Process Costing

This is a method of accumulating and assigning costs to units of production in companies which
produced a large number of identical or standardized units employing consistent processes.
Costs are accumulated and assigned first to production departments before they are traced to
the units of outputs as they move through the departments.
Information about the flow of units and costs through the work in process account of a
processing department is recorded in a Cost of Production Report (CPR) – consisting of three
sections: th Quantity Schedule, the Costs Charged to the Department, and the Cost
Reconciliation.

 Quantity Schedule is the first section of the cost of production report which summarizes
the flow of the units through the processing department, and presents the total units to
be accounted, and how those units are accounted. In accounting the total units, the
percentage of completion of any work in process is applied to the actual quantity to
determine the equivalent units for each cost component. Equivalent Units of Production
(EUP) refers to the number of units necessary to complete the work currently in process.
But in the case of the ending inventory, it is the equivalent of the work done on the units.
The quantity schedule serves as a guide in preparing the next two sections.
 Costs Charged to the Department presents the total costs accumulated in the
processing department which include the beginning inventory cost and costs added
during the period. The cost per equivalent unit is also computed which is used to
determine the cost of the inventories as accounted in the next section.
 Costs Accounted for as follows (Cost Reconciliation) is the last section of the CPR
which shows the accounting of the total costs, identified and recorded in the preceding
section (Costs Charged to the Department), to the units in the inventories. Usually, the
total costs to be accounted consists of the following: cost of the beginning inventory,
cost of materials, labor and overhead incurred by the department during the current
period; and cost transferred in from the preceding department during the period – of the
reporting department is a succeeding department.
In the preparation of the CPR, it is important to take note of the following: the inventory
recording system that the processing department adopts whether FIFO or weighted
average; determination if the processing department is the first department or a
succeeding department; and the accounting of the total costs determines the cost to be
assigned to the units as accounted in the Quantity Schedule.
ILLUSTRATION: Process Costing in the First and Succeeding Departments
Sisina Company is in the business of producing and selling perfume for ten years now. The
production process is done in two departments which activities involve collecting ingredients,
extracting oils, blending, aging, and packaging, among others, before the completed units are
transferred to the finished goods. The data that follow relate to the May 2023 operations:
Department A Department B
Units in beginning WIP inventory:
Department A (100% materials, 80% conversion cost) 800
Department B (60% materials, 40% conversion costs) 1,200
Units started in process 2,400
Units transferred out from the department 2,200 3,000
Units in ending WIP inventory:
Department A (100% materials, 20% conversion cost) 1,000
Department B (100% materials, 50% conversion cost) 400

Costs in the beginning inventory:

From the preceding department P148,000
Direct materials P58,560 4,600
Direct labor 5,920 3,200
Factory overhead 19,600 5,040

Costs added during May:

Direct materials P180,000 P 56,280
Direct labor 33,240 39,760
 Factory overhead 93,480 56,800
Required:
1. Prepare a Cost of Production Report for each department, and journal entry to record the
transfer of completed units to the next department, under FIFO method.
2. Prepare a Cost of Production Report for each department, and the journal entry to record the
transfer of completed units to the next department, under weighted average method.
Solution:
1. FIFO
Sisina Company
Cost of Production Report – Department A
For the month of May 2022

Quantity Schedule:
Direct Materials Conversion Cost
Actual WD EUP WD EUP
Beginning WIP inventory 800
Units started 2,400
Total units as accounted for 3,200
=====
Beginning WIP inventory 800 - - 0% 160
Started and Completed 1,400 100% 1,400 100% 1,400
Ending WIP inventory 1,000 100% 1,000 20% 200
Total Units as accounted for 3,200 2,400 1,760
===== ===== ====
Costs Charged to the Department:
Total EUP Unit Cost
Beginning WIP inventory P 84,080
Costs added this period:
Direct materials P180,000 2,400 P75
Conversion cost 126,720 1,760 72
Total costs added this period P306,720
Total Costs to be Accounted for P390,800 P147
======= ====

Costs Accounted for as follows:

Beginning WIP inventory P84,080
Cost added this period:
Conversion cost (160 x 72) 11,520 P95,600
Started and Completed (1,400x P147) 205,800
Ending WIP inventory:
Direct materials (1,000 x P75) P75,000
Conversion cost (200 x P72) 14,400 _ 89,400
Total Costs as Accounted for P390,800
========
Journal Entry:
Work in Process – Department B 301,400
Work in Process – Department A 301,400
To record the transfer of completed units to Department B.

Beginning WIP inventory 800 units P95,600

Started and Completed 1,400 units 205,800
Completed and transferred out 2,200 units P301,400
========= =======
 Sisina Company
Cost of Production Report – Department B
For the month of May 2022

Quantity Schedule:
Direct Materials Conversion Cost
Actual WD EUP WD EUP
Beginning WIP inventory 1,200
Units received 2,200
Total units as accounted for 3,400
=====
Beginning WIP inventory 1,200 40% 480 60% 720
Received and Completed 1,400 100% 1,800 100% 1,800
Ending WIP inventory 400 100% 400 50% 200
Total Units as accounted for 3,200 2,680 2,720
===== ===== ====
Costs Charged to the Department:
Total EUP Unit Cost
Beginning WIP inventory P160,840
Costs added this period:
Transferred-in cost P301,400 2,200 P137
Direct materials P 56,280 2,680 21
Conversion cost 96,560 2,720 35.50
Total costs added this period P454,240
Total Costs to be Accounted for P615,080 P193.50
======= =====

Costs Accounted for as follows:

Beginning WIP inventory:
Beginning balance P160,840
Cost added this period:
Direct materials (480 x P21) 10,080
Conversion cost (720 x P35.50) 25,560 P196,480
Received and Completed (1,800 x P193.50) 348,300
Ending WIP inventory:
Transferred-in cost (400x P137) P 54,800
Direct materials (400 x P21) 8,400
Conversion cost (200 x P35.50) 7,100 _ 70,300
Total Costs as Accounted for P615,080
========
Journal Entry:
Finished Goods Inventory 544,780
Work in Process – Department B 544,780
To record the transfer of completed units to the Finished Goods.

Beginning WIP inventory 1,200 units P196,480

Received and Completed 1,800 units 348,300
Completed and transferred out 3,000 units P544,780
========= =======
2. Weighted Average Method

Sisina Company
Cost of Production Report – Department A
For the month of May 2022

Quantity Schedule:
Direct Materials Conversion Cost
Actual WD EUP WD EUP
Beginning WIP inventory 800
Units started 2,400
Total units as accounted for 3,200
=====
Completed and Transferred 2,200 100% 2,200 100% 2,200
Ending WIP inventory 1,000 100% 1,000 20% 200
Total Units as accounted for 3,200 3,200 2,400
===== ===== ====
Costs Charged to the Department:
Total EUP Unit Cost
Beginning WIP inventory
Direct materials P 58,560
Conversion cost 25,520
Total P 84,080

Cost added this period:

Direct materials P180,000 3,200 P74.55
Conversion cost 126,720 2,400 63.43
Total costs added this period P306,720
Total Costs to be Accounted For P390,800 P137.98
======= ======
Costs Accounted for as follows:
Completed and transferred (2,200 x P137.98) P303,563
Ending WIP inventory:
Direct materials (1,000 x P74.55) P74,550
Conversion cost (200 x 63.43) 12,687 87,237
Total Costs as Accounted for P390,800
========
Journal Entry:
Work in Process – Department B 303,563
Work in Process – Department A 303,563
To record the transfer of completed units to Department B.

Sisina Company
Cost of Production Report – Department B
For the month of May 2022

Quantity Schedule:
Direct Materials Conversion Cost
Actual WD EUP WD EUP
Beginning WIP inventory 1,200
Units received 2,200
Total units as accounted for 3,400
=====
Completed and Transferred 3,000 100% 3,000 100% 3,000
Ending WIP inventory 400 100% 400 50% 200
Total Units as accounted for 3,400 3,400 3,200
===== ===== ====
Costs Charged to the Department:
Total EUP Unit Cost
Beginning WIP inventory:
Transferred-in cost P148,000
Direct materials 4,600
Conversion cost 8,240
Total costs added this period P160,840

Costs added this period:

Transferred-in cost P303,563 3,400 P132.81
Direct Materials 56,280 3,400 17.90
Conversion costs 96,560 3,200 32.75
Total Costs added this period P456,403
Total Costs to be Accounted For P617,243* P183.46
======== ======
Costs Accounted for as follows:
Completed and Transferred (3,000 x P183.46) P550,406
Ending WIP inventory:
Transferred-in cost (400x P132.81) P 53,125
Direct materials (400 x P17.90) 7,162
Conversion cost (200 x P32.75) 6,550 66,837
Total Costs as Accounted for P617,243
========
Journal Entry:
Finished Goods Inventory 550,406
Work in Process – Department B 550,406
To record the transfer of completed units to the Finished Goods.

The Total Costs to be Accounted For, on the succeeding department, will differ between the
FIFO and weighted average because of the difference in costing the units in process and is
traceable as follows:
Total costs in WA P617,243
Total costs in FIFO 615,080
Differential cost P 2,163

on the Completed and Transferred on the Ending WIP Inventory

WA P550,406 WA P66,837
FIFO 544,780 FIFO 70,300
Excess of WA over FIFO P 5,626 Excess of FIFO P 3,463
====== Over WA ======

Additional Notes:
 The Total Costs to be Accounted in the first department is the same under FIFO and
Weighted Average, but differs in the case of the succeeding department.
 WD (Work Done) – the percentage of the work done/finished this period to complete the
whole units in the inventory.
 EUP (Equivalent Unit of Production) – the equivalent number of units needed to
complete the whole units in the inventory. In the beginning inventory, it is the remaining
units not completed in the previous period, which is completed in the current period. But
in the case of the ending inventory, it is the equivalent of the partially completed units
this current period.
 Though only two decimal figures are presented, the complete decimal numbers are used
in computing the total cost of inventories.