Process Costing

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 Process Costing

PROCESS COSTING

Table of Contents:
Page
Number

6. 1 Definition and Explanation of Process Costing System 3

6.2 Characteristics and Procedure of Process Costing System 3
6.3 Similarities between Job Order and Process Costing System 3
6.4 Difference between Job Order and Process Costing 4
6.5 Costing By Departments 4
6.6 Product Flow in Process Costing System 5
6.7 Procedures for Materials, Labor, and Overhead Costs Accumulations 5
6.8 Equivalent Units 7
Continuing Example 8
6.9 Weighted Average and FIFO Process Costing Methods 8
6.10 Average Costing Method versus FIFO Costing Method 11
6.11 Process Costing in a Multidepartment Setting 12
6.12 Normal and abnormal losses 12
Continuing Example 14
6.13 Rework 15
6.14 Difficulties Encountered in Process Costing Procedures 16
6.15 Hybrid Costing System 17
Illustrations 18
Exercises 35
Case 44
Practice Sheet 45

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 Process Costing

6. 1 Definition and Explanation of Process Costing System:

Cost accumulation procedures used by manufacturing concerns are classified as either job order
costing or process costing. It is important to understand that, except for some modifications, the
accumulation of materials costs, labor costs, and factory overhead also applies to process costing system.
Process costing method is used for industries producing chemicals, petroleum, textiles, steel, rubber,
cement, flour, pharmaceuticals, shoes, plastics, sugar, and coal. Process costing system is also used by firms
manufacturing items such as rivets, screws, bolts, and small electrical parts. A third type of
industry using process costing system is the assembly type industry which manufactures such things as
typewriters, automobiles, airplanes, and household electric appliances (washing machines, refrigerators,
toasters, irons, radios, television sets, etc.). Finally certain service industries, such as gas, water, and heat,
cost their products by using process costing system. Thus, process costing is used when products are
manufactured under conditions of continuous processing or under mass production methods. So, process
costing procedures are often termed as "continuous or mass production cost accounting procedures".

The type of manufacturing operations performed determines the cost procedures that must be used. For
example, a company manufactures custom machinery will use job order costing, whereas a chemical
company will use process costing. In the case of machinery manufacturer, a job order cost sheet is prepared
for each order, accumulating the costs of materials, labor, and factory overhead. In contrast the chemical
company cannot identify materials, labor, and factory overhead with each order, since each order is part of a
batch or a continuous process. The individual order identity is lost, and the cost of a completed unit must be
computed by dividing total cost incurred during a period by total units completed. The summarization of
the costs takes place via the cost of production report, which is an extremely efficient, economical, and
timesaving device for the collection of large amounts of data.

6.2 Characteristics and Procedure of Process Costing System:

The characteristics of process costing system:
1. A cost of production report is used to collect, summarize and compute total and unit costs.
2. Production is accumulated and reported by departments.
3. Costs are posted to departmental work in process accounts.
4. Production in process at the end of a period is restated in terms of completed units.
5. Total cost charged to a department is divided by total computed production of the department in order
to determine a unit cost for a specific period.
6. Costs of completed units of a department are transferred to the next processing department in order to
arrive at the total costs of the finished products during a period. At the same time, costs are assigned to
units still in process.

The procedures of process costing are designed to:

1. Accumulate materials, labor, and factory overhead costs by departments.
2. Determine a unit cost for each department.
3. Transfer costs from one department to the next and to finished goods.
4. Assign costs to the inventory of work in process (WIP)

If accurate units and inventory costs are to be established by process costing procedures, costs of a period
must be identified with units produced in the same period.

6.3 Similarities between Job Order and Process Costing System:

Similarities between job order and process costing systems can be summarized as follows.
1. Both systems have the same basic purposes-to assign material, labor, and overhead costs to products
and to provide mechanism for computing unit product cost.
2. Both systems use the same basic manufacturing accountants, including manufacturing overhead, Raw
materials, Work in process, and Finished Good.
3. The flow of costs through the manufacturing accounts is basically the same in both systems.

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6.4 Difference between Job Order and Process Costing:

The differences between job order costing and process costing arise from two factors. The first is that the
flow of units in a process costing system is more or less continuous, and the second is that these units are
indistinguishable from one another. Under process costing it makes no sense to try to identify materials,
labor, and overhead costs with a particular order from a customer ( as we do with job order costing ), since
each order is just one of many that are filled from a continuous flow of virtually identical units from the
production line. Under process costing, we accumulate costs by department rather than by order, assign
these costs uniformly to all units that pass through the department during a period.

A further difference between the two costing systems is that the job cost sheet is not used in process costing,
since the focal point of process costing is on departments. Instead of using job cost sheet a production report
is prepared for each department in which work is done on products. The production report serves several
functions. It provides a summary of number of units moving through a department during a period, and it
also provides a computation of unit costs. In addition it shows what costs were charged to the department
and what disposition was made on these costs. The department production report is a key document in a
process costing system.

These differences are summarized below:

Job Order Costing Process Costing

1. Many different jobs are worked on during each 1. A single product is produced either on
period, with each job having different continuous basis or for long periods. All units
production requirements. of product are identical.

2. Costs are accumulated by individual job. 2. Costs are accumulated by departments.

3. Job cost sheet is the key document controlling 3. The department production report is the key
the accumulation of costs by a job. document showing the accumulation and
disposition of costs.
4. Unit costs are computed by job on the job cost 4. Unit costs are computed by department on the
sheet. department production report.

6.5 Costing By Departments:

The nature of manufacturing operations in firms using process or job order cost procedures is usually such
that work on product takes place in several departments. With either procedure, departmentalization of
materials, labor, and factory overhead costs facilitates application of responsibility accounting. Each
department performs a specific operation or process towards the completion of the product.

For example, after the blending department has completed the starting phase of the work on product, units
are transferred to the testing department, after which they may go to the terminal department
for completion and transferred to the finished goods storeroom. Both units and costs are transferred from
one manufacturing department to another manufacturing department. Separate departmental work in
process (WIP) accounts are used to charge each department for the materials, labor, and factory overhead
used to complete its share of manufacturing process.

Process costing involves averaging costs for a particular period in order to obtain departmental and
cumulative unit costs. The cost of a completed unit is determined by dividing the total cost of a period by
the total units produced during the period. Determining departmental production for a period includes
evaluating units still in process. Departmental total and unit costs are determined by the use of the cost of
production report. Most of the activity in process costing system involves the accumulation of data needed
for the preparation of these reports.

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6.6 Product Flow in Process Costing System:

A product can flow through a factory in numerous ways. Three product flow formats associated with
process costing - sequential, parallel, and selective - are illustrated here to indicate that basically the same
costing procedures can be applied to all types of product flow situations.

6.6.1 Sequential Product Flow:

In a sequential product flow, each item manufactured goes through the same set of operation, as
illustrated below.

Work-in-process Work-in-process Work-in-process Finished Goods

Blending Testing Terminal
Department Department Department
Materials Labor Labor
Labor FOH* FOH*
FOH*
*Factory Overhead

Materials are placed into production in the Blending Department, and labor and factory overhead
are added. When the work is finished in the Blending Department, it moves to the Testing
Department. The second process, and any succeeding processes, may add more materials or simply
work on the partially completed input from the preceding departments, adding only labor and
factory overhead, as in this example. After the product has been processed by the Terminal
Department, it is a completed product and becomes a part of finished goods inventory.

6.6.2 Parallel Flow:

In a parallel product flow, certain portion of the work are done simultaneously and then brought
together in a final process or processes for completion and transfer to finished goods inventory. As
in the previous illustration, materials may be added in subsequent processes.

6.6.3 Selective Product Flow:

In a selective product flow, the product moves to different departments within the plant, depending
upon the desired final product. For example, in meet processing, after the initial butchering process,
some of the product goes directly to the Packaging Department and then to finished goods
inventory; some goes to the Smoking Department and then to the Packaging Department and finally
to finished goods inventory; Some goes to the grinding department, then to the packaging
department and lastly to finished goods inventory. Transfer of costs from the Butchering
Department involves joint cost allocation, which will be discussed on By-Products and Joint
Products Costing chapter.

6.7 Procedures for Materials, Labor, and Factory Overhead Costs Accumulations:
In process costing, materials, labor, and factory overhead costs are accumulated in the usual accounts, using
normal cost accounting procedures. Costs are then analyzed by departments or processes and charged to
departments by appropriate journal entries. The details involved in process costing are usually fewer than
those in the job order costing, where accumulation of costs for many orders can become unwieldy.
6.7.1 Materials Costs:
In job order costing system, materials requisitions are used to charge jobs for direct materials used.
If requisitions are used in process costing, details are considerably reduced because materials are
charged to departments rather than to jobs, and the number of departments using materials is
usually less than the number of jobs a firm might handle at a given time. Frequently materials are
issued only to the process-originating department; subsequent department other than the first, they
are charged to that department performing the specific operation.

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For materials control purposes, materials need not always be priced individually on requisition
forms. The cost of materials used can be determined at the end of the production period through
inventory difference procedures, i.e., adding purchases to beginning inventory and then deducting
ending inventory. Or consumption reports which state the cost of materials or quantity of materials
put into process by various departments can be used. Costs or quantities charged to departments by
consumption reports may be based on formulas or proration. Formulas specify the type and
quantities of materials required in the various products and are applied to finished production in
order to calculate the materials consumed. Chemical and pharmaceutical industries use such
procedures, particularly when more than one product is manufactured by a department. Frequently
the cost of materials used by a department must by prorated to different products on various
estimated bases.

For any of the materials cost computation methods discussed, a typical journal entry charging direct
manufacturing materials used during a period is:

Work in Process - Blending department 24,500 Dr.

Materials 24,500 Cr.

The source of the cost figures for the above entry as well as the entries for labor and factory
overhead is the cost of production report which is discussed on cost of production report page.

6.7.2 Direct Labor:

Labor costs are identified by and charged to departments in process costing, thus eliminating the
detailed clerical work of accumulating labor costs by jobs. Daily time tickets or weekly time clock
cards are used instead of job time tickets. Summary labor charges are made to departments through
an entry which distributes the direct manufacturing payroll:

Work in Process - Blending department 29,140 Dr.

Work in Process - Testing Departments 37,310 Dr.
Work in Process - Terminal Department 32,400 Dr.
Payroll 98,850 Cr.

6.7.3 Factory Overhead Costs:

Factory overhead incurred in process costing as well as in job order costing should be accumulated
in the factory overhead subsidiary ledger for producing and service departments. This procedure is
consistent with requirements for responsibility accounting and responsibility reporting.

Normally it is emphasized to use the predetermined overhead rates for charging overhead to jobs
and products. However, in various process and job order costing procedures, actual rather than
applied overhead is sometimes used for product costing. This practice is feasible when production
remains comparatively stable from period to period, since factory overhead will then remain about
the same from one month to the next. The use of actual overhead can also be justified when factory
overhead is not and important part of total cost. However, predetermined overhead rates for
producing departments should be used if:
1. Production is not stable.
2. Factory overhead, especially fixed overhead, is a significant cost.

Fluctuations in production can lead to the unequal incurrence of actual factory overhead from
month to month. In such cases, factory overhead should be applied to production using
predetermined rates, so that units produced receive proper charges for factory overhead. Similarly,
if factory overhead - especially fixed factory overhead - is significant, it is desirable to allocate
factory overhead on the basis of normal or uniform production using predetermined overhead rates.
Indeed, the use of predetermined rates is highly recommended for improving cost control and
facilitating cost analysis.

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Prior to charging factory overhead to departments via their respective work in process accounts,
expenses must be accumulated in a factory overhead control account. As expenses are incurred the
entry is:
Factory overhead control xxxxx Dr.
Accounts Payable xxxxx Cr.
Accumulated Depreciation - Machinery xxxxx Cr.
Prepaid Insurance xxxxx Cr.
Materials xxxxx Cr.
Payroll xxxxx Cr.

The use of factory overhead control account requires a subsidiary ledger for factory overhead, with
departmental expense analysis sheet to which all expenses are posted. Service department expenses
are kept in like manner and distributed later to producing departments. At the end of each period,
departmental expense analysis sheets are totaled. These totals, which also include distributed
service department costs, represent factory overhead for each department. By debiting the actual
cost incurred or by using the predetermined overhead rates multiplied by the respective actual
activity base (e.g., direct labor hours) for each producing department, the entry charging these
expenses to work in process is as follows:

Work in Process - Blending department 28,200 Dr.

Work in Process - Testing Departments 32,800 Dr.
Work in Process - Terminal Department 19,800 Dr.
Factory Overhead Control 80,800 Cr.

6.8 Equivalent Units:

The physical flow of units through a department and the manufacturing effort expended in a department
during a period normally occur in the following order:
 units started in the previous period and finished in the present period,
 units started in the present period and finished in the present period, and
 units started in the present period and not finished in the present period.

Because of these mixed manufacturing efforts, production cannot be measured by counting whole units.
Accountants use a concept known as equivalent units of production to measure the quantity of production
achieved during a period.

After materials, labor and overhead costs have been accumulated in a department, the department's output
must be determined so that unit cost can be computed. A department usually has some partially completed
units in its ending inventory. It does not seem reasonable to count these partially completed units as
equivalent to fully completed units when counting the department's out put. These partially converted units
are mathematically converted into an equivalent number of fully completed units. In other words,
equivalent units of production (EUP) are an approximation of the number of whole units of output that
could have been produced during a period from the actual effort expended during that period. EUPs are
calculated by multiplying the number of actual but incomplete units produced by the respective percentage
degree of completion.

Equivalent Units = Number of partially Completed Units × Percentage of Completion

Ex: if 1000 units are in Work-In-Process at the end of the period and are considered 80% complete, the
equivalent production is 800 units. The equivalent unit cost of manufacturing an item equals the total cost
divided by the equivalent units. If the total cost of manufacturing the item was $2400, the unit cost would be
$3 ($2400/800). Equivalent units are determined separately for Direct Material and Conversion Cost. If 3,000
units in ending work-in-process are 70% complete as to direct material and 90% complete as to conversion,
the equivalent units are 2100 for direct material and 2700 for conversion.

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Continuing Example:
Sunspot Beverages, Ltd., of Fiji makes blended tropical fruit drinks in two stages. Fruit juices
are extracted from fresh fruits and then blended in the Blending Department. The blended
juices are then bottled and packed for shipping in the Bottling Department. Materials in the
Blending Department are added at the beginning of the process and conversion costs are
incurred uniformly throughout the process. The following information pertains to the
operations of the Blending Department for June. (The currency in Fiji is the Fijian dollar.)

Percent Completed
Units
Physical Units: Materials Conversion
Work-in-process, beginning 20,000 100% 75%
Started into production 180,000
Completed and transferred out 160,000
Work-in-process, ending 40,000 100% 25%
Cost Data:
Work-in-process, beginning $25,200 $24,800
Cost added during June $334,800 $238,700

Units Ending Beginning Units

Started WIP WIP Completed
Process Line

180,000 40,000 20,000 160,000

0% 25% 75% 100%

Materials
Conversion

Computation of Equivalent Units for Sunspot Beverage Ltd:

Physical Equivalent units
Outputs
flow Materials Conversion
Units completed 160,000 160,000 160,000
[160,000 X 100%] [160,000 X 100%]
Ending WIP 40,000 40,000 10,000
[40,000 X 100%] [40,000 X 25%]
Total Outputs 200,000
Total Woks Done 200,000 170,000

6.9 Weighted Average and FIFO Process Costing Methods:

The two methods of accounting for cost flows in process costing are (1) weighted average and (2) FIFO.
These methods relate to the manner in which cost flows are assumed to occur in the production process. In a
very general way, these process costing approaches can be related to the cost flow methods used in financial
accounting.
In a retail business, the weighted average method is used to determine an average cost per unit of inventory.
This cost is computed by dividing the total cost of goods available by total units available. Total cost and
total units are found by adding purchases to beginning inventory. Costs and units of the current period are
not distinguished in any way from those on hand at the end of the prior period. In contrast, the FIFO
method of accounting for merchandise inventory separates goods by when they were purchased and at
what cost. The costs of beginning inventory are the first costs sent to Cost of Goods Sold; units remaining in
the ending inventory are assigned costs based on the most recent purchase prices.

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The use of these methods for costing the production of a manufacturing firm is similar to their use by a
retailer. The weighted average method computes a single average cost per unit of the combined beginning
inventory and current period production. The FIFO method separates beginning inventory and current
period production and their costs so that a current period cost per unit can be calculated. The denominator
used in the cost formula to determine unit cost differs depending on which of the two methods is used.

In almost all cases, some direct material must be introduced at the start of a production process or there
would be no need for labor or overhead to be incurred. For example, to make its various products, Lumina
introduces wax at the start of a process. Any material added at the start of production is 100 percent
complete throughout the process regardless of the percentage of completion of labor and overhead.

Most production processes require multiple direct materials. Additional materials may be added at any
point or even continuously during processing. A material, such as a box, may even be added at the end of
processing. During the production process, the product is 0 percent complete as to the box although other
materials may be complete and some labor and overhead may have been incurred.

Labor and Overhead added continuously

START END

Color
WAX and Wax is
Scent poured BOX
Wick Individual
from vats candles
into are cut.
Wax added, Color and Scent separate Wick added, Box is added,
100% complete. added, 100% candle 100% complete. 100% complete.
Labor and complete. Labor molds. Labor and Labor and
Overhead 5% and Overhead Overhead 50% Overhead 100%
complete. 20% complete. complete. complete after
packaging

The production flow for candles shown in above figure visually illustrates the need for separate EUP
computations for each cost component. The material “wax” is 100 percent complete at any point in the
process after the start of production; no additional wax is added later in production. When enough labor
and overhead have been added to melt the wax and reach the 20 percent completion point, additional
materials (coloring and scent) are added. Prior to 20 percent completion, these materials were 0 percent
complete; after the 20 percent point, these materials are 100 percent complete. The wick is added at the 50
percent completion point, and the candles are packaged when processing is 99 percent finished, after which
the candles are 100 percent complete. Thus, boxes are 0 percent complete throughout production; when the
candles are packaged, the product is complete and is transferred to the finished goods warehouse or directly
to customers.

If 8,000 candles are assumed to be 75 percent complete as to labor and overhead at the end of a period, those
candles would be 100 percent complete as to wax, coloring and scent, and wicks, and 0 percent complete as
to boxes. The EUP calculations would indicate that there are 8,000 EUPs for wax, coloring and scent, and
wicks, and 0 EUPs for boxes. The labor and overhead (conversion) components of cost would have an
equivalency of 6,000 candles, because the product is 75 percent complete and labor and overhead are added
continuously during the process.3

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When overhead is applied on a direct labor basis, or when direct labor and overhead are added to the
product at the same rate, a single percentage of completion estimates can be made and used for both
conversion cost components. However, because cost drivers other than direct labor are increasingly being
used to apply overhead costs, single computations for “conversion EUP” will be made less often. For
example, the cost driver for the utilities portion of overhead cost may be machine hours; the cost driver for
the materials handling portion of overhead cost may be pounds of material. The increased use of multiple
cost pools and/or activity-based costing concepts makes it less likely that the degrees of completion for the
direct labor and overhead components of processing will be equal.

PROCESS COSTING STEPS UNDER WEIGHTED AVERAGE AND FIFO METHODS

Weighted Average Method FIFO Method

Step 1

Compute cost component wise number of Compute cost component wise number of
equivalent units (Total Works Done) equivalent units (Current Period Works Done)
Step 2

Compute per equivalent unit Compute per equivalent unit

average cost rate current period cost rate

Value all your outputs form the process based

on how far does it completed in terms of
material, labor and overhead (step 1) and per
Value all your outputs form the process
equivalent unit’s current period cost rate (step
based on how far does it completed in
Step 3

2). But to value finished output, first compute

terms of material, labor and overhead
cost of beginning work-in-process considering
(step 1) and per equivalent unit’s average
both cost incurred in previous period and the
cost rate (step 2).
additional cost incurred during the current
period. All other finished output should value
based on current period’s cost rate.

Continuing Example of Sunspot Beverage:

Step 1: Quantity Schedule for Sunspot Beverage Ltd:
Weighted Average FIFO
Physical Equivalent units Equivalent units
Outputs
flow Materials Conversion Materials Conversion
Units completed 160,000 160,000 160,000 160,000 160,000
Ending WIP 40,000 40,000 10,000 40,000 10,000
Total Outputs 200,000
Total Woks Done 200,000 170,000 200,000 170,000
Less: Last period works done* 20,000 15,000
Current period works done 180,000 155,000

Point of Differences

*part of work that has been completed in previous period should not be included in works
completed in current period as under FIFO we are computing works done in current period only.
So out of Beginning WIP 100% of material and 75% of conversion cost has to be deducted from
total works done to get current period works done.

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Step 2: Computation of per equivalent unit cost for Sunspot Beverage Ltd:
Weighted Average FIFO
Materials Conversion Materials Conversion
Last period cost (LPC) $25,200 $24,800 - -
Current period cost (CPC) $334,800 $238,700 $334,800 $238,700
Total Cost = [LPC+CPC] $360,000 263,500 $334,800 $238,700
Equivalent Units (EU):
Total Works Done 200,000 170,000 - -
Current Period Works Done - - 180,000 155,000
P.U. Cost = [Total Cost/EU] $1.80* $1.55* $1.86** $1.54**

*per equivalent unit average cost rate

**per equivalent unit current period cost rate

Step 3: Cost Report for Sunspot Beverage Ltd:

Weighted Average FIFO
$ $ $ $
Units Completed (160,000 units):
Materials: 160,000 units @ $1.80 288,000
Conversion: 160,000 units @ $1.55 248,000
536,000
Cost of 20,000 units (Beginning WIP):
LPC: Material 25,200
Conversion 24,800
50,000
CPC: Material – 0% of 20,000 units @ $1.86 -
Conversion – 25% of 20,000 units @ $1.54 7,700
7,700
Total cost of 20,000 units 57,700
Cost of 140,000 units:
Materials: 140,000 units @ $1.86 260,400
Conversion: 140,000 units @ $1.54 215,600
Total cost of 140,000 units 476,000
Cost of units Completed (160,000 units) 533,700
Ending Work-in-process (40,000 units):
Materials: 40,000 units @ $1.80; $1.86 72,000 74,400
Conversion: 10,000 units @ $1.55; $1.54 15,500 15,400
Cost of Ending Work-in-process (40,000 units) 87,500 89,800
Total Cost 623,500 623,500

6.10 Average Costing Method versus FIFO Costing Method:

Both average costing and FIFO costing have certain advantages. It would be arbitrary to state that one
method is either simpler or more accurate than the other. The selection of either method depends entirely
upon management's opinion regarding the most appropriate and practical cost determination procedures.

The basic difference between the average costing and FIFO costing method concerns the treatment of
beginning work in process inventory. The averaging method adds beginning work in process inventory
costs to the preceding department's materials, labor and factory overhead costs incurred during a period.

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Unit costs are determined by dividing these costs by equivalent production figures. Units and costs are
transferred to the next department as one cumulative figure.

The FIFO method retains the beginning work in process inventory cost as a separate figure. Costs necessary
to complete the beginning work in process units are added to this total cost. The sum of these two costs
totals is transferred to the next department. Units started and finished during the period have their own unit
cost which is usually different from the completed unit cost of the units in process at the beginning of the
period. The FIFO method thus separately identifies for management the current period unit cost originating
in a department. Unfortunately, the costs are averaged out in the next department, resulting in a loss of
much of the value associated with the use of the FIFO method. If the FIFO method is used, units lost during
a period must be identified as to whether they came from in process at the beginning or from units received
during the period. Also, in computing equivalent production figures in FIFO costing, the degree of
completion of both the beginning and ending work in process inventories must be considered.

The principle disadvantage of FIFO costing is that if several unit cost figures are used at the same time,
extensive detail is required within the cost of production report, which can lead to complex procedures and
even inaccuracy. Whether the extra detail yields more representative unit costs than the average costing
method is debatable, especially in a firm using process costing where production is continuous and more or
less uniform and appreciable fluctuations in unit costs are not expected to develop. Under such conditions,
the average costing method leads to more satisfactory cost computations.

6.11 Process Costing in a Multidepartment Setting:

Most companies have multiple, rather than single, department processing facilities. In a multidepartment-
processing environment, goods are transferred from a predecessor department to a successor department.
For example, if the candles at the Decorative Waxes Company were boxed by the dozen, the company’s
manufacturing activities could be viewed as occurring in two departments: Processing and Packaging.

Manufacturing costs always follow the physical flow of goods. Therefore, the costs of the completed units of
predecessor departments are treated as input material costs in successor departments. Such a sequential
treatment requires the use of an additional cost component element called “transferred-in” or “prior
department cost.” This element always has a percentage of completion factor of 100 percent, because the
goods would not have been transferred out of the predecessor department if they had not been fully
complete. The transferred-in element is handled the same as any other cost element in the calculations of
EUP and cost per EUP. A successor department might add additional raw materials to the units transferred
in or might simply provide additional labor with the corresponding incurrence of overhead. Anything
added in the successor department requires its own cost element column for calculating equivalent units of
production and cost per equivalent unit (unless the additional elements have the same degree of completion,
in which case they can be combined).

Occasionally, successor departments might change the unit of measure used in predecessor departments.
For example, when the Decorative Waxes Company produces candles, the measure in the Processing
Department would be number of candles; the measure in the Packaging Department would be number of
boxes of a dozen candles.

6.12 Normal and Abnormal Losses:

In process costing, we can often found the output from a process is less than the input. Where the output
from a process is less than the input, there is therefore a loss.

Basically there are two types of losses in Process Costing:

 Normal loss
 Abnormal Loss

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6.12.1 Normal Losses:

Certain losses are inherent in the production process and cannot be eliminated. These losses occur under
efficient operating conditions and are referred to as Normal or uncontrollable losses. Normal loss is
unavoidable losses arising due to the nature of the material or the process. The reasons for such loss in
output can be due to evaporation, breakage, scrap due to high quality needed, rejection on inspection,
defective Units, loss inherent in large scale manufacturing, chemical change, residue material etc.
Examples of normal losses are metal turnings, off-cuts, metal borings, edges, shreddage and ends. The
quantity of normal loss anticipated is determined from past experience and from the material
specification.

 Normal loss is the loss expected during a process. It is not given a cost.
 Since a normal loss is not given a cost, the cost producing these units is borne by the good units of
output.
 One inherent problems related to normal losses is to determine whether normal spoilage costs
should be allocated to cost of goods completed and cost of ending work-in-process, or simply
charged to cost of goods completed. The general rule is that the ending work-in-process will be
charged with spoilage only if the ending inventory is, on average, beyond the point at which
inspection for spoilage occurs.

6.12.2 Abnormal Losses:

In addition to losses which cannot be avoided, there are some losses which are not expected to occur
under efficient operating conditions, for example, the improper mixing of ingredients, the use of inferior
materials and the incorrect cutting of cloths. These losses are not an inherent part of the production
process and are referred to as abnormal or controllable losses.

 Abnormal losses is the extra loss resulting when actual loss is greater than normal or expected loss,
and it is given a costs.
 Abnormal gain is the gain resulting when actual loss in less than the normal or expected loss, and it
is given a 'negative cost'.

In case of abnormal loss and gain, units are valued at the same rate as "good" units. Abnormal events do
not therefore affect the cost of good production. Their costs are analyzed separately in an abnormal loss
or abnormal gain account.

Scrap value of loss: Loss may have a scrap value. Revenue from scrap is treated, not as an addition to
sales revenue, but as a reduction in costs. For scrap value the following basic rules are applied in
accounting.

Treatments of Normal Loss are as follows:

 Where the loss has NO scrap value:-
 The quantity of loss is credited to the process account. The good output bears
the cost of the expected/normal loss

 Where the loss has SCRAP value:-

 Deduct the scrap value from the process cost;
 Open a Normal Loss account and debit the quantity and value of the loss and
credit the process account with the scrap value when it is sold

Treatments of Abnormal Loss are as follows:

 The scrap value of abnormal loss is used to reduce the costs of abnormal loss
DEBIT Scrap account
CREDIT Abnormal loss account

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Continuing Example:
Sunspot Beverages, Ltd., of Fiji makes blended tropical fruit drinks in two stages. Fruit juices
are extracted from fresh fruits and then blended in the Blending Department. The blended
juices are then bottled and packed for shipping in the Bottling Department. Materials in the
Blending Department are added at the beginning of the process and conversion costs are
incurred uniformly throughout the process. The following information pertains to the
operations of the Blending Department for June. (The currency in Fiji is the Fijian dollar.)

Percent Completed
Units
Physical Units: Materials Conversion
Work-in-process, beginning 20,000 100% 75%
Started into production 180,000
Work-in-process, ending 40,000 100% 25%
Units spoiled 4,000
Cost Data:
Work-in-process, beginning $25,200 $25,720
Cost added during June $334,800 $245,000
The firm inspects the units when they are 80% completed and expects a normal spoilage rate
of 2% of the units inspected. The firm uses average costing to determine the cost of goods.

Units Ending Beginning Units

Started WIP WIP Completed
Process Line

180,000 40,000 20,000 156,000

0% 25% 75% 100%

80%
Inspection Point
Spoiled units 4,000

Computation of Equivalent Units for Sunspot Beverage Ltd:

Physical Equivalent units
Outputs
flow Materials Conversion
Units completed 156,000 156,000 156,000
Normal spoilage 3,200* 3,200 2,560
[3,200 X 100%] [3,200 X 80%]
Abnormal spoilage 800** 800 640
[800 X 100%] [800 X 80%]
Ending WIP 40,000 40,000 10,000
Total Outputs 200,000
Total Woks Done 200,000 169,200
*normal spoilage is 2% of units inspected.
**abnormal spoilage is total spoilage less normal spoilage
Units inspected:
Total possible units inspected (Beginning WIP + units started) : 200,000
Less: Beginning WIP, if not inspected : -
Less: Ending WIP, if not inspected : 40,000
: 160,000

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Computation of per equivalent unit cost Cost Report

Mat Con $ $
Last period cost $25,200 $25,720 Units Completed:
Current period cost $334,800 $245,000 156,000 units @ 3.40 530,400
Cost of Normal Spoilage:
Total Cost $360,000 270,720
Mat: 3,200 @ 1.80 = 5,760
Equivalent Units 200,000 169,200
Con: 2,560 @ 1.60 = 4,096
P.U. Cost $1.80 $1.60
9,856
540,256
Cost of Abnormal Spoilage:
Mat: 800 units @ 1.80 1,440
Con: 640 units @ 1.60 1,024
2,464
Ending WIP (40,000 units):
Mat: 40,000 units @ $1.80 72,000
Con: 10,000 units @ $1.60 16,000
88,000
Total Cost 630,720

Here, cost of normal loss is fully allocated to units completed as these are the only good units
available. If in any case the ending inventory of WIP lies beyond the inspection point, the
ending WIP will also become good unit and as such the cost of normal loss will be
proportionately distributed among the good units.

6.13 Rework:
A process may result in some units that are spoiled and others that can be reworked. In such an event we
should determine whether normal rework should be charged to spoiled units. In addition, we must separate
normal from abnormal spoilage, normal from abnormal rework, and decide whether ending work-in-
process should be charged for a portion of normal rework, normal spoilage, or both. The treatment of
rework costs is similar to spoilage. The cost of normal rework is allocated to all units surviving inspection
(good units). The cost of abnormal rework is considered a loss. But as the rework cost is an additional cost to
make defective units a good one, consideration of starting point for rework is quite important to
understand. Cost for rework is always the cost required for the repetitive work cost required for the
defective units. When a process involved multiple inspections for spoilage and/or rework, the question
arises as to whether normal spoilage/rework should be assigned to the units identified as normal/abnormal
spoilage or rework in subsequent inspections. The rule is that at each inspection we charge normal spoilage
and rework to the physical units that survive the inspection. If some of these physical units are found to be
spoiled in a later inspection, then we allocate the normal spoilage or rework from the first inspection to both
the normal and abnormal spoiled units in the second inspection.
Example:

Units Beginning Ending Units

Started WIP WIP Completed
175,000 25,000 35,000 155,000

0% 15% 25% 75% 100%

35% 60%
Materials Rework IP Spoilage IP
Conversion Costs

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 Process Costing

The above process line shows two inspection point (IP), one for rework and another to identify spoiled
units. Now based on the above line we can conclude the followings –

 At 35% for rework inspection, units will be inspected more than the total input (beginning WIP +
units started) as reworked units will be inspected twice.
 Rework requires only 20% (35% less 15%) additional work to be done as the units identified for
rework at 35% progress level need to send back to 15% progress level. No additional materials are
required at the time of rework as all materials are added at the beginning of the process. However,
conversion costs are required exactly equal to the additional work to be done i.e., 20%.
 Cost of normal rework should be allocated among units completed, ending WIP and also spoiled
units (both normal and abnormal spoilage) as all these three components of the process output
survived during inspection at 35% level.
 Cost of normal spoilage (which already includes a part of normal rework) will be then allocated
between units completed and ending WIP as both of these two components of the process output
survived during inspection at 60% level.
 Cost of abnormal rework and abnormal spoilage should be accounted separately and should be
treated as loss.

Rework as a separate process:

In the preceding discussion of rework, we presumed that items that had to be reworked were sent back
through the original process a second time. In many processes this will not be the case. Instead, items to
be reworked will be pulled from the production line and sent to the separate rework center. In these
situations, the accounting for rework is far easier. With a separate center we will know precisely what
the rework costs have been. (They will have been accumulated in the separate department.) Similarly,
we will have a precise count of the units actually transferred to the rework department, so there is no
need to estimate the amount of rework. In this case the task is limited to distinguishing normal from
abnormal rework and calculating an average cost for rework. We still write off the abnormal rework as a
loss, and we add the normal rework to cost of goods completed and ending work-in-process (if beyond
the inspection point) as a product cost.

6.14 Difficulties Encountered in Process Costing Procedures:

Certain difficulties likely to be encountered in actual practice should be mentioned with regard to
process cost accounting procedures:

1. The determination of production quantities and their stage of completion presents problem. Every
computation is influenced by these figures. Since the data generally come to the cost department from
operating personnel often working under circumstances that make a precise count difficult, a certain
amount of double counts and unreliable estimates are bound to exist. Yet, the data submitted from the
basis for the determination of inventory costs.

2. Materials cost computations frequently require careful analysis in the illustrations materials
are generally considered to the cost of first department. In certain industries, materials costs are not
even entered on production reports. When materials prices are influenced by fluctuating market
quotations, the materials cost may be recorded in a separate report designed to facilitate management
decisions in relation to the materials market.

3. The discussion of lost units by shrinkage, spoilage, or evaporation indicates that the time when the loss
occurs influences the final cost calculation. Different assumptions concerning the loss would result in
departmental unit costs, which, in turn effect inventory costs, the cost of units transferred, and the
completed unit cost. Another consideration involves the possibility of treating cost attributable to
avoidable loss as an expense of the current period.

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4. Industries using process cost procedures are generally of the multiple product type. Joint processing
cost must be allocated the products resulting from the processes. Weighted unit averages or other bases
are used to prorate the joint cost to the several products. If units manufactured are used as a basis for
cost allocation, Additional clerical expenses are necessary if the labor hour or machine hour basis is used
for charging overhead to work in process. Management must decide whether economy and low
operational cost are compatible with increased information based on additional cost computations and
procedures.

It should be noted that some companies use both process costing and job order costing procedures for
various purposes in different departments. This is particularly true when a parallel or selective cost flow
format is required. Each system or method employed by a company must be based on reliable production
and performance data which, when combined with output, budget, or standard cost data, will provide the
foundation for effective cost control and analysis.

6.15 Hybrid Costing Systems:

Many companies are now able to customize what were previously mass-produced items. In such
circumstances, neither job order nor process costing techniques are perfectly suited to attach costs to output.
Thus, companies may choose to use a hybrid costing system that is appropriate for their particular
processing situation. A hybrid costing system combines certain characteristics of a job order system and a
process costing system. A hybrid system would be used, for example, in a manufacturing environment in
which various product lines have different direct materials, but similar processing techniques.

To illustrate the need for hybrid systems, assume you order an automobile with the following options:
leather seats, a Bose stereo system and compact disk player, cruise control, and pearlized paint. The costs of
all options need to be traced specifically to your car, but the assembly processes for all the cars produced by
the plant are similar. The job order costing feature of tracing direct materials to specific jobs is combined
with the process costing feature of averaging labor and overhead costs over all homogeneous production to
derive the total cost of the automobile you ordered. It would not be feasible to try to use a job order costing
system to trace labor or overhead cost to your car individually, and it would be improper to average the
costs of your options over all the cars produced during the period. The accompanying News Note reflects a
build-to-order approach in the automobile industry.

A hybrid costing system is appropriate for companies producing items such as furniture, clothing, or jam. In
each instance, numerous kinds of raw materials could be used to create similar output. A table may be made
from oak, teak, or mahogany; a blouse may be made from silk, cotton, or polyester; and jam may be made
from peach, strawberries, or marmalade. The material cost for a batch run would need to be traced
separately, but the production process of the batch is repetitive.

Hybrid costing systems allow accounting systems to portray more accurately the actual type of
manufacturing activities in which companies are engaged. Job order costing and process costing are two
ends of a continuum and, as is typically the case for any continuum, neither end is necessarily the norm. As
flexible manufacturing increases, so will the use of hybrid costing systems.

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Illustration – 1:
Selzik Company makes super-premium cake mixes that goes through two processing departments,
Blending and Packaging. Materials are added at the beginning of the blending process and conversion costs
are incurred uniformly throughout the process. The following activity was recorded in the Blending
Department during July:

Direct Conversion
Units
Material Costs Costs
Work in Process 7/1/10 (20% completed) 3,000 $ 85,050 $ 13,700
Units started in production 27,000
Costs for July $724,950 $753,500
Work in Process 7/31/00 (60% completed) 5,000

Required:
1. Prepare a quantity schedule for the process under weighted average costing method.
2. Calculate cost per equivalent unit for each cost components under weighted average costing method.
3. Prepare a cost report for Selzik Company under weighted average costing method.

Solution – 1:

Units Beginning Ending Units

Started WIP WIP Completed
27,000 3,000 5,000 25,000

0% 20% 60% 100%

Conversion Costs
Materials

Quantity Schedule Calculation of Cost per EU:

Physical Equivalent DM Cc
Flow Units (EU) Last Period Costs [LPC] 85,050 13,700
DM Cc Current Period Costs [CPC] 724,950 753,500
Inputs: Total Cost = [LPC+CPC] 810,000 767,200
BWIP 3,000 Equivalent Units (EU) 30,000 28,000
Units started 27,000 P.U. Cost = [Total Cost/EU] 27.00 27.40
Total inputs 30,000
Outputs: Cost Report
Units completed 25,000 25,000 25,000 $ $
EWIP 5,000 5,000 3,000 Units Completed:
Total outputs 30,000 DM: 25000 X 27.00 675,000
Total Works Done 30,000 28,000 Cc: 25,000 X 27.40 685,000
Or, 25,000 X 54.40 1,360,000
Here,
Ending WIP:
DM represents ‘Direct Materials’ and
Cc represents ‘Conversion Costs’. DM: 5,000 X 27.00 135,000
Cc: 3,000 X 27.40 82,200
217,200
Total Costs 1,577,200

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Illustration – 2:
Refer to the data of Blending Department of Selzik Company, in illustration – 1. Assume that the company
uses the FIFO method rather than the weighted average method in its process costing.

Required:
1. Prepare a quantity schedule for the process under FIFO method.
2. Calculate cost per equivalent unit for each cost components under FIFO method.
3. Prepare a cost report for Selzik Company under FIFO method.

Solution – 2:

Units Beginning Ending Units

Started WIP WIP Completed
27,000 3,000 5,000 25,000

0% 20% 60% 100%

Conversion Costs
Materials

Quantity Schedule Cost Report

Physical Equivalent $ $ $
Flow Units (EU) Units Completed:
DM Cc Cost of 3,000 units -
Inputs: LPC:
BWIP 3,000 DM 85,050
Units started 27,000 Cc 13,700
Total inputs 30,000 98,750
Outputs: CPC:
Units completed 25,000 25,000 25,000 DM: 0 X 26.85 0
EWIP 5,000 5,000 3,000 Cc: 2,400 X 27.50 66,000
Total outputs 30,000 66,000
Total Works Done 30,000 28,000 164,750
Less: Last period Cost of 22,000 units -
works done 3,000 600 DM: 22,000 X 26.85 590,700
Current Period Cc: 22,000 X 27.50 605,000
Works Done 27,000 27,400
1,195,700
Cost of 25,000 units 1,360,450
Calculation of Cost per EU (Current Rate): Ending WIP:
DM Cc DM: 5,000 X 26.85 134,250
Current Period Costs 724,950 753,500 Cc: 3,000 X 27.50 82,500
Equivalent Units 27,000 27,400 216,750
P.U. Cost 26.85 27.50 Total Costs 1,577,200

Illustration – 3:
Weston Products manufactures an industrial cleaning compound that goes through three processing
departments – Grinding, Mixing and Cooking. All raw materials are introduced in the process of Mixing
Department when process reached 25% level of work. Labors are paid when the work has been completed
by 50% and overheads are incurred uniformly throughout the process. The work in process T-account for
the Mixing Department for a recent month is given below:

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 Process Costing

Work-in-Process (Mixing Department)

$ $
Inventory, May 1 Completed and transferred to ?
(8,000 units 80% completed): 34,585 Cooking Department (70,000 units)
May costs added (65,000 units Inventory, May 31
introduced in the process): (3,000 units, 30% completed) ?
Direct materials 162,500
Direct labor 111,600
Manufacturing overhead 109,650
Total 418,335 418,335

The May 1 work in process inventory consists of $16,350 in materials, $10,900 in labor and $7,335 in
overhead costs. The company uses the FIFO method to account for units and costs.

Required: Prepare a production report for Mixing Department for the month.

Solution – 3:

US EWIP BWIP UC
65,000 3,000 8,000 70,000

0% 25% 30% 50% 80% 100%

OH OH
Materials Labor

Quantity Schedule
Physical Here,
Equivalent Units (EU)
Flow US: Units Started
DM DL MOH EWIP: Ending Work in Process
Inputs: BWIP: Beginning Work in Process
BWIP 8,000 UC: Units Completed
Units started 65,000 OH: Overhead
DM: Direct Materials
Total inputs 73,000
DL: Direct Labor
Outputs:
MOH: Manufacturing Overhead
Units completed 70,000 70,000 70,000 70,000 LPC: Last Period Cost
EWIP 3,000 3,000 - 900 CPC: Current Period Cost
Total outputs 73,000
Total Works Done 73,000 70,000 70,900
Less: Last period
works done 8,000 8,000 6,400
Current Period
Works Done 65,000 62,000 64,500

Calculation of Cost per EU (Current Rate):

DM Cc MOH
Current Period Costs 162,500 111,600 109,650
Equivalent Units 65,000 62,000 64,500
P.U. Cost 2.50 1.80 1.70

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 Process Costing

Cost Report
$ $ $
Units Completed:
Cost of 8,000 units -
LPC:
DM 16,350
DL 10,900
MOH 7,335
34,585
CPC:
DM: 0 X 2.50 0
DL: 0 X 1.80 0
OH: 1,600 X 1.70 2,720
2,720
37,305
Cost of 62,000 units -
DM: 62,000 X 2.50 155,000
DL: 62,000 X 1.80 111,600
Cc: 62,000 X 1.70 105,400
372,000
Cost of 70,000 units 409,305
Ending WIP:
DM: 3,000 X 2.50 7,500
DL: 0 X 1.80 0
Cc: 900 X 1.70 1,530
9,030
Total Costs 418,335

Illustration – 4:
Cooperative San Jose of southern Sonora state in Mexico makes a unique syrup using cane sugar and local
herbs. The syrup is sold in small bottles and is prized as a flavoring for drinks and for use in desserts. The
bottles are sold for $25 each. The first stage in the production process is carried out in the Mixing
Department, which removes foreign matter from the raw materials and mixes them in the proper
proportions in large vats. The company uses the weighted average method in its process costing system.
Materials in the department needs to be introduced in several stages, 30% of the total materials are
introduced when production has been started, 50% of the total materials are introduced when production
has been completed by 50% and the rest 20% of the total material should be introduced at 90% process level.
Labor will be paid when work has been done by 30% and overhead costs are incurred uniformly throughout
the process. The company uses weighted average method of costing.

The following activity was recorded in the Mixing Department during July:

Units DM DL MOH
Work in Process 7/1/10 (25% completed) 20,000 $12,500 - $15,500
Units started in production 110,000
Costs for July $250,000 $247,000 $344,500
Work in Process 7/31/00 (60% completed) 25,000

Required: Prepare a production report for the Mixing Department for the month.

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 Process Costing

Solution – 4:

US BWIP EWIP UC
110,000 20,000 25,000 105,000

0% 25% 30% 50% 60% 90% 100%

OH OH
DM Labor DM DM
[30% of total [50% of total [20% of total
Material] Material] Material]

Quantity Schedule
Physical Here,
Equivalent Units (EU)
Flow US: Units Started
DM DL MOH EWIP: Ending Work in Process
Inputs: BWIP: Beginning Work in Process
BWIP 20,000 UC: Units Completed
Units started 110,000 OH: Overhead
DM: Direct Materials
Total inputs 130,000
DL: Direct Labor
Outputs:
MOH: Manufacturing Overhead
Units completed 105,000 105,000 105,000 105,000
EWIP 25,000 20,000 25,000 15,000
Total outputs 130,000
Total Works Done 125,000 130,000 120,000

Calculation of Cost per EU: Cost Report

DM Cc MOH $ $
Last Period Costs $12,500 - $15,500 Units Completed:
Current Period Costs 250,000 247,000 344,500 Cost of 105,000 units -
Total Costs 262,500 247,000 360,000 DM: 105,000 X 2.10 220,500
Equivalent Units 125,000 130,000 120,000 DL: 105,000 X 1.90 199,500
P.U. Cost 2.10 1.90 3.00 Cc: 105,000 X 3.00 315,000
735,000
Ending WIP:
DM: 20,000 X 2.10 42,000
DL: 25,000 X 1.90 47,500
Cc: 15,000 X 3.00 45,000
134,500
Total Costs 869,500

Illustration – 5:
Paradise Products, Inc., manufactures a cooking compound that goes through three processing stages prior
to completion. Information on work in the first department, Cooking, is given below for May:

Production data:
Units in process, May 1; 100% complete as to materials and
80% complete as to conversion. 2,500

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 Process Costing

Units started into production during May 22,500

Good units completed and transferred out during May 18,500
Units in process, May 31; 100% complete as to materials
and 25% complete as to conversion 4,000
Cost data:
Work in process inventory, May 1:
Materials cost $2,500
Conversion cost 2,000
Cost added during May:
Materials cost $22,500
Conversion cost 20,000

Materials are added at beginning of the cooking process, whereas labor and overhead costs are incurred
uniformly. Spoiled units are detected upon inspection at the end of the process (normal spoilage is 10% of
units inspected) and are disposed of at zero net disposal value. All completed work is transferred to the next
department. The company uses the weighted-average method.

Required: Prepare a quantity schedule and a computation of equivalent units; Compute the costs per
equivalent unit for the month; and prepare a cost reconciliation.

Solution – 5:
Quantity Schedule and Equivalent units
Physical
Equivalent Units
Flow
DM Cc
Units to be accounted for:
BWIP (DM 100%, CC 80%) 2,500
Units started 22,500
Total units to be accounted for: 25,000
Units accounted for:
Units completed 18,500 18,500 18,500
Normal spoilage* 1,850 1,850 1,850
Abnormal loss** 650 650 650
EWIP (DM 100%, CC 25%) 4,000 4,000 1,000
Total Units accounted for 25,000 25,000 22,000

 Normal spoilage is 10% of good units transferred out i.e. 1,850 units (10% of 18,500)
 Total spoilage = (Total Input – Units completed – EWIP) = 25,000 – 18,500 – 4,000 = 2,500 units
 Abnormal spoilage = Total spoilage – normal spoilage = 2,500 – 1,850 = 650 units

Costs per equivalent unit:

Total
Particulars DM CC
cost
Last Period Costs $4,500 $2,500 $2,000
Current Period Costs 42,500 22,500 20,000
Total costs to be accounted for $47,000 $25,000 $22,000
Equivalent units 25,000 22,000
Cost per equivalent unit $2.00 $1.00 $1.00

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 Process Costing

Cost reconciliation:
Total
Equivalent Units
cost
DM Cc
Costs accounted for: @ $1 @ $1
Cost of completed units @ $2.00 37,000 18,500 18,500
Costs of normal spoilage 3,700 1,850 1,850
Total cost of good units completed and transferred out 40,700
Costs of abnormal spoilage 1,300 650 650
Costs of ending WIP 5,000 4,000 1,000
Total costs accounted for $47,000

Illustration – 6:
The Sporting Bag Company manufactures golf bags in a two-department process: Assembly and Finishing.
The Assembly Department uses weighted average costing; the cost driver for overhead in this department is
unrelated to direct labor. The Finishing Department adds the hardware to the assembled bags and uses FIFO
costing. Overhead is applied to the bags in this department on a direct labor basis. During June, the
following production data and costs have been gathered:

Assembly Department: Units

Beginning work in process
(100% complete for material; 40% complete for labor; 30% complete for overhead) 250 units
Units started 8,800 units
Ending work in process
(100% complete for material; 70% complete for labor; 90% complete for overhead) 400 units

Assembly Department: Costs

Direct
Material Overhead Total
Labor
Beginning inventory $ 3,755 $ 690 $ 250 $ 4,695
Current 100,320 63,606 27,681 191,607
Totals $104,075 $64,296 $27,931 $196,302

Finishing Department: Units

Beginning work in process
(100% complete for transferred-in; 15% complete for material; 40% complete for conversion) 100 units
Units transferred in 8,650 units
Ending work in process
(100% complete for transferred-in; 30% complete for material; 65% complete for conversion) 200 units

Finishing Department: Costs

Transferred- Direct
Conversion Total
In Material
Beginning inventory $ 2,176 $ 30 $ 95 $ 2,301
Current 188,570 15,471 21,600 225,641
Totals $190,746 $15,501 $21,695 $227,942

Required:
1. Prepare a cost of production report for the Assembly Department.
2. Prepare a cost of production report for the Finishing Department.

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 Process Costing

Solution – 6:

Equivalent Units of Production (Assembly Department)

Whole Direct Direct
Overhead
Units Material Labor
Beginning inventory 250 250 100 75
Units started 8,800
Units to account for 9,050
BWIP completed 250 0 150 175
Started and completed 8,400 8,400 8,400 8,400
Units completed 8,650
Ending inventory 400 400 280 360
Units accounted for 9,050
Weighted average EUP 9,050 8,930 9,010

Cost Data (Assembly Department):

Direct Direct
Whole units Overhead
Material Labor
Total
BWIP costs $4,695 $3,755 $690 $250
Current period costs 191,607 100,320 63,606 27,681
Total costs $196,302 $104,075 $64,296 $27,931
Divided by EUP 9,050 8,930 9,010
Cost per EUP $21.80 $11.50 $7.20 $3.10

Cost Assignment:
Transferred out (8,650 X $21.80) $188,570
Ending inventory
Direct material (400 X $11.50) $4,600
Direct labor (280 X $7.20) 2,016
Overhead (360 X $3.10) 1,116
7,732
Total cost accounted for $196,302

Equivalent Units of Production (Finishing Department)

Whole Transferred- Direct

Conversion
Units In Material
Beginning inventory 100
Units started 8,650
Units to account for 8,750
BWIP completed 100 0 85 60
Started and completed 8,450 8,450 8,450 8,450
Units completed 8,550
Ending inventory 200 200 60 130
Units accounted for 8,750
FIFO EUP 8,650 8,595 8,640

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 Process Costing

Cost Data (Finishing Department):

Transferred- Direct
Whole Units Conversion
In Material
Total
BWIP costs $2,301
Current period costs 225,641 $188,570 $15,471 $21,600
Total costs $227,942
Divided by EUP 8,650 8,595 8,640
Cost per EUP $26.10 $21.80 $1.80 $2.50

Cost Assignment:
Transferred out
Beginning inventory cost $2,301
Cost to complete:
Transferred-in (0 X $21.80) 0
Direct material (85 X $1.80) 153
Conversion (60 X $2.50) 150
$2,604
Started and completed
(8,450 X $26.10) 220,545
Ending inventory
Transferred-in (200 X $21.80) $4,360
Direct material (60 X $1.80) 108
Conversion (130 X $2.50) 325
4,793
Total cost accounted for $227,942

Illustration – 7:
A process shows the following process line, where, direct materials are added at 80% level of work and
conversion costs incurred uniformly throughout the process. Inspection point is at 50% level to identify
spoiled units. Spoiled units cannot be reworked and so need to treat as scrap with zero saleable value.
Prepare a cost report using weighted average method to account for its units and costs.

Units
NS: 5% of
Started BWIP EWIP Units
total inputs
25,000 3,000 4,000 Direct Completed
units units IP units Material 22,000 units

0% 30% 50% 70% 80% 100%

Last period costs:

Cc = $4,500

Cc

Cost added during the period:

DM = $66,000
Cc = $111,600

Page 26 of 50
 Process Costing

Solution – 7:

Quantity Schedule
Physical Equivalent
Flow Units (EU)
Inputs: DM Cc
BWIP 3,000
Units started 25,000
Total 28,000
Outputs:
Units completed 22,000 22,000 22,000
Normal loss 1,400 0 700
Abnormal loss 600 0 300
EWIP 4,000 0 2,800
Total 28,000
Total Works Done 22,000 25,800

Calculation of Cost per EU:

$ $
Last Period Costs [LPC] 0 4,500
Current Period Costs [CPC] 66,000 111,600
Total Cost = [LPC+CPC] 66,000 116,100
Equivalent Units (EU) 22,000 25,800
P.U. Cost = [Total Cost/EU] 3.00 4.50

Cost Report
$ $ $
Units Completed:
Direct material 66,000
Conversion cost 99,000
165,000
(+) Normal Spoilage: 2,665
167,665
Abnormal Spoilage:
Direct material 0
Conversion cost 1,350
1,350
Ending WIP:
Direct material 0
Conversion cost 12,600
12,600
(+) Normal Spoilage 485
13,085
Total Costs 182,100

Page 27 of 50
 Process Costing

Allocation of Normal Spoilage:

Cost of normal spoilage
= Direct material + Conversion Costs
= (0 X 3.00) + (700 X 4.50) = 3,150

Allocation of normal spoilage between the good units (Units completed and EWIP):
Total good units = (22,000 + 4,000) = 26,000
Cost of normal spoilage for units completed:
= 3150 X 22,000 ÷ 26,000 = 2,665
Cost of normal spoilage for EWIP:
= 3,150 X 4,000 ÷ 26,000 = 485

Illustration – 8:
A process shows the following process line, where, direct materials are added at the start of the process and
conversion costs incurred uniformly throughout the process. Inspection point for rework is at 60% level to
identify defective units needs rework. Spoiled units cannot be reworked and so need to treat as scrap with
zero saleable value which is identified at 75% level. Prepare a cost report using weighted average method to
account for its units and costs.

Units
Started BWIP Inspection Inspection EWIP Units
4,000 500 point Point 600 Completed
units units Rework Spoilage units 3,650 units

0% 20% 25% 60% 75% 80% 100%

DM
Number of units
inspected: 4,650

Last period costs:

DM = $3,000
Cc = $1,000

Cc

Normal Rework: 2% of units inspected

Normal Spoilage: 5% of units inspected

Cost added during the period:

DM = $20,625
Cc = $34,020

Page 28 of 50
 Process Costing

Solution – 8:
Quantity Schedule
Physical Rework (RW):
Equivalent Units
Flow [Additional materials required for rework is
DM Cc zero and additional conversion cost required is
Inputs: (60% - 20%) = 40%]
BWIP 500 Total RW:
Units started 4,000 Total units inspected : 4,650
Total inputs : 4,500
Total 4,500
Total RW units : 150
Outputs: Normal RW: 4,650 X 2% = 93 units
Units completed 3,650 3,650.00 3,650.00 Abnormal RW: (150 – 93) = 57 units
Normal rework - - 37.20
Abnormal rework - - 22.80
Spoilage:
Normal loss 225 225.00 168.75 [Materials spend for spoiled units are 100% and
Abnormal loss 25 25.00 18.75 conversion cost spend up to the inspection
EWIP 600 600.00 480.00 point i.e., 75%]
Total 4,500 Total Spoilage:
Total Works Done 4, 500 4,378 Total output [F/G+EWIP] : 4,250
Total inputs : 4,500
Calculation of cost per equivalent unit: Total spoiled units : 250
Normal Spoilage: 4,500 X 2% = 225 units
DM Cc Abnormal Spoilage: (250 – 225) = 25 units
Last Period Cost [LPC] $3,000 $1,000
Current Period Costs [CPC] 20,625 34,020
Total Cost = [LPC+CPC] 23,625 35,020 Allocation of NRW cost:
Cost of Normal Rework:
Equivalent Units (EU) 4,500 4,378
Direct material: 0 X 5.25 =0
P.U. Cost = [Total Cost/EU] 5.25 8.00
Conversion cost: 37.20 X 8.00 = 298
Cost Report: = 298
Normal Rework should be allocated among
Units Completed: $
units survived the rework inspection i.e., units
(3,650 x 13.25) 48,363 completed (3,650 units), EWIP (600 units) and
(+) Normal rework 242 spoiled units (250 units).
(+) Normal Spoilage 2,187
Abnormal rework: 50,792 Cost of NRW to UC: 298 X 3,650 ÷ 4,500 = 242
Cc: 22.80 X 8.00 182 Cost of NRW to EWIP: 298 X 600 ÷ 4,500 = 40
Cost of NRW to NS: 298 X 225 ÷ 4,500 = 15
Abnormal Spoilage:
Cost of NRW to AS: 298 X 25 ÷ 4,500 =1
DM: 25 X 5.25 131
Cc: 18.75 X 8.00 150
(+) Normal rework 1 Allocation of NS cost:
Cost of Normal Spoilage:
Ending WIP: 282
Direct material: 225 X 5.25 = 1,181
DM: 600 X 5.25 3,150
Conversion cost: 168.75 X 8.00 = 1,350
Cc: 480 X 8.00 3,840
(+) cost of NRW = 15
(+) Normal rework 40 = 2,546
(+) Normal Spoilage 359 Normal spoilage should be allocated among
7,389 units survived the spoilage inspection i.e., units
Total Costs 58,645 completed (3,650 units) and EWIP (600 units).

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 Process Costing
Illustration – 9:
Del Co. Ltd. began the current period with 1000 units, which were 60% complete. During the period, works
on additional 50000 units were started. Materials are added at the start of the process while labor is added
when units are 40% complete. Overhead costs are incurred uniformly. Units are inspected for rework when
they are 50% complete. Rejected units are returned to 20% complete point for rework. Normal rework is 3%
of the units inspected. Units are again inspected when they are 70% complete. Rejected units are thrown
away as spoiled. Normal spoilage is 1% of the units inspected. There were 52000 units inspected for rework
and 800 units were rejected as spoilage. Ending work in process consists of 6000 units, 80% complete. Costs
attached to opening inventory were tk. 45000 for material, tk. 21000 for labor and tk. 50000 for overheads;
Current costs were material tk. 225000, labor tk. 106100 and tk. 421680 for overhead.

Using weighted average method, find out –

1. Cost of goods completed
2. Cost of ending work in process
3. Cost of abnormal rework and
4. Cost of abnormal spoilage.

Solution – 9:
Statement of production and Equivalent Units of production
Equivalent Units
Physical
Element of production Material Labor Overhead
Units
Units % Units % Units %
Inputs
Opening WIP 1000
Introduced during the period 50000
Units accounts for 51000
Outputs
Finished Goods 44200 44200 100 44200 100 44200 100
Ending WIP 6000 6000 100 6000 100 4800 80
Normal Spoilage 510 510 100 510 100 357 70
Abnormal Spoilage 290 290 100 290 100 203 70
Normal Rework - - - 1560 100 468 30
Abnormal Rework - - - 440 100 132 30
Equivalent Units 51000 51000 53000 50160

Total spoilage = 800 units (given)

Normal spoilage = 1% of units inspected i.e. 1% of 51,000 units = 510 (not inspected for rework unit)
Abnormal spoilage = 800 – 510 = 290 units
Total rework = 52,000 units – 50,000 units = 2,000 units
(B. WIP not included as it has already passed the 50% rework inspection point).
Normal rework = 3% of units inspected for rework i.e. 3% of 52,000 = 1,560 units
Abnormal rework = 2,000 – 1,560 = 440 units

Statement of costs and costs per equivalent unit

Elements of costs Total Material Labor Overhead
Opening inventory of WIP 116000 45000 21000 50000
Current years costs 752680 225000 106100 421680
Total Costs (Tk.) 868680 270000 121100 471680
Equivalent units 51 000 53 000 50 160
Cost per equivalent units (Tk.) 5.29 2.40 9.40

Page 30 of 50
 Process Costing
Statement showing the evaluation of different elements of production:
Shifted
Category Costs (Tk.) Ratio Amount
to
Cost of Normal Rework L: 1560*2.40 3,744 FG 44200/51000 7056
O: 468*9.40 4,399 WIP 6000/51000 957
Total 8,143 NS 510/51000 83
AS 290/51000 47

Cost of Abnormal Rework L: 440*2.40 1,056

O: 132*9.40 1,241
Total 2,297

Cost of Normal Spoilage M: 510*5.29 2,698 FG 44200/50200 6482

L: 510*2.40 1,224 WIP 6000/50200 878
O: 357*9.40 3,356
Share of NR 83
Total 7,361

Cost of Abnormal Spoilage M: 290*5.29 1,534

L: 290*2.40 696
O: 203*9.40 1,908
Share of NR 47
Total 4,185

Cost of ending WIP M: 6000*5.29 31,740

L: 6000*2.40 14,400
O: 4800*9.40 45,120
Share of NR 957
Share of NS 878
Total 93,095

Cost of Finished Goods M: 44200*5.29 233,818

L: 44200*2.40 106,080
O: 44200*9.40 415,480
Share of NR 7,056
Share of NS 6,482
Total 768,916

Process Account
Elements of
Elements of costs Units Costs Units Costs
Production
WIP, beginning 1000 Abnormal Rework 2 297
Material 45 000 Abnormal Spoilage 290 4 186
Labor 21 000 Normal Spoilage 510 -
Overhead 50 000 Finished Goods 44200 7 68 916
Introduced during the year 50000 Balance c/d 6000 93 096
Material 2 25 000 (WIP, ending)
Labor 1 06 100
Overhead 4 21 680
51000 8 68 780 51000 8 68 780

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 Process Costing
Illustration – 10:
Lubricants, Inc., produces a special kind of grease that is widely used by race car drivers. The grease is
produced in two processing departments: Refining and Blending. Raw materials are introduced at various
level of refining process. Conversion costs are incurred uniformly throughout the process.

The following incomplete Work in Process account is available for the Refining Department for May:

Work-in-Process (Refining Department)

$ $
Inventory, May 1 Completed and transferred to ?
(5,000 units 60% completed) $44,530 Blending Department (30,000 units)
May costs added (30,000 units Inventory, May 31
introduced in the process): (4,000 units, 75% completed) ?
Direct materials 155,040
Conversion Costs 218,230
Total 417,800 417,800

The May 1 work in process inventory consists of $21,960 in materials and $22,570 in conversion costs. The
company uses the weighted average method to account for units and costs.

80% of the total materials in the refining process are introduced at the start of the process whereas, the rest
20% are introduced when conversion has been done by 30%. Lubricants, Inc., inspect their process twice,
one to identify units subject to rework, which is done at 50% level of work and the other inspection is done
to identify spoiled units @ 80% level of work. In the first stage of inspection Lubricants, Inc., inspected total
32,000 units for rework and send back the units subject to rework to 20% level of work to covert them as
good units. Under the both inspection points, the company expects 5% of units inspected as normal loss. In
the second stage of inspection, the company identifies the spoiled units and can sell the scrap at the rate of
$3 per unit.

Required: Prepare a production report for Refining Department for the month.

Solution – 10:

BWIP EWIP Units

Units Started IP 5,000 4,000 Completed
30,000 units Rework units units 30,000 units

0% 20% 30% 50% 60% 75% 80% 100%

IP
DM DM Number
Spoilage
80% of Total 20% of Total of units
Materials Materials inspected:
32,000

Cc

Page 32 of 50
 Process Costing
Quantity Schedule
Physical Equivalent Units Rework (RW):
Flow (EU) [Additional materials required for rework is
DM Cc 20% and additional conversion cost required is
Inputs: (50% - 20%) = 30%]
BWIP 5,000 Total RW:
Units started 30,000 Total units inspected : 32,000
Units suppose to be inspected : 30,000
Total 35,000
Total RW units : 2,000
Outputs:
Normal RW: 32,000 X 5% = 1,600 units
Units completed 30,000 30,000 30,000 Abnormal RW: (2,000 – 1,600) = 400 units
Normal rework - 320 480
Abnormal rework - 80 120 Spoilage:
Normal spoilage 1,550 1,550 1,240 [Materials spend for spoiled units are 100% and
Abnormal spoilage (550) (550) (440) conversion cost spend up to the inspection
EWIP 4,000 4,000 3,000 point i.e., 80%]
Total Spoilage:
Total 35,000
Total output [F/G+EWIP] : 34,000
Total Works Done 35,400 34,400
Total inputs : 35,000
Total spoiled units : 1,000
Calculation of cost per equivalent unit:
Units Inspected (35,000 – 4,000) : 31,000
DM Cc Normal Spoilage:
Last Period Cost [LPC] 21,960 22,570 31,000 X 5% = 1,550 units
Current Period Cost [CPC] 155,040 218,230 Abnormal Spoilage:
(1,000 – 1,550) = (550) units
Total Cost = [LPC+CPC] 177,000 240,800
Equivalent Units (EU) 35,400 34,400 Allocation of Normal Rework cost:
P.U. Cost = [Total Cost/EU] 5.00 7.00 Cost of Normal Rework:
Direct material: 320 X 5.00 = 1,600
Cost Report: Conversion cost: 480 X 7.00 = 3,360
Units Completed: $ = 4,960
(30,000 x 12.00) 360,000 Normal Rework should be allocated among
units survived the rework inspection i.e., units
(+) Normal rework 4,251
completed (30,000 units), EWIP (4,000 units)
(+) Normal Spoilage 12,000
and spoiled units (1,000 units).
Abnormal rework: 376,251
Cost of NRW to UC : 4,960 X 30,000 ÷ 35,000
DM: 80 X 5.00 400
: 4,251
Cc: 120 X 7.00 840
Cost of NRW to EWIP : 4,960 X 4,000 ÷ 35,000
Abnormal Spoilage: 1,240 : 567
DM: (550) X 5.00 (2,750) Cost of NRW to NS : 4,960 X 1,550 ÷ 35,000
Cc: (440) X 7.00 (3,080) : 220
(+) Normal rework (78) Cost of NRW to AS : 4,960 X (550) ÷ 35,000
(-) Scrap value 1,650 : (78)
Ending WIP: (4,258)
Allocation of Normal Spoilage cost:
DM: 4,000 X 5.00 20,000 Should be allocated only to units completed as
Cc: 3,000 X 7.00 21,000 only it survived the inspection for spoilage.
(+) Norma rework 567 Cost of NS = {(DM + Cc) + NRW – Scrap Value}
41,567 = {(7,750 + 8,680) + 220 – 4,650}
Total Costs 414,800 = 12,000

Illustration – 11:

Page 33 of 50
 Process Costing
Micro Labs Company produces house paint in two processing departments: the Mixing Department which
mixes the paint colors and the Finishing Department which puts the paint in containers and labels them. The
following information related to the company’s operation for October follows:

(a) Raw materials were issued for use in production: Mixing department, $551,000, and the Finishing
department, $629,000.
(b) Direct labor costs incurred: Mixing department $230,000, and Finishing department $270,000.
(c) Manufacturing overhead cost applied: Mixing department $665,000, and Finishing department,
$405,000.
(d) The cost of the mixed paint transferred from the Mixing department to the Finishing department was
$1,850,000.
(e) Paint that had been prepared for shipping was transferred from the Finishing department to Finished
Goods. Cost of the transferred paint was $3,200,000.

Required: Prepare journal entries to record items a) through e) above.

Solution – 11:
(a) Work in Process – Mixing 551,000
Work in Process – Finishing 629,000
Raw Materials 1,180,000

(b) Work in Process – Mixing 230,000

Work in Process – Finishing 270,000
Wages and Salaries Payable 500,000

(c) Work in Process – Mixing 665,000

Work in Process – Finishing 405,000
Manufacturing Overhead 1,070,000

(d) Work in Process – Finishing 1,850,000

Work in Process – Mixing 1,850,000

(e) Finished Goods 3,200,000

Work in Process – Finishing 3,200,000

EXERCISES:

Page 34 of 50
 Process Costing
E1: Patio Company produces outdoor brooms. On April 30, 2001, the firm had 3,600 units in process that
were 70 percent complete as to material, 40 percent complete as to direct labor, and 30 percent complete as
to overhead. During May, 186,000 brooms were started. Records indicate that 184,200 units were transferred
to Finished Goods Inventory in May. Ending units in process were 40 percent complete as to material, 25
percent complete as to direct labor, and 10 percent complete as to overhead.
(a) Calculate the physical units to account for in May.
(b) How many units were started and completed during May?
(c) Determine May’s EUP for each category using the weighted average method.
(d) Determine May’s EUP for each category using the FIFO method.
(e) Reconcile your answers to parts (c) and (d).

E2: The Midwest Coal Company mines and processes coal that is sold to four power plants in central
Pennsylvania. The company employs a process costing system to assign production costs to the coal it
processes. For the third week in March 2001, the firm had a beginning Work in Process Inventory of 50,000
tons of ore that were 100 percent complete as to material and 30 percent complete as to conversion. During
the week, an additional 200,000 tons of ore were started in process. At the end of the week, 35,000 tons
remained in Work in Process Inventory and were 70 percent complete as to material and 60 percent
complete as to conversion. For the third week in March:
(a) Compute the total units to account for.
(b) Determine how many units were started and completed.
(c) Determine the equivalent units of production using the weighted average method.
(d) Determine the equivalent units of production using the FIFO method.

E3: Frankfurt Products manufactures an electronic language translator. The device can translate seven
languages in either direction. Analysis of beginning Work in Process Inventory for February 2001 revealed
the following:

800 Units Percent Complete Cost Incurred

Material 45 $ 8,700
Direct labor 65 3,800
Overhead 40 6,600
Total beginning WIP $19,100

During February, Frankfurt Products started production of another 3,800 translators and incurred $85,380
for material, $23,560 for direct labor, and $65,720 for overhead. On February 28, the company had 400 units
in process (70 percent complete as to material, 90 percent complete as to direct labor, and 80 percent
complete as to overhead).

Required: Prepare a cost of production report for February using the weighted average method.

E4: Alt Enterprises manufactures belt buckles in a single-step production process. To determine the proper
valuations for inventory balances and Cost of Goods Sold, you have obtained the following information for
August 2001:

Whole Units Cost of Material Cost of Labor

Beginning work in process 400,000 $ 400,000 $ 630,000
Units started during period 2,000,000 2,600,000 3,990,000
Units transferred to finished goods 1,800,000

Page 35 of 50
 Process Costing
Beginning inventory units were 100 percent complete as to material, but only 80 percent complete as to labor
and overhead. The ending inventory units were 100 percent complete as to material and 50 percent complete
as to conversion. Overhead is applied to production at the rate of 60 percent of direct labor cost.

(a) Prepare a schedule to compute equivalent units of production by cost component assuming the
weighted average method.
(b) Determine the unit production costs for material and conversion.
(c) Calculate the costs assigned to completed units and ending inventory for August 2000.

E5: The following information has been gathered from the records of Jack’s Snacks for August 2001. The
firm makes a variety of snacks; the information presented here is for a cashew and dried mango mix.
Materials are added at the beginning of processing; overhead is applied on a direct labor basis. The mix is
transferred to a second department for packaging. Jack’s uses a FIFO process costing system.

Beginning WIP inventory (40% complete as to conversion) 5,000 pounds

Mix started in August 90,400 pounds
Ending WIP inventory (70% complete as to conversion) 4,000 pounds
Materials cost incurred in August $415,840
Conversion costs incurred in August $106,030

Beginning inventory cost totaled $13,875. For August 2001, compute the following:
(a) Equivalent units of production by cost component.
(b) Cost per equivalent unit by cost component.
(c) Cost of mix transferred to the packaging department in August.
(d) Cost of August’s ending inventory.

E6: In a single-process production system, the Cleopatra Corporation produces press-on fingernails. For
October 2000, the company’s accounting records reflected the following:

Beginning Work in Process Inventory

(100% complete as to material; 30% complete as to direct labor;
60% complete as to overhead) 6,000 units
Units started during the month 45,000 units
Ending Work in Process Inventory
(100% complete as to material; 40% complete as to direct labor;
70% complete as to overhead) 10,000 units

Cost Component Beginning Inventory October

Material $4,980 $45,000
Direct labor 450 21,600
Overhead 3,180 33,300

(a) For October, prepare a cost of production report assuming the company uses the weighted average
method.
(b) For October, prepare a cost of production report assuming the company uses the FIFO method.

E7: You have just been hired as the cost accountant for Sun Valley Micro, a producer of personal computer
cases. This position has been vacant for one month. John Amos, manager of the firm’s tax department, has
performed some computations for last month’s information; however, he confesses to you that he doesn’t
remember a great deal about cost accounting.

Page 36 of 50
 Process Costing
In the production process, materials are added at the beginning of production and overhead is applied to
each product at the rate of 70 percent of direct labor cost. There was no Finished Goods Inventory at the
beginning of July. A review of the firm’s inventory cost records provides you with the following
information:

Units DM Cost DL Cost

Work in Process 7/1/00
(70% complete as to labor and overhead) 100,000 $ 750,000 $ 215,000
Units started in production 1,300,000
Costs for July 4,850,000 3,265,000
Work in Process 7/31/00
(40% complete as to labor and overhead) 400,000
At the end of July, the cost of Finished Goods Inventory was determined to be $124,033.

Required:
(a) Prepare schedules for July 2000, to compute the following:
1. Equivalent units of production using the weighted average method.
2. Unit production costs for material, labor, and overhead.
3. Cost of Goods Sold.
(b) Prepare the journal entries to record the July transfer of completed goods and the July cost of goods sold.

E8: Global Defense, Inc. is a manufacturer of military equipment. Its Halifax plant manufactures the
Interceptor missile under contract to the Canadian government and friendly countries. All Interceptors go
through an identical manufacturing process. Every effort is made to ensure that all Interceptors are identical
and meet many demanding performances specifications. The product-costing system at the Halifax plant
has a single direct cost category (direct materials) and a single indirect cost category (conversion costs). Each
Interceptor passes through two departments – the Assembly Department and the Testing Department.
Direct materials are added at the beginning of the process in Assembly. Conversion costs are added evenly
throughout the two departments. When the Assembly Department finishes work on each Interceptor, it is
immediately transferred to Testing.

Global Defense uses the weighted-average method of process costing. Data for the Assembly Department
for October 2009 are:

Physical units Direct Conversion

(missiles) Materials Costs
Work in process, October 1[Conversion completed 60%] 20 $460,000 $120,000
Started during October 2009 80
Completed during October 2009 90
Work in process, October 31[Conversion completed 70%] 10
Costs are added during October 2009 $2,000,000 $935,000

Required:
1. For each cost element, compute equivalent units of work done in October 2009 in the Assembly
Department. Show physical units in the first column.
2. For each cost element, calculate cost per equivalent unit of beginning work in process and of work done
in October 2009.
3. Summarize the total Assembly Department costs for October 2009, and assign these costs to units
completed (and transferred out) and to units in ending work in process using the WAVG method.
4. Prepare a set of summarized journal entries for all October 2009 transactions affecting Work in Process-
Assembly. Set up at T-account for Work in Process-Assembly, and post the entries to it.

Page 37 of 50
 Process Costing
E9: [continuing problem of E8] Global Defense, Inc., as you know, manufactures the Interceptor missile at
its Halifax plant. It has two departments-Assembly Department and Testing Department. This problem
focuses on the Testing Department. (Problem 30 focused on the Assembly Department.) Direct materials are
added at the end of the Testing Department. Conversion costs are added evenly during the Testing
Department’s process. As each unit is completed in Testing, it is immediately transferred to Finished Goods.

Global Defense uses the weighted-average method of process costing. Data for the Testing Department for
October 2009 are:
Physical units Transferred Direct Conversion
(missiles) in costs Materials Costs
Work in process, October 1[Conversion completed 70%] 30 $985,800 $0 $331,800
Started during October 2009 ?
Completed during October 2009 105
Work in process, October 31[Conversion completed 60%] 15
Costs are added during October 2009 $3,192,866 $3,885,000 $1,581,000

Required:
1. Prepare a Production Report for the Testing Department for October 2009.
2. Prepare journal entries for October transfers from the Assembly Department to the Testing Department
and from Testing to Finished Goods.

E10: Star Toys manufactures one type of wooden toy figure. It buys wood as its direct material for the
Forming Department of its Fredericton plant. The toys are transferred to the Finishing Department, where
they are hand-shaped and metal is added to them. In the Forming Department materials are added at the
beginning of the process whereas, direct materials are added when conversion is completed 80% in the
Finishing Department.

A star toy uses the weighted-average method of process costing. Consider the following data for the
Forming Department in April 2009:
Physical units Direct Conversion
(missiles) Materials Costs
Work in process, April 1 [Conversion completed 40%] 300 $7,500 $2,125
Started during April 2009 2,200
Completed during April 2009 2,000
Work in process, April 31 [Conversion completed 25%] 500
Costs are added during April 2009 $70,000 $42,500

REQUIRED
1. Summarize the total Forming Department costs for April 2009, and assign these costs to units completed
(and transferred out) and to units in ending work in process using the weighted-average method.
2. Prepare a set of summarized journal entries for all April transactions affecting Work in Process-
Forming. Set up a T-account for Work in Process-Forming, and post the entries to it.

Given the following information for the Finishing Department

Physical units Transferred Direct Conversion
(missiles) in costs Materials Costs
Work in process, April 1[Conversion completed 60%] 500 $17,750 $0 $7,250
Started during April 2009 2,000
Completed during April 2009 2,100
Work in process, April 31[Conversion completed 30%] 400
Costs are added during April 2009 $104,000 $23,100 $38,400

Page 38 of 50
 Process Costing
3. Summarize the total Finishing Department costs for April 2009, and assign these costs to units
completed (and transferred out) and to units in ending work in process using the weighted-average
method.
4. Prepare journal entries for April transfers from the Forming Department to the Finishing Department
and from the Finishing Department to Finished Goods.

E11: Simex, Inc., manufactures a cooking compound that goes through three processing stages prior to
completion. Information on work in the first department, Cooking, is given below for July:

Production data:
Units in process, July 1 (Materials 100% completed, 10,000
conversion 60% completed)
Units started into production during December 2,20,000
Units completed and transferred out 2,05,000
Units in process, July 31 (Materials 60% completed, ?
conversion 35% completed)
Cost data:
Work in process inventory, July 1:
Materials cost $1,50,000
Conversion cost 1,38,375
Cost added during July:
Materials cost 31,72,000
Conversion cost 46,71,000

Materials are added at different stages during the cooking process, whereas labor and overhead costs are
incurred uniformly. The company uses the weighted-average method.
Required: Prepare a quantity schedule and a computation of equivalent units; Compute the costs per
equivalent unit for the month; and prepare a cost reconciliation.

E12: Builder Products, Inc., manufactures a caulking compound that goes through three processing stages
prior to completion. Information on work in the first department, Cooking, is given below for December:

Work-in-Process Account
$ $
Balance B/d (15,000 units; full Units completed and transferred
competed as to material and 4/5 out (1,05,000 units) ?
completed as to conversion costs) $1,92,000
Units started into production
during December (1,10,000 units)
Costs added during the year: Balance C/d ( ? units completed;
Material 5,71,200 3/5 completed as to material and
Labor 2,87,000 1/5 completed as to conversion
Overhead 4,11,600 costs) ?
$14,61,800 $14,61,800

Costs details from last month record for the beginning work-in-process are given below:
Materials cost : $84,000
Labor cost : $40,000
Overhead cost : $68,000
Materials are added at several stages during the cooking process, whereas labor and overhead costs are
incurred uniformly. The company uses the weighted-average method.

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 Process Costing
Required: Prepare a quantity schedule and a computation of equivalent units; Compute the costs per
equivalent unit for the month; and prepare a cost reconciliation.

E13: Paradise Products, Inc., manufactures a cooking compound that goes through three processing stages
prior to completion. Information on work in the first department, Cooking, is given below for December:

Production data:
Units in process, December 1; 80% complete as to materials
and 70% complete as to conversion. 14,000
Units started into production during December 2,16,000
Units completed and transferred out ?
Units in process, December 31; 60% complete as to
materials and 30% complete as to conversion 20,000
Cost data:
Work in process inventory, December 1:
Materials cost $1,15,900
Conversion cost 1,25,000
Cost added during December:
Materials cost 6,12,260
Conversion cost 14,34,520

Materials are added at several stages during the cooking process, whereas labor and overhead costs are
incurred uniformly. The company uses the weighted-average method.

Required: Prepare a quantity schedule and a computation of equivalent units; Compute the costs per
equivalent unit for the month; and prepare a cost reconciliation.

E14: Brady Products, Inc., manufactures a caulking compound that goes through three processing stages
prior to completion. Information on work in the first department, Pressuring, is given below for March:

Production data:
Units in process, March 01 (4/5 completed) 15,000
Units started into production during March 1,10,000
Units completed and transferred out 84% of total inputs
Units in process, March 31 (1/5 completed) ?

Cost data:
Work-in-process inventory, March 01 –
Material $66,300
Labor 40,000
Manufacturing overhead 68,000
Cost added during March –
Material $5,71,200
Labor 2,87,000
Manufacturing overhead 4,11,600

Materials are introduced at the start of cooking process, whereas labor and overhead costs are incurred
uniformly. The company uses the weighted-average method.

Required: Prepare a production cost report for the month.

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 Process Costing
E15: Alfred Aluminum Inc., manufactures a cooking compound that goes through three processing stages
prior to completion. Information on work in the first department, Molding, is given below for December:

Production data:
Units in process, December 1 (2/5th completed) 500
Units started into production during December 6,500
Units completed and transferred out ?
Units in process, December 31 (3/5th completed) 750
Cost data:
Work in process inventory, December 1:
Materials cost $2,82,500
Conversion cost 68,000
Cost added during December:
Materials cost 32,17,500
Conversion cost 22,77,000
Materials are added at the beginning during the cooking process, whereas labor and overhead costs are
incurred uniformly. The company uses the weighted-average method.

Required:
1. Prepare a quantity schedule and a computation of equivalent units.
2. Compute the costs per equivalent unit for the month.
3. Using the data from (1) and (2) above, prepare a cost reconciliation.

E16: Builder Products, Inc., manufactures a caulking compound that goes through three processing stages
prior to completion. Information on work in the first department, Shaping, is given below for November:

Fraction completed
Units
Material Conversion
Production data:
Work in process, November 1 28,000 Nil 2/7
Started into production 402,000
Completed and transfer out ?
Work in process, November 30 20,000 100% 3/5

Cost data:
Work in process, November 1 $4,500
Cost added during November:
Materials cost 322,500
Conversion cost 206,500

Materials are added at several stages during the cooking process, whereas labor and overhead costs are
incurred uniformly. The company uses the weighted-average method.

Required:
1. Prepare a quantity schedule and a computation of equivalent units.
2. Compute the costs per equivalent unit for the month.
3. Using the data from (1) and (2) above, prepare a cost reconciliation.

E17: The Mosley Co. Ltd. has two departments and uses a weighted-average process costing system. The
following information pertains to department 2 for the month of April 2009. Materials are added at the
beginning of the process. Based on the following data prepare a cost of production report for Department 2:

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 Process Costing
a) At March 31, 2009, the work in process inventory in department 2 consisted of 6,000 units which were
50% complete and had been charged $56,000 for department 1 costs, $14,000 for direct materials, and
$24,000 for conversion costs in department 2 in the previous period.
b) During April, 22,000 units were received from department 1 at a cost of $224,000.
c) Department 2 costs during April were $42,000 for materials and $156,000 for conversion costs.
d) 16,000 units were completed and transferred to finished goods.
e) At the end of April, 10,000 units were still in process in department 2. They were estimated to be 60%
complete.

In department 2, it is expected that 5% of good output will be spoiled. Inspection takes place at the end of
the process.

E18: The Larado Company uses a process costing system to account for the costs of three production
departments (departments I, II, and III). Department II receives units from department I and applies
conversion costs evenly throughout the process. When the units are 90% complete, they are inspected and
all materials are then added to the good units. The following is additional information related to
department II for the month of November 2009:

(a) 2,000 units were in process at the beginning of November 2009. They were estimated to be 40%
complete. Costs associated with these units were as follows:
Department I costs ………………………………………….....$10,000
Department II costs (all CC) ……………………………….......2,100
(b) During November 2009, 35,000 units were received from Dept. 1 at a cost of $212,000.
(c) Actual costs incurred by department II during November 2009 were:
Materials ………………………………………………………. $12,800
Conversion costs …………………………………………...…. 105,000
(d) During November 2009, 32,000 units were completed and transferred to department III.
(e) At the end of November 2009, there were 4,000 units in process, which were estimated to be 70%
complete.
(f) Assume normal spoilage on 32,000 good units produced, is 1,000 units.

Required: Prepare a cost of production report for department II for November 2009 using the weighted-
average method, Note: Calculations of unit costs should be rounded to five decimals places.

E19: The Nieforth Co. Ltd. Operates under a weighted-average process cost system. It has two
departments, 1 and 2. In department 2, materials are added at the end of the process, following inspection.
Normal spoilage is considered to be 3% of good output. Labor and overhead costs are assumed to apply
evenly throughout the process. Inventory at the beginning of the period was one-half complete; ending
inventory is two-thirds complete. Following are the costs and unit production statistics for the period:
Beginning inventory……………………………………….. 2,000 units
Received from department 1..……………………………… 8,000 units
Completed and transferred to
finished goods storeroom……….…………………………... 7,000 units
Ending inventory……………………………………………. 1,500 units

Transferred form
Costs Materials Labor Overhead
Department 1
Beginning inventory $6,100 - $1,400 $550
Current costs 23,900 $7,000 12,000 5,050

Required: Prepare cost of production report for department 2.

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 Process Costing
E20: Based on the following process line prepare a cost of production report under –
(a) Weighted average method
(b) FIFO method

Units
Started BWIP Direct Direct EWIP Units
65,000 12,000 Material Inspection Material 9,000 Completed
units units (30%) Point (70%) units 60,000 units

0% 25% 40% 55% 70% 85% 100%

Last period costs: Cost added during the period:

Cc = $32,410 DM = $196,350; Cc = $414,300

Cc

Normal Spoilage: 8% of good units

E 21: Based on the following process line prepare a cost of production report under –
(a) Weighted average method
(b) FIFO method

US EWIP BWIP Units

22,000 2,500 Inspection 1,000 Completed
units units point units 19,500 units

0% 20% 30% 40% 60% 75% 90% 100%

DM DM DM
50% 30% 20%

3/4th of the defective units Last period costs:

identified at the inspection TIC = $17,500;
point can be reworked and DM = $5,600
the other 1/4th should be
Cc = $8,880
treated as spoiled units

Cc

Normal Rework: 6% of units inspected

Normal Spoilage: 8% of units inspected
Spoiled units can be sold in the market at a salvage value of $2 per unit

Cost added during the period:

TIC = $3,72,500; DM = $1,51,550; Cc = $1,89,570

Note: Total output [F/G+EWIP] is 22,000 units whereas total input was 23,000 units. Therefore,
total spoiled units are 1,000 which is 1/4 th of total defective units. So total defective units were
4,000 units which indicate 3,000 of the defective units were reworked.

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 Process Costing

CASE:
Rainbow Paints makes quality paint sold at premium prices in one production department. Production
begins with the blending of various chemicals, which are added at the beginning of the process, and
ends with the canning of the paint. Canning occurs when the mixture reaches the 90 percent stage of
completion. The gallon cans are then transferred to the Shipping Department for crating and shipment.
Labor and overhead are added continuously throughout the process. Factory overhead is applied at the
rate of $3 per direct labor hour.

Prior to May, when a change in the process was implemented, work in process inventories were
insignificant. The change in process enables greater production but results in large amounts of work in
process. The company has always used the weighted average method to determine equivalent
production and unit costs. Now, production management is considering changing from the weighted
average method to the first-in, first-out method.

The following data relate to actual production during May:

Costs for May

Work in process inventory, May 1
Direct material—chemicals $ 45,600
Direct labor ($10 per hour) 6,250
Factory overhead 1,875
Current month
Direct material—chemicals $228,400
Direct material—cans 7,000
Direct labor ($10 per hour) 35,000
Factory overhead 10,500

Units for May (Gallons)

Work in process inventory, May 1 (25% complete) 4,000
Sent to Shipping Department 20,000
Started in May 21,000
Work in process inventory, May 31 (80% complete) 5,000

(a) Prepare a cost of production report for each cost element for May using the weighted average
method.
(b) Prepare a cost of production report for each cost element for May using the FIFO method.
(c) Discuss the advantages and disadvantages of using the weighted average method versus the FIFO
method, and explain under what circumstances each method should be used.
(CMA adapted)

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 Process Costing
PRACTICE SHEET

Practice Case – 1:
Draw a process line for the following case:
Materials are added at the beginning of the process, labor are paid when conversion is done by 70%
and overhead incurred uniformly throughout the process.

BWIP 9,000 units (50% completed); units started during the period 60,000; units completed during the
period 63,000 and EWIP 6,000 units (80% completed).

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Hints: Identify where to put Material, labor and overhead costs and also where is the standing of
inputs (BWIP and units started) and outputs (units completed and EWIP).

Practice Case – 2:
Calculate number of equivalent units based on the following case:
Materials are added at the beginning of the process and conversion costs incurred uniformly
throughout the process. BWIP 3,000 units (70% completed); units started during the period 35,000; units
completed during the period 32,000 and EWIP 6,000 units (20% completed).

Units Ending Beginning Units

Started WIP WIP Completed
35,000 6,000 3,000 32,000

0% 20% 70% 100%

Conversion Costs
Materials

Quantity Schedule:
Weighted Average FIFO
Physical Equivalent units Equivalent units
Outputs
flow Materials Conversion Materials Conversion
Units completed

Ending WIP

Total Outputs

Total Woks Done

Less: Last period works done

Current period works done

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 Process Costing

Practice Case – 3:
Calculate number of equivalent units based on the following case:
Materials are added twice in the process. First 70% of the total materials are introduced at the start of
the process and the rest 30% are introduced when conversion is done by 60%. Conversion costs
incurred uniformly throughout the process. Inspection is done at 50% work level.

Units
NS: 2% of
Started EWIP BWIP Units
total inputs
120,000 18,000 12,000 Completed
units units IP units 110,000 units

0% 30% 50% 60% 70% 100%

DM [70% of DM [30% of
total material] total material]
Cc

Quantity Schedule:
Weighted Average FIFO
Physical Equivalent units Equivalent units
Outputs
flow Materials Conversion Materials Conversion
Units completed

Normal spoilage

Abnormal spoilage

Ending WIP

Total Outputs

Total Woks Done

Less: Last period works done

Current period works done

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 Process Costing

Practice Case – 4:
Draw a process line and answer the required questions based on the following case:
A process has started with 6,000 units of BWIP (80% completed) and new units added in the process
during the period totaled 72,000. Out of these inputs, 4,000 units (20% completed) remained in the
process as EWIP at the end of the period and 1,500 units are found as spoiled units. Materials in the
process are added twice, first, 75% of the total materials are introduced at the start of the process and
the remaining 25% are added when conversion is done by 50%. Conversion costs are incurred
uniformly throughout the process. The process has been inspected twice, one to identify units subject to
rework (at 70%) and another to identify spoiled units at 90% work level. At 70%, total 70,000 units were
inspected and the units subject to rework have been sent back to 40% work level to do the necessary
work. The process expects 3% of units inspected under both the inspection points as normal loss.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Answer the following questions based on the above case and process line:

1. How many units are completed and transferred out during the period? :

2. What percentage of additional work need to be done during rework? :

3. What percentage of DM costs incurred during rework? :

4. What percentage of conversion costs incurred during rework? :

5. How many units are inspected at 90% level of inspection? :

6. How many units are normal spoilage? :

7. How many units are abnormal rework (abnormal gain)? :

8. How many EU have been worked for spoilage in terms of DM? :

9. How many EU have been worked for spoilage in terms of Cc?

10. How many EU have been worked for rework in terms of DM? :

11. How many EU have been worked for rework in terms of Cc?

12. Cost of normal rework should be allocated among ________ (put tick)? :

13. Cost of normal spoilage should be allocated among _______ (put tick)? :

14. How many EU of BWIP have been completed last period in terms of DM? :

15. How many EU of BWIP have been completed last period in terms of Cc? :

Here, EU refer ‘Equivalent Units’; DM refers to ‘Direct Materials’; and Cc refers to ‘Conversion Costs’.

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 Process Costing

Practice Case – 5:
Calculate number of equivalent units based on the following case:
Materials are added at the start of the process, labors are paid when conversion is done by 35% and
overheads are incurred uniformly throughout the process. Inspection for rework is at 50% work level
and the defective units are sent back to 30% level for the additional work. Inspection for spoilage is at
90% level and the company is expecting 5% of the units inspected as normal loss (both normal spoilage
and normal rework).

BWIP EWIP Units

Units Started 4,000 IP 8,000 Completed
70,000 units units Rework units 62,000 units

0% 20% 30% 35% 50% 75% 90% 100%

IP
DM Direct Number
Spoilage
Labor of units
inspected: Units inspected:
76,000 ?

OH

Quantity Schedule:
Weighted Average FIFO
Physical Equivalent units Equivalent units
Outputs
flow Materials Conversion Materials Conversion
Units completed

Normal Rework

Abnormal rework (GAIN)

Normal spoilage

Abnormal spoilage

Ending WIP

Total Outputs

Total Woks Done

Less: Last period works done

Current period works done

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 Process Costing

Practice Case – 6:
Calculate and allocate the normal rework cost based on the following case:

BWIP EWIP Units

Units Started 3,000 IP 5,000 Completed
55,000 units units Rework units 51,500 units

0% 20% 30% 35% 50% 75% 90% 100%

IP
DM Direct Number
Spoilage
Labor of units
inspected: NS = 1,060
60,000 AS = 440

OH
Normal rework and normal spoilage is 2% of units inspected

Quantity Schedule
Physical
Equivalent Units (EU)
Flow
DM DL MOH
Normal rework - 1,200 240
Cost Data
Cost per unit $40 $30 $25

Cost of Normal rework:

Direct material cost :$

Direct labor cost :$

Manufacturing Overhead cost : $______________

Total cost of normal rework :$

Allocation of Normal rework to –

Units completed :$

EWIP :$

Normal spoilage :$

Abnormal spoilage : $______________

Total :$

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 Process Costing
Practice Case – 7:
Calculate and allocate the normal rework and normal spoilage cost based on the following case:

BWIP EWIP Units

Units Started 9,000 IP 8,000 Completed
80,000 units units Rework units 79,000 units

0% 20% 30% 35% 50% 75% 90% 100%

IP
DM Direct Number
Spoilage
Labor of units
inspected:
92,000

OH
Normal rework and normal spoilage is 2% of units inspected

Quantity Schedule
Physical
Equivalent Units (EU)
Flow
DM DL MOH
Normal rework - 1,780 356
Normal spoilage 1,620 1,620 1,620 1,458
Cost Data
Cost per unit $40 $30 $25

Cost of Normal rework:

Direct material cost :$
Direct labor cost :$
Manufacturing Overhead cost : $______________
Total cost of normal rework :$
Allocation of Normal rework to –
Units completed :$
EWIP :$
Normal spoilage :$
Abnormal spoilage : $______________
Total :$
Cost of Normal Spoilage
Direct material cost :$
Direct labor cost :$
Manufacturing Overhead cost :$
(+) Share of normal rework : $______________
Total cost of normal rework :$
Allocation of Normal rework to –
Units completed :$
EWIP : $______________
Total :$

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