Chapter 6: Process Costing system
Introduction:
As we learn from chapter 5, There are two types of product costing systems
which used in accumulating product cost in manufacturing firms.
1- Job Costing System
‫نظام تكاليف األوامر االنتاجية‬
2- Process Costing System
)‫نظام تكاليف العمليات (المراحل‬
The type of industry determining which system is used
Job Costing System
Is a product costing system in which
costs are assigned to batches or job
orders of production
Assign costs to Distinct units of
product or service
Used when the firm produce distinct
bath of production called job order
Like:
Film Production , Building House
Aircraft Manufacture
Process Costing System
Accumulates the costs of a production
process and assigns them to the
products that comprise ‫ يشكل‬the
organization's output.
assign costs to masses ( Similar units)
and compute unit cost on an Average
base
Used by companies that produce large
number of identical units
Like:
Chemicals, Microchips, Gasoline
Beer, Textiles
In This chapter we will use process costing system in determining:
1- Product cost [ cost per unit produced]
2- Cost of goods sold [ units sold * cost per unit]
3- Cost of ending inventory [ units in ending inventory * cost per unit]
Nature of process costing system:
1- there are many stages to produce the product
Cost of goods sold
Page 1 of 12
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Determining Product cost [Cost per unit]
The determination of product cost [total product cost] and then the cost per unit
produced depending in three cases:
Case 1: Zero beginning and Ending work in process inventory
At this case the unit cost can be averaged by dividing total cost in a given accounting
period by total units produced in that period.
Cost per unit =
Total department cost
.
Number of units completed and transferred out
Exercise 1
The following data extracted from Nour Co. which has a two manufacturing
departments ( Assembly and Testing ), books for the month of January 2011, show
the followings:
Physical units for January 2011
Work in process beginning inventory (Jan 1)
Started during January
Completed and transferred out during January
Work in process, Ending inventory (Jan 31)
0 Units
400 Units
400 Units
0 Units
Total Costs For January 2011
Direct material
Conversion costs
Total assembly department costs added during Jan
$32,000
$24,000
$56,000
Requirement
1- Compute the cost per unit completed and transferred to the Testing
Department during January 2004?
Answer:
Cost per unit =
Total assembly department cost
.
Number of units completed and transferred
= 56,000 / 400 = $140 per unit
This case shows that: in a process costing system , unit costs can be
averaged by dividing total cost in a given accounting period by total units
produced in that period.
Because each unit is identical
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Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Case 2: Zero Beginning But some ending work in process inventory
: ‫وفي هذه الحالة يجب إتباع خمسة خطوات وهي‬
12345-
Units to be accounts for ( Summarize the flow of physical Units )
Equivalent units ( Compute output in term of equivalent unit )
Total cost
Cost per equivalent unit
Assignments of costs
Meaning of Equivalent units: ( ‫ ) الوحدات المعادلة‬or ( ‫) الوحدات المتجانسة‬
‫وهي كمية المخرجات التامة التي تأخذ نفس القدر من المدخالت للوحدات غير التامة‬
‫ وحدة تامة‬01 ‫ ) يمثلها‬%01 ‫ وحدة غير تامة ( تامة بنسبة‬011 : ‫مثلا‬
‫ وحدة تامة‬01 = 1200.*011 ‫ ) يمثلها‬%00 ‫ وحدة غير تامة ( تامة بنسبة‬011
: ‫ومن الملحظ‬
) DM , C C ( ‫ يجب حسابها لكل نوع من المدخالت حيث قد تختلف نسب االستفادة من‬Equivalent Units ‫أن‬
‫ مدن تكداليف‬%01 ‫حيث قدد تحلدل الوحددات المنتجدة نلدب نلديبها كدامالم مدن المدواد بينمدا تحلدل فقدل نلدب‬
. ‫التحويل‬
Exercise 2
The following data extracted from Nour Co. which has a two manufacturing
departments ( Assembly and Testing ), books for the month of February 2004, show
the followings:
Physical units for February 2004
Work in process beginning inventory (Jan 1)
Started during January
Completed and transferred out during January
Work in process, Ending inventory (Jan 31)
0 Units
400 Units
175 Units
225 Units
The 225 partially assembled units are fully processed with respect to direct
materials, an assembly department supervisor estimates that the partially assembled
units are on average 60% complete from the respective of conversion costs.
Total Costs For February 2004
Direct material
Conversion costs
Total assembly department costs added during Jan
$32,000
$18,600
$50,600
Requirement
1- Compute the cost of goods completed and transferred to the refining
Department during February.
Note:
Degree of completion in this department
(Direct material 100% , Conversion cost 60%)
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Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Answer:
Physical
Units
1- Physical Units to account for:
Work In process, Beginning
+ Started During the Year
= Units To account for
2- Equivalent Units :
* Started And Completed
* Work In process, Ending
Direct
Material
Conversion
costs
0
400
400
175
225
175
225
225*100%
= Total Equivalent Unit
3- Total Costs:
* For Work In process, Beginning
* Costs Added in Current Period
= Total Cost To account for
4- cost per Equivalent unit
225*60%
500
400
310
0
50,600
50,600
0
32,000
32,000
0
18,600
18,600
32,000/400=
5- Assignment costs
* Started and completed (175 U)
24,500
24,500
Total cost of units completed
* Work In process, ending (225 u)
Total Work in process, end
26,100
= Total cost to account for
175
135
18,600/310=
80
60
175*80
14,000
175*60
10,500
225*$80
18,000
135*$60
8,100
50,600
Student Notes:
1- Very important formula:
W.I.P
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beg
+ Started = Completed + W.I.P
end
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Case 3: Some beginning and some ending Work in process inventory
‫ ) أو‬Average Method ( ‫وفي هذه الحالة يجب اختيار طريقة من طرق تدفق التكاليف المعروفة وهي‬
) FIFO (
Average method cost ‫ طريقة متوسط التكلفة‬: ‫أوالا‬
‫نتبع نفس خطوات الحل كما في حالة وجود مخزون انتاج تحت التشغيل آخر الفترة فقل‬
Exercise 3-1:
At the beginning of march 2004, Nour Co. had 225 partially assembled DG-19
units in the assembly department, it started production of another 275 units in
march,2004 , data for assembly department for march are:
Physical units for march:
Work in process, beginning inventory ( March 1 )
225 units
Direct material ( 100% completed )
Conversion costs ( 60% completed )
Completed and transferred out during March
275 Units
400 Units
Work in process, ending inventory ( March 31 )
100 Units
Started during March:
Direct material ( 100% completed )
Conversion costs ( 50% completed )
Total costs for March 2004
Work In process, beginning inventory
Direct materials ( 225 equivalent units * $80 per unit ) $18,000
Conversion costs ( 135 equivalent units * $60 per unit ) $ 8,100
Direct material cost added during march
Conversion cost added during march
Total costs to account for
Page 5 of 12
$26,100
$19,800
$16,380
$62,280
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Physical
Units
1- Physical Units to account for:
Work In process, Beginning
+ Started During the Year
= Units To account for
2- Equivalent Units :
* Started And Completed
* Work In process, Ending
Direct
Material
225
275
500
400
100
400
100
100*100%
= Total Equivalent Unit
3- Total Costs:
* For Work In process, Beginning
* Costs Added in Current Period
= Total Cost To account for
4- cost per Equivalent unit
Conversion
costs
400
50
100*50%
500
500
450
26,100
36,180
62,280
18,000
19,800
37,800
8,100
16,380
24,480
37,800/500=
24,480/450=
$75.60
$54.40
5- Assignment costs
* Started and completed (225 U)
Total cost of units completed
* Work In process, ending (225 u)
Total Work in process, end
= Total cost to account for
Page 6 of 12
52,000
52,000
10.280
62.280
400*$75.60
30,240
400*$54.40
21,760
100*$75.60
7,560
50*$54.40
2,720
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
First In First Out ( FIFO) ‫ طريقة الوارد أوالَ صادر أوالا‬: َ ‫ثانيا‬
‫نتبع نفس خطوات الحل كما في طريقة متوسل التكلفة ولكن االختالف يكون في الخطوة الثانية وهي الخاصة‬
‫ حيث يتم حسابها بالتفليل نلب حسب األول فداألول وكدذلع نندد إجدرال نمليدة‬Equivalent units ‫بتحديد‬
Assignments of cost ‫ربل التكلفة‬
Physical
Units
1- Physical Units to account for:
Work In process, Beginning
+ Started During the Year
= Units To account for
2- Equivalent Units :
* Started And Completed (400 Units)
■ From Beginning WIP
Direct
Material
Conversion
costs
225
275
500
225
0
225*0%
■ Started and Completed
175
175
175*100%
* Work In process, Ending
90
225*40%
100
175
175*100%
100
50
500
275
315
26,100
36,180
62,280
0
19,800
19,800
0
16,380
16,380
100*100%
= Total Equivalent Unit
3- Total Costs:
* For Work In process, Beginning
* Costs Added in Current Period
= Total Cost To account for
4- cost per Equivalent unit
19,800/275=
16,380/315=
$72
$52
5- Assignment costs
* Started And Completed (400 Units)
Cost forwarded
■ From Beginning WIP (225 units)
26,100
4,680
0
0*$72
■ Started and Completed (175 units)
21,700
90*$52
12,600
175*$72
* Work In process, Ending
52,480
9,800
Page 7 of 12
9,100
175*$52
7,200
100*$72
= Total cost of units completed
4,680
2600
50*$52
62,280
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Use the following information for the next 3 questions.
Salmon Manufacturing Company uses a process costing system. Direct materials are added at the beginning
of the process. During January, Department Q had a beginning inventory of 2,000 units, 25% complete for
conversion costs. During the month 14,000 units were started and there were 1,000 units in ending inventory,
60% complete for conversion costs.
2.
Using FIFO process costing, the equivalent units for direct materials for the month were
a. 13,600
b. 14,000
c. 16,000
d. 15,600
3.
Using weighted average process costing, the equivalent units for direct material for the month were
a. 13,600
b. 14,000
c. 16,000
d. 15,600
4.
Using weighted average process costing, the equivalent units for conversion costs for the month
were
a. 14,100
b. 14,000
c. 16,000
d. 15,600
Physical
Units
1- Physical Units to account for:
Work In process, Beginning
+ Started During the month
= Units To account for
2- Equivalent Units :
* Started And Completed (15,000)
From Beginning WIP
Direct
Material
2,000
14,000
16,000
2,000
0
2,000*0%
From Started During Month
13,000
13,000
13,000*100%
* Work In process, Ending
1,000
Page 8 of 12
16,000
1,500
2,000*75%
13,000
13,000*100%
1,000
1,000*100%
= Total Equivalent Unit
Conversion
costs
14,000
600
1,000*60%
15,100
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Use the following information for the next 3 questions.
Salmon Manufacturing Company uses a process costing system. Direct materials are added at the beginning
of the process. During January, Department Q had a beginning inventory of 2,000 units, 25% complete for
conversion costs. During the month 14,000 units were started and there were 1,000 units in ending inventory,
60% complete for conversion costs.
2.
Using FIFO process costing, the equivalent units for direct materials for the month were
a. 13,600
b. 14,000
c. 16,000
d. 15,600
3.
Using weighted average process costing, the equivalent units for direct material for the month were
a. 13,600
b. 14,000
c. 16,000
d. 15,600
4.
Using weighted average process costing, the equivalent units for conversion costs for the month
were
a. 14,100
b. 14,000
c. 16,000
d. 15,600
Physical
Units
1- Physical Units to account for:
Work In process, Beginning
+ Started During the month
Direct
Material
2,000
14,000
= Units To account for
16,000
2- Equivalent Units :
* Started And Completed
15,000
15,000
15,000*100%
* Work In process, Ending
1,000
Page 9 of 12
16,000
15,000
15,000*100%
1,000
1,000*100%
= Total Equivalent Unit
Conversion
costs
16,000
600
1,000*60%
15,600
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Use the following information for the next 8 questions.
Hendrix, Inc. employs a process costing system. Direct materials are added at the beginning of the process.
Here is information about July’s activities:
On July 1:
Beginning inventories = 750 units, 60% complete
Direct materials cost = $5,925
Conversion costs = $4,095
During July:
15,000 units started
Direct materials added = $150,000
Conversion costs added = $83,520
On July 31:
Ending inventories = 1,500 units, 40% complete
7.
Using the FIFO method, the number of units started and completed in July was
a. 14,250
b. 15,000
c. 13,500
d. 15,750
8.
Using the FIFO method, the number of equivalent units of conversion costs was
a. 14,400
b. 14,550
c. 14,850
d. 14,700
9.
Using the FIFO method, the cost per equivalent unit for materials used during July was
a. $9.90
b. $9.80
c. $11.11
d. $10.00
10.
Using the FIFO method, the cost of goods completed and transferred out during July was
a. $225,150
b. $225,060
c. $213,300
d. $213,000
11.
Using the weighted average method, the number of equivalent units of material was
a. 15,750
b. 14,250
c. 15,000
d. 13,500
12.
Using the weighted average method, the cost per equivalent unit for conversion costs was
a. $5.80
b. $5.90
c. $6.00
d. $6.10
13.
Using the weighted average method, the cost of the goods completed and transferred out was
a. $225,150
b. $225,060
c. $213,300
d. $213,000
Page 10 of 12
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
14.
Using the weighted average method, the cost of the ending work in process inventory for July was
a. $18,480
b. $18,540
c. $18,330
d. $18,390
15.
On September 1, Kelita Company had 20,000 units in process, which were 30% completed.
Materials are added at the beginning of the process. During the month 160,000 units were started and
170,000 completed. Ending work in process was 50% complete. By what amount would the
equivalent units of materials differ if weighted average were used instead of FIFO?
a. 20,000 more
b. -0c. 6,000 more
d. 14,000 less
16.
Assume that ending work in process is 8,000 units, 20% complete, and that 20,000 units were started
during the month. The beginning work in process was 75% complete. Materials are added at the
beginning of the process, and the cost of materials are added during the month was $61,500. Using
the weighted average method, materials are allocated at $4.00 per equivalent unit. The cost of
material included in the beginning work in process from last month was
a. $18,500
b. $20,000
c. $34,500
d. None of the above
Page 11 of 12
Ehab Abdou (+965 97672930)
Chapter 6: Process Costing system
Physical
Units
1- Physical Units to account for:
Work In process, Beginning
+ Started During the month
= Units To account for
2- Equivalent Units :
* Started And Completed (14,250)
From Beginning WIP
Direct
Material
Conversion
costs
750
15,000
15,750
750
0
750*0%
From Started During Month
13,500
13,500
13,500*100%
* Work In process, Ending
1,500
3- Total Costs:
* For Work In process, Beginning
* Costs Added in Current Period
= Total Cost To account for
13,500
13,500*100%
1,500
1,500*100%
= Total Equivalent Unit
300
750*40%
600
1,500*40%
15,750
15,000
14,400
10,020
233,520
0
150,000
0
83,520
243,540
150,000
83,520
4- Cost per Equivalent unit
150,000
15,000
10.00
5- Assignment costs
* Completed
From Beginning
10,020
1,740
83,520
14,400
5.80
0
0×$10.34
Fron Started
213,300
135,000
13500×$10
Total cost of units completed
* Work In process, ending
300×$5.80
78,300
13500×$5.80
225,060
18,480
15,000
1500×$10
Total Work in process, end
1,740
3,480
600×$5.80
18,480
243,540
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