Process costing

Learning objectives
• Distinguish between job order costing and
process costing
• Understand the flow of production and how
manufacturing cost are traced to process
costing
• Compute equivalent units
• Use process costing in a second or later
production department
 Job Costing vs Process Costing

Similarities

Product cost
Material Labor Manuf.
cost cost OH cost

The flow od
accounting
Raw Wage Manuf. records is
material payable OH basically same

Manufacturing account

WIP FG COGS
 Job order costing vs Process costing
Differences

Classification Job order Process costing

Unique Standard
The uniqueness of product product/heterogeneous product/homogenous
Size of job Small batches Mass production
DM, labor and OH are RM, labor and OH are
Cost assignment
assigned to job assigned to department
Unit cost information comes Departemental
Job cost sheet
from production cost
Much more record Cost aggregates by
keeping as DM, labor department, and so
Record keeping
and OH are charged to requires less record
specific job keeping
Several WIP, one for
Inventory account One WIP
each department
 Flow of cost
Job order costing
WIP

Job 200
Raw material
Finished
Direct labor Job 201 COGS
goods
Manufacturing
overhead applied Job 202
 Flow of cost
Process costing
WIP

WIP
Dept A
Raw material

WIP Finished
Direct labor COGS
Dept B goods
Manufacturing
overhead applied
WIP
Dept C
 Cost flow in process costing

Inventory flow
Conversion cost Equivalent unit
assumption

Direct labor

Manufacturing
overhead
Sequential processing from manufacture of Healthblend’s mineral and vitamin

Mixing Encapsulating Bottling Finished

department department department goods

Material : Material : Material :

• Herbs Capsules Bottles
• Vitamin
• Mineral
 Concept of equivalent unit

Mixing Encapsulating Bottling

Finished goods
department department department

WIP WIP WIP

How to determine number of unit for WIP?

Equivalent unit Unit

Equivalent unit = Number of partially complete X

Percentage of completion
 Calculating equivalent units of production

100 unit 100

completed equivalent
unit

200 unit, 50% 100

completed equivalent
unit
 Inventory flow in process costing
Total equivalent unit = Unit completed +
equivalent unit
ending WIP

Transferred Transferred
Department B
IN OUT

Unit cost = Total product cost

Total equivalent unit

FIFO
Beginning WIP Ending WIP
(BWIP) (EWIP)
Weighted
Equivalent unit = Number of partially complete X
average
Percentage of completion
 • Is a measure of the work done during the period
Equivalent units • It is expressed in full unit and used to determine the
unit cost of product in process costing

Why Production process are

continuous

Cost of production
report is prepared

Separate inventory
cost

WIP inventories (or

Finished good
partially
inventories
completed)

Equivalent unit Ending WIP

 Formulas

Equivalent units = number of partially complete units X

percentage completion

Total equivalent unit = Unit completed +

Equivalent unit of ending inventory

Unit cost = Total production cost

Total equivalent unit
 Production timeline

3,000 unit started, but not Transfer to next department

completed

40%
completed

Equivalent units of productions = unit in EWIP X percentage complete

= 3,000 unit X 40% = 1,200
Information :
October data : 1, 000 unit completed, 600 unit, 25% complete

Require :
Calculate the equivalent units for October

Solution :

1,000 unit 1,000 equivalent unit

completed =

600 unit X 0,25 = 150 equivalent unit

October output = 1,150 equivalent unit

 Inventory flow assumption

2 method of treating Beginning

WIP (BWIP)

FIFO (First In First Out) Weighted average

A method in which equivalent unit Blend together units and costs

and unit costs relate only to work from the current period with units
done during the current period and costs from the prior period

It is assumed that unit from

the beginning inventory are
completed first and transferred
out
 Step 2 : Calculation of equivalent unit

Note for step 2

WIP require WIP

60% + 40%
In calculating
equivalent unit

Means 60% of material In most manufacturing Direct material is

and conversion cost company, material enter assumed 100%
has been used the production process completed
early

and

Labor and other inputs Conversion cost

are incurred more evenly depend on the
throughout the process percent completion
 GAH 30 Sdn Bhd
Mixing Departement
Production Units
Ending WIP
(EWIP)

200 units, 300 units started 100 units

20% completed and completed 30% completed

Jan 2016 Feb 2016

Beginning WIP 400 units started during Feb 2016

(BWIP)

Unit completed and 200 + 300= 500 unit

transferred to next department
Ending WIP :
100 unit X 30% = 30 unit
Equivalent unit production = 530 units
Shaping and Milling Department
Beginning work in process, 30% completed 200 unit
Unit started into production during May 5,000 unit
Unit completed during May and transferred 4,800 unit
to next department
Ending work in process, 25% completed 400 unit

Require :
Calculate the equivalent units for May
 Solution :

5,000 unit started

Beginning Ending
WIP WIP

200 unit, 4.600 unit started and 400 unit,

30% complete completed 25% complete

4,800 unit completed and transferred

Unit completed and transferred to next 4,800

Department
Ending WIP : 400 unit X 0,25 100
Equivalent unit of production 4,900
 Weighted average method

Production :
Unit in process, July 1, 75% completed 20,000 gallons
Unit completed and transferred out 50,000 gallons
Unit in process, July 31, 25 % completed 10,000 gallons

Cost :
Work in process, July 1 $ 3,525
Cost added during July $ 10,125

Required :
1. Calculate an output measure for July
2. Assign costs to unit transferred out and EWIP using the weighted average method
 Weighted average method
BWIP EWIP

20,000 galon; 10,000 galon;

30.000
75% completed 25% completed

Unit completed and transferred 50,000

Unit started and completed

= Unit completed and transferred – BWIP
= 50,000 – 20,000 = 30,000
Output for July :
Unit completed and transferred :
- BWIT 20,000
- Unit started and completed 30,000
50,000
Add EWIP : 10.000 X 25% 2.500
52.500
BWIP cost
July cost
$ 3,525
$ 10,125

Total
Manufacturing cost
13,650

Cost per unit = $13,650/52,500 unit = $0,26

Transfer out (0,26 X 50,000) 13,000

EWIP (0,26 X 2500) 650
Total cost assigned 13.650
 5 steps in preparing a production report

Step 1 : Measure the physical flow of production

Purpose : to trace the physical unit of production

is not Equivalent
Physical unit
unit

They may be in
different stage of
any completion
 Physical flow (1)

Total unit completed and transferred

Unit started and completed = Total unit completed –

BWIP EWIP
Units in BWI
transferred

Unit started = Unit start and completed +

Units in EWIP
 Physical flow (2)

BWIP + unit started during the period = UNITS TO ACCOUNT FOR

BWIP EWIP

unit completed & transferred + EWIP = UNITS ACCOUNTED FOR

 Cost of production report provide a summary of unit information and
cost information

a. Unit information section includes physical unit flow and degree of completion

BWIP + Unit started = Unit completed + EWIP

Units to account for Units accounted for

b. Cost information section

Cost BWIP + Cost incurred during period = Cost of goods transferred out + Cost EWIP

Cost to account for Cost accounted for

 Preparing physical flow schedule

Production :
Unit in process, July 1, 75% completed 20,000 gallons
Unit completed and transferred out 50,000 gallons
Unit in process, July 31, 25 % completed 10,000 gallons

Required : Prepare a physical flow schedule

 Solution :

Unit started and completed = Unit completed – Unit, BWIP

= 50,000 – 20,000
= 30,000

Unit started = Unit started and completed+ Unit, EWIP

= 30,000 + 10,000
= 40,000

Units to account for : Units accounted for :

Units in BWIP 20,000 Units completed and transferred out
Units stated during the period 40,000 Started and completed 30,000
Total units to account for 60,000 From BWIP 20,000
50,000
Units in EWIP 10,000
Total units accounted for 60,000
Step 2 : Calculation of equivalent unit

BWIP = 20,000
+
Unit started and completed = 30,000
+
EWIP, 25% complete = 2,500
= 52,500

60,000 total physical unit Become 52,500 equivalent unit

 Step 2 : Calculation of equivalent unit

Note for step 2

WIP require WIP

60% + 40%
In calculating
equivalent unit

Means 60% of material In most manufacturing Direct material is

and conversion cost company, material enter assumed 100%
has been used the production process completed
early

and

Labor and other inputs Conversion cost

are incurred more evenly depend on the
throughout the process percent completion
 Step 3 : Computation of unit cost

Total manufacturing cost = WIP, beginning + cost added during the period

BWIP cost
+ July cost
$ 3,525
$ 10,125

Total
Manufacturing cost
13,650

Cost per unit = Total manufacturing cost

Total equivalent unit
= $13,650
52,500
= $0,26
Step 4 : Valuation inventories

Cost per unit = Total manufacturing cost

Total equivalent unit
= $13,650
52,500
= $0,26

Cost of goods transferred out = Cost per unit X unit transferred

= 0,26 X 50,000
= $ 13,000

Cost Ending WIP = Cost per unit X equivalent unit of EWIP

= 0,26 X 2,500
= $ 650
 Step 5 : Cost reconciliation

Total manufacturing costs assigned to inventories :

Goods transferred out 13,000
Goods in EWIP 650
Total cost accounted for 13,650

Total manufacturing costs to account for :

BWIP 3,525
Incurred during period 10,125
Total cost accounted for 13,650
 Healthblend company
Mixing department
Production report for July 20XX
Weighted average method

UNIT INFORMATION
Physical flow
Units to account for : Units accounted for
Units in BWIP 20,000 Unit completed 50,000
Units started 40,000 Units in EWIP 10,000
Total units account for 60,000 Total units accounted for 60,000

Equivalent unit
Unit completed 50,000
Units in EWIP 2,500
Total equivalent unit 52,500
 Healthblend company
Mixing department
Production report for July 20XX
Weighted average method

COST INFORMATION

Cost to account for :

BWIP $ 3,525
Incurred during period $10,125
Total cost to account for $ 13,650

Transferred Ending Total

Out WIP

Cost accounted for

Goods transferred out 13,000 13,000
Goods in EWIP 650 650
Total cost accounted for 13,000 650 13,650