PROCESS COSTING

Candles in beginning WIP Inventory (40% complete as to labor and

overhead or conversion) 10,000
Candles started during current period 401,400
Candles completed and transferred to FG Inventory 406,000
Candles in ending WIP Inventory (80% complete as to labor and
overhead or conversion) 5,400

Costs of beginning WIP Inventory

Direct material ₱11,886
Direct labor 5,658
Overhead 19,858 ₱37,402
Current period costs
Direct material ₱642,240
Direct labor 122,638
Overhead 385,262 1,150,140
TOTAL COST TO ACCOUNT FOR: ₱1,187,542
PROCESS COSTING: WEIGHTED AVERAGE METHOD
Step 1: Calculate the Total Physical Units to Account For
Candles in beginning WIP Inventory 10,000
Candles started during current period 401,400
Candles to account for 411,400
Step 2: Calculate the Physical Units Accounted For
Candles completed and transferred to F Inventory 406,000
Candles in ending WIP Inventory 5,400
Candles accounted for 411,400
Step 3: Calculate the Equivalent Units of Production
Units S & C = Units Completed During Period - Units in Beginning WIP Inventory
Units S & C = Units Started During Period - Units in Ending WIP Inventory

Units Started & Completed DM CC

Candles in beginning WIP Inventory (actual units) 10,000 10,000
Candles started and completed 396,000 396,000
Ending WIP Inventory (candles X % complete) 5,400 4,320
Equivalent units of production 411,400 410,320

• If all direct material is added at the same stage of completion, a single computation for direct material can be
made;
• If multiple materials are used but placed into production at different points in the production process, multiple
direct material EUP calculations are necessary;
• If overhead is based on direct labor or if these two factors are always at the same degree of completion, a single
EUP can be computed for conversion;
• If neither condition exists, separate EUP schedules must be prepared for labor and overhead.

Step 4: Calculate the Total Cost to Account For

 TOTAL DM DL OH
Beginning WIP Inventory Cost ₱37,402 ₱11,886 ₱5,658 ₱19,858
Current period cost 1,150,140 642,240 122,638 385,262
Total Cost to account for ₱1,187,542 ₱654,126 ₱128,296 ₱405,120

• Total cost to account for equals beginning WIP Inventory cost plus current period costs. Production costs can be
determined from transfers of direct material from the warehouse, incurrence of direct labor, and either actual or
applied overhead amounts.
• The total cost to account for must be assigned to the goods transferred to FG Inventory (or, if appropriate, to the
next department) and to the ending WIP Inventory. Assignments are made in relation to the whole or equivalent
whole units contained in each type of inventory.

Step 5: Calculate the Cost per Equivalent Unit of Production

Total Cost Incurred
Unit Cost =
Total Equivalent Units of Production
(Beginning WIP Inventory Cost +
Unit Cost = Current Period Cost)
WA EUP

TOTAL DM CC
Beginning WIP Inventory costs ₱ 37,402 ₱ 11,886 ₱ 25,516
Current period costs 1,150,140 642,240 507,900
Total cost to account for ₱1,187,542 ₱654,126 ₱533,416
Divided by EUP (step 3 411,400 410,320
Cost per EUP ₱2.89 ₱1.59 ₱1.30

Step 6: Assign Costs to Inventories

Using the WA method, the cost of goods transferred out is found by multiplying the total number of units
transferred by the total cost per EUP:
Total Cost Transferred = Total number of units transferred x Cost per EUP
Total cost transferred = 406,000 units × ₱2.89 = ₱1,173,340

Ending WIP Inventory

Direct material (5,400X $1.59) ₱ 8,586
Conversion (4,320 × $1.30) 5,616
Total cost of ending WIP Inventory ₱14,202

PROCESS COSTING: FIFO METHOD

• Used to separate goods (merchandise inventory) according to when they were purchased and at what cost
• The costs of beginning inventories are the first costs to be sent to the Cost of Goods Sold, with other costs
following in the order in which they were incurred;
• Units remaining in the ending inventory are assigned costs based on the most recent purchases;
• FIFO method separates WIP inventory and current period production as well as their costs so that a current
period cost per unit can be calculated.
Costing Method Cost & Units Cost per Unit
BI + Current period Average wost for all EUP
Weighted average
production worked on during the period
 Separate costs for Bl units
First-in, first-out BI separated from current and units started during the
period production period

Step 1: Calculate the Total Physical Units to Account For

Candles in beginning WIP Inventory 10,000
Candles started during current period 401,400
Candles to account for 411,400
Step 2: Calculate the Physical Units Accounted For
Candles completed and transferred to F Inventory 406,000
Candles in ending WIP Inventory 5,400
Candles accounted for 411,400
Step 3: Calculate the Equivalent Units of Production
Using the FIFO method, the work performed last period is not commingled with work of the current period. Only
the work performed on the beginning WIP Inventory during the current period is shown in the EUP schedule.
DM CC
Candles in beginning WIP Inventory completed in the
current period 6,000
Candles started and completed 396,000 396,000
Ending WIP Inventory (candles X % complete) 5,400 4,320
Equivalent units of production 401,400 406,320

Step 4: Calculate the Total Cost to Account For

TOTAL DM DL OH
Beginning WIP Inventory Cost ₱37,402 ₱11,886 ₱5,658 ₱19,858
Current period cost 1,150,140 642,240 122,638 385,262
Total Cost to account for ₱1,187,542 ₱654,126 ₱128,296 ₱405,120

Step 5: Calculate the Cost per Equivalent Unit of Production

The FIFO EUP calculation ignores the work performed in the prior period on beginning WIP Inventory; thus, the
FIFO cost per EUP computation also ignores prior period costs.
TOTAL DM CC
Current period costs ₱1,150,140 ₱ 642,240 ₱ 507,900
Divided by EUP (step 3) 401,400 406,320
Cost per EUP ₱2.85 ₱1.60 ₱1.25

Step 6: Assign Costs to Inventories

The FIFO method assumes that the units in beginning WIP Inventory are the first units completed during the
current period and, thus, are the first units transferred out. The remaining units transferred out during the period
were both started and completed in the current period.
Transferred out
(1) Beginning inventory (prior period costs) ₱ 37,402
Completion of beginning inventory
Direct material (0 X $1.60) 0
Conversion (10,000 × 60% × $1.25) 7,500
Total cost of beginning inventory transferred ₱44,902
(2) Candles started and completed (396,000 × $2.85) 1,128,600
Total cost transferred ₱1,173,502
Ending WIP Inventory ₱ 8,640
Direct material (5,400 X $1.60) 5,400
Conversion (4,320 X $1.25) ₱14,040
Total cost of ending WIP Inventory

ACCOUNTING FOR SPOILAGE: PROCESS COSTING

Spoilage
However, almost every process produces some units that do not meet production specifications. In other
situations, addition Or expansion of materials after the start of the process may cause the number of units
accounted for to be higher than those to be accounted for originally or in a previous department.
NORMAL LOSS ABNORMAL LOSS
Falls within a tolerance level that is Any loss in excess of the set
expected during production expectation level

COST COST
TYPE ASSUMED TO OCCUR MAY BE HANDLED ASSIGNED
HOW? TO?
Absorbed by
all units in
ending
NORMAL inventory and Product
Continuous Uniformly throughout transferred out
Loss process on an EUP
basis
Written off as a
ABNORMAL loss on an Period
EUP basis
Absorbed by
all units past
inspection
Discrete At inspection point or at NORMAL point in ending Product
Loss end of process inventory and
transferred out
on an
ABNORMAL EUP basis Period

• The costs of normal shrinkage and normal continuous losses in a process costing environment are accounted for
using the method of neglect, which excludes the spoiled units in the equivalent units of production
schedule.
• Ignoring the spoilage results in a smaller number of EUP, and dividing production costs by a smaller EUP
raises the cost per equivalent unit. Thus, the cost of lost units is spread proportionately over the good units
transferred out and those remaining in WIP Inventory.
• Alternatively, the cost of normal discrete losses should be assigned only to units that have passed the inspection
point. Such units should be good units (relative to the inspected characteristic), whereas the units prior to this point
may be good or they may be defective or spoiled. Assigning loss costs to units that may be found to be defective
or spoiled in the next period would not be reasonable.
• The cost of all abnormal losses should be accumulated and treated as a loss in the period in which those losses
occurred. Abnormal loss cost is always accounted for on an equivalent unit basis.
• Abnormal losses are extended in the EUP schedule at the percentage of completion at the end of production for
continuous losses (100 percent complete for all cost elements) or at the point of inspection for discrete losses.
ILLUSTRATION:
Hanks produces glass jars in a single department; the jars are then sold to candle manufacturers. All materials are
added at the start of the process, and conversion costs are applied uniformly throughout the production process.
Breakage commonly occurs at the end of the production process when a machine pushes air into the jars to form
their openings. Hanks expects a maximum of 5% of the units started into production to be lost during processing.
Recyclable shipping containers are provided by buyers and, therefore, are not a cost to Hanks Inc. The company
uses the WA method of calculating equivalent units.

In June, Hanks had 12,000 jars in the beginning WIP Inventory and started 90,000 jars into production. At the end
of June, the company accounted for 94,200 jars (79,200 completed and 15,000 in ending WIP Inventory).

Units
Beginning WIP Inventory (60% complete) 12,000
Started during month 90
Jars completed and transferred 79.2
Ending WIP Inventory (75% complete) 15,000
Spoiled jars 7,800

Costs
Beginning WIP Inventory
Material ₱ 16,230
Conversion 3,459 ₱19,689
Current period
Material ₱ 101,745
Conversion 19,041 120,788
Total cost to be accounted for ₱140,475

EUP SCHEDULE
Production Data Whole Units DM CC
Beginning WIP Inventory (100%; 60%) 12,000
Jars started 90,000
Jars to account for 102,000
Beginning WIP Inventory (completed) 12,000 12,000 12,000
Jars started and completed 67,200 67,200 67,200
Total jars completed 79,200
Ending Inventory (100%; 75%) 15,000 15,000 11,250
Normal spoilage (not extended) 4,500
Abnormal spoilage (100%; 100%) 3,300 3,300 3,300
Jars accounted for 102,000 97,500 93,750

COST DATA TOTAL DM CC

Beginning WIP inventory cost ₱ 19,689 ₱ 16,230 ₱ 3,459
Current costs 120,786 101,745 19,041
Total cost to account for ₱140,475 ₱117,745 22,500
Divided by EUP 97,500 93,750
Cost per WA EUP ₱1,45 ₱1.21 ₱0.24
 COST ASSIGNMENT
Transferred out (79.200 × $1.45) ₱ 114,840
Ending WIP inventory:
Direct Material (15,000 × $1.21) ₱ 18,150
Conversion (11,250 × $0.24) 2,700 20,850
Abnormal loss (3,300 × $1.45) 4,786
Total costs accounted for ₱140,475
PROCESS COSTING • Process costing assigns costs to both fully
and partially completed units by
Job Order Costing: Firms that produce mathematically
heterogeneous and custom outputs must converting partially completed units to
track product costs to the product or equivalent whole units.
customer level using the job order costing
system. Equivalent Units of Production: Units
Process Costing: Firms that produce typically flow through a production
homogenous output in batch or continuous department in FIFO order - incomplete
production processes can use process goods at the end of a period (ending WIP
costing to compute an Inventory of the previous period, beginning
"average" product cost. WIP Inventory of the current period) are
completed first in the current period before
Assigning costs to product units requires the the other goods started for the current
use of an averaging process. A product's period. Some of the goods started during
actual unit cost is found by dividing a the current period may end up incomplete
period's departmental production costs by by the end of the period (ending WIP
that period's departmental production Inventory of the current period).
quantity.
• To Measure the quantity of production
Unit Cost = Production Costs / achieved during a period, accountants use a
Production Quantity concept called Equivalent Units of
Production.
Production Cost: Obtained by • Some quantity of direct material must be
accumulating departmental costs incurred in introduced at the start of production to begin
a single period. For multi-product, the conversion process. Any material added
costs must be accumulated by product: at the start of production is 100 percent
• Using separate WIP Inventory accounts for complete at the outset of the process,
each product; or, regardless of the percentage of completion
• Using a single WIP Inventory control of labor and overhead.
account supported by detailed subsidiary
ledgers Simple Illustration:
containing specific product information. Assume Flame 'N Scent had no WIP
Inventory on November 1. During
Production Quantity: November, the company worked on 220,000
• Represents the total departmental units: 200,000 units were fully completed
production for the period; and 20,000 units were 40 percent complete
• In most production processes, partially at the end of the period. The EUP for the
completed units comprise the ending WIP period are as follows:
Inventory of the previous period and EUP = BI units completed + Units started
become the partially completed beginning and completed + El units partially
WIP Inventory of the next period; complete
EUP = 0 + [(200.000 × 100%)] + [(20.000 × Weighted Average (WA) Method of
40%)] Accounting for Cost Flow in Process
EUP = 208.00 Costing:
• Used to determine an average cost per
STEPS IN PROCESS COSTING unit of inventory;
• In retail, the cost is computed by dividing
Step 1: Calculate the physical units to the total cost of goods available for sale
account for (COGAS) by the total units available for sale
Units in beginning WIP Inventory + Units (UAFS);
started Cost = Total COGAS / Total UAFS
• In WA, costs and units of the current
Step 2: Calculate the physical units period are not distinguished from those on
accounted for hand at the end of
Units transferred out + Units in ending the prior period, unlike in FIFO;
WIP Inventory • The WA computes a single average cost
per unit of the combined beginning WIP
Verify that the units in Steps (1) and (2) are Inventory and
equal current period production.

Step 3: Calculate the equivalent units of

production
•Weighted average method
•FIFO method
Step 4: Calculate the total cost to account
for
Cost in beginning WIP Inventory + Cost
of current period
Step 5: Calculate the cost per equivalent
unit of production
•Weighted average method
•FIFO method

Step 6: Assign the costs to inventory

accounts
Transferred out (to FG Inventory or to the
next department) or Ending WIP Inventory

Verify that the costs in Steps (4) and (6)

are equal
Cost transferred out + Cost in Ending
Inventory = Total Cost to account for