ACC 122: PROCESS COSTING

Overview
• Process costing is a method of accumulating and assigning costs to units of production in companies that make large
quantities of homogeneous products.
• Both job-order costing and process costing accumulate costs by cost component in each production department.
However, the tow systems assign costs to departmental output differently.
a. In job-order costing, costs are assigned to specific jobs and then, if possible, to units contained within the
job.
b. Process costing uses an averaging technique to assign costs directly to units produced during the period.
• Cost assignment in any production environment is essentially an averaging process.
• The actual unit cost of a product is found by dividing a period’s departmental production costs by the period’s
departmental quantity of production, the average being expressed by the following formula:
Sum of Production Costs
Unit Cost =
Production Quantity
The numerator
• The numerator in the average product cost fraction is the sum of the actual direct materials cost, actual direct labor
cost, and actual or predetermined overhead cost for the period.
• Cost accumulation in a process costing system differs from job order costing in two ways:
a. the quantity of production for which costs are being accumulated at any one time and:
• in job order costing, the direct materials, direct labor, and overhead costs are accumulated for each
job; or
• in process costing, much larger amounts of direct materials, direct labor, and overhead are
accumulated for each department of a production process.
b. the cost object to which the costs are assigned:
• in job order costing the cost object is the job; or
• in process costing, the costs assignable to each product type are designated and attached to the
specific production runs; then the costs are assigned to the units worked on during the period.

The denominator
• The denominator in the average product cost fraction represents total departmental production for the period.
• If all units were 100% complete at the end of the period, we would simply count the units to obtain the denominator.
• However, WIP at the end of the period represent partially completed units that become beginning inventory for the
next accounting period.
• Process costing assigns costs to both fully completed units in finished goods inventory and to the partially completed
units in WIP.
• We mathematically convert partially completed units into equivalent whole units by calculating equivalent units of
production (EUP).
• Equivalent units of production (EUP) are an approximation of the number of whole units of output that could
have been produced during a period from the actual effort expended during that period. Two facts are recognized by
the use of equivalent units of production.
• Goods that were incomplete at the end of the last period are the first ones completed during the current period. The
units in the beginning Work in Process were started last period, but will be completed during the current period—
meaning that some costs related to these units were incurred last period and additional costs will be incurred in the
current period.
• Some units are begun but not completed during the current period. These partially completed units in the ending
Work in Process Inventory were started in the current period, but will not be completed until the next period—
meaning that costs were incurred in this period and additional costs will be incurred next period, due to current
production efforts on the ending Work in Process Inventory.

Weighted Average and FIFO Process Costing Methods

• The weighted average method is a method of process costing that computes an average cost per equivalent unit
of production; it combines beginning inventory units and costs with current production and costs, respectively, to
compute that average.
The weighted average method is not concerned about what quantity of work was performed in the prior period on
the units in beginning inventory; it only focuses on units that are completed in the current period and units remaining
in ending inventory.
The method does not distinguish between units in beginning inventory and units entering production during a period.
Average unit cost is found by dividing the total cost to be accounted for by the total equivalent units of production
and is calculated as follows:

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 Beginning Inventory Cost + Current Period Cost
Unit Cost =
Weighted Average Equivalent Units of Production
Total Cost Incurred
=
Total Equivalent Units of Effort
• The FIFO method is a method of process costing that computes an average cost per equivalent unit of production
using only current period production and cost information; units and costs in beginning inventory are separately sent
to the next department or to Finished Goods Inventory, as is appropriate.
The FIFO method separates beginning inventory and current period production and their costs so that a current
period cost per unit can be calculated.
The FIFO method more realistically reflects the way in which most goods actually flow through the production
system.
The method does not commingle units and costs of different periods, so that equivalent units and costs of beginning
inventory are withheld from the computation of average current period cost.
The focus is specifically on the work performed during the current period, and the EUP schedule shows only that
work.
The FIFO average cost per equivalent unit is calculated as follows:
Current Period Costs
Unit Cost =
Equivalent Units of Production
• Separate EUP calculations must be made for each cost component.
• Some direct material must be introduced at the start of a production process or there would be no need for labor or
overhead to be incurred. The beginning material is one hundred percent complete throughout the process regardless
of the percentage of completion of labor and overhead.
• Additional materials may be added at any point—continuously during processing, or even at the end of processing.
• A single materials computation may be made if all materials are at the same degree of completion, or multiple
equivalent unit calculations will have to be made if multiple materials are used and are placed into production at
different points in time.
• One percentage of completion estimate may be made and used for direct labor and overhead if overhead is applied
on a direct labor basis, or direct labor and overhead are added to the product at the same rate.
• Overhead costs are more likely to be caused by cost drivers other than direct labor today, so companies probably will
make single computations for “conversion equivalent units” less often than in the past.
• The calculation of equivalent units of production requires that a cost flow be specified—either weighted average or
FIFO.
• The only difference between the calculations under the two methods is that the work performed in the prior period on
beginning inventory is not included in the current period EUP using FIFO.

EUP Calculations and Cost Assignments

• The six steps in a process costing system are:
Step 1: Calculate the physical units to account for;
Step 2: Calculate the physical units accounted for (verify that step 1 equals step 2);
Step 3: Determine the equivalent units of production;
Step 4: Determine the total cost to account for;
Step 5: Calculate the cost per equivalent unit; and
Step 6: Assign the costs to units completed and transferred out and units in ending work in process (verify that the
total costs transferred out plus the costs in ending inventory equal step 4).
• The six steps listed above can be combined into a cost of production report.
• A cost of production report is a process costing document that details all operating and cost information, shows
the computation of cost per equivalent unit, and indicates cost assignment to goods produced during the period.
• The total units to account for are the sum of whole and partial units worked on in the department during the
current period. It is equal to actual beginning inventory units plus actual units started.
• The total cost to account for is the sum of the balance in WIP at the beginning of the period plus all current costs
for direct material, direct labor, and overhead.
• Cost must be assigned to goods transferred from WIP to Finished Goods Inventory (or to another department).
• In addition, at the end of any period, a value must be assigned to goods still in WIP.

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Weighted Average Method
Step 1: Calculate the total units to account for
Step 2: Calculate the total units accounted for
• Units fit into one of two categories:
• units completed and transferred out,
• partially completed units remaining in ending WIP.
Step 3: Determine EUP (weighted average method).
• EUP is completed separately for:
• Direct materials, and
• Labor and overhead.
Step 4: Determine the total cost to account for.
Step 5: Calculate the cost per equivalent unit.
Step 6: Assign costs to inventories.

FIFO Method
Steps 1 and 2 are the same for FIFO as they are for the Weighted Average Method.
Step 3: Determine EUP under the FIFO Method.
• Under the FIFO Method, the work performed last period is not commingled with work of the current period.
• Only the work performed on the WIP beginning inventory during the current period is shown in the EUP schedule.
• The work equals the whole units in beginning inventory x (1-% of work done in the prior period).
Step 4: Determine the total cost to account for.
Step 5: Calculate the cost per equivalent unit.
Step 6: Assign costs to inventories.

Spoilage
• Spoilage represents units from the production process that does not meet specifications.
• The cost of normal losses are assigned only to units that have passed the inspection point because assigning loss
costs to units that may be found to be defective in the next period would not be reasonable.
The cost of normal losses is a product cost.
• Abnormal losses are expensed in the current period.

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 EXERCISE PROBLEMS

Problem A Zeno Corporation uses the weighted-average method in its process costing system. This month, the
beginning inventory in the first processing department consisted of 400 units. The costs and percentage completion of
these units in beginning inventory were:
Percent
Cost Complete
Materials costs P5,700 65%
Conversion costs P6,800 45%

A total of 6,500 units were started and 5,900 units were transferred to the second processing department during the
month. The following costs were incurred in the first processing department during the month:
Materials costs P125,500
Conversion costs P207,000

The ending inventory was 50% complete with respect to materials and 35% complete with respect to conversion costs.

Note: To reduce rounding error, carry out all computations to at least three decimal places.

1. What are the equivalent units for conversion costs for the month in the first processing department?
2. The cost per equivalent unit for materials for the month in the first processing department is closest to:
3. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
4. The cost per equivalent whole unit for the month in the first processing department is closest to:
5. The total cost transferred from the first processing department to the next processing department during the month
is closest to:
6. The cost of ending work in process inventory in the first processing department according to the company's cost
system is closest to:

Problem B Muichiro Corporation uses the FIFO method in its process costing system. Data concerning the first
processing department for the most recent month are listed below:

Beginning work in process inventory:

Units in beginning work in process inventory 700
Materials costs P11,500
Conversion costs P22,200
Percentage complete with respect to materials 75%
Percentage complete with respect to conversion 65%
Units started into production during the month 8,600
Units transferred to the next department during the month 7,800
Materials costs added during the month P159,300
Conversion costs added during the month P348,500
Ending work in process inventory:
Units in ending work in process inventory 1,500
Percentage complete with respect to materials 65%
Percentage complete with respect to conversion 50%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the
closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal
places.

1. What are the equivalent units for materials for the month in the first processing department?
2. What are the equivalent units for conversion costs for the month in the first processing department?
3. The cost per equivalent unit for materials for the month in the first processing department is closest to:
4. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
5. The cost per equivalent whole unit for the month in the first processing department is closest to:
6. The total cost transferred from the first processing department to the next processing department during the month
is closest to:
7. The cost of ending work in process inventory in the first processing department according to the company's cost
system is closest to:

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Problem C Saitama Manufacturing produces a product that passes through two processing departments. The units from
the Molding Department are completed in the Assembly Department. The activity in the Assembly Department for the
current month is presented below. Saitama uses the FIFO method in its process costing system.

Units in beginning work in process inventory (materials 0%

complete; conversion 25% complete) 8,000
Units transferred in from the Molding Department during the month 42,000
Units completed and transferred to finished goods 38,000
Units in ending work in process inventory (materials 0%
complete; conversion 40% complete) 12,000

1. The equivalent units (with respect to the Molding Department's costs) transferred from the Molding Department to
the Assembly during the month were:
2. The equivalent units for materials for the Assembly Department during the month were:
3. The equivalent units for conversion costs for the Assembly Department during the month were:

Problem D

The following information is available for Yamamoto Genryusai Company for April:

Started this month 80,000 units

Beginning WIP
(40% complete) 7,500 units
Normal spoilage (discrete) 1,100 units
Abnormal spoilage 900 units
Ending WIP
(70% complete) 13,000 units
Transferred out 72,500 units

Beginning Work in Process Costs:

Material P10,400
Conversion 13,800
Current Costs:
Material P120,000
Conversion 350,000

All materials are added at the start of production and the inspection point is at the end of the process.

1. What are equivalent units of production for material using FIFO?

2. What are equivalent units of production for conversion costs using FIFO?
3. What is cost per equivalent unit for material using FIFO?
4. What is cost per equivalent unit for conversion costs using FIFO?
5. What is the cost assigned to ending inventory using FIFO?
6. What is the cost assigned to abnormal spoilage using FIFO?
7. What are equivalent units of production for material using weighted average?
8. What are equivalent units of production for conversion costs using weighted average?
9. What is cost per equivalent unit for material using weighted average?
10. What is cost per equivalent unit for conversion costs using weighted average?
11. What is the total cost assigned to goods transferred out using weighted average?

NOTHING FOLLOWS

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