COST ACCOUNTING AND CONTROL
QUIZ 3
PROCESS COST SYSTEM
INTRODUCTION
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Process costing accumulates all the costs
of operating a process for a period of time
and then divides the costs by the number
of units of product that passed through
that process during the period; the result is
a unit cost. If the product of one process
becomes the material of the next, a unit
cost is computed for each process.
The process costing method can be
evidently seen in the industry where there
are homogeneous products like in the
manufacturing of standardized bottle caps,
chemical
plants,
textile
factories,
manufacturing of flour and etc. where
large quantities of one product are
produced. It is also applicable to industries
producing
papers,
lumbers,
pipes,
petroleum ,steel, small electrical parts.
Some utility companies like gas, water and
electricity cost their products using
process costing.
Process costing accumulates costs by
production process or by department on a
period to period basis. It is also applicable
when all the units are worked within a
department or when there is no need to
distinguish among units.
This method is used when the products
manufactured under the conditions of
continuous processing or under mass
production methods where the products
manufactured within a department or cost
center are homogeneous. Production
costs are accumulated for a process or
department rather than a job.
UNDERSTAND WHO
COST SYSTEMS
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USES
SIMILARITIES
AND
DIFFERENCES
BETWEEN JOB ORDER COST AND
PROCESS COST SYSTEMS.
SIMILARITIES
● Both systems track the same cost
elements—direct materials, direct labor,
and manufacturing overhead.
● Costs are accumulated in the same
accounts—Raw
Materials
Inventory,
Factory
Labor,
and
Manufacturing
Overhead.
● Accumulated costs are assigned to the
same
accounts—Work
in Process,
Finished Goods Inventory, and Cost of
Goods Sold.
DIFFERENCES
JOB ORDER
COSTING
PROCESS
COSTING
WIP inventory
account used
One
WIP
account per job
order
Separate WIP
account
for
each
production
process
or
manufacturing
process
Cost
Summaries
To
individual
jobs
and
summarized in
a job cost sheet
and
totaled
upon
completion of a
job
In a cost of
production
report for each
department;
and cost are
totaled at the
end of a time
period
Computation of
unit cost
Unit cost in a
job cost system
is total cost per
job
÷ units
produced
Unit cost is
calculated as
total
manufacturing
costs for the
period ÷ the
units produced
during
the
period.
Reports
prepared
Statement
of
Cost of Goods
Manufactured
and Sold
Cost
Production
Report
PROCESS
Process cost systems are used by
companies that mass-produce similar
products in a continuous fashion. Once
production begins, it continues until the
finished product emerges. Each unit of the
finished product is indistinguishable from
every other unit.
Manufacturers of consumer goods use
process costing i.e. manufacturers of
textile,
milk,
sugar,
coffee,
pharmaceuticals,
paint,
detergents,
shampoos, toothpaste, etc.
of
EXPLAIN THE FLOW OF COSTS IN A
PROCESS COST SYSTEM
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Manufacturing costs for raw materials,
labor, and overhead are assigned to work
in
process
accounts
for
various
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departments or manufacturing processes,
and the costs of units completed in a
department are transferred from one
department to another as those units
move through the manufacturing process.
The costs of completed work are
transferred to Finished Goods Inventory.
When inventory is sold, costs are
transferred to Cost of Goods Sold.
COMPUTE EQUIVALENT UNITS
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Equivalent Units of Production measure
work done during a period, expressed in
fully completed units.
This concept is used to determine the cost
per unit of completed product.
One EUP is the amount of direct
materials, or conversion cost (direct labor
and factory overhead) required to produce
one unit of finished goods. The objective
of the EUP is to allocate materials, labor
and overhead costs to finished goods,
ending work-in-process, and possibly lost
units.
Equivalent units are the sum of the units
completed and transferred out ( beg
inventory completed
+ started and
completed)
plus equivalent units of
ending work in process.
Under FIFO Method, only the costs
incurred this period are allocated between
finished
goods
and
ending
work-in-process.
Beginning
inventory
costs are maintained separately from
current period costs.
Under the Weighted Average Method, it
averages all materials, labor and
overhead both incurred in the beginning
work-in-process and those incurred this
period. Thus, no differentiation is made
between goods started in the preceding
and the current period.
The result of such computation is that the
FIFO method EUP differs from the
Weighted Average Method EUP by the
amount
of
EUP
in
beginning
work-in-process.
EXPLAIN THE FOUR STEPS NECESSARY
TO PREPARE A PRODUCTION COST
REPORT
1. Compute the physical unit flow—that is,
the Total Units to be Accounted For or the
TUTAF.
2. Compute
the
equivalent units of
production.
3. Compute the unit production costs,
expressed in terms of equivalent units of
production.
4. Prepare a cost reconciliation schedule,
which shows that the total costs
accounted for equal the total costs to be
accounted for.
COST OF PRODUCTION REPORT
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The production cost report contains both
Quantity Schedule and Cost data/analysis
for a production department.
COSTING METHOD USES
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FIFO costing and Weighted Average
costing
LOST UNITS IN PROCESS COST SYSTEM
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Lost units are always shown with other
whole units under “Units accounted for” in
the cost of production report.
If there is an inspection point, lost units
are discrete because the exact point of
occurrence can be determined.
The costs of normal loss units are
inventoriable costs while the costs of
abnormal loss are period costs.
NORMAL LOST UNITS
➔ Lost units are inherent, usual or
expected by the nature of
operations and within tolerance
limits set by the company for
human and machine errors and
therefore, it cannot be avoided.
➔ Normal lost units are expected
under efficient operating conditions
and in uncontrollable.
➔ Normal losses are treated as
product costs, that is, the cost of
the lost units are included as part
of all units finished or still in
process. In other words, the good
units absorb the cost of the units
lost.
➔ However,
this
principle
still
depends whether what particular
stage wherein the normal lost units
normally occur.
ABNORMAL LOST UNITS
➔ Lost units which are unusual, or
unexpected or even though
expected but it exceeds the normal
limits.
➔ A company does not expect such
spoilage during efficient operating
condition and can more likely
prevent (or avoid) abnormal loss
than normal loss.
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➔ The present generally accepted
accounting principles is that the
cost of abnormal losses should be
accumulated and treated as a loss
in the period in which those losses
occurred. This treatment is justified
by the cost principle discussed in
financial accounting.
➔ The cost principle allows only cost
that are necessary to acquire or
produce an asset. All unnecessary
cost are written off in the period in
which they are incurred. Any cost
of abnormal loss is regarded as a
period cost or to a current period
expense account.
A. CONTINUOUS NORMAL LOSS
● Lost units are not extended to the EUP
schedule (method of neglect)
● All good production (both fully and
partially completed) absorbs the cost of
lost units through higher per-unit costs.
B. CONTINUOUS ABNORMAL LOSS
● All units are appropriately extended to
the
EUP
schedule.
(accounted
separately)
● The cost of loss units is assigned as
period cost.
C. DISCRETE NORMAL LOSS
● Normal loss is appropriately extended to
the EUP schedule.
● Determine whether ending inventories
have passed the inspection point.
➔ If yes, the cost of lost units is
pro-rated between units in the
ending work-in-process and units
transferred out
➔ If no, the cost of lost units is
assigned only to the good
production that was transferred
out.
D. DISCRETE ABNORMAL LOSS
● All units are appropriately extended to
the EUP. (accounted separately)
● Cost of the loss units is assigned as a
period cost.
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