Process Costing: A Comprehensive Guide with Exercises and Solutions | Exercises Cost Accounting

Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department

LEARNING PACKET

COSMAN1, Session 2, First Semester, SY 2020-21

LEARNING PACKET 5

TOPIC: Process Costing

I. CONCEPT NOTES

PROCESS COSTING

•Process costing is suitable for a large number of mining, manufacturing and public utility industries like

mines and quarries, cotton, wool and jute textiles, chemicals, soap making, paper, plastics, distillation

processes, e.g. alcohol, tanning, oil refining, screws, bolts and rivets, canning, food products, dairy, and

electricity and gas undertakings.

Features of Process Costing

•The production is continuous and the end product is the result of a sequence of processes.

•The product is homogeneous and the units product are identical and standardized.

•The sequence of operations for processing the product is specific and predetermined.

•The finished products of one process works as raw material for the next or process until completion.

Job Order Costing vs. Process Costing

Job Costing Process Costing

Production is by specify orders. Production is in continuous flow, the products being

homogeneous

Costs are determined by jobs or batches of

products

Cost are compiled on time basis, i.e. for production for a

given accounting period, for each process or departments

The various jobs are separate and

independent of each other

Being manufactured in a continuous flow, products lose

their individual entity

Unit cost of a job is calculated by dividing

the total cost incurred into the units

produced in the lot or batch

The unit cost of a process, which is computed by dividing

the total cost for the period (after adjustment of the

opening and closing work-in-process), is an average cost

for the period

Costs are calculated when a job is

completed

Costs are calculated at the end of the cost period

There may or may not be any work-in-

progress at the beginning or end of an

accounting period.

Production being continuous there is usually some work-

in-process at the beginning as well as at the end of the

accounting period.

There are usually no transfers from one

job to another unless it is necessary to

transfer surplus work or excess

production.

As a product moves from one process to another, transfers

of cost from process to process are made.

As such product unit is different and

production is not continuous, more

managerial attention is needed if proper

control is to be exercised

Process production is standardized and is more stable.

Hence, control of process activities is comparatively easy.

Advantages of Process Costing

•Process cost may be determined periodically at short intervals. When predetermined overhead rates are in

use, it may be possible to complete unit cost weekly or even daily. This not always so under the job costing

system, particularly when jobs run for long periods and there are no significant units of completed

production during the various accounting periods, falling between the total period of run of the jobs.

•It involves less efforts and less clerical expenses as the accounting method is simpler than that in job

costing.

•Detailed cost, budgeted as well as actual, are made available for each possible by evaluating the

performance of each process etc.

•Allocation of overhead to departments and processes can be made fairly accurately on definite bases.

•Since the material consumption ass the various operations are more or less standardized, more accurate

cost estimates are available for price quotations.

•It is easier to set effective and fairly stable standards in case of mass production or continuous repetitive

production. Process costing situations are, therefore, more adaptable for installing standard costing

procedures.

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Ateneo de Zamboanga University School of Management and Accountancy Accountancy Department LEARNING PACKET COSMAN1, Session 2, First Semester, SY 2020- LEARNING PACKET 5 TOPIC: Process Costing I. CONCEPT NOTES PROCESS COSTING

Process costing is suitable for a large number of mining, manufacturing and public utility industries like mines and quarries, cotton, wool and jute textiles, chemicals, soap making, paper, plastics, distillation processes, e.g. alcohol, tanning, oil refining, screws, bolts and rivets, canning, food products, dairy, and electricity and gas undertakings. Features of Process Costing
The production is continuous and the end product is the result of a sequence of processes.
The product is homogeneous and the units product are identical and standardized.
The sequence of operations for processing the product is specific and predetermined.
The finished products of one process works as raw material for the next or process until completion. Job Order Costing vs. Process Costing Job Costing Process Costing Production is by specify orders. Production is in continuous flow, the products being homogeneous Costs are determined by jobs or batches of products Cost are compiled on time basis, i.e. for production for a given accounting period, for each process or departments The various jobs are separate and independent of each other Being manufactured in a continuous flow, products lose their individual entity Unit cost of a job is calculated by dividing the total cost incurred into the units produced in the lot or batch The unit cost of a process, which is computed by dividing the total cost for the period (after adjustment of the opening and closing work-in-process), is an average cost for the period Costs are calculated when a job is completed Costs are calculated at the end of the cost period There may or may not be any work-in- progress at the beginning or end of an accounting period. Production being continuous there is usually some work- in-process at the beginning as well as at the end of the accounting period. There are usually no transfers from one job to another unless it is necessary to transfer surplus work or excess production. As a product moves from one process to another, transfers of cost from process to process are made. As such product unit is different and production is not continuous, more managerial attention is needed if proper control is to be exercised Process production is standardized and is more stable. Hence, control of process activities is comparatively easy. Advantages of Process Costing
Process cost may be determined periodically at short intervals. When predetermined overhead rates are in use, it may be possible to complete unit cost weekly or even daily. This not always so under the job costing system, particularly when jobs run for long periods and there are no significant units of completed production during the various accounting periods, falling between the total period of run of the jobs.
It involves less efforts and less clerical expenses as the accounting method is simpler than that in job costing.
Detailed cost, budgeted as well as actual, are made available for each possible by evaluating the performance of each process etc.
Allocation of overhead to departments and processes can be made fairly accurately on definite bases.
Since the material consumption ass the various operations are more or less standardized, more accurate cost estimates are available for price quotations.
It is easier to set effective and fairly stable standards in case of mass production or continuous repetitive production. Process costing situations are, therefore, more adaptable for installing standard costing procedures.

Limitations of Process Costing

Being only average costs for the accounting period, process cost cannot be considered to be very accurate for the purpose of detailed analysis, evaluation, and control of individual performance efficiency on a day- to-day basis.
Costs obtained at the end of the accounting period are only historical and are not of much use for effective control unless standard process cost are used. This is, no doubt, true in respect of all other historical systems but the nature of process accounting with its departmental divisions makes this disadvantage more prominent.
When different products come out of one and the same process, the common costs are prorated to the various products. Such cost of individual products are not reliable as they may, at best, be taken to be only approximations.
For the purpose of calculation of unit costs of continuous processes, work-in-process is required to be determined at the end of an accounting period. This is done mostly on estimated basis which introduces further inaccuracies in costs. Steps to Apply Process Costing
Summarize the physical flow of the units to produce.
Calculate production in terms of equivalent units.
Calculate equivalent unit costs.
Summarize total costs to account for
Assign total costs to the units already completed and to units in ending work in process inventory (WIP). WEIGHTED AVERAGE VS. FIFO METHOD The main difference between the FIFO and weighted average method is in the treatment of beginning work-in- process inventory. The weighted average method includes this inventory in computing process costs, while the FIFO method keeps it separate. WA vs FIFO: Equivalent Units Costs for raw materials and conversions are proportionately allocated to equivalent units, which include finished and unfinished goods. Conversion costs include direct labor and factory overhead costs. For example, if 100 units of ending work-in-process inventory used 75 percent of the purchased raw materials and 60 percent of the conversion costs, then the equivalent units for process costing purposes are 75 units (100 x 0.75) and 60 units (100 x 0.60), respectively. If 100 additional units were completed and shipped to customers, then the equivalent units are 175 (100 + 75) and 160 (100 + 60) for raw materials and conversion costs, respectively. The beginning work-in-process inventory is subtracted from the totals in the FIFO method. Continuing with the example, if the beginning work-in-process inventory consisted of 20 units, and it includes 100 percent of raw materials and 50 percent conversion costs, then the equivalent units are 20 (20 x 1.00) and 10 units (20 x 0.50), respectively. Therefore, the ending work-in-process inventory contains 55 (75 - 20) and 50 (60 - 10) equivalent units for raw materials and conversion costs, respectively. Therefore, using the FIFO method, the total equivalent units are 155 (100 + 55) and 150 (100 + 50), respectively. WA vs FIFO: Equivalent Unit Cost The beginning inventory costs and additional costs incurred in a period are combined in the weighted average method. Continuing with the example, if the total raw material costs under the weighted average method are $1,250, then the equivalent unit raw materials costs are about $7.14 ($1,250 / 175). If the conversion costs are $3,500, then the equivalent unit conversion cost is about $21.88 ($3,500 / 160). Therefore, the total equivalent unit cost is $29.02 ($7.14 + $21.88). Under the FIFO method, the beginning work-in-process raw materials and conversion costs are excluded. If these were $250 and $1,000, respectively, then the equivalent unit costs are about $6.45 [($1,250 - $250) / 155 = $1,000 / 155 = $6.45] and about $16.67 [($3,500 - $1,000) / 150 = $2,500 / 150 = $16.67]. Therefore, the total equivalent unit cost using the FIFO method is $23.12 ($6.45 + $16.67). WA vs FIFO: Assigned Costs The raw materials and conversion costs are assigned to the completed and work-in-process units. To conclude the example, under the weighted average method, the completed unit cost is $2,902 (100 x $29.02), the work-in- process cost is about $1,848 [(75 x $7.14) + (60 x 21.88)] and the total cost is $4,750 ($2,902 + $1,848). In the FIFO method, the completed unit cost is $2,312 (100 x $23.12), the work-in-process cost is $1,188 [(55 x $6.45) + (50 x 16.67)] and the total cost is $3,500 ($2,312 + $1,188).

Additional Information are as FOLLOWS: a. Manufacturing starts at Department 1 where all materials are added at start of production and FIFO costing is used. b. Units are added in the Department 2 where 50% of direct materials as added when it is 30% complete and excess when it is ready to be transferred to the storeroom. This department uses weighted average costing method. Required:

Make a cost of production report for Department 1.
Make a cost of production report for Department 2. PROBLEM 3: WALANG FOREVER just started operations on January 1, 2017. During its first year, 80,000 units were put into production and the following costs were incurred: Raw materials purchased P 130, Salaries of workers in production 201, Salaries of factory supervisor and security personnel 38, Utilities (water and electricity incurred) 20, Only 80% of the raw materials purchased were put into production and 20% of those used were indirectly traceable to the product. As per physical count at December 31, 2017, there are only 5,255 units in the production are where they are 59% complete, and 60,000 are in the warehouse ready to be sold. The company usually expects that 10% of those started will be spoiled after the production period. Direct materials are added 3/5 when unit is 2% complete, 25% when it is 98% complete and excess is added at the end. Direct labor and overhead is incurred evenly. Required:
1. If the inspection point is at 30% completion: a. Make a cost of production report for the period. (10pts) b. Make the necessary entries to record all the transactions that happened for the period. (10pts)
2. If the inspection point is at 95% completion: a. Make a cost of production report for the period. (10pts) b. Make the necessary entries to record all the transactions that happened for the period. (10pts) PROBLEM 4: GUSTOKONANGBUMITAW Corporation uses process costing in its two production departments. A separate work in process account is kept in the general ledger for each production department. The following data relate to operations for the month of September: Beginning Added Inventory During March Direct materials cost: Department A $ 5,000 $25, Department B 3,000 20, Direct labor cost: Department A 6,000 40, Department B 4,500 35, Applied overhead: Department A 12,000 90, Department B 4,500 35, During September, 45,000 units with a cost of $5 each were transferred from Department A to Department B, and 40,000 units with a cost of $9 each were transferred from Department B to finished goods inventory. Required: Prepare the appropriate general journal entries to record the cost charged to the producing departments during September and the cost of units transferred from Department A to Department B and Department B to finished goods inventory. PROBLEM 5: GLEE Company uses process costing to account for the costs of its only product, X. Production takes place in two departments Sanding and Polishing. On December 31, the inventory for Product X was as follows: No unused materials. Work in process Sanding Department............................................ 800 units (3/4 complete as to labor)

Work in process Polishing Department......................................... 1,000 units (1/2 complete as to materials and 3/4 complete as to direct labor) Finished Goods................................................................ 600 units Required:

Compute the equivalent units of materials in all inventories combined on December 31.
Compute the equivalent units of the Sanding Department's direct labor in all inventories on December 31. PROBLEM 6: Barcelona Beach Products reports the following data for the first department in its production process: Units in process at beginning of period (all materials; 3/4 labor and factory overhead)........................................................................................................................ 5, Units started in process................................................................................................................................. 35, Units transferred out....................................................................................................................................... 33, Units still in process (all materials; 1/2 labor and factory overhead)........................................ 5, Units completed but not yet transferred to Finished Goods........................................................... 2, Related data were: Work in Process at Added During Beginning of Period Period Materials..................................................................................................... $100,000 $ 304, Labor............................................................................................................ 125,400 407, Factory overhead.................................................................................... 173,500 407, Total.................................................................................................... $398,900 $ 1,118, Required: Using the average costing method:
Compute the unit cost for materials, labor, and factory overhead.
Determine the cost of the work in process ending inventory. PROBLEM 7: The following costs were accumulated by Department 2 of H Company during September: Cost Transferred: from Dept. 1 Material CC Total Beginning Inventory $ 17,050 $ 5,450 $ 22, Current Period Cost 184,000 $ 34,000 104,000 322, $ 201,050 $ 34,000 $ 109,450 $ 344, Production for September in Department 2 (in units): WIP—September 1 2,000 60% complete Complete period transferred 20, WIP—September 31 5,000 40% complete Materials are not added in Department 2 until the very end of processing Department 2. Required: Compute the cost of units completed and the value of ending WIP for: a. Average inventory assumption b. FIFO inventory assumption PROBLEM 8: The Valentine’s Day Company has two processing departments, Cooking and Packaging. Ingredients are placed into production at the beginning of the process in Cooking, where they are formed into various shapes. When finished, they are transferred into Packaging, where the candy is placed into heart and tuxedo boxes and covered with foil. All material added in Packaging is considered as one material for convenience. Since the boxes contain a variety of candies, they are considered partially complete until filled with the appropriate assortment. The following information relates to the two departments for February 2001:

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