Lecture: 6, and 7

Chapter -5
Process costing
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Process Costing system
A process costing system is used in such situations where the
company produces homogeneous products or identical products in
bulk quantities on continuous basis for a long period of time. i.e.,
the same products are produced repeatedly on large quantities.
The products produced are either homogeneous in nature (e.g., a
liquid or powder) or discrete, but identical units (e.g., a particular
automotive part, particular medicine, etc.).
Examples: Oil, Chemicals, Cement, Paint, Soft drinks, Wine,
medicines, Bricks, paper, Plastics etc.

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The journal entries in process costing are similar to the job order costing system. The main difference is that, in process costing
there is more than one work in process accounts.i.e, one for each process/department, where as in job order costing there will
be one work in process account for all jobs.
In process costing the costs are recorded and accumulated in production Report (departmental wise) as compared to job order
costing, where costs are recorded & accumulated in Job order cost sheet (Job order wise).
Cost of production report is made for each department/process. This report contains the following four sections.
1.Quantity Schedule.
2.The calculations for Equivalent units, and unit cost, etc.
3.The cost charged to the department
4.The cost accounted for the department.
 Now we elaborate, briefly about each section one by one under two separate assumptions (see next pages)

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

Assumption: 1

(i).Very first department

(ii).WIP beginning inventory is Nil

(iii).Lost units are normal and occurred at the beginning of the period

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Format under above Assumption #1:

ABC Corporation
Cost of Production Report
Department name
For the month of February, 2019
1.Quantity Schedule
Units put into process xx
Units completed & transferred to finished goods Store
or to next department xx
Units in process at the end of month. xx
Units lost in process xx xx

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2. Calculations for Equivalent units, and unit cost

(i). Equivalent production:

Direct Material = Transferred units + WIP units X completion stage %
as per as per direct material = xx
Direct Labor = Transferred units + WIP units X completion stage % as
per as per direct labor = xx
Factory overhead = Transferred units + WIP units X completion stage %
as per FOH = xx

(ii).
Unit cost for direct material, labor, and Factory
overhead.
Direct material = Direct Material cost ÷ Equivalent units =Rs xx
Direct Labor = Direct labor cost ÷ Equivalent units = Rs xx
Factory overhead = Factory overhead cost ÷ Equivalent units = Rs xx

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3. The cost charged to the department
Cost added by department:
Total cost Unit cost
Direct Material Rs xx Rs xx
Direct labor xx xx
Factory overhead xx xx
Total cost added and to be accounted for Rs xx Rs xx
===== ====

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4. Cost accounted for as follows
Costs Transferred to next departmental or finished goods Store.[Units X unit cost] = Rs xx
Work in process - ending inventory:

Direct Materials [WIP units X Completion stage % Material cost per unit] =xx

Labor [WIP units X Completion stage % X Labor cost per unit] =xx

Factory overhead [WIP units X Completion stage% X Factory overhead cost per u nit]= xx xx

Thus Total cost accounted for Rs xx

= ====

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Assumption: 2
 
(i). Subsequent department (i.e. subsequent to the
first department)

(ii). WIP beginning inventory is Nil

(iii). Lost units are normal and occurred at the

beginning of the period

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Format under above Assumption:2

ABC Corporation
Cost of Production Report
Department name
For the month of --------
1. Quantity Schedule
Units received from preceding department xx
Units completed & transferred to finished goods Store or to
next department. xx

Units in process at the end of month. xx

Units lost in process xx xx
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 2. Calculations for Equivalent units, unit cost

(i). Equivalent production.

Material = Transferred units + WIP units X completion stage % as per as
per direct material = xx
Direct labor = Transferred units + WIP units X completion stage % as
per as per labor = xx
Factory overhead = Transferred units + WIP units X completion stage
% as per FOH = xx

(ii). Unit cost for direct material, Direct labor, and Factory overhead.
Direct Material = Direct Material cost ÷ Equivalent units = Rs xx
Direct Labor = Direct labor cost ÷ Equivalent units = Rs xx
Factory overhead = Factory overhead cost ÷ Equivalent units = Rs xx

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3. The cost charged to the department.
Total cost Unit Cost
Rs Rs
Cost from preceding department:
Transferred in during the month xx xx
Adjustment of unit cost of preceding department due to lost units:
((Cost of preceding department ÷ (units recd – units lost) - Unit cost of preceding dept)) xx
Adjusted rate of previous department xx
Cost added by the department:
Direct material xx xx
Direct labor xx xx
Factory overhead xx xx
Total cost added during the month xx xx
Total cost to be accounted for xx xx
=== ===

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4. Cost accounted for as follows
Transferred to next departmental or finished goods Store.[Units X unit cost] Rs xx
Work in process - ending inventory:
Adjusted cost from preceding department [WIP Units X Adjusted .unit cost] xx
Direct material [WIP units X Completion stage % X direct labor cost per unit] xx
Labor [WIP units X Completion stage % X Labor cost per unit] xx
Factory overhead [WIP units X Completion stage % X FOH cost per unit] xx
xx

Total cost accounted for Rs

xx
=====
 

……………… ………………

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(Problem – 11.1) The following is the condensed information from the records of
Quality Steel Mills, Karachi for the month of November 1983.
 

500 units in process November 1, 1983

(80% completed to material and processing) Rs. 3,850
Cost Incurred during November 
Direct Material Rs. 34,700
Labour Rs. 45,000
Factory Overhead applied (90% of Direct Labour) ????
 Company completed 11,000 units in November 1983. There are 500 units in process
at the end of the month in the following stage of completion:
Material 100%
Processing (Labour and Factory overhead) 40%

 Required:
Compute Equivalent Production Units assuming FIFO method of inventory.
Compute the unit cost for November 1983
Compute the cost of the units transferred to warehouse assuming FIFO method.
Compute the ending inventory of goods in process
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1. Equivalent Production Units assuming
FIFO method of inventory.
Direct Material Conversion Cost
Particulars Units Direct Labour FOH Units
Units
Completed and transferred out 11000 11000 11,000
Add: Ending Work in Process
(ending WIP units x of completion)
500 x 100% 500
500 x 40% 200
500 x 40% 200
11,500 11,200 11,200
Less: Operating Work in process
(opening WIP units x % of
completion) (400)
500 x 80% (400)
500 x 80% (400)
500 x 80% 11,100 10,800 10,800
Total Equivalent Production Units

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2. Computation of Cost Per Unit
Basic Formula = Cost added during the period / EPU
 
Material Cost = Rs. 34,700 / 11,100 units = Rs. 3.13 per unit

Labour Cost = Rs. 45,000 / 10,800 units = 4.17 per unit

FOH Cost = Rs. (45,000 x 90%) / 10,800 units= 3.75 per unit

Total Unit Cost = 11.05 per unit

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3. Cost of units Completed and Transferred Out
(using FIFO method)
Cost of Opening WIP inventory (500 units) Rs. 3,850
Add: Cost added during this period
(Opening WIP units x %of completion x unit cost of element)
 
Material Cost = 500 x 20% x Rs. 3.13 313
Labour Cost = 500 x 20% x Rs. 4.17 417
FOH Cost = 500 x 20% x Rs. 3.75 375
Total cost from opening WIP (500 units) 4,955
 
Add: Cost from current production (10,500 units)
(units completed – Opening WIP units ) x unit cost
(11,000 units -500 units) x 11.05 116,025
Total cost of units transferred out (11,000 units0 120,980

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4. Cost of Ending Inventory of Goods in
Process

(Ending WIP units x % of completion) x unit cost of element

 
Material cost = 500 x 100% x 3.13 Rs. 1,565
Labour Cost = 500 x 40% x 4.17 834
FOH Cost = 500 x 40% x 3.75 750
Total cost of ending WIP (500 units 3,149

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(Problem 11.2) The following information was taken from the books of Hilal Manufacturing
Company for the month of January 1996.
 
Cost of units in process at beginning:
January 1, 1996 Rs. 30,000
Cost of Raw Material used 74,000
Direct Labour Cost Incurred 57,600
Factory Overhead Cost Incurred 43,200
 
The data extracted from the production report relating to above process are as follows:
 
Units in process from the at the beginning of January
40% complete as to material and 60% complete as to conversion cost 5000 units
 
Units placed in production during January 13000 units
 
Units in process at end of January 31
60% complete as to material and 80% as to conversion cost 3000 units

Required:
Equivalent Production Unit, the Unit Cost, the total cost of unit completed and total cost of units in
process at end.
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1. Equivalent Production Units
Direct Material Conversion Cost
Particulars Units Direct Labour FOH Units
Units
Completed and transferred out (W- 1) 15000 15000 15,000
Add: Ending Work in Process
(ending WIP units x of completion)
3000 x 60% 1,800
3000 x 80% 2,400
3000 x 80% 2,400
16,800 17,400 17,400
Less: Operating Work in process
(opening WIP units x % of completion) (2000)
5000 x 40% (3000)
5000 x 60% (3000)
5000 x 60% 14,800 14,400 14,400
Total Equivalent Production Units

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(W-1)
Calculation for units Transferred Out
Units in Opening WIP 5000 units
Add: Units put in process 13000 units
Total units put in process18000 units
Less: Units still in process (3,000) units
Units completed and transferred out 15,000 units

Computation of Cost per Unit

Basic formula = Cost added during the period / EPU

Material cost = Rs. 74,000 / 14,800 units = Rs. 5.00 per unit
Labour cost = 57,600 / 14,400 units = 4.00 per unit
FOH = 43,200 / 14400 units = 3.00 per unit
Total Unit Cost 12.00 per unit
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Cost o units completed and Transferred Out (Using Fifo Method)

Cost of opening WIP inventory (5000 units) Rs. 30,000

Add: Cost added during this period
(Opening WIP units x %of completion x unit cost of element)
 
Material Cost = 5,000 x 60% Rs. 5.00 15,000
Labour Cost = 5,000 x 40% Rs. 4.00 8,000
FOH cost = 5,000 x 40% Rs. 3.00 6,000
Total Cost from opening WIP (5,000 units) 59,000
Add: Cost from current production (10,000 units)
(Units completed – Opening WIP units ) x units cost (15,000 units – 5,000 units) x 12.00 120,000
Total cost of units transferred out (15,000 units) 179,000 22
Cost of Ending Inventory of Goods in Process

(Ending WIP units x % of completion) x unit cost of element

 

Material Cost = 3,000 x 60% x 5.00 Rs. 9,000

Labour Cost = 3,000 x 80% x 4.00 9,600
FOH Cost = 3,000 x 80% x 3.00 7,200
Total Cost of ending WIP (3,000 units) 25,800
•  

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Any Questions?

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Thanks

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