PROCESS COSTING
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
PROCESS COSTING
Inventory-flow methods and process costing
A. Weighted-average process-costing method: calculates equivalent-unit cost of all
work done to date and assigns this cost to equivalent units completed and transferred out
of the process and those in ending work-in-process inventory
1. Step 1: Summarize the flow of physical units of output
a. Units to account for are sum of units in beginning work in process and of units
started during the period
b. Units accounted for are sum of units completed and transferred out and of units in
ending work-in-process inventory
2. Step 2: Compute output in terms of equivalent units
a. Weighted-average method merges equivalent units in beginning inventory with
equivalent units of work done in current period [to account for] because concern is
work done to date (stage of completion of current-period beginning work in process
is irrelevant)
b. Weighted-average method keeps separate equivalent units of completed and
transferred out from ending work in process [accounted for]
3. Step 3: Compute equivalent unit costs
a. Cost of work done to date (sum of costs of beginning work-in-process inventory
plus costs of work done in current period) divided by total equivalent units of work
done to date
b. Cost per equivalent unit is weighted-average cost for each input-cost category
4. Step 4: Summarize total costs to account for (same as cost of work done to date in
Step 3)
5. Step 5: Assign total costs to units completed and to units in ending work in process
a. Costs assigned to equivalent units completed and transferred out—for each inputcost category, equivalent units multiplied by weighted-average cost of equivalent
unit
b. Costs assigned to equivalent units in ending work in process by multiplying
equivalent units within each input-cost category by weighted-average equivalent
unit cost for that category
B. First-in, first-out (FIFO) process-costing method: calculates and separates cost
according to order of time periods in which the work was done (ordinal number of
“first”)—work done on beginning inventory before the current period is kept separate from
work done in current period
1. Step 1: Summarize the flow of physical units of output
a. Units to account for is same regardless of inventory flow method
b. Units accounted for are subdivided by time period in which work is done
i.
Completed and transferred out during current period


Started in prior period (beginning work in process) and completed this
period
Started this time period and completed this period
ii. Work in process, ending (started this time period but not completed this time
period)
PROCESS COSTING
2. Step 2
a. Equivalent units calculated only for work done during current period for each inputcost category, includes
i.
Work done to complete units in beginning work-in-process inventory
ii. Work done to complete units started this time period
iii. Work done on units started this time period but not completed
b. No equivalencies calculated for work done in prior period
3. Step 3: Compute equivalent unit costs—only costs for each input category added in
the current period divided by equivalent units for each input-cost category of work
done in current period
4. Step 4: Summarize total costs to account for (costs of beginning work-in-process
inventory plus costs added in the current period )
5. Step 5: Assign total costs to units completed and to units in ending work in process
a. Units completed and transferred out assigned costs according to
i.
Beginning work-in-process units assigned costs from costs to account for in
beginning work-in-process
ii. Beginning work-in-process units also assigned costs of costs used to complete
them using equivalent units of work for each input-cost category multiplied by
equivalent cost per unit of work done this period
iii. Started and completed this time period—assigned costs from multiplying
equivalent units of work for each input-cost category by equivalent cost per unit
of work for input category
b. Units in work in process, ending—equivalent units of work for the current time
period multiplied by equivalent cost for corresponding input-cost category of
current time period
Accounting for Spoilage
If spoilage is normal and continuous, the calculations for EUP do not include this
spoilage (method of neglect), and the good units simply absorb the cost of such
spoilage. If spoilage is normal and discrete, the equivalent units are used in the
EUP calculations, and the spoilage cost is assigned to all units that passed through
the inspection point during the current period. If the spoilage is abnormal and
either discrete or continuous, the equivalent units are used in EUP calculations and
costed at the cost per EUP; the total cost is then assigned to a loss account.
PROCESS COSTING
Problem 1. Malinta Woolens is a manufacturer of wool cloth. The information for March is
as follows:
Beginning work in process
Units started
Units completed
10,000 units
20,000 units
25,000 units
Beginning work-in-process direct
materials
Beginning work-in-process conversion
Direct materials added during month
Direct manufacturing labor during
month
Factory overhead
P 6,000
P 2,600
P30,000
P12,000
P 5,000
Beginning work in process was half converted as to labor and overhead. Direct
materials are added at the beginning of the process. All conversion costs are incurred
evenly throughout the process. Ending work in process was 60% complete.
Required:
Prepare a production cost worksheet using the weighted-average method. Include any
necessary supporting schedules.
Problem 2 .The Avenida Factory produces expensive boots. It has two departments that
process all the items. During January, the beginning work in process in the tanning
department was 40% complete as to conversion and 100% complete as to direct
materials. The beginning inventory included P6,000 for materials and P18,000 for
conversion costs. Ending work-in-process inventory in the tanning department was
40% complete. Direct materials are added at the beginning of the process.
Beginning work in process in the finishing department was 60% complete as to
conversion. Beginning inventories included P7,000 for transferred-in costs and P10,000
for conversion costs. Ending inventory was 30% complete.
Additional information about the two departments follows:
Beginning work-in-process units
Units started this period
Units transferred this period
Ending work-in-process units
Material costs added
Conversion costs
Transferred-out cost
Tanning
5,000
14,000
16,000
?
Finishing
4,000
?
18,000
2,000
P18,000
32,000
50,000
?
P19,000
?
Required:
Prepare a production cost worksheet using weighted-average costing for the finishing
department.
PROCESS COSTING
Problem 3. New Image Sports uses a process-costing system. For March, the company had
the following activities:
Beginning work-in-process inventory (1/3 complete)6,000 units
Units placed in production
24,000 units
Good units completed
18,000 units
Ending work-in-process inventory
10,000 units
Cost of beginning work in process
P 5,000
Direct material costs, current
P18,000
Conversion costs, current
P13,800
Direct materials are placed into production at the beginning of the process. All spoilage
is normal and is detected at the end of the process. Ending WIP is 50% completed as to
conversion.
Required: Prepare a production cost worksheet using the FIFO method.
Problem 4. Tide Products Company uses an automated process to clean and polish its
souvenir items. For March, the company had the following activities:
Beginning work in process inventory
Units placed in production
Units completed
Ending work in process inventory
Cost of beginning work in process
Direct material costs, current
Conversion costs, current
3,000 items, 1/3
complete
12,000 units
9,000 units
6,000 items, 1/2
complete
P2,500
P9,000
P7,700
Direct materials are placed into production at the beginning of the process and
conversion costs are incurred evenly throughout the process.
Required: Prepare a production cost worksheet using the FIFO method.
Problem 5. Fairview Company produces baseball bats and cricket paddles. It has two
departments that process all products. During July, the beginning work in process in
the cutting department was half completed as to conversion, and complete as to direct
materials. The beginning inventory included P40,000 for materials and P60,000 for
conversion costs. Ending work-in-process inventory in the cutting department was 40%
complete. Direct materials are added at the beginning of the process.
Beginning work in process in the finishing department was 80% complete as to
conversion. Direct materials for finishing the units are added near the end of the
process. Beginning inventories included P24,000 for transferred-in costs and P28,000
for conversion costs. Ending inventory was 30% complete. Additional information about
the two departments follows:
Beginning work-in-process units
Units started this period
Units transferred this period
Ending work-in-process units
Material costs added
Conversion costs
Transferred-out cost
Cutting
20,000
60,000
64,000
Finishing
24,000
P48,000
28,000
128,000
P34,000
68,500
68,000
20,000
Required: Prepare a production cost worksheet, using FIFO for the finishing
department.
PROCESS COSTING
Problem 6. New Image Sports uses a process-costing system. For March, the company had
the following activities:
Beginning work-in-process inventory (1/3 complete)
Units placed in production
Good units completed
Ending work-in-process inventory
Cost of beginning work in process
Direct material costs, current
Conversion costs, current
6,000 units
24,000 units
18,000 units
10,000 units
P 5,000
P18,000
P13,800
Direct materials are placed into production at the beginning of the process. All spoilage
is normal and is detected at the end of the process. Ending WIP is 50% completed as to
conversion.
Required:
Prepare a production cost worksheet using the FIFO method.
Problem 7. Springfield Sign Shop manufactures only specific orders. It uses a standard cost
system. During one large order for the airport authority, an unusual number of signs
were spoiled. The normal spoilage rate is 10% of units started. The point of first
inspection is half way through the process, the second is three-fourths through the
process, and the final inspection is at the end of the process. Other information about
the job is as follows:
Units started
Units spoiled
3,000
450
Direct materials put into process at beginning
P 60,000
Conversion costs for job
P120,000
Standard direct material costs per sign
P27
Standard conversion cost per sign
P54
Average point of spoilage is the 3/4 completion point
Average current disposal cost per spoiled sign
P15
Required:
Make necessary journal entries to record all spoilage.
PROCESS COSTING
MULTIPLE CHOICES.
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 1 THROUGH 4.
The Rest-a-Lot Chair Company manufacturers a standard recliner. During February, the
firm's Assembly Department started production of 75,000 chairs. During the month, the firm
completed 85,000 chairs and transferred them to the Finishing Department. The firm ended
the month with 10,000 chairs in ending inventory. All direct materials costs are added at the
beginning of the production cycle. Weighted-average costing is used by Rest-a-Lot.
1.
How many chairs were in inventory at the beginning of the month? Conversion costs
are incurred uniformly over the production cycle.
a. 10,000 chairs
b. 20,000 chairs
c.
15,000 chairs
d. 25,000 chairs
2.
What were the equivalent units for materials for February?
a. 95,000 chairs
b. 85,000 chairs
c.
80,000 chairs
d. 75,000 chairs
3.
What were the equivalent units for conversion costs for February if beginning inventory
was 70% complete as to conversion costs and ending inventory was 40% complete as
to conversion costs?
a. 89,000
b. 75,000
c.
85,000
d. 95,000
4.
Of the 75,000 units Rest-a-Lot started during February, how many were finished during
the month?
a. 75,000
b. 85,000
c.
65,000
d. 95,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 5 THROUGH 8.
The Rest-a-Lot chair company manufacturers a standard recliner. During February, the
firm's Assembly Department started production of 75,000 chairs. During the month, the firm
completed 80,000 chairs, and transferred them to the Finishing Department. The firm ended
the month with 10,000 chairs in ending inventory. There were 15,000 chairs in beginning
inventory. All direct materials costs are added at the beginning of the production cycle and
conversion costs are added uniformly throughout the production process. The FIFO method
of process costing is used by Rest-a-Lot. Beginning work in process was 30% complete as to
conversion costs, while ending work in process was 80% complete as to conversion costs.
Beginning inventory:
Direct materials
Conversion costs
P24,000
P35,000
Manufacturing costs added during the accounting period:
Direct materials
P168,000
Conversion costs P278,000
5.
How many of the units that were started during February were completed during
February?
a. 85,000
b. 80,000
c.
75,000
d. 65,000
PROCESS COSTING
6.
What were the equivalent units for conversion costs during February?
a. 83,500
b. 85,000
c.
75,000
d. 79,500
7.
What is the amount of direct materials cost assigned to ending work-in-process
inventory at the end of February?
a. P19,200
b. P22,400
c.
P25,600
d. P22,500
8.
What is the cost of the goods transferred out during February?
a. P417,750
b. P456,015
c.
P476,750
d. P505,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 9 THROUGH 13.
Gilmore Computer Systems, Inc., manufactures printers. All direct materials are added at
the inception of the production process. During January, the accounting department noted
that there was no beginning inventory. Direct materials purchases totaled P100,000 during
the month. Work-in-process records revealed that 4,000 cards were started in January,
2,000 cards were complete, and 1,500 units were spoiled as expected. Ending work-inprocess units are complete in respect to direct materials costs. Spoilage is not detected until
the process is complete.
9.
What are the respective direct material costs per equivalent unit, assuming spoiled
units are recognized or ignored?
a. P20.00; P35.00
b. P25.00; P40.00
c.
P30.00; P45.00
d. P35.00; P50.00
10. What is the direct material cost assigned to good units completed when spoilage units
are recognized?
a. P50,000
b. P100,000
c.
P80,000
d. P87,500
11. What is the cost transferred out assuming spoilage units are ignored?
a. P87,500
b. P80,000
c.
P50,000
d. P77,500
12. What are the amounts allocated to the work-in-process ending inventory assuming
spoilage units are recognized and ignored, respectively?
a. P20,000; P24,500
b. P30,000; P34,250
c.
P12,500; P20,000
d. P37,500; P40,000
13. Spoilage costs allocated to ending work in process are larger by which method and by
how much?
a. When spoiled units are recognized by P2,500
b. When spoiled units are recognized by P4,250
c.
When spoiled units are ignored by P7,500
d. When spoiled units are recognized by P7,500
PROCESS COSTING
14. THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 14 THROUGH 23.
The Marcelo Plastic Manufacturing Company produces a product known as “wal-astik” which
undergoes processing through two production departments, In Department 2, the process is
completed in ten days , during which time the units in process suffer a loss of 15% through
evaporation.
During the month of April, 2011 Department 1 transferred to Department 2, 120,000 units costing
p 240,000.
The records of Department 2 showed the following information regarding its operations for the
month:
Quantity:
In process, April 1 …………………………………………………...
1,925 units (1/4)
Transferred to Storeroom …………………………………………..
86,700 units
In process, April 30 ………………………………………………….
18,500 units (1/2)
Cost:
In process, April 1 …………………………………………………...
p 4,165.00
Costs during April, 2011
Materials ………………………………………………………...
56,865.00
Labor …………………………………………………………….
28,432.50
Overhead ………………………………………………………...
9,477.50
From the above data, choose the appropriate answer from the listed items enumerated under each
independent cases:
14. The total evaporation loss suffered in April is:
a. 15,000 units
b. 11,500 units
c. 16,725 units
15. The total equivalent production for the month is:
a. 94,775 units
b. 95,525 units
c. 95,500 units
16. The unit cost for Material is:
a. p 0.50
b. p 0.45
c. p 0.60
17. The unit cost for labor is:
a. p 0.30
b. p 0.20
c. p 0.10
18. The unit cost for overhead is:
a. p 0.30
b. p 0.20
c. p 0. 10
19. The cost of completion of the in-process units, April 1, is.
a. p 6,475
b. p 5,440
c. p 5,450
20. The costs of completion of 100,000 units currently received from Department 1, is:
a. p 300,000
b. p 250,000
c. p 285,000
21. The total costs of transfer of the 86,700 units to storeroom is:
a. p 290,440
b. p 305,450
c. p 312,450
22. The in-process at the end is charged for the costs from prior department, in the amount of:
a. p 40,000
b. p 39,000
c. p 45,000
23. The total costs charged to the in-process April 30, is:
a. p 48,500
b. p 45,000
c. p 50,000
24. On occasion, the FIFO and the weighted-average methods of process costing will result
in the same peso amount of costs being transferred to the next department. Which of
the following scenarios would have that result?
a. When the beginning and ending inventories are equal in terms of unit numbers.
b. When the beginning and ending inventories are equal in terms of the percentage
of completion for both direct materials, and conversion costs.
c.
When there is no ending inventory.
d. When there is no beginning inventory.
PROCESS COSTING
25. An assumption of the FIFO process-costing method is that
a. the units in beginning inventory are not necessarily assumed to be completed by
the end of the period.
b. the units in beginning inventory are assumed to be completed first.
c.
ending inventory will always be completed in the next accounting period.
d. no calculation of conversion costs is possible.
26. Which one of the following statements is true?
a. In a job-costing system, individual jobs use different quantities of production
resources.
b. In a process-costing system each unit uses approximately the same amount of
resources.
c.
An averaging process is used to calculate unit costs in a job-costing system.
d. Both (a) and (b) are true.
27. Conversion costs
a. include all the factors of production.
b. include direct materials.
c.
in process costing are usually considered to be added evenly throughout the
production process.
d. include both (b) and (c).
28. An example of a business which would have no beginning or ending inventory but could
use process costing to compute unit costs would be
a. a clothing manufacturer.
b. a corporation whose sole business activity is processing the customer deposits of
several banks.
c.
a manufacturer of custom houses.
d. a manufacturer of large TVs.
29. Which of the following statement (s) concerning conversion costs is correct?
a. Estimating the degree of completion of direct materials in a partially completed
unit is usually easier to calculate than estimating the degree of completion for
conversion costs.
b. The calculation of equivalent units is relatively easy for the textile industry.
c.
Estimates are usually not considered acceptable.
d. Both (b) and (c) are correct.
30. The purpose of the equivalent-unit computation is
a. to convert completed units into the amount of partially completed output units
that could be made with that quantity of input.
b. to assist the business in determining ending inventory.
c.
to convert partially completed units into the amount of completed output units
that could be made with that quantity of input.
d. both (b) and (c).
31. Forte Co. has the following information for May:
Beginning Work In Process Inventory (70% complete as to conversion)
6,000 units
Started
24,000 units
Ending Work In Process Inventory
(10% complete as to conversion)
8,500 units
Beginning WIP Inventory Costs:
Material
P 23,400
Conversion
50,607
Current Period Costs:
Material
P 31,500
Conversion
76,956
All material is added at the start of the process and all finished products are transferred
out.
How many units were transferred out in May?
PROCESS COSTING
a.
b.
15,500
18,000
c. 21,500
d. 24,000
32. Assume that weighted average process costing is used. What is the
cost per equivalent unit for material?
a. P 1.83
c. P 0.55
b. P 1.05
d. P 1.31
33. Assume that FIFO process costing is used. What is the cost per equivalent unit for
conversion?
a. P 7.03
c. P 4.24
b. P 3.44
d. P 5.71
The following information is available for OP Company for the current year:
Beginning WIP (75% complete)
14,500 units
Started
75,000 units
Ending WIP (60% complete)
16,000 units
Abnormal Spoilage
2,500 units
Normal Spoilage (continuous)
5,000 units
Transferred Out
66,000 units
All materials are added at the start of production.
Cost of Beginning Work in Process
Materials
P 25,100
Conversion
50,000
Current Cost
Materials
P120,000
Conversion
300,000
34. Using weighted average, what are equivalent units for materials?
a. 82,000
c. 84,500
b. 89,500
d. 70,000
35. Using weighted average, what are equivalent units for conversion costs?
a. 80,600
c. 83,100
b. 78,100
d. 75,600
36. What is the cost per equivalent unit for materials using weighted average?
a. P 1.72
c. P 1.77
b. P 1.62
d. P 2.07
37. What is the cost per equivalent unit for conversion costs using weighted average?
a. P 4.62
c. P 4.48
b. P 4.21
d. P 4.34
38. What is the cost assigned to normal spoilage using weighted average?
a. P31,000
c. P30,850
b. P15,500
d. None of the above
39. T Company has the following information for July:
Units started
100,000 units
Beginning WIP (35% complete)
20,000 units
Normal Spoilage (discrete)
3,500 units
Abnormal Spoilage
5,000 units
Ending WIP (70% complete)
14,500 units
Transferred Out
97,000 units
Beginning Work in Process Costs:
Materials
P 15,000
Conversion
10,000
PROCESS COSTING
All materials are added at the start of the production process. T Co. inspects goods at
75% completion as to conversion.
a.
b.
What are the equivalent units of production for materials assuming FIFO?
100,000
c. 95,000
96,500
d. 120,000
40. What are the equivalent units of production for conversion costs, assuming FIFO?
a. 108,900
c. 108,650
b. 103,900
d. 106,525
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