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Chapter 14

Process Costing
Process costing is a method of cost accumulation that accumulated production costs by
department. This system is commonly used by companies that manufactures on a continuous
basis only one product or standard products.

Problems in process costing are often given in the CPA examination. To pass Practical
Accounting 2, candidates must be thoroughly familiar with situations encountered in these
problems, typical of which are the following:

1. Preparation of Cost of Production Report using:

a. First-in, First – out (FIFO) costing method

b. Average costing method

2. Accounting for spoilage (lost units)

a. Normal spoilage

b. Abnormal spoilage

COST OF PRODUCTION REPORT

At the end of each month the cost of production report is prepared for each department by the
cost accountant of the department. A production report has two sections:

1. Quantity schedule, which shows the follow of units.

2. cost analysis which shows the flow of cost.

Quantity Schedule

This section shows the number of units that were in process in the department at the start of
the month, the number of units begun during the month, the number of units transferred out
of the department during the month, the number of units still in work in process at the end of
the month.

The principal problem in the quantity schedule is the computation of the equivalents
production (measure of work done in terms of completed units) of units finished and units in
process for materials and conversion costs (labor and overhead). The computation of the
equivalent units of production (EUP) will depend on the inventory costing method used.

a. First in, First out (FIFO) Costing. Under this method, the stage of completion of the units of
Beginning Work in Process (BWIP) is determined separately from the units started and finished
this month. This means that the equivalent units of production are calculated only for work
actually performed during the month.

b. Average Costing. Under this method, the unit in process at the beginning is combined with
the units started and finished this month and presented in one batch of units. This means that
the work performed on the units in progress beginning (last month) is treated as if it were
performed this month.

Cost Analysis

This section summarized the costs incurred in the department, the cost per unit of the product,
the total costs of products completed and transferred out of department, and the costs related
to the ending inventory of work in process in each department. The principal problem in this
section is the computation of unit cost and the allocation of the total costs to units finished and
transferred out and to units in ending work in process.

Unit cost:

a. First in, first out (FIFO) Costing. Total costs incurred this month (current costs) divided by the
equivalent units of production.

b. Average Costing. Cost last month (cost incurred in BWIP) plus cost this month (current costs)
divided by the equivalent units production.

Allocation of total costs:

a. First in, first out (FIFO) Costing:

Finished and transferred out:

BWIP: Cost last month

Cost this month = EUP x UC

Started in process = Actual units UC

EWIP = EUP x UC

b. Average Costing:

Finished and transferred out = Actual units x total UC

EWIP = EUP x UC

ACCOUNTING FOR SPOILAGE (LOST UNITS)

Spoilage units are units of product that have been damaged or improperly manufactured and
cannot be completed as salable products. Spoilage may be classified as normal spoilage,
because it is a common occurrence that is inherent in the manufacturing process and abnormal
spoilage that results from unusual and nonrecurring factors, such as fire or water damage.

Candidates should be familiar with the following procedures in presenting spoilage in the cost
of production report.

Quantity Schedule. Normal and abnormal spoilage are presented separately and the equivalent
units of production computed bases on the work done.

Cost Analysis. The costs of units lost through normal spoilage are absorbed by the remaining
god units produced during the month. Costs of abnormal spoilage are presented separately and
charged to a Loss Abnormal Spoilage account so that the completed units do not absorb the
costs related abnormal lost units.

Computation of the cost of normal spoilage:

Spoiled units may be discovered at the start of the process, during the process or at the end of
the process. The computation of the cost of lost units depends on the point of discovery as
follows:

a. if lost units are discovered at the start or during the process –

• In the first department = no cost

• In the subsequent department = lost units x unit cost from preceding department

b. if lost units are discovered at the end of the process –

• In the first department = lost units x total unit costs in this department
• In the subsequent department = lost units x total unit cost from preceding and in this
department

c. if lost units are discovered at inspection point-

Search • In the first department = EUP of lost units x unitUpload

cost EN
• In the subsequent department = cost from preceding department plus cost in this
department (EUP x UC)

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Allocation of cost of normal spoilage
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Cost of normal spoilage is to be absorbed by the good units because good units cannot be made
without also making some units that are spoiled. Cost of normal spoilage should be alloxated
pro-rate among the good units on the bases of actual units or EUP. The allocations procedures
Home are:

a. If lost units are discovered at the start or during the process –

Saved • First In, First Out Costing – To all the goods units started finished this month and units in
process at the end.
• Average costing – To all the good units, finished and in process.

b. If lost units are discovered at the end of the process –

Bestsellers
• First in, First out costing – To all the units finished and transferred out.
• Average costing – to all the good units finished and in process.
Books c. if lost units are discovered at inspection point. To all the good units that passed the
inspection point.

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Chapter 1 p2 - Guerrero p2 - Guerrero AFAR - Income Test Bank -

PROBLEMS
Ch13 Ch17.Docx Recognition:… Chapter 3 Jo
Installment
1. Department of Hope Manufacturing Company presents the following Sales,
production data for the Order Costin
month of May, 2013: Franchise, Long-
term Construction
Opening inventory 3/8 completed 4,000 units
Started in process 13,000 units
Transferred 9,000 units
Closing inventory, 1/2 completed 4,000 units
3/4 completed 4,000 units

What are the equivalent units of production for the month of May, 2013.

FIFO AVERAGE
a.12,500 units 13,000 units
b.17,000 units You're Reading a Preview
12,500 units
C. 12,500 units 14,000 units PROBLEMS
1. Department of Hope Manufacturing Company presents the following production data for the
d. 15,000 units 14,000 units
month of May, 2013:
Upload your documents to download.
2. Rose Co, bad 3,000 units in work in process at April 1, 2013, which were 60% complete as to
Opening invcost,
conversion entorDu
y 3ring
/8 cApril,
omple10,000
ted 4,000 unitAt
units was completed. s April 30, 4,000 units remained in
St arte d in proce ss
work in process which were 40% complete as to ORconversion tcsost. Direct materials are added at
1 3 , 0 0 0 uni
Tranbegi
the sfernning
red of the process. 9,000 units
Closing inventory, 1/2 completed 4,000 units
Become a Scribd member for full access. Your
How many units were started 3/4 cduring
ompletApril?
ed 4,000 units

What
a. 0 the equivalent units offirst
9,00are 30 days
production for the are
monthfree.
of May, 2013.
b. 9,800
FIFO AVERAGE
c. 10,000
a.12,500 units 13,000 units
d. 11,000
b.17,000 units 12,500 units Continue for Free
C. 12,500 units 14,000 units
3. The Ilang-llang Corporation, engaged in a manufacturing business and using proce ss costing,
d. 15,000 units 14,000 units
gave the following production data for three different situations. Stages of completion of the
inventories apply to all cost elements.
2. Rose Co, bad 3,000 units in work in process at April 1, 2013, which were 60% complete as to
conversion cost,
(1) Started in During
process, April,units;
6,500 10,000 units was 5,500
transferred, completed.
units; At April 30, 400
in process, 4,000 units remained in
units
work in process and
50% completed which
600were 40%
units 25% complete as to conversion cost. Direct materials are added at
completed.
the beginning of the process.
(2 ) Beginning inventory, 6,250 units 40% completed; started in process, 25,000 units;
How many units
transferred, were
26,250 started
units; during at
in process April?
the end, 3,000 units 50% co mpleted and 2,000 units
25% completed.
a. 9,000
b. 9,800
(3) Beginning inventory, 6,000 units 30% completed; started in process. I3,000
c. 10,000
d. 11,000

3. The Ilang-llang Corporation, engaged in a manufacturing business and using proce ss costing,
gave the following production data for three different situations. Stages of completion of the
inventories apply to all cost elements.

(1) Started in process, 6,500 units; transferred, 5,500 units; in process, 400 units
50% completed and 600 units 25% completed.

(2 ) Beginning inventory, 6,250 units 40% completed; started in process, 25,000 units;
transferred, 26,250 units; in process at the end, 3,000 units 50% co mpleted and 2,000 units
25%
units;completed.
lost in processing, 500 units from production started this period (loss was normal and
occurred throughout the production process); transferred, 14,000 units; in process at the end,
(3) Beginning
3,000 inventory,
units 50% complet6,000
ed andunits
1,5030% completed;
0 units star
75% comp ted. in process. I3,000
leted

What are the equivalent production of the three different situations under FIFO and average
costing?

FIFO AVERAGE
1 2 3 1 2 3
a.5,850 25,750 14,825 5,850 28,250 16,625
b. 5,850 27,550 18,425 5,580 22,850 15,662
c.8,550 20,575 15,428 5,508 28,025 16,265
d. 5,058 20,775 12,524 5,850 28,250 16,625

units;
4. lost in
Orchids
occurred
Company
throughou t You're Reading a Preview
processing,
has 500
the
unitss from
a proces
production
production
cost system
process);
usingstarted
transferred,
this
the FIFO period
cost
14,000
flow(loss
metho
units; in
was
d. normal and
Al l materials
process
are introduced at the beginning of the process in Department One. The following information at the end,is
3,000 unitfor
available s 50%
the complet
month ofedJanuary
and 1,50 0 units 75% completed.
2012:

What are the Upload your documents to download.

equivalent production of the three different
Work in process, 1/1/08 (40% complete as to conversion 500
Units
situations under FIFO and average
costing?
costs)
Started in January
FIFO ORAVERAGE 2,000
Transferred to Department Two during January 2 ,1 0 0
1 2 3 1 2 3
Work in process, 1/31/08 (25% complete as to 400
Become a Scribd member for full access. Your
a.5,850 25,750 14,825 5,850 28,250 16,625
conversion costs)
b. 5,850 27,550 18,425 5,580 22,850 15,662
c.8,550 20,575
first 30 days are free.
15,428 5,508 28,025
What are the equivalent units of production for the month of January 2013?
d. 5,058 20,775 12,524 5,850 28,250
16,265
16,625

Materials Conversion
a.2,500 2,200
b.2,500 1,900 Continue for Free
4. Orchids Company has a process cost system using the FIFO cost flow method. Al l materials
are introduced
c.2,000 at the beginning
2,200 of the process in Department One. The following information is
available
d.2,000 for the month of
2,000January 2012:
Units
Work
5 in process,
. Anahaw 1/1/08
Company's (40%tion
produc complete as to conversion
cycle starts in the Mixing 500
Department. The following
costs)
information is available for the month of April 2013?
Started in January Units 2 ,0 0 0
T ra nsfe rre d to De part m en t T w
Work inprocess, April 1 (50% complete)o du ring J a nua ry 40,000 2 ,1 0 0
Work
Started ininpro
Apcess,
ril 1/31/08 (25% complete as to 240,000 400
conversion costs)
work-in-process, April 30 (60% complete) 2 5 ,0 0 0

What are the

Materials are equivalent units
added in the of production
beginning for the month
of the process of January
in the Mixing Depa2013?
rtment. Using the
weighted average method, what are the equivalent units of production for the month of April
Materials Conversion
2013?
a.2,500 2,200
b.2,500 1,900
c.2,000 2,200
d.2,000 2,000

5. Anahaw Company's production cycle starts in the Mixing Department. The following
information is available for the month of April 2013?
Units
Work inprocess, April 1 (50% complete) 40,000
Started in April 2 4 0 ,0 0 0
work-in-process, April 30 (60% complete) 2 5 ,0 0 0

Materials Conversion
Materials are added in the beginning of the process in the Mixing Department. Using the
a.240,000 250,000
weighted average method, what are the equivalent units of production for the month of April
b.255,000 255,000
2013?
c.270,000 280,000
d.280,000 270,000

6. Materials are added at the start of the process in Jasmin company's cutting department, the
first stage of the production cycle. The following information is available for the month of
March 2013.
units
Work in process, March 1 (60% complete as to 60,000
conversion costs)
Started in March 150,000
Transferred to the next department 110,000
Lost in production 30,000
You're Reading a Preview
Materials Conversion
Work in process, March 31 (50% complete as to 70,000
a.240,000 250,000
conversion costs
b.255,000 255,000
c.270,000 280,000
d.280,000 Upload your documents to download.
Under Jasmin's cost accounting system, the costs incurred on the lost units are absorbed by the
270,000
remaining good units. Using the First in, First out method, what are the equivalent units for the
materials unit cost calculation?
6. Materials are added at the start of the process in Jasmin company's cutting department, the
first stage
OR
a. 120 ,000of the production cycle. The following information is available for the month of
March
b.145,000 2013.
c. 180,000
Work
Become a Scribd member for full access. Your units
d. 210in ,00process,
0 March 1 (60% complete as to 60,000
conversion costs) first 30 days are free.
Started in March 150,000
T ra ns fe rr ed to t he next dep artm ent
7. Bayani Manufacturing Company, using the FIFO process cost 1 10,0system,
00 has the following data
Lfor
ostthe
in pmro du ct io n
onth of April: 3 0 , 0 00
Continue for Free
Work in process, March 31 (50% complete as to 70,000 Percent Complete
conversion costs Actual Units Materials Conversion cost
Beginning Inventory 15,000 * I 00% 40%
Under
TransfeJasmin's
rred in cost acco1unting
50,000system, the costs incurred on the lost units are absorbed by the
remaining
Transferredgood
out units. Using
120,t0he
00First in, First out method, what are the equivalent units for the
materials unit
Ending Inventorycost calculation?
45,000 100% 30%

a. 120,000
What are the equivalent units of production for the month of April?
b.145,000
c. 180,000
Materials Conversion Costs
d. 210,000
a.150,000 127,500
b.165,000 139,500
C. 135,000 124,500
7. Bayani Manufacturing Company, using the FIFO process cost system, has the following data
d. 150,000 133,500
for the month of April:
Percent Complete
Actual Units Materials Conversion cost
Beginning Inventory 15,000 * I 00% 40%
Transferred in 150,000
Transferred out 120,000
Ending Inventory 45,000 100% 30%

What are the equivalent units of production for the month of April?

Materials Conversion Costs

a.150,000 127,500
b.165,000 139,500
C. 135,000 124,500
d. 150,000 133,500

8. Eastern Products Inc., Input all materials at the start of operation

is process at the beginning of January consisted of 4,000 units with
P100,000 and labor and overhead of P20,000 . In January, 20,000 un
with material cost of P500,000. Labor and overhead in January cost
January., the inventory was 100% complete in materials but only 60
The ending inventory consisted of 10,000 units. The equivalent unit
the month of January amounted to:
You're Reading a Preview
a.20,000
Upload your documents to download.
b.10,000
C. 26,000
d. 30,000 OR

9. Become
Yakal Coma pany
Scribd member
com forflow
puted the full access.
of physYour
ical units completed fo
month, of March first
2030
13 days are free.
as follows:
8. Eastern Products Inc., Input all materials at the start of operation
Units completed:
is
Froprocess
m workat
-inthe
probceginning
ess on MofarcJa
hnuary
1, 200consiste
8 d of154,000
,000 units with
P100,000 Continue for Free
From Marcandh prla
obor
ductand
ion overhead of P20,000 . In 4January,
5,000 20,000 un
with material cost of P500,000. Labor and overhead in January cost
January.,
No. 9 – Cothe
ntininventory
ued was 100% complete in materials but only 60
The ending inventory consisted of 10,000 units. The equivalent unit
the monthare
Materials of January
added atamounted to: of the process. The 12,000 un
the beginning
March 31, 2013, were 80% complete as to conversion costs. The wo
a.20,000
2043 was 80% complete as to conversion costs. Using the FIFO met
b.10,000
March conversion costs were:
C. 26,000
d. 30,000
a. 55,200
b. 57,000
9. Yakal Company computed the flow of physical units completed fo
C. 60,600
month, of March 2013 as follows:
d. 63,600
Units completed:
Fro. m
10 work-iCompany
Mataba n process sells
on Mfood
arch processors
1, 2008 1 5 ,0 0 0
and manufactures them
From MaAt
process. rchthe
proend
ductof
ion 45value
August there were 200 units ,000 d at P30,09
P25,200 in materials cost and P4,895 in conversion cost. These were
No. 9 – Continued
materials and 25% complete as to conversion cost 1200 units were
September, and these had materials costs of P168,000. Processors w
Materials
.1,400 are
completed
a added
at the 50 atofthe
1,3end beginningtotal
September of the200process.and
units Thewere
12,000
100%un
March
and
b 0031,comp
.1,250% 2013,1,1were
lete 0as
0 to80% complete
conver sion cosast.toConv
convers
ersioion costs.
n cost Theg wo
durin Se
2043
c.1,20was
There 0were 80%
no1complete
units
,150 lost inas process.
to conversion costs. Using the FIFO met
March
d.1,200conversion 1,25costs
0 were:
What are the equivalent units of production for September?
a. 55,200
11. The Wiring Department is the second stage of Acacia Company'
b. 57,000
Mathe
1, terbeginning
ials Cowork-in
nversionprocCosess
t contained 25,000 units which wer
C. 60,600
conversion
d. 63,600
You're Reading
costs. During May,a100,000
Preview units were transferred-in fro
production cycle. On May 31, the ending work in Process contained
Upload your
80% complete as todocuments
conversion cost to download.
s. Material costs are added at th
10. Mataba Company sells food processors and manufactures them
the weighted-average method, the equivalent units were:
process. At the end of AuOR gust there were 200 units valued at P30,09
P25,200
Materialin s materia
Convlsercost
sionand
costP4,895
s in conversion cost. These were
a.1Become
materials
25,000and a Scribd
25% member
100,complete
00 0 fortofull
as access. Your
conversion cost 1200 units were
September,
b.105,000 and 0these
1first
5,03000had
daysma terials
are free.costs of P168,000. Processors w
a .1,400
completed 1,350 of September total 200 units and were 100%
c.105,000 at the 121end,000
b
and.1 ,2 0 0 1 ,1 0 0 to conversion cost. Conversion cost during Se
d.1250% 5,000complete121,as 000
cThere
.1,200were no1units ,1Continue
5 0 lost in for Free
process.
d.1,200 1,250
12. Dhalia Company adds materials at the beginning of the process
What are theconce
Information equivalent units
rning the of production
materials used infor September?
April 2013 production
11. The Wiring Department is the second stage of Acacia Company'
M
1, athe
terbeginning
ials Cowork-in
nversionprocCosess
t contained 25,000 units which wer
Units
conversion
Work-in-procosts.cess aDuring
t April May, 100,000 units were1transferred-in
0 ,0 0 0 fro
production
Started duricycle.
ng AprOn il May 31, the ending work in 5 Process
0,000 contained
80% complete
Completed andas to conversion
transferred costs. Material costs
to next are added at th
36,000
the weighted-averag
department during Aprile method, the equivalent units were:
Normal spoilage incurred 3 ,0 0 0
Materials Conversion costs
Abnormal spoilage incurred 5 ,0 0 0
a.125,000 100,000
Work in process at April 30 1 6 ,0 0 0
b.105,000 105,000
c.105,000 121,000
Under Dhalia's cost accounting system, costs of normal spoilage are
d.125,000 121,000
of good units produced. However, the costs of abnormal spoilage ar
overhead. Using the weighted-average method, what are the equiv
12. Dhalia Company adds materials at the beginning of the process
unit cost calculation for the month of April?
Information concerning the materials used in April 2013 production
a.47,000
b.52,000 Units
W
C. o55,000
rk-in-process at April 1 0 ,0 0 0
S
d.ta57,000
rted during April 5 0 ,0 0 0
Completed and transferred to next 36,000
department during
13. The following April
information pertains Lanao's First Department for
N ormal spoilage incurred
April: 3 ,0 0 0
Abnormal spoilage incurred 5 ,0 0 0
Work in process at April 30 1 6 ,0 0 0

Under Dhalia's cost accounting system, costs of normal spoilage are

of good units produced. However, the costs of abnormal spoilage ar
overhead. Using the weighted-average method, what are the equiv
unit cost calculation for the month of April?

a.47,000
b.52,000
C. 55,000
d. 57,000

13. The following information pertains Lanao's First Department for

April: