labor 50,000
Factory overhead 100,000

At the end of the month, 700 units were completed and transferred to Department 2.

- The objective of process cost system is to calculate how much of P 150,000 direct materials, P 50,000 of
direct labor, and P 100,000 of manufacturing overhead costs will be allocated to 700 units completed and
transferred to Department 2 and how much will be allocated to the 300 units still in process in Department
1.

COMPARISON OF PROCESS COST AND JOB ORDER COST SYSTEM

SIMILARITIES

- Manufacturing cost elements.

o Both track and record three elements of cost: direct materials, direct labor and factory overhead
- Accumulation of costs
o Under both costing system, all raw materials purchased are debited to Materials account; all
direct labor are debited to Factory Payroll account; and all actual manufacturing overhead costs
are debited to Factory Overhead Control account.

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

- Flow of costs.
o The accumulated manufacturing costs are assigned to the same accounts in both costing systems:
Work in Process, Finished Goods, and Cost of Goods Sold.

DIFFERENCES

DIFFERENCES JOB ORDER COSTING PROCESS COSTING

Multiple Work in Process
Number of Work in Process Only one Work in Process
accounts are used for each
accounts used account is used
production department

Point at which total costs is At the end of each month while

when the job is completed
determined the units are being processed

Unit cost is equal to the total

Determined by dividing the total manufacturing costs for the
Unit cost computation
cost per job by the units produced period divided by the units
produced during the period

ACCUMULATION OF COSTS BY DEPARTMENT

The departmental accumulations of costs under process cost system are summarized below:

- Units completed in one department are transferred to the next department accompanied by their
corresponding costs
- Completed unit of one department becomes the raw materials of the next department until the units are
converted to finished products
- The output of Department 1 becomes the input of Department 2. Department 2 receives both the units
produced in Department 1 as well as its production costs
- Upon completion of the process in Department 2, the cost of units completed consists of the costs
received in Department 1 and cost incurred in Department 2
- The cost of a unit increases as it progresses from one department to the next.

Example:

TM Corporation manufactures office tables in three departments. Department 1 cuts the woods at an average cost
of P 100 per unit. The woods are then transferred to Department 2, where they are assembled at an average cost of
P 200 per unit. The last stop is in Department 3 where they are painted at an average cost of P 300 per unit. The
completed units are transferred from Department 3 to finished goods inventory.

The total unit cost of one finished table is P 600, computed as follows:

Department Unit Cost Added

1 P 100
2 200
3 300
Total unit cost P 600

NOTE:
- In general, the cost per unit increases as units follow through each department.
o However, the unit cost decrease when volume is added to the units that pass through a
department.
ASSIGNMENT OF MANUFACTURING COSTS

For each producing department, a work in process accounts is used. Manufacturing costs incurred by a
department are charged to its own work in process account.
Process cost system accumulates the three elements of costs using either the following cost procedures:

- Normal costing.
o Direct materials and direct labor are applied at actual cost while factory overhead is applied at a
predetermined rate

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
- Standard costing
o Direct materials, direct labor and factory overhead are applied at standard cost or estimated cost.

In this chapter and in the following chapter process costing using the normal costing will be used.

Direct materials.

 Usually direct materials are added to the first department, but they may also be added in the subsequent
departments.
 Departmental charges for materials costs are based on stores requisitions and consumption reports.
 Consumption reports is often required of department heads because not all of the materials issued during
a period are used during the same period.
 The inventory of raw materials in the producing departments still form part of the raw materials
inventory.
 Materials cost incurred were tallied with the expected amount thereof considering the actual volume of
production.
 All materials used by a producing department (whether forming part of the finished product or not) are
charged to work in process.

Example:

Materials and supplies used are as follows:

Mixing Dept. P 12,000
Brewing Dept. 10,000
Finishing Dept. 6,000
Service Departments 2,100

Entry:
Work in Process – Mixing Dept. P 12,000
Work in Process – Brewing Dept. 10,000
Work in Process – Finishing Dept. 6,000
Factory Overhead Control 2,100
Stores/ Materials P 30,100

LABOR COST

- Labor costs per payroll (whether directly expended on goods in process or not) are charged to the payroll
account and subsequently charged to the different departments where they are incurred as indicated on
summary of daily time tickets or daily clock cards.

- Example:
Payroll amounted to P 32,000. The distribution is as follows:
Mixing Dept. P 11,000
Brewing Dept. 9,000
Finishing Dept. 8,000
Service Departments 4,000

Entry:
Work in Process – Mixing Dept. P 11,000
Work in Process – Brewing Dept. 9,000
Work in Process – Finishing Dept. 8,000
Factory Overhead Control 4,000
Payroll P 32,000

FACTORY OVERHEAD
- Factory overhead is accumulated in the Factory overhead (or Factory Overhead Control) account supported
by the subsidiary record – factory overhead analysis sheet
o If departmentalization is observed, departmental factory overhead analysis sheets (or standing orders)
are maintained also.

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
- Factory overhead may be charged to production at its actual amount or at a predetermined rate based on
normal capacity.
o Actual amounts may be used if overhead per unit is expected to remain at more or less the same level
and this holds true when
 Production volume is more or less constant and
 Factory overhead (particularly, fixed overhead) is not a significant portion of cost.
o If production volume fluctuates significantly and fixed factory overhead is a significant portion of cost,
application of factory overhead is preferably by the use of predetermined rate(s) based on normal
capacity.

- Example:
Applied factory overhead is P 33,800, while factory overhead as accumulated amounts to P 35,000. They
are analyzed as follows:
Factory overhead applied:
Mixing Department P 13,500
Brewing Department 9,200
Finishing Department 11,100
Total P 33,800

Factory overhead control

Distribution:
Mixing Department P 15,000
Brewing Department 9,000
Finishing Department 11,000
Total P 35,000

Entries:
Work in Process – Mixing Dept. P 13,500
Work in Process – Brewing Dept. 9,200
Work in Process – Finishing Dept. 11,100
Factory Overhead – Mixing Dept. P 33,800
Factory Overhead - Brewing Dept. 9,200
Factory Overhead - Finishing Dept. 11,100
Overhead charged to production

Factory Overhead Control P 35,000

Cash and Other Credits P 35,000
Actual factory overhead

Factory Overhead – Mixing Dept. P 15,000

Factory Overhead - Brewing Dept. 9,000
Factory Overhead - Finishing Dept. 11,000
Factory Overhead Control P 35,000

- After these entries, the balance of the factory overhead account for each department must be equal to the
departmental factory overhead variance.

INTERDEPARTMENTAL TRANSFERS
- Transfers from one department to another are recorded by debiting the work in process account of the
transferee department and crediting that of the transferor department.
o Upon completion, the accumulated cost of the finished goods is charged to the finished goods accounts
and credited to the work in process account. The goods still in process in the different departments
comprise the ending inventory of work in process for the entire factory.
- Example:
Goods completed in Dept. A (cost, P 38,000) are transferred to Dept. B. During the same period, Dept. B.
completed goods with accumulated cost of P 64,200 and transferred these to the finished goods
stockroom.

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Entries:

Work in Process – Dept B P 38,000

Work in Process – Dept A P 38,000
Goods completed and transferred out by Dept A

Finished Goods 64,200

Work in Process – Dept B 64,200
Goods completed and transferred out by Dept. B.

Production report (Quantity Schedule)

At the end of each month a production report is prepared for each department by the cost accountant.

Production report – shows the number of units that were in process in the department at the start of the month,
the number of units started during the month, the number of units transferred out of the
department during the month, the number of units still in work in process at the end of
the month, and the percentage of completion of the units still in process at the end of the
month.

Cost of Production Report

Based on the production report and the information about costs incurred during the month a cost of
production report is prepared for each department at the end of the month.

Cost of production report

– the document used by the management to understand and evaluate the operations of a
department because it shows the flow of units as well as the flows of costs related to that
department.
- summarizes the costs incurred in the department, the average cost per unit of product,
the total costs of products completed and transferred out of the department, and the costs
related to the ending inventory of work in process in each department.
- the source for summary journal entries for the period.

Warehousing
- Cost procedures related to warehousing are almost the same as those in job order costing.
- A difference is that the cost of goods completed is transferred from the last departmental Work in Process
account to Finished Goods Inventory by an entry in the general journal rather than in a job cost sheet.
- One summary entry is made at the end of the month to record the cost of goods completed during the
month.

Selling
- All procedures in recording sales are similar to those used when goods are sold from stock under the job
order cost system. The Cost of Goods Sold account is debited and the Finished Goods Inventory account
is credited for cost of products sold.

Characteristics of Process Costing

- Cost data are accumulated and reported by departments or processes.

- A cost of production report is used as subsidiary record for work in process and on which total and unit costs
are computed.
- Volume of work done is stated in terms of equivalent units of production.
- Unit cost in a department is equal to departmental costs divided by equivalent units of production.
Unit cost (per dept) = Departmental costs______
Equivalent units of production
- Units cost is computed at the end of the costing period which, in general, is one month.
- Cost assigned to processed units are identified with them so that when goods in process are transferred from
department to another, the corresponding costs go with them and have to be accounted for in the succeeding
department.

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Procedures should be designed to
a) Accumulate factory costs by departments or processes,
b) Determine departmental unit costs
c) Transfer costs from one department to the next and subsequently, to finished goods, and
d) Assign cost to ending inventories of work in process.

FLOW OF COST UNDER PROCESS COSTING (WITH MULTIPLE DEPARTMENTS)

Stores

Work in Process Work in Process -

- Dept A Dept B Finished Goods

Payroll

Factory Overhead - Factory Overhead -

Dept. A Dept. B
Actual Applied Actual Applied

COSTING BY DEPARTMENTS
- Inasmuch as homogeneous products cannot be identified from one another and are processed in a continuous
flow, the different elements of cost (materials, labor and factory overhead) are accumulated by processes or
departments.
- Unit cost in each department is computed based on volume of work done and
- The total unit cost of a unit completed in all departments is the total of the unit costs in all the departments
in which it passed through.
- If it is partly done only in a department, the cost assigned is proportionate to the amount of work done.

Example: Ago-o Manufacturing Co. has three producing departments (A, B and C). For January 2014, the
unit costs in these departments are as follows:

Dept. A Dept. B Dept. C Total

Materials cost P 5.00 P 8.00 P 3.00 P 16.00
Labor cost 3.00 4.00 1.50 8.50
Factory overhead 2.00 2.50 1.50 6.00
Total P 10.00 P 14.50 P 6.00 P 30.50

- The assignment of unit costs would be as follows:

o A unit of the product that was placed in process in Dept. A and completed in January in all the three
departments is assigned the total unit cost of P 30.50.
o A unit cost of the product that was started in January, completed in Depts. A and B, and ¼ done in
Dept C shall be assigned the unit cost of P 26.00 arrived at as follows:
Dept. A P 10.00
Dept. B 14.50
Dept. C (one unit x ¼ x P 6) 1.50
P 26.00
o A unit of the product that was started on in January and completed only in Depts. A and B shall be
assigned the total of the unit costs from these two departments of P 24.50 (or P 10.00 + 14.50).

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
o A unit of the product that was started on in January, completed in Dept. A and 1/5 done in Dept B shall
be assigned the unit cost of P 12.90 or:
Dept A P 10.00
Dept B (one unit x 1/5 x P 14.50) 2.90
P 12.90

EQUIVALENT UNITS OF PRODUCTION – EVEN APPLICATION OF COSTS

- Under process costing, the volume of work done is measured in terms of finished units or equivalent units of
production.
Example:
Three thousand (3,000) units were started on during the month of January. As of January 31, they are 1/5
done only.
The equivalent production for January is computed as follows:
Equivalent production = (3,000 units x 1/5) = 600

- If there is an ending inventory of work in process, it is assumed to have come from those placed in process
during the month.
Example:
Assume that of the 3,000 units, only 500 units (1/4 done) are still in process as of January 31. The equivalent
production is computed as follows:
Actual Work Done This Equivalent
Month Production
Placed in process 3,000

Placed in process, finished and 2,500 100% 2,500

transferred to stockroom
Work in Process, Jan. 31 500 ¼ 125
Units accounted for 3,000
Total equivalent production 2,625
- When there is work in process inventory at the beginning, the computation for equivalent units of production
depends on the assumed flow of cost, that is, whether it is FIFO or average.

Even application of costs

o Refers to the assumption that the three elements of cost (materials, labor and factory overhead) are
applied during processing so that each element conforms to the completion stage of each unit.
o Thus, if a unit of work in process were 1/5 done, it implies that 1/5 of materials, labor and factory
overhead have been applied.

- Equivalent units of production – FIFO

o First-in, first-out, being the normal flow of cost, is observed in the absence of any statement to the
contrary.
o Under FIFO, it is assumed that the units still in process at the beginning of a period are completed
ahead of those placed in process during the period.
 The corresponding equivalent production are based only on the fraction or percentage of
work done during the current month.
o Example A:
There were 2,000 units still in process as of February 1, 2014 and they were ¼ done. They were
completed during the month.
 Work done on the 2,000 units in February must be the remaining ¾ so that the equivalent
unit of production must be equal to 1,500 arrived at as follows:
Actual Work done this Equivalent
month Production
Work in process, Feb. 1 and 2,000 ¾ 1,500
completed in February
o Example B:
The following production data on a one department factory are given for March, 2014
Units Stage of completion
Work in process, March 1 6,000 1/4
Placed in process 20,000
Work in process, March 31 5,000 1/5

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

The work in process as of March 31 of 5,000 units must be part of the 20,000 units placed in
process so that only 15,000 units of the latter must have been completed in March.

Quantity Schedule (or schedule of equivalent units of production):

Work in Process, March 1 6,000

Placed in process 20,000
Units to be accounted for 26,000
Equivalent
Actual Work Done Production
Work in process, Mar. 1, finished and transferred to
stockroom 6,000 3/4 4,500

Placed in process, finished, and transferred to

stockroom (20,000 - 5,000) 15,000 100% 15,000
Work in process, March 31 5,000 1/5 1,000
Units accounted for 26,000
Total equivalent production 20,500

Equivalent Production – Multiple departments

o When goods are processed in one department and subsequently transferred to another, the units
transferred out from the first department become part of the units to be accounted for in the next.
o Example:
The following production data are given by Luzon Mfg. Co. for February, 2014:

Dept. A Dept. B
Stage of Stage of
Units Completion Units Completion
In process, Feb. 1 5,000 1/4 2,000 1/5
Placed in process 20,000
Transferred to Dept. B 19,000
Transferred to stockroom 18,000
Work in process, Feb. 28 6,000 1/3 3,000 1/6

Factory costs are applied evenly throughout the process.

The quantity schedule is shown below:
Luzon Mfg. Co
Quantity Schedule
February, 2014

Department A Department B
Work Work
Done Done
This Equivalent This Equivalent
Actual Month Production Actual Month Production
In process, Feb. 1 5,000 2,000
Placed in process 20,000
Received from preceding
dept. 19,000
Units to be accounted for 25,000 21,000

In process, Feb. 1, finished and transferred 5,000 ¾ 3,750 2,000 4/5 1,600
Placed in process, finished and transferred 14,000 100% 14,000
Received, finished and transferred 16,000 100% 16,000
In process, Feb. 28 6,000 1/3 2,000 3,000 1/6 500
Units accounted for 25,000 19,750 21,000 18,100

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Notes:
- Department A:
o The 19,000 units transferred out consist of 5,000 units in process on February 1 st and 14,000 coming
from those just placed in process.
o The units still in process as of February 28 must have come from those placed in process during the
month.
- Department B:
o Inasmuch as 19,000 units were transferred out from Department A, these are part of the units to be
accounted for in Department B so that the total to be accounted for is 21,000.
o With 18,000 units given as transferred out, priority is given to work in process, February 1 st, of 2,000
units so that only the difference of 16,000 must have come from those received (or transferred in) from
Department A. Thus out of the 19,000 units received, 3,000 units are still in process as of February 28.

LAST-IN, FIRST-OUT
- Not used in process costing because the layering aspects of this technique would make process costing
applications quite difficult.
- May be used in valuing raw materials and finished goods inventories.

COST OF PRODUCTION REPORT;

FORMS THEREOF

- The subsidiary record for work in process under process costing.

- It serves as the backbone in this costing method.

- Shows:
o Flow of units in process and their stages of completion
o Computation of equivalent units of production
o Costs charged to a producing department or costs to be accounted for
o Computation of cost per equivalent unit
o An accounting for total cost

- Cost to be accounted for – the debits to work in process

- Cost accounted for – (with the exception of the ending inventory of work in process) are the credits to work
in process

Forms of Cost of Production Report

1. Conventional form of cost of production report

o Computations are shown ahead of the amounts.

2. Modified form – shows the computations after the total cost column.
- the column headings amount and unit cost are observed throughout the report by presenting
computations in the unit cost column. In so doing, errors can easily be traced.
- the consistency in the use of the columns makes it easier to computerize the report.

Regardless of the form being used, the quantity schedule may be shown separately. This has the advantage of
being able to emphasize cost analysis on a shorter cost of production report. In some cases, errors in one do not
require the revision of both.

ILLUSTRATIVE PROBLEM A

EVEN APPLICATION OF COST, ONE DEPARTMENT FACTORY WITHOUT BEGINNING WORK

IN PROCESS
The Solo Mfg. Co. provides you with the following data based on its first month of production in January, 2014:
Quantity data:
Placed in process 60,000 units
In process, January 31 20,000 units, 1/2 done

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

Factory costs:
Materials P 25,000
Labor 20,000
Factory Overhead 15,000
Factory costs are applied evenly throughout the process.
The schedule of equivalent production and the cost of production report are presented on the next page:

Quantity Schedule
Work Done Equivalent
Actual This Month Production
Placed in process 60,000
Placed in process, finished and transferred 40,000 100% 40,000
In process, January 31 20,000 1/2 10,000
Units accounted for 60,000 50,000

Solo Mfg. Co
Cost of Production Report
For the Month Ended January 31, 2014

Amount Unit Cost

Costs to be accounted for:
Factory costs:
Materials P 25,000 ÷ 50,000 = P 0.50
Labor 20,000 ÷ 50,000 = 0.40
Factory overhead 15,000 ÷ 50,000 = 0.30
Total cost to be accounted for 60,000 P 1.20

Costs accounted for as follows:

Placed in process, finished and
transferred out P 48,000 ( 40,000 units x P 1.20)

In process, January 31 12,000 ( 20,000 x 1/2 x P 1.20)

Total cost accounted for P 60,000

Based on the foregoing cost of production report, the postings to the work in process account would be as follows:

Work in Process
2014 2014
Jan 1-31 Materials 25,000 Jan 1-31 To finished goods 48,000
Labor 20,000
Factory Overhead 15,000

The ending balance of work in process of P 12,000 is the cost assigned to the 20,000 units that are still one-half
done as of January 31, per cost of production report.

Costing Work in Process at the Beginning, Finished and Transferred.

When there are some units in process as of the beginning of the costing period, their cost, upon completion, is
computed as follows:

Cost last month of work in process, beginning

+
Cost added this month based on work done this month

Cost last month - refers to the accumulated cost as of the beginning of the month
Cost added this month – pertains to the factory cost added during the current costing period based on work done
during the same period.

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Example:
As of March 1, 2014, there were 6,000 units in process, 1/4 done, with accumulated cost of P 3,100. Factory costs
for March amount to P 40,000 and equivalent production is 20,000 units so that the unit cost for the month must
be P 2.00. The cost of the 6,000 units is computed as follows:

Work in process, March 1,

Finished and transferred:
Cost last month P 3,100
Cost added in March 9,000 (6,000 u. x 3/4 x P2.00)
P 12,100

Cost last month may also be called cost, March,1 and cost added in March as cost this month.
The 6,000 units were 1/4 done as of March 1st so that to complete them this month, work done in March ought to
be the remaining 3/4.

ILLUSTRATIVE PROBLEM B:
EVEN APPLICATION OF COST, ONE DEPARTMENT FACTORY WITH BEGINNING WORK IN
PROCESS

The Manggahan Mfg. Co. has a one-department factory and uses the process costing method for its sole product.
Factory costs are applied evenly throughout the process. The following production data are given:
Cost data:
Work in process, March 1, 2014 P 17,600
Factory costs, March, 2014
Materials 50,000
Labor 25,000
Factory overhead 20,000
Quantity data:
In process, March 1 (5/8 done) 8,000 units
Placed in process, March 30,000 units
In process, March 31 (1/5 done) 10,000 units
The schedule of equivalent production and the cost of production report are shown below.
Quantity Schedule
Work Done Equivalent
Actual This Month Production
In process, March 1 8,000
Place in process 30,000
Units to be accounted for 38,000
In process, March 1, finished and transferred 8,000 3/8 3,000
Placed in process, finished
and transferred ( 30,000 - 10,000) 20,000 100% 20,000
In process, March 31 10,000 1/5 2,000
Units accounted for 38,000 25,000

Manggahan Mfg. Co.

Cost of Production Report
For the Month Ended March 31, 2014
Amount Unit Cost
Costs to be accounted for
Factory costs
Materials P 50,000 ÷ 25,000 = P 2.00
Labor 25,000 ÷ 25,000 = 1.00
Factory overhead 20,000 ÷ 25,000 = 0.80
P 95,000
Work in process, March 1, 2014 17,600
Total unit cost P 3.80
Total cost to be accounted for P 112,600

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PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

Cost accounted for as follows:

Transferred to stockroom: 28,000 units
In process, March 1, finished and transferred 8,000 units
Cost last month P 17,600
Cost, this month 11,400 (8,000 x 3/8 x P 3.80)
P 29,000
Placed in process, finished and transferred 20,000 units 76,000 (20,000 x P 3.80)
Total cost transferred out P 105,000 (28,000 @ P 3.75)
In process, March 31 10,000 units 7,600 (10,000 x 1/5 x P 3.80)
Total cost accounted for 112,600
The postings to the work in process account would be as follows:

Work in Process
2014 2014
Mar 1 Balance 17,600
1-31 Materials 50,000 Mar 1-31 To finished goods 105,000
Labor 25,000
Factory Overhead 20,000

Based on the above postings, the ending balance must be P 7,600, the cost assigned to work in process per cost of
production report.
CONVENTIONAL FORM OF COST OF PRODUCTION REPORT
Manggahan Mfg. Co,
Cost of Production Report
For the Month Ended March 31, 2014
Quantity Schedule:
Work Done Equivalent
Actual This Month Production
In process, March 1 8,000
Place in process 30,000
Units to be accounted for 38,000

In process, March 1, finished and transferred 8,000 3/8 3,000

Placed in process, finished
and transferred ( 30,000 - 10,000) 20,000 100% 20,000
In process, March 31 10,000 1/5 2,000
Units accounted for 38,000
Total equivalent production 25,000
Cost Analysis: Total Cost Unit Cost
Materials P 50,000 ÷ 25,000 = P 2.00
Labor P 25,000 ÷ 25,000 = 1.00
Factory Overhead P 20,000 ÷ 25,000 = 0.80
Factory cost, March, 2014 P 95,000 3.80
Work in process, March 1, 2014 17,600
Total cost to be accounted for P 112,600
Cost accounted for as follows:
Finished and transferred to storeroom: 28,000 units
In process, March 1, finished and transferred 8,000 units
Cost last month P 17,600
Cost this month ( 8,000 x 3/8 x P 3.80) 11,400 P 29,000
Placed in process, finished and transferred 20,000 units
(20,000 x P 3.80) 76,000
Total cost transferred to storeroom
(28,000 @ P 3.75) P 105,000
Work in process, March 31 10,000 units
(10,000 x 1/5 x P 3.80) 7,600
Total cost accounted for P 112,600

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COST OF PRODUCTION REPORT – MULTIPLE DEPARTMENTS

- When goods in process pass through consecutive departments, costs from preceding departments become part
of the cost to be accounted for in the succeeding departments.
- In the succeeding department, cost from preceding department is identified with the units transferred in during
the period.
- Thus, at the end of the current costing period, their cost shall be the sum of the costs from the preceding and
the current departments.
- Accordingly, the cost of units in process at the end shall be equal to:

Cost, preceding department: 100 %

+
Cost, this department: Based on work done this month

ILLUSTRATIVE PROBLEM C:
EVEN APPLICATION OF COST, TWO-DEPARTMENT FACTORY
The sole product of Amapola Manufacturing Co. is processed in two consecutive departments A and B. The
production data for April, 2014 are as follows:

Quantity data: Dept A Dept B

In process, April 1 1,000 2,000
Stage of completion 20% 60%
Placed in process 10,000
In process, April 30 500 700
Stage of completion 80% 10%

Cost data:
Work in process, April 1 P 305.00 P 2,502.00
Factory costs:
Materials P 5,350.00 1,600.50
Labor 2,140.00 3,201.00
Factory overhead 3,210.00 533.5

Factory costs are applied evenly throughout the process.

Amapola Mfg. Co.

Quantity Schedule
April, 2014

Department A Department B
Work Work
Done Done
This Equivalent This Equivalent
Actual Month Production Actual Month Production
In process, April. 1 1,000 2,000
Placed in process 10,000
Received from preceding dept. 10,500
Units to be accounted for 11,000 12,500

In process, April. 1, finished and transferred 1,000 80% 800 2,000 40% 800
Placed in process, finished and transferred 9,500 100% 9,500
Received, finished and transferred 9,800 100% 9,800
In process, April 30 500 80% 400 700 10% 70
Units accounted for 11,000 10,700 12,500 10,670

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

Based on the cost of production report, the postings to the departmental work in process would be as follows:

Work in Process – Dept. A

2014 2014
April 1 Balance 305.00
1-30 Materials 5,350.00 April 1-30 To Dept B 10,605.00
Labor 2,140.00
Factory Overhead 3,210.00 30 Balance 400.00
11,005.00 11,005.00

Work in Process – Dept. B

2014 2014
April 1 Balance 2,502.00
From Dept A 10,605.00
1-30 Materials 1,600.50 April 1-30 To Stockroom 17,700.00
Labor 3,201.00
Factory Overhead 533.50 30 Balance 742.00
18,442.00 18,442.00

JOURNAL ENTRIES
The journal entries for Amapola Mfg. Co. would be as follows:
Work in Process P 10,700.00
Materials P 5,350.00
Payroll 2,140.00
Factory Overhead 3,210.00
Dept. A’s factory costs in April 2014

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

Work in Process – Dept B 10,605.00

Work in Process – Dept A 10,605.00
Cost transferred to Dept B

Work in Process – Dept B 5,335.00

Materials 1,600.50
Payroll 3,201.00
Factory Overhead 533.50
Dept B’ factory costs in April 2014

Finished Goods 17,700.00

Work in Process – Dept B 17,700.00
Finished goods from Dept B

After posting the foregoing entries to the respective work in process accounts, the balance in each should
be equal to the ending work in process per cost of production report.

SCHEDULE OF COST OF GOODS MANUFACTURED

- This may be prepared based on the cost of production report or on the postings to the departmental work in
process accounts as follows:
o Work in process inventory, beginning = Total of the departmental work in process inventories
o Factory costs, current period = Total of the departmental factory costs for the current period
o Work in process inventory, end = Total of the departmental work in process inventories
o Cost of goods manufactured = Total cost transferred out from the last department

For Amapola Manufacturing Co., the schedule is prepared as follows:

Amapola Manufacturing Co.

Cost of Goods Manufactured
For the Month Ended April 30, 2014

Factory costs:
Materials P 6,950.50
Labor 5,341.00
Factory overhead 3,743.50 P 16,035.00
Work in process, April 1 2,807.00
Work in process, April 30 (1,142.00)
Cost of Goods manufactured P 17,700.00

Raw Materials and Finished Goods on Floor.

- At year-end, there may be raw materials already issued to the factory but are not yet worked on.
- These are raw materials on floor and are treated as part of raw materials inventory.
- The entry made upon their issuance may be temporarily reversed on working paper for the purpose of
preparing the periodic financial statements.
- In some cases, goods already completed by the last department have not yet been transferred to the
stockroom. They are called finished goods on floor and are part of the ending inventory of finished goods.
- For financial statement preparation, a working paper entry may be made for the reclassification.

UNEVEN APPLICATION OF COSTS

- There is uneven application of cost when an element of cost is applied to production at a rate different
from the rate of progress in the manufacturing process.
- In other words, the portion added does not comply with the completion stage of a unit. This holds true in the
case of materials. In most manufacturing operations, the greater portion of material s is added at the start of
the process.
- Uneven application of cost results in a different equivalent units of production for the particular
element.

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
- The computation for equivalent units of production for materials is illustrated in the following examples. It is
assumed that conversion costs are evenly applied throughout the process so that the computation for the
corresponding equivalent units of production remains the same.

Example A:
Lagundi Mfg. Co. adds all the materials at the start of the process. Conversion cost is applied evenly
throughout the process. The quantity data are as follows:

Placed in process, May, 2014 20,000 units

In process, May 31 5,000 units, 60% done

The equivalent units of production for materials should be different from those for the conversion cost. They
are computed as follows:
Materials
Work done Equivalent
Actual this month Production
Placed in process 20,000

Placed in process, finished and transferred out 15,000 100% 15,000

In process, May 31 5,000 100% 5,000
Units accounted for 20,000 20,000

- It may be noted that due to the addition of materials at the start of the process, the equivalent production of
ending work in process for materials is 100% despite the fact that it is 60% completed only.
- This is emphasized in the following diagram:

Start of the
process Manufacturing process
Materials ///////////////
///////////////
Conversion cost /////////////////////////////////////////////////////////////////

Example B:
Assume that in example A, there were 3,000 units in process on May 1 st, 30% done. The equivalent units of
production for materials must also be 20,000 units as arrived at in the following computation.

-
Work done Equivalent
Actual this month Production
In process, May 1 3,000
Placed in process 20,000
Units to be accounted for 23,000

In process, May 1, finished and transferred out 3,000 -

Placed in process, finished and transferred out 15,000 100% 15,000
In process, May 31 5,000 100% 5,000
Units accounted for 23,000 20,000

- Despite the existence of beginning work in process, equivalent production for materials remains at 20,000, the
number of units started on during the current month.
o Reason: beginning work in process has zero equivalent production for materials because the required
materials for the lot were already added when it was started last month.
o Therefore, when materials are added at the start of the process, equivalent production for materials
(under the FIFO assumed flow of cost) must be equal to the number of units started on during the
current month.

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
Example C:
Sixty percent of the materials are added at the start of the process and 40%, when the process is 4/5
completed.

In process, beg. 6,000 3/10 done

Placed in process 30,000
In process, end 5,000 7/10 done

The equivalent units of production for materials must be 30,400 as shown below.
Materials
Work done Equivalent
Actual this month Production
In process, May 1, finished and transferred out 6,000 40% 2,400
Placed in process, finished and transferred out 25,000 100% 25,000
In process, May 31 5,000 60% 3,000
Units accounted for 36,000 30,400

The following visual aids would make it easier to understand the percentage of work done for materials:
,
Manufacturing process

60% 40%
Addition of materials

Work in process, beg. ///////////////////////////////

///////////////////////////////
Work in process, end ///////////////////////////////////
///////////////////////////////////

- Work in process beginning was 30% done at the start so that 60% of the materials were added last month.
Only the remaining 40% are added this month.
- Work in process, end is 70% done only so that only 60% of the materials were added during the month. The
remaining 40% shall be added next month when it reaches 4/5 or 80% completion.

Example D:
Seventy percent of materials are added at the start of the process, 10% at the middle, and 20%, at the end.
Same quantity data as in Example C.
The equivalent units of production for materials are arrived at as follows:
Materials
Work done Equivalent
Actual this month Production
In process, May 1, finished and transferred out 6,000 30% 1,800
Placed in process, finished and transferred out 25,000 100% 25,000
In process, May 31 5,000 80% 4,000
Units accounted for 36,000 30,800

The following diagrams would be of help to understand how the equivalent units of production are arrived at:

Manufacturing process

70% 10% 20%

Addition of materials

Work in process, beg. ///////////////////////////////

///////////////////////////////
Work in process, end ///////////////////////////////////
///////////////////////////////////

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
- Equivalent production for work in process at the beginning is equal to 30%.
o Reason: inasmuch as they were placed in process last month, 70% of the materials were added last
month.
o For this month, 10% was added when it reached the middle of the process and the remaining 20%,
upon completion.
- For ending work in process, which is 7/10 done, equivalent production is 80%.
o Inasmuch as they were placed in process during the current month, 70% of the materials were
immediately added and 10%, when it reached the middle of the process.

Cost of Production Report – Uneven Application of Costs

In preparing the cost of production report, bear in mind the different equivalent units of production in the
computation and assignment of unit costs.

ILLUSTRATIVE PROBLEM D: UNEVEN APPLICATION OF COST, TWO-DEPARTMENT

FACTORY

Laguna Mfg. Co. provides the following data on its May, 2014 production:

Dept. I Dept. II
Quantity data:
In process, May 1, 2014 3,000 units 5,000 units
Stage of completion 30% 25%
Placed in process, May 2014 20,000 units
In process, May 31 5,000 units 7,000 units
Stage of completion 20% 5/7

Cost data:
Work in process, May 1 P 3,450 P 21,750
Prime costs, May 2014 50,000 24,000
Materials 18,100 11,850
Labor

- In Department I, all the materials are added at the start of the process and factory overhead rate is 50% of
labor cost.
- In Department II, 60% of the materials are added at the start of the process with the remainder applied when
the goods are 4/5 done. Factory overhead rate in Department II is P .40 per equivalent unit of production.

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS

SUMMARY OF PRINCIPLES AND PROCEDURES

The process cost system is used by companies that manufacture on a continuous basis only one or a few products
that are homogeneous.
o The system is ideal in the accounting for costs in mass-production.
o This is used by companies such as soft drink and bottling, paint manufacturer, and petroleum refining.
o Usually in manufacturing operations using process cost system, goods are produced for stock; one unit
of production is similar to the others; factory procedures are standardized; and goods move through
production processes in a constant stream.
o The costs of materials, labor and overhead are accounted for in the usual manner.
The procedures for charging costs to production in a process costs system follow those in the job order system
except that there is no job costs sheet.
o Direct materials placed in production as well as direct labor costs are charged to departmental Work in
Process accounts.
o Indirect materials issued to producing departments and indirect labor costs in a producing department
are charged to Factory Overhead Control Account.
o At the end of the period Factory Overhead is closed into the departmental Work in Process accounts.
After costs are accumulated in Work in Process accounts, production data must be assembled to compute the unit
cost.
o The month production report provides information about the quantity stated, quantity transferred in
and out, and the quantity and stage of completion of products in process at the end of the month.
o The cost accountant then computes the equivalent units of production to show the amount of work
done on both completed and partially processed units in each department. Equivalent units of
production reflect the number of units that could have been completely produced from the costs
incurred.
Using the costs figures and the equivalent production unit figures, a cost of production report for each department
is prepared.
The cost of production report has two main schedules. The quantity schedule and the cost schedule.
o The first part of the Quantity Schedule provides unit data showing units to be accounted for. The
second part explains what happened to the units that were handled in that department. Generally, the
products are either transferred out of the department or are in the ending work in process inventory in
various stages of completion.

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING: FIFO: EVEN AND UNEVEN APPLICATION OF COSTS
o In the first part of the Cost Schedule, total costs are assembled and the cost per equivalent unit of
production for each cost category (materials, labor, overhead, and transferred in cost) is computed. In
addition, the cumulative cost per equivalent unit is calculated.
o The second part of the Cost Schedule accounts for the costs. Some costs relate to units that are
transferred to the next department or to finished goods. The total of costs transferred out is computed
by multiplying the cumulative cost per equivalent unit by the number of units transferred out. Other
costs remain as part of the work in process. The cost of ending work in process is the unit cost of each
cost category multiplied by the number of equivalent units of that cost category still in process.
The total cost of goods transferred from one department to the next or to finished goods, as shown in the cost of
production report, is recorded by a journal entry and posted to the general ledger.

References:
Cost accounting by Nenita Mejorada, 3rd Edition.
Cost accounting by Guillermo M. De Leon Jr. And Norma D. De Leon.

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 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
Module 9.1
7
Process costing: FIFO
PROCESS COSTING: FIFO – INCREASE AND LOSS IN UNITS
The addition of materials may bring about an increase in the quantity being processed. In some cases, there may
be decreases in the number of units due to the nature of the materials being used or the manufacturing process involved.
Both increases and decreases in the number of units in process (except in the case of abnormal loss) have the
reverse effect on unit cost.
Addition of Materials – Its Effects

- Although materials are generally placed in process in the first department, additional materials are often required
in subsequent departments for the completion of the goods.
- These additions may result in an
o increase in unit cost or
 The addition of materials results in an increase in unit cost when it does not result in an increase
in the number of units.
 Examples:
 use of bottles (or cans) for beverages,
 bleach for textiles, and
 plating mixture for metal parts.
o an increase in the number of units in process
 The addition of materials in liquid form (such as water and oil) increases the quantity of goods
being processed.
Equivalent Units of Production with Increase in Quantity
- An increase in quantity increases the number of units to be accounted for.
- Determine carefully at what point the increase occurs.
o If the increase occurs at the start of the process, the increase in quantity should be associated with the
units received during the month only.
o Uneven addition of materials requires computation for equivalent units of production different from those
for conversion cost.
- Example:
The addition of materials at the start of the process in Dept. B of Mid-way Mfg. Co. brings about an increase in
quantity by 25%. The quantity data are given as follows:
In process, beg 6,000 gals., 1/4 done
Received from Dept. A 20,000 gals.
In process, end 7,000 gals., 2/7 done
The equivalent units of (or effective) production is computed as follows:
Schedule of equivalent units of production:

Materials Conversion Cost

Work Done Equivalent Work Done Equivalent
Actual This Month Production This Month Production
In process, beg. 6,000
Received from Dept. A 20,000
Increase in units (25% x 20,000) 5,000

Units to be accounted for 31,000

In process, beg, finished and transferred out 6,000 - - ¾ 4,500

Received from preceding dept., finished

and transferred out (25,000-7,000) 18,000 100% 18,000 100% 18,000
In process, End 7,000 100% 7,000 2/7 2,000
Units accounted for 31,000 25,000 24,500
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
- Inasmuch as the increase in quantity occurs upon addition of materials at the start of the process, it follows that
the 25% increase is to be based on the units received from the preceding department during the current month
only.
o Thus, the 20,000 units received increase to 25,000 units (or 20,000 x 125%)
o Out of the 25,000 increased units, 7,000 are still in process at the end so that only 18,000 units were
transferred out.

- If the addition of materials brings about an increase in quantity but normal losses also occur, only the net
increase may be reflected in the cost of production report provided they are associated with the same group of
units as accounted for.

- If the increase occurs at a point different from the point of loss, the loss may be shown separately.

Adjustment in Unit Cost

- An increase in the quantity being processed has the effect of spreading costs over a greater number of units.
- The unit cost from the preceding department is adjusted as follows:
Adjusted unit cost from preceding department = Cost from preceding department
Increased number of units

- Example:
Dept. B received 20,000 gallons from Dept. A costing P 5 per gallon. The addition of materials at the start of the
process in Dept. B increases the quantity by 25%. The adjusted unit cost is computed as follows:
Adjusted unit cost from Dept A = 20,000 gallons x P 5
20,000 gallons x 125%
= P 100,000
25,000 gals.
= P 4 per gallon
- The unit cost from preceding department is adjusted from P 5 to P 4 per gallon.
- Cost from preceding department for the 25,000 gallons shall be at P 4 regardless of their stage of completion as of
the end of the current costing period.
Example:
The following cost data are given in addition to the quantity data given for Mid-way Mfg. Co.:
In process, August 1 P 25,590
Received from Dept. A 100,000
Factory costs, August:
Materials 24,500
Labor 12,250
Factory overhead rate – 80% of labor cost

INCREASE IN UNITS DUE TO ADDITION OF MATERIALS AT THE START

Schedule of Equivalent units of Production
Mid-Way Mfg. Co.
Cost of Production Report
For the Month Ended, August 31, 2014
Materials Conversion Cost
Work Done Equivalent Work Done Equivalent
Actual This Month Production This Month Production
In process, beg. 6,000
Received from Dept. A 20,000
Increase in units (25% x 20,000) 5,000
Units to be accounted for 31,000

In process, beg, finished and transferred out 6,000 - - 3/4 4,500

Received from preceding dept., finished
and transferred out (25,000-7,000) 18,000 100% 18,000 100% 18,000
In process, End 7,000 100% 7,000 2/7 2,000
Units accounted for 31,000 25,000 24,500
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
Total Cost Unit Cost
Costs to be accounted for
Factory costs:
Materials P 24,500 ÷ 25,000 P 0.98
Labor 12,250 ÷ 24,500 0.50
Factory Overhead 9,800 ÷ 24,500 0.40
46,550 P 1.88
Work in process, August 1 25,590
Received from Dept. A 100,000 ÷ 25,000 = 4.00
Total cost to be accounted for 172,140 5.88

Cost accounted for as follows:

Finished and transferred 24,000 units

In process, August 1 finished and transferred 6,000 units

Cost last month P 25,590
Cost this month
Labor 2,250 (6,000 x 3/4 x. P .50)
Factory overhead 1,800 (6,000 x 3/4 x. P .40)
P 29,640
Received, finished and transferred 18,000 units 105,840 (18,000 x P 5.88)
Total cost transferred out P 135,480 (24,000 units @ P 5.645)

Work in process, August 31: 7,000 units

Cost, Dept A P 28,000 (7,000 x P 4.00)
Cost, this dept. :
Materials 6,860 (7,000 x P 0.98)
Labor 1,000 (7,000 x 2/7 x P 0.50)
Factory overhead 800 (7,000 x 2/7 x P 0.40)
P 36,660
Total cost accounted for P 172,140

Increase Occurs Evenly Throughout the Process.

- When the increase in quantity occurs evenly throughout the process, the increase may be identified with the
units received during the current costing period for convenience.
o Takes into consideration the fact that unit cost for completed units is computed based on modified FIFO.
 Modified FIFO
Unit cost for completed units is the average unit cost derived from the total of accumulated costs of
units completed during the month consisting of (a) beginning work in process and (b) part of work
received (or placed in process) during the month.

ILLUSTRATION:
INCREASE IN UNITS DUE TO ADDITION OF MATERIALS EVENLY THROUGHOUT THE PROCESS

Mid-Way Mfg. Co.

Cost of Production Report
For the Month Ended, August 31, 2014

Work Done Equivalent

Actual This Month Production
In process, August 1 6,000
Received from Dept. A 20,000
Increase in units (25% x 20,000) 5,000
Units to be accounted for 31,000

In process, beg, finished and transferred out 6,000 3/4 4,500

Received from preceding dept., finished and
transferred out (25,000-7,000) 18,000 100% 18,000
In process, August 31 7,000 2/7 2,000
Units accounted for 31,000 24,500
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
Total Cost Unit Cost
Costs to be accounted for
Factory costs:
Materials P 24,500 ÷ 24,500 P 1.00
Labor 12,250 ÷ 24,500 0.50
Factory Overhead 9,800 ÷ 24,500 0.40
46,550 P 1.90
Work in process, August 1 25,590
Received from Dept. A 100,000 ÷ 25,000 = 4.00
Total cost to be accounted for 172,140 5.90

Cost accounted for as follows:

Finished and transferred 24,000 units

In process, August 1 finished and transferred 6,000 units

Cost last month P 25,590
Cost this month 8,550 (6,000 x 3/4 P 1.90)
P 34,140
Received, finished and transferred 18,000 units 106,200 (18,000 x P 5.90)
Total cost transferred out P 140,340
Work in process, August 31: 7,000
units
Cost, Dept A P 28,000 (7,000 x P 4.00)
Cost, this dept 3,800 (7,000x2/7 x P 1.90)
P 31,800
Total cost accounted for P 172,140

Increase at a Specific Point During Process

- When the increase in quantity occurs at a specific point during process, say at the middle, it would be convenient
to treat the second half of the process as another cost center with the increase occurring at the start of the
process therein.

LOSS IN UNITS
- There may be losses due to wastage, seepage, shrinkage, evaporation, accidents and fortuitous events.
- When loss is inherent in the manufacturing process, the normal percentage of loss is computed based on expected
yield percentage.

o Thus, if the expected yield is 95%, normal loss must be 5%.

Yield percentage = Output (or weight of completed units)

Input (or weight of materials used)

o When the yield is significantly below the expected level, the possible causes thereof are determined and
may require a separate computation of the abnormal portion of the loss.

NORMAL AND ABNORMAL LOSSES

- What is normal or abnormal loss depends on the nature of manufacturing processes involved.
- The loss is normal when
o it is unavoidable or inherent in the manufacturing process.
o Examples of normal loss:
 Those due to seepage and shrinkage.
- The loss is abnormal when
o It is not inherent in the manufacturing process.
o When percentage, the loss in units significantly exceeds its normal excess is considered abnormal.
- Unrecoverable cost of normal lost units is treated as additional cost of remaining units depending on the
point of loss.
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
- In the case of abnormal loss, the unrecoverable cost is removed from work in process by charging the
appropriate loss account depending on its cause or causes.

Losses in Equivalent Units of Production

Lost units are included in the computation for equivalent units of production so that the corresponding cost may be
accorded the appropriate treatment.
- As a general rule, lost units, whether normal or abnormal, are included in the computation for equivalent units
of production except when the loss occurs at the start or progressively during the process.
- When loss occurs at the start of the process,
o Nothing yet has been done on the lost units.
- When it occurs progressively during the process,
o The amount of work done cannot be easily determined so that it is ignored in the computation.
- Inasmuch as the assignment of cost is based on equivalent units of production, losses at the start or progressively
during process do not absorb cost in the department wherein the loss occurs.
o This treatment automatically increases the cost of the remaining units.

Loss in a subsequent department

- If the loss occurs at the start of or during process in a subsequent department, the lost units have zero
equivalent production and do not absorb cost in the subsequent department.
o However, they have accumulated cost coming from the preceding department which should be charged to
the remaining units depending on the point of loss.

ILLUSTRATIVE PROBLEM A:
LOST UNITS – EQUIVALENT UNITS OF PRODUCTION
Anahaw Mfg. Provides you with the following quantity data based on the production in Department A in September,
2014:

In process, Sept. 1 10,000 units, 2/5 done

Received from preceding dept 50,000 units
In process, Sept. 30 5,000 units, 1/5 done
Loss in units 8,000 units
What should be the total equivalent units of production under each of the following assumptions?
1. The loss occurred at the start of the process.
2. The loss occurred during the process.
3. The loss occurred when the goods were 3/4 done.
4. The loss occurred at the end of the process.
The equivalent units of production are computed as follows:
Actual 1. Loss at the start 2. Loss during 3. Lost units, 3/4 4. Loss at the
process done end
Work EUP Work EUP Work EUP Work EUP
done done done done
this this this this
month month month month
In process, Sept, 1 10,000
Received from preceding dept. 50,000
Units to be accounted for 60,000

In process, Sept. 1 F and T 10,000 3/5 6,000 3/5 6,000 3/5 6,000 3/5 6,000
Received, F and T 37,000 100% 37,000 100% 37,000 100% 37,000 100% 37,000
In process, end 5,000 1/5 1,000 1/5 1,000 1/5 1,000 1/5 1,000
Loss 8,000 - - - - ¾ 6,000 100% 8,000
Units accounted for 60,000 44,000 44,000 50,000 52,000
- It may be noted that the losses in Nos. 1 and 2 have zero equivalent production.
- In No. 3, the loss is at a specific point during process, that is, when the goods are 3/4 done;
- In No. 4, the loss is 100% included in equivalent production because it occurred at the end of the process.
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
TREATMENT OF ABNORMAL LOSS
- Abnormal loss is treated as a period cost.
- The cost assigned to the lost units is removed from work in process by charging the appropriate loss account (
such as loss from substandard materials, loss from flood, and loss from factory accident)
- Therefore, the unit cost of the remaining units is not affected.
o If there is partial cost recovery as in the case of spoiled goods, only the unrecovered cost is charged to the
loss account.

Illustrative Problem B: Abnormal loss, Subsequent Dept.

The following data pertain to the July, 2014 production of Department B in a manufacturing company:
Quantity data:
In process, July 1 3,000 units, 2/3 done
Received from preceding dept 45,000
In process, July 31 4,000 units, 1/8 done
Abnormal loss 5,000 units
Cost data:
In process, July 1 P 28,340
Factory costs, July:
Materials 159,375
Labor 95,625
Factory overhead 63,750
Received from preceding dept 135,000
The loss in units is abnormal and for comparative presentation of quantity data and assigned costs, the following
independent assumptions are being observed:
A. Loss occurs at the start of the process.
B. Loss occurs when the units were one-half done.
C. Loss occurs at the end of the process.
In the comparative presentation of cost and equivalent units of production (on the next page), the following may
be noted:
- The differences between the total equivalent units of production are due to the different figures assigned to the
abnormal loss.
o These differences result in different departmental unit costs.
- The abnormal loss is costed separately inasmuch as it shall be removed from the work in process account.
o Loss at the start of the process does not have equivalent production so that its cost comes from the
preceding department only.
o The abnormal loss that occurred when the goods are one-half done absorbs cost in the department based on
its equivalent production.
o The abnormal loss at the end of the process is fully assigned the departmental unit cost of P 7.50. Instead
of showing the breakdown of its cost, the 5,000 units may simply be multiplied by the total unit cost of P
10.50.
<

(Note: To be able to balance the report immediately, six decimal places are maintained for unit costs that are not exact
because there are five digits in the number of units. The additional decimal place takes care of the carry-over.)
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
NORMAL LOSS – A PRODUCT COST
- Normal loss, being a product cost, is generally charged to the remaining units.
- What the remaining units are depends on the point of loss.
- Remaining units
o Refers to what are left of the particular group of units with which the loss is identified.
o The loss may be identified either with those placed in process, both of those in process at the beginning
and those placed in process, or only those completed during the period. `
o The different points of loss and the corresponding figures for remaining units are the following:
Point of Normal Loss Remaining units
Start of the process Units started in process minus lost unit
During process Method I – Units started in process minus lost units
Method II – Equivalent production for remaining units
At a specific point in process Units that passed through the specific point of loss during the current
period minus lost units
End of the process Completed units

- In case normal loss occurs during process, determine whether the said loss must be identified with beginning
work in process or with those started on during the period.
o In Method I, the loss is identified with those started during the period while in
o Method II, it is identified with both beginning work in process and units started during the period.
 Method I is generally used for convenience inasmuch as beginning work in process must already
have its share in normal loss during the preceding costing period.
- If the loss is stated to occur progressively during process, it implies that it is related to both the beginning work in
process and the units received or started on during the period.
ADJUSTMENTS FOR LOST UNITS
- A normal loss is treated as an additional cost of the remaining units and the additional unit cost charged to the
latter is usually called adjustment for lost units.
- To have an adjustment for lost units, the lost units must have absorbed cost.
- In case lost units have market value, the adjustment for lost units is based on the unrecovered portion of their cost.
 NORMAL LOSS IN THE FIRST DEPARTMENT
- When normal loss occurs at the start of the process or during the process in the first department, the lost
units do not absorb cost inasmuch as costing is based on equivalent units of production.
o Reason:
 When normal loss occurs at the start of the process, nothing has been done yet in the current
department.
 In the case of normal loss during the process, the specific point of loss is not determinable so that
it is not included in the equivalent units of production.
 This has the effect of automatically charging the cost of lost units in the current department
to the remaining units based on work done during the period.
 When normal loss occurs at the end of the process in the first department, the loss units must have
absorbed cost equal to the unit cost of a completed unit and must be identified with the completed units
only
Formula for adjustment for lost units
Adjustment for lost units = Cost of lost units
Completed units
 NORMAL LOSS IN A SUBSEQUENT DEPT.
- A unit in a subsequent department has absorbed cost in the preceding department so that there is adjustment
for lost units regardless of the point of loss. The numerator must be the accumulated cost of the lost units.
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
o Normal loss at the Start of the Process
 Accumulated cost of the lost units is equal to their cost from the preceding department.
 The loss is identified with the units received during the current costing period.
 Formula:
Normal loss at the start of the process:
Adjustment for lost units = Cost of lost units from preceding department
Units received – lost units
 Adjustment for lost units, in this case
 An additional cost of remaining units (out of those received) regardless of the latter’s stage
of completion as of the end of the period.

o Normal loss During Process

 The specific point of loss is not determinable so that the lost units are not included in the
computation for equivalent production and consequently in the assignment of cost in the
department.
 The cost of lost units must be their share in the cost received from the preceding department.
 Formula:
Normal loss during process:
Method I:
Adjustment for lost units = Cost of lost units from preceding dept.
Units received – Lost units
Method II:
Adjustment for lost units = Cost of lost units from preceding dept.
Equivalent production for remaining units
o Normal Loss at the End of the Process
 The lost units must have absorbed costs in the first and second departments and are identified
with the completed units only.
 Formula:
Normal loss at the end of the process:
Adjustment for lost units = Cost of lost units from preceding and this department
Completed units
ILLUSTRATIVE PROBLEM C:
NORMAL LOSS, SUBSEQUENT DEPT.

The following data are on the production of Department B of Sumilang Mfg. Co. for August, 2014:

In process, August 1 5,000 units, 2/5 done

Received from Department A 20,000 units @ P 1
In process, August 31 6,000 units, 2/3 done
Normal loss 2,000 units

Work in process, August 1 P 14,100

Costs added in Dept. B:

Materials 39,900
Labor 23,940
Factory overhead 15,960

Factory costs are evenly applied throughout the process.

The following different points of loss are assumed for comparative presenstaiton of cost and equivalent units of
production:
A. Loss occurs at the start of the process. C. Loss occurs during process (Method II).
B. Loss occurs when the goods are 1/2 done. D. Loss occurs at the end of the process.
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
In the comparative presentation of cost and equivalent units of production, the following may be noted:
 The changes in the equivalent units of production are due to the different figures assigned to normal
loss. Losses at the start and progressively during process do not have equivalent production. The loss at
a specific point (1/2 done) has the corresponding figure assigned and the loss at the end has 100%
equivalent production.
 The changes in the equivalent units of production bring about changes in unit costs.
 The normal lost units are not costed separately. Instead, their costs are charged to remaining units
depending on the point of loss. The adjustments for lost units are arrived at as follows:
Normal loss at the start:
Cost of lost units:
Cost from preceding dept. (2,000 units x P 1) P 2,000
Divide by
Remaining units out of those received (20,000 units – 2,000 lost) 18,000 units
Adjustment for lost units P.111111
Normal loss, one-half done
Cost of lost units:
Cost from preceding dept. (2,000 units x P 1) P 2,000
Cost, this dept (2,000 x 1/2 x P 3.99) 3,990
Cost of lost units P 5,990
Divide by
Remaining units with which loss is identified:
In process, August 1 5,000
Received, finished and transferred 12,000
In process, August 31 6,000 23,000 units
Adjustment for lost units P.260435
Normal loss during process (Method II):
Cost of lost units:
Cost from preceding dept. (2,000 units x P 1) P 2,000
Divide by
Remaining units based on work done during the month (or equiv. Prod) 19,000 units
Adjustment for lost units P.105263
Normal loss at the end:
Cost of loss units:
Cost from preceding dept. (2,000 units x P 1) P 2,000
Cost, this dept (2,000 x P 3.80) 7,600
Cost of lost units P 9,600
Divide by
Completed units:
In process, August 1, finished and transferred 5,000 units
Received, finished and transferred 12,000 17,000 units
Adjustment for lost units P .564706

 The loss during process (Method II) is identified with the three groups (beginning work in process,
finished and transferred; units received, finished and transferred; and, ending work in process) so that
each of them shares in the cost of the lost units based on equivalent production. If method I were used,
the figures would be the same as in A (loss at the start).
 The normal lost units, one-half done, absorb cost up to the middle of the process. The accumulated cost
is divided between the three groups because they all pass the middle of the process during the period.
Beginning work in process was not yet half done at the start so that it passed the middle of the process
this month. In the case of the ending work in process, it passed the middle of the process during the
same month because it was started during the month and was already 2/3 done as of August 31.
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
Normal Loss, Uneven Application of Cost
 When there is normal loss and factory costs are applied unevenly thoroughout the process, the same
formula for adjustment for lost units are observed. The difference lies only in the costing of the normal
lost units.

ILLUSTRATIVE PROBLEM D:
NORMAL LOSS AND UNEVEN APPLICATION OF COST

Using the data per illustrative problem – C assume that materials are added at the start of the process. The
comparative presentation of costs and equivalent units of production is on the next page.

Normal Loss and Abnormal Loss, Uneven Application of Cost

When there are normal and abnormal losses and factory costs are unevenly applied, the abnormal lost
units may absorb part of the cost of the normal lost units depending on the points of loss for both. The uneven
application of cost would require assignment of cost based on the different equivalent units of xproduction as
already taken up.

ILLUSTRATIVE PROBLEM E:
NORMAL AND ABNORMAL LOSSES; UNEVEN APPLICATION OF COST
The following data are on the production of Department B of Silangan Mfg. Co. for September, 2014:
Quantity data:
In process, September 1 10,000 units, 1/4 done
Received from preceding dept 40,000 units
In process, September 30 5,000 units, 1/5 done
Normal loss 2,000 units
Abnormal loss 3,000 units, 1/2 done

Cost data:
Factory costs, September:
Materials P 152,000
Labor 82,000
Factory overhead 32,800
Received from preceding dept 79,800
Work in process, Sept 1 41,400
Materials are added at the start of the process.

For comparative presentation of cost and equivalent units of production, the following independent assumptions
are observed:

1. Normal loss occurs at the start of the process.

2. Normal loss occurs progressively during process, Method II.
3. Normal loss occurs at the end of the process.

Per solution given on the preceding pages, the following may be noted:
 The abnormal loss, which occurred at the middle of the process, absorbs part of the cost of normal lost
units except when the latter occurs after the middle of the process.

 The cost pertaining to normal loss at the middle of the process is charged to the different groups,
excluding work in process, end. The reason for this is that work in process (end) is only 1/5 done or it
did not reach the middle of the process, the point of normal loss. The abnormal loss shares also in the
cost of normal lost units because the abnormal loss occurred at the middle of the process, the point of
normal loss.
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
Evaporation
o The transformation of liquid into vapour, is a normal loss.
o It occurs due to the nature of materials being used and the type of manufacturing process involved.
o Inasmuch as the percentage of evaporation is generally stated based on the original quantity, beginning
work in process and month-end figures (which are already net of the evaporation that has taken place) are
converted to their original quantities.
 Original quantities are used in accounting for total units and in determining the actual quantities
transferred of work in process beginning and of those received during the month.
ILLUSTRATIVE PROBLEM F:
EVAPORATION
In Dept. B of Jolly Mfg. Co., evaporation for 10 days is 5%. The following data are on the August, 2014
production:
Quantity data:
In process, August 1 5,910 gals., 3 days done
Received from Dept A 30,000 gals.
In process, August 31 7,760., 6 days done
Cost data:
In process, August 1 P 24,200
Received from Dept. A 90,000
Factory costs, August:
Materials P 59,092
Labor 29,546
Factory overhead 14,773
With evaporation of 5% for 10 days, evaporation for three days must be .015 or 1.5%. the 5,910 gallons of
beginning work in process must therefore be net of .015 evaporation or equal to 98.5% of original quantity.
The original quantities for beginning and ending goods in process are computed as follows:
Original quantity of work in process, August 1 = 5,910 / [1-(3/10 x .05)]
= 5,910/.985
= 6,000
Original quantity of work in process, August 31 = 7,760 / [1-(6/10 x .05)]
= 7,760/.97
= 8,000
With 6,000 as the original quantity of beginning work in process, the quantity upon completion (or net of the total
evaporation of 5%) must be 5,700 gals. Computed as follows:
Quantity of beginning work in process upon completion = 6,000 gals x (1 - .05)
= 6,000 gals. X .95
= 5,700*
 Or 5,910 x (0.95/ .985) = 5,700
The equivalent units of (or effective) production are arrived at as follows:
Original Net Work Done This Equivalent
Month Production
In process, Aug. 1 (5,910/ .985) 6,000
Received from Dept A 30,000
Units to be accounted for 36,000

In process, Aug. 1 finished and transferred 6,000 5,700 7/10 3,990

Received, finished and transferred (30,000 – 8,000) 22,000 20,900 100% 20,900
In process, Aug 31 8,000 7,760 6/10 4,656
Units accounted for 36,000 29,546
Based on the foregoing computation, a total of 26,600 gallons were finished and transferred out consisting of:
5,700 gals. – In process, Aug. 1. Finished and transferred
20,900 gals. – Received, finished and transferred
26,600 gals. – Total transferred out
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
The cost of production report is presented below.
- If factory costs are applied unevenly, they should be apportioned between the different groups that pass through
the point(s) of application.
- In the given example (Jolly Mfg. Co.), if materials were added at the start of the process, the corresponding cost
should be identified with those received during the month so that it is apportioned between 22,000 and 8,000 gals.
(the breakdown of the units received during the month).
- In the foregoing computations, the equivalent production for ending work in process is based on the net quantity
as of the end of the month. It may also be based on the quantity upon completion (that is, original quantity minus
5% evaporation). The difference has significant effect on the unit cost unless the quantity of work in process
inventory fluctuates so much.

ILLUSTRATION F: EVAPORATION, EVEN APPLICATION OF COST

Jolly Mfg. Co.

Cost of Production Report
For the Month of August, 2014

Department B

Original Net Work Done This Equivalent

Month Production
In process, Aug. 1 (5,910/ .985) 6,000
Received from Dept A 30,000
Units to be accounted for 36,000

In process, Aug. 1 finished and transferred 6,000 5,700 7/10 3,990

Received, finished and transferred (30,000 – 8,000) 22,000 20,900 100% 20,900
In process, Aug 31 8,000 7,760 6/10 4,656
Units accounted for 36,000 29,546

Total Cost Unit Cost

Costs to be accounted for:
Factory costs, August:
Materials P 9,092 ÷ 29,546 = P 2.00
Labor 29,546 ÷ 29,546 = 1.00
Factory overhead 14,773 ÷ 29,546 = 0.50
P 103,411 P 3.50
Work in process, August 1 24,200
Received from Dept. A 90,000 ÷ 30,000 = 3.00
Total cost to be accounted for P 217,611 P 6.50

Costs accounted for as follows:

Finished and transferred 26,600 Gals.
In process, Aug.2, finished 5,700 gals.
and transferred
Cost last month P 24,200
Cost this month 13,965 (5,700 x 7/10 x P 3.50)
P 38,165
Received, finished and 20,900 gals.
Transferred
Cost, preceding dept P 66,000 (22,000 gals. X P 3)
Cost this department 73,150 (20,900 x P 3.50)
P 139,150
Total cost transferred P 177,315 (26,600 gals. @ P 6.66598)
Work in process, August 31 7,760 gals.
Cost, preceding dept P 24,000 (8,000 x P 3)
Cost this department 16,296 (7,760 x 6/10 x P 3.50)
P 40,296
Total cost accounted for P 217,611

References:
Cost accounting by Nenita Mejorada, 3rd Edition.
 COST ACCOUNTING AND CONTROL
PROCESS COSTING FIFO INCREASE AND LOSS IN UNITS
Cost accounting by Guillermo M. De Leon Jr. And Norma D. De Leon.
 Module 9.2
8
PROCESS COSTING: AVERAGE METHOD

Average costing method – adopted to simplify the costing process

- However, simplification of the costing process does not necessarily imply an improvement in cost estimates.
There are cases wherein the FIFO costing method ought to be used to arrive at fairer estimates of product cost.
- Also called weighted-average method because the quantity (or equivalent production) of each lost is considered
in computing for the average unit costs.

FIFO and AVERAGE COSTING COMPARED

FIFO METHOD AVERAGE METHOD

As to cost flow Units in process at the beginning are assumedThere is no assumed flow of cost. Units
assumption completed ahead of those started in process processed absorb the same amount of materials,
labor and overhead.
As to costing of Beginning work in process is treated as a It is not shown separately but is merged with
beginning work in separate lot and its cost, upon completion is those started on during the period. An average
process, finished and equal to: cost is used in costing completed units and those
transferred still in process at the end of the costing period
Cost last month + Cost this month
As to basis in computing Based on work done during the current Based on total work done (that is, work done last
for equivalent costing period only month and this month)
production
As to unit cost Unit cost, current month = Average unit cost, preceding dept:
computation
Factory costs Total of costs from preceding department of:
EUP Beginning work in process and Units received
this month
÷
Units in Beginning work in process + Units
received this month

Average unit cost, current dept.:*

Cost in current dept. Of beginning work in
process + factory costs
÷
Equivalent Production

*by elements, see below

Average unit cost by elements in the department:

Materials average unit cost = Materials cost added last month to work in process beg. + materials cost Added this month
Equivalent production for materials

Labor average unit cost = Labor cost added last month to work in process beg. + Labor cost Added this month
Equivalent production for labor

Factory overhead average unit cost = FOH cost added last month to work in process beg. + FOH cost Added this month
Equivalent production for factory overhead

EQUIVALENT PRODUCTION

- Computed based on total work done so that, in general, it is equal to completed units plus work done on ending
work in process.

ILLUSTRATION:

CASE A: Even application of costs

In process, beg 6,000 units, 1/3 done

Started in process 20,000 units
In process, end 5,000 units, 2/5 done

1
Equivalent units of production:

Actual Work done Equivalent

Production
In process, beg 6,000
Started in process 20,000
Units to be accounted for 26,000

Finished and transferred 21,000 100% 21,000

In process, end 5,000 2/5 2,000
Units accounted for 26,000 23,000

CASE B: With increase in quantity – even application of costs

In process, beg 10,000 units, 4/5 done

Received from Dept. A 50,000 units
Increase 5,000 units
In process, end 8,000 units, 1/4 done

Equivalent units of production:

Actual Work Equivalent

done Production
In process, beg 10,000
Received from Dept A 50,000
Increase 5,000
Units to be accounted for 65,000

Finished and transferred 57,000 100% 57,000

In process, end 8,000 ¼ 2,000
Units accounted for 65,000 59,000

CASE C: Uneven application of costs

In process, beg 8,000 units, 1/4 done

Received from Dept. I 30,000 units
In process, end 9,000 units, 1/3 done
Materials are added at the start of the process
Equivalent units of production:
Materials Conversion Cost
Actual Work Equivalent Work Equivalent
done Production Done Production
In process, beg 8,000
Received from Dept I 30,000
Units to be accounted for 38,000
Finished and transferred 29,000 100% 29,000 100% 29,000
In process, end 9,000 100% 9,000 1/3 3,000
Units accounted for 38,000 38,000 32,000
CASE D: With abnormal loss
In process, beg 5,000 units, 2/5 done
Received from Dept. A 20,000 units
In process, end 3,000 units, 1/3 done
Abnormal loss at the end 1,500 units
Equivalent units of production:
Actual Work Equivalent
done Production
In process, beg 5,000
Received from Dept. A 20,000
Units to be accounted for 25,000

Finished and transferred 20,500 100% 20,500

In process, end 3,000 1/3 1,000
Abnormal loss at the end 1,500 100% 1,500
Units accounted for 25,000 23,000

2
CASE E : With normal loss during process

In process, beg 7,000 units, 1/7 done

Received from Dept. X 25,000 units
In process, end 2,500 units, 1/5 done
Normal loss during process 1,000 units
Equivalent units of production:
Actual Work Equivalent
done Production
In process, beg 7,000
Received from Dept X 25,000
Units to be accounted for 32,000

Finished and transferred 28,500 100% 28,500

In process, end 2,500 1/5 500
Normal loss during 1,000 - -
process
Units accounted for 32,000 29,000
CASE F: With abnormal and normal losses

In process, beg 3,000 units, 1/3 done

Received from Dept. I 22,000 units
In process, end 2,000 units, 3/4 done
Abnormal loss 1,000 units, 1/2 done
Normal loss end of process 800 units
Equivalent units of production:
Actual Work Equivalent
done Production
In process, beg 3,000
Received from Dept I 22,000
Units to be accounted for 25,000

Finished 21,200 100% 21,200

In process, end 2,000 3/4 1,500
Abnormal loss 1,000 1/2 500
Normal loss during process 800 100% 800
Units accounted for 25,000 24,000

COST OF PRODUCTION REPORT – ITS FORM

When using the average method,
- Data are presented on the cost of production report in a manner that should facilitate the computation of the
average unit costs.
- Cost analysis section should show the two groups of costs, namely, cost from preceding department and cost
added in this department.
o In computing for average unit cost from preceding department, the cost from preceding department of
beginning work in process is added to the cost transferred in during period and the total thereof is divided
by the total number units.
o For costs added in the department, average unit cost is computed for materials, labor and factory overhead.
- Horizontal and Vertical presentation of Cost Analysis
o Vertical presentation – generally preferred specially when the report is multi-departmental.
o Example: The following data pertain to the February production in Department D of Excel Mfg. Co.:
In process, February 1 2,000 units, 1/4 done
Accumulated cost as of February 1:
Cost from preceding department P 10,500
Cost, this department:
Materials 1,000
Labor 300
Factory overhead 300
Work in process, February 1 P 12,310
Transferred in 48,000 units @ P 5 P 240,000
Factory costs, February:
Materials 38,600
Labor 20,100
Factory overhead 10,900

3
Per computations, total equivalent production for February is 40,000.

The horizontal and vertical forms for cost analysis are shown on the next page.

In the given illustration, the average unit cost from preceding department is arrived at by dividing the total cost from
preceding department of P 250,500 by the total number of units of 50,000.

HORIZONTAL PRESENTATION OF COST ANALYSIS

Units Total Cost Unit Cost

Cost from preceding department
Work in process, February 1 2,000 P 10,500 P 5.25
Received this month 48,000 240,000 P 5.00
50,000 P 250,500 P 5.01

Cost Added in this Department: In process, Cost Added

February 1 this month
Materials P 1,000 P 38,600 P 39,600 ÷ 40,000 = P 0.99
Labor 300 20,100 20,400 ÷ 40,000 = 0.51
Factory Overhead 300 10,900 11,200 ÷ 40,000 = 0.28
Total added in this dept. P 1,600 P 69,600 71,200 P 1.78
P 321,700 P 6.79

VERTICAL PRESENTATION OF COST ANALYSIS

Units Total Cost Unit Cost

Cost from preceding department
Work in process, February 1 2,000 P 10,500 P 5.25
Received this month 48,000 240,000 P 5.00
50,000 P 250,500 P 5.01

Cost Added in this Department:

Work in process, February 1
Materials P 1,000
Labor 300
Factory Overhead 300
Cost added this month:
Materials 38,600 P 0.99
Labor 20,100 0.51
Factory overhead 10,900 0.28
Total cost added in this department P 71,200 P 1.78
Total cost to be accounted for P 321,700 P 6.79

EVEN APPLICATION OF COST, FIRST DEPARTMENT

When cost of production report is being prepared for the first department, only the department’s average unit cost for each
element is computed

ILLUSTRATIVE PROBLEM A

The Tiger Mfg. Co. has its product processed in two consecutive departments, A and B. For January, 2014, the production
data for te first department are as follows:

Quantity data:
In process, January 1 3,000 units, 1/4 done
Started in process 25,000 units
In process, January 31 2,000 units, 1/4 done
Cost data:
Work in process, January 1:
Materials P 840
Labor 500
Factory overhead 475
Factory cost, January:
Materials P 38,910
Labor 20,700
Factory overhead 19,400
4
Factory costs are applied evenly throughout the process.
The cost of production report is given below:

Tiger Mfg. Co
Cost of Production Report
January, 2014

Department A
Quantity Schedule
Actual Work Done Equivalent
Production
In process, Jan 1 3,000
Started in process 25,000
Units to be accounted for 28,000
Finished and transferred 26,000 100% 26,000
In process, Jan 31 2,000 1/4 500
Units accounted for 28,000 26,500
Cost Analysis: In process, Cost Added Total Cost Unit cost
January 1 this month
Materials P 840 P 38,910 P 39,750 ÷ 26,500 = P 1.50
Labor 500 20,700 21,200 ÷ 26,500 = 0.80
Factory Overhead 475 19,400 19,875 ÷ 26,500 = 0.75
P 1,815 P 79,010
Total cost to be accounted for P 80,825 P 3.05
Costs accounted for as follows:
Finished and transferred 26,000 units P 79,300 [ 26,000 x P 3.05]
In process, January 31 2,000 units
Materials P 750 [500 x P 1.50]
Labor 400 [500 x P 0.80]
Factory overhead 375 [500 x P 0.75]
P 1,525
Total cost accounted for P 80,825

EVEN APPLICATION OF COSTS – SUBSEQUENT DEPARTMENT

- For a subsequent department, the total average unit cost is equal to the total of the average unit cost from
preceding department and the average unit cost in the department.

ILLUSTRATIVE PROBLEM B
The following data are on the production of Department II of Sumilang Mfg. Co. for March, 2014
Quantity data:
In process, March 1 8,000 units, 3/4 done
Received from Department I 30,000 units
In process, March 31 6,000 units, 1/3 done
Cost data:
Received from Department I P 90,000
In process, March I
Cost, Department I 24,240
Cost, Department II
Materials 3,090
Labor 2,390
Factory overhead 1,780
Factory cost, March
Materials 15,950
Labor 14,610
Factory overhead 11,820

The different elements of cost are applied evenly throughout the process.
The cost of production report is shown below:

5
 Sumilang Mfg. Co
Cost of Production Report
March, 2014

Department II
Quantity Schedule
Actual Work Done Equivalent
Production
In process, March 1 8,000
Received from Dept I. 30,000
Units to be accounted for 38,000

Finished and transferred 32,000 100% 32,000

In process, March 31 6,000 1/3 2,000
Units accounted for 38,000 34,000

Cost from Preceding Department: Units Total Cost Unit Cost

Work in process, March 1 8,000 P 24,240 P 3.03
Received this month 30,000 90,000 3.00
38,000 114,380 P 3.01
Cost, this Department:

In process, Cost Added

March 1 this month
Materials P 3,090 P 15,950 P 19,040 ÷ 34,000 = P 0.56
Labor 2,390 14,610 17,000 ÷ 34,000 = 0.50
Factory Overhead 11,820 13,600 ÷ 34,000 = 0.45
1,780
P 7,260 P 42,380 P 49,640 P 1.46
Total cost to be accounted for P 164,020 P 4.47

Costs accounted for as follows:

Finished and transferred 32,000 units P 143,040 [32,000 x P 4.47]
In process, March 31 6,000 units
Cost from preceding department P 18,060 [6,000 x P 3.01)
Cost this department
Materials P 1,120 [2,000 x P 0.56]
Labor 1,000 [2,000 x P 0.50]
Factory overhead 800 [2,000 x P 0.40]
P 20,980
Total cost accounted for P 164,020

UNEVEN APPLICATION OF COST, SUBSEQUENT DEPARTMENT

- Uneven application of cost requires the computation for equivalent production for each element of cost in the
department.
ILLUSTRATIVE PROBLEM C
The addition of materials at the start of the process in Department C of Mutya Mfg. Co. increases the quantity by
5%. The following data are on its April, 2014 production.
Quantity data:
In process, April 1 3,000 units, 1/2 done
Received from Department B 20,000 units
In process, April 30 5,000 units, 2/5 done
Cost data:
Work in process, April 1
Cost, preceding department P 19,200
Cost, this department
Materials 3,000
Labor 1,090
Factory overhead 800
Received from Department B 134,160
Factory cost, April 1
Materials 11,640
Labor 8,360
Factory overhead 5,710
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 The cost of production report is shown below:

Mutya Mfg. Co
Cost of Production Report
April, 2014

Department C

Quantity Schedule Materials Conversion Cost

Actual Work Done Equivalent Work Done Equivalent
Production Production
In process, April 1 3,000
Received from Dept B 20,000
Increase in quantity (5% x 20,000) 1,000
Units to be accounted for 24,000

Finished and transferred 19,000 100% 19,000 100% 19,000

In process, March 31 5,000 100% 5,000 2/5 2,000
Units accounted for 24,000 24,000 21,000

Cost from Preceding Department: Units Total Cost Unit Cost

Work in process, March 1 3,000 P 19,200 P 6.400
Received this month 20,000 134,160 6.708
Increase in quantity 1,000
24,000 153,360 P 6.39
Cost, this Department:

In process, Cost Added

April 1 this month
Materials P 3,000 P 11,640 P 14,640 ÷ 24,000 = P 0.61
Labor 1,090 8,360 9,450 ÷ 21,000 = 0.45
Factory Overhead 800 5,710 6,510 ÷ 21,000 = 0.31
P 4,890 P 25,710 P 30,600 P 1.37
Total cost to be accounted for P 183,960 P 7.76

Costs accounted for as follows:

Finished and transferred 19,000 units P 147,440 [19,000 x P 7.76]
In process, April 30 5,000 units
Cost from preceding department P 31,950 [5,000 x P 6.39)
Cost this department
Materials P 3,050 [5,000 x P 0.61]
Labor 900 [2,000 x P 0.45]
Factory overhead 620 [2,000 x P 0.31]
P 36,520
Total cost accounted for P 183,960

Note:
- With materials added at the start of the process, only the 20,000 units received during the period increased by 5%
or by P 1,000.
- The average unit cost from preceding department is accordingly adjusted by dividing the total cost from
preceding department (of beginning work in process and those received during the month) by the increased
quantity.

ABNORMAL LOSS, SUBSEQUENT DEPARTMENT

- Abnormal loss is costed as a separate lot using the average unit costs as arrived at and based on stage of
completion of the lost units.

ILLUSTRATIVE PROBLEM D
Laguna Mfg. Co. operates five producing departments (A, B, C, D and E). Department E’s production data for May 2014
are as follows:
In process, May 1 5,000 units, 2/5 done
Cost, preceding department P 27,225
Cost, this department
Materials 3,920

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 Labor 2,450
Factory overhead 1,029
Received from Department D ....50,000 units @ P 5.50
In process, May 31 6,000 units, 1/3 done
Abnormal loss 2,000 units, 1/2 done
Factory cost, May
Materials 92,120
Labor 34,790
Factory overhead 18,571
The cost of production report is shown below:

Laguna Mfg. Co
Cost of Production Report
May, 2014

Department E
Quantity Schedule
Actual Work Equivalent
Done Production
In process, May 1 5,000
Received from Dept D 50,000
Units to be accounted for 55,000

Finished and transferred 47,000 100% 47,000

In process, March 31 6,000 1/3 2,000
Abnormal loss 2,000 1/2 1,000
Units accounted for 55,000 50,000

Cost from Preceding Department: Units Total Cost Unit Cost

Work in process, May 1 5,000 P 27,225 P 5.4450
Received this month 50,000 275,000 5.5000
55,000 P 302,225 P 5.4950
Cost, this Department:

In process, Cost Added

April 1 this month
Materials P 3,920 P 92,120 P 96,040 ÷ 50,000 = P 1.9208
Labor 2,450 34,790 37,240 ÷ 50,000 0.7448
=
Factory Overhead 18,571 ÷ 50,000 0.3920
1,029 19,600 =
P 7,399 145,481 P 152,880 P 3.0576
Total cost to be accounted for P 455,105 P 8.5526

Costs accounted for as follows:

Finished and transferred 47,000 units P 401,972 [47,000 x P 8.5526]
Work In process, May 31 6,000 units
Cost from preceding department P 32,970 [6,000 x P 5.495)
Cost this department
Materials P 3,842 [2,000 x P 1.9208]
Labor 1,490 [2,000 x P 0.7448]
Factory overhead 784 [2,000 x P 0.3920]
P 39,085
Abnormal loss
Cost from preceding department P 10,990 [2,000 x P 5.495]
Cost this department
Materials P 1,921 [1,000 x P 1.9208]
Labor 745 [1,000 x P 0.7448]
Factory overhead 392 [1,000 x P 0.3920]
P 14,048
Total cost accounted for P 455,105

NORMAL LOSS
- The cost of lost units is computed and any unrecoverable portion thereof is charged as follows
Loss at the start Remaining units

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 Loss during process Remaining units (Method I)
Equivalent units of production for remaining units (Method II)
Finished units (Method III)
Loss at the end Finished units

- When the point of loss is not given, it may be assumed to have occurred at the start of the process.
- If it is normal loss during process,
o Method I – cost of lost units from preceding department is divided by the remaining good units so that even
ending work in process shares therein.
 This is automatically adjusted the following costing period when the cost of lost units in that
period is again spread among all remaining good units.
o Method II – the higher the percentage of work done on a unit, the greater should be its share in the cost of
lost units.
o Method III – the cost of lost units is charged only to the finished units.
 Ending work in process is to share in the cost of lost unit upon completion during the next costing
period.
- When loss occurs at a specific point, the FIFO method is preferably used because of the required
identification with the specific group that passed through the point of loss

ADJUSTMENT FOR LOST UNITS

- When normal loss occurs at the start, the lost units may be subtracted right away in the units’ column so that the
average unit cost from preceding department is automatically adjusted.
o The same is observed when using Method I for normal loss during process.
- Example:
Cost from preceding department of beginning work in process (3,000 units) is P 7,620 and transferred in
cost during the month (48,000 units) is P 122,430. Normal loss during process is 1,000 units.

The adjustment for lost units is based on the average unit cost computed as follows:

Cost from Preceding Department: Units Total Cost Unit Cost

Work in process, May 1 3,000 P 7,620 P 2.54
Transferred in this month 48,000 122,430 2.55
51,000 P 130,050 P 2.55
Adjustment for lost units (1,000 x P 2.55) / 50,000 0.051
Average cost from preceding dept. As adjusted for lost units P 2.601

Without showing the adjustment for lost units separately, it is automatically included in the computation as follows:

Cost from Preceding Department: Units Total Cost Unit Cost

Work in process, May 1 3,000 P 7,620 P 2.54
Transferred in this month 48,000 122,430 2.55
Normal loss (1,000)
51,000 P 130,050 P 2.55
- When normal loss occurs at the end, the adjustment for lost units is based on the finished units and is added to the
unit cost assigned to the latter.
o Another alternative is to add the cost of the lost units to that of the completed ones.

ILLUSTRATIVE PROBLEM E

Rambutan Mfg. Co. has its product processed in three consecutive departments. The June, 2014 production data for the
last department are as follows:

In process, June 1 8,000 units, 3/4 done

Cost from department P 32,300
Cost this department
Materials 11,994
Labor 6,060
Factory Overhead 4,880
Received from preceding dept 40,000 units @ P 4
9
 Normal loss 1,000 units
Factory cost, June:
Materials 79,000
Labor 39,500
Factory overhead 31,600
Ending inventory consists of 2,000 units, 1/4 done.
- For comparative presentation as given on the next page, normal loss is assumed to have occurred (a) during
process (with cost of lost units charged to remaining units and (b) at the end.
ILLUSTRATION E: NORMAL LOSS IN A SUBSEQUENT DEPARTMENT - COMPARATIVE PRESENTATION

(a) Normal Loss During Process (b) Normal Loss, End of Process
Equivalent Equivalent
Work Done Work Done
Production Production

Quantity Schedule: Actual

In Process, June 1 8,000

Received from preceding dept 40,000
Units to be accounted for 48,000

Finished and transferred 45,000 100% 45,000 100% 45,000

In Process, June 30 2,000 1/4 500 1/4 500
Normal loss 1,000 - 0 100% 1,000
Units accounted for 48,000.00 45,500 46,500.00

Cost from Preceding Department: Units Total Cost Unit Cost Total Cost Unit Cost
Work in process, June 1 8,000 32,300.00 4.037500 32,300.00 4.037500
Received this month 40,000 160,000.00 4.000000 160,000.00 4.000000
48,000 192,300.00 4.006250 192,300.00 4.006250
Cost, this Department:
Work in process, June 1
Materials 11,994.00 11,994.00
Labor 6,060.00 6,060.00
Factory Overhead 4,880.00 4,880.00
Cost added this month:
Materials 79,000.00 1.999868 79,000.00 1.956860
Labor 39,500.00 1.001319 39,500.00 0.979785
Factory Overhead 31,600.00 0.801758 31,600.00 0.784516
Total cost added in this department 173,034.00 3.802945 173,034.00 3.721161
7.809195 7.727411
Adjustment for los t units
[(1,000 u. x P 4.00625) / 47,000] 0.085239
[(1,000 u. x P 7.727411) / 45,000] 0.17
Tota cost to be accounted for 365,334.00 7.894434 365,334.00 7.899131

Cost accounted for as follows:

[45,000 x
Finished and transferred 45,000 units 355,250.00 [45,000 x 7.894434] 355,461.00 7.899131
Work in Process, June 30 2,000 units
[2,000 x 4.00625 + [2,000 x
Cost preceding department 8,183.00 0.085239)] 8,013.00 4.00625)]
Cost this department
Materials 1,000.00 [500 x 1.999868] 979.00 [500 x 1956860]
Labor 501.00 [500 x 1.001318] 490.00 [500 x 0.979784]
Factory Overhead 401.00 [500 x 0.801758] 392.00 [500 x 0.784516]
10,084.00 9,874.00

Total cost accounted for 365,334.00 365,334.00

EVAPORATION
- When goods being processed are subject to evaporation, original quantities for beginning and ending work in
process are computed to be assured that all units are accounted for.
- The computation for equivalent production is based on total work done on the end of the month (or net) figures.
- The average unit cost from preceding department is based on the original quantity for each lot.

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 ILLUSTRATIVE PROBLEM F
In Department Y of Masugid Mfg. Co. evaporation is 8% for 20 days. The production data for July, 2014 are as
follows:
In process, July 1 5,880 gals., 5 days done
Cost from preceding dept. P 12,072
Cost this department
Materials 310
Labor 920
Factory overhead 880
Received from preceding dept 30,000 gals. 60,648
Cost added in July:
Materials 5,686
Labor 17,068
Factory overhead 15,609
In process, July 31 8,568 gals. 12 days done
The cost of production report is presented below:
ILLUSTRATION F: EVAPORATION
Masugid Mfg. Co.
Cost of Production Report
July, 2014

Department Y
Net as of Equivalent
Quantity Schedule: Original Work Done
July 31 Production

In Process, July 1
[5,880 / 1 - (8%/20 x 5 days)] 6,000
Received from preceding dept 30,000
Units to be accounted for 36,000
Finished and transferred
(36,000 - 9,000) 27,000 24,840 100% 24,840.0
In Process, June 30 9,000 8,568 12/20 5,140.8
Units accounted for 36,000.00 29,980.80
Cost from Preceding Department: Total Cost Unit Cost
Work in process, July 1 6,000 12,072.00 2.0120
Received from preceding department 30,000 60,648.00 2.0216
36,000 72,720.00 2.0200
Cost added in this Department:
Work in process, June 1
Materials 310.00
Labor 920.00
Factory Overhead 880.00
Cost added this month:
Materials 5,686.00 0.2000
Labor 17,068.00 0.6000
Factory Overhead 15,609.00 0.5500
Total cost added in this department 40,474.00 1.3500
Total cost to be accounted for 113,194.00 3.3700
Cost accounted for as follows:
Finished and transferred 24,840 gals.
Cost preceding dept. 54,540.00 [27,000 x 2.02]
Cost this dept. 33,534.00 [24,840 x 1.35]
88,074.00
Work in Process, July 31 8,5686 gals.
Cost preceding department 18,180.00 [9,000 x 2.02]
Cost this department
Materials 1,028.00 [5,140.8 x 0.20]
Labor 3,084.00 [5,140.8 x 0.60]
Factory Overhead 2,828.00 [5,140.8 x 0.55]
25,120.00
Total cost accounted for 113,194.00

Reference:
Cost Accounting by Nenita Mejorada, 3rd Edition
Cost Accounting by Guillermo De Leon and Norma De Leon

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