Guerrero Process Costing PDF

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Chapter 14

Process Costing Process costing is a method of cost accumulation that accumulated production costs by department. This system is commonly used by companies that manufactures on a continuous basis only one product or standard products.

Problems in process costing are often given in the CPA examination. To pass Practical Accounting 2, candidates must be thoroughly familiar with situations encountered in these problems, typical of which are the following: 1. Preparation of Cost of Production Report using: a. First-in, First – out (FIFO) costing method b. Average costing method 2. Accounting for spoilage (lost units) a. Normal spoilage b. Abnormal spoilage COST OF PRODUCTION REPORT At the end of each month the cost of production report is prepared for each department by the cost accountant of the department. A production report has two sections: 1. Quantity schedule, which shows the follow of units. 2. cost analysis which shows the flow of cost. Quantity Schedule This section shows the number of units that were in process in the department at the start of the month, the number of units begun during the month, the number of units transferred out of the department during the month, the number of units still in work in process at the end of the month.

The principal problem in the quantity schedule is the computation of the equivalents production (measure of work done in terms of completed units) of units finished and units in process for materials and conversion costs (labor and overhead). The computation of the equivalent units of production (EUP) will depend on the inventory costing method used. a. First in, First out (FIFO) Costing. Under this method, the stage of completion of the units of Beginning Work in Process (BWIP) is determined separately from the units started and finished this month. This means that the equivalent units of production are calculated only for work actually performed during the month. b. Average Costing. Under this method, the unit in process at the beginning is combined with the units started and finished this month and presented in one batch of units. This means that the work performed on the units in progress beginning (last month) is treated as if it were performed this month.

Cost Analysis This section summarized the costs incurred in the department, the cost per unit of the product, the total costs of products completed and transferred out of department, and the costs related to the ending inventory of work in process in each department. The principal problem in this section is the computation of unit cost and the allocation of the total costs to units finished and transferred out and to units in ending work in process. Unit cost: a. First in, first out (FIFO) Costing. Total costs incurred this month (current costs) divided by the equivalent units of production. b. Average Costing. Cost last month (cost incurred in BWIP) plus cost this month (current costs) divided by the equivalent units production. Allocation of total costs:

a. First in, first out (FIFO) Costing: Finished and transferred out: BWIP: Cost last month Cost this month = EUP x UC Started in process = Actual units UC

EWIP = EUP x UC b. Average Costing: Finished and transferred out = Actual units x total UC EWIP = EUP x UC ACCOUNTING FOR SPOILAGE (LOST UNITS) Spoilage units are units of product that have been damaged or improperly manufactured and cannot be completed as salable products. Spoilage may be classified as normal spoilage, because it is a common occurrence that is inherent in the manufacturing process and abnormal spoilage that results from unusual and nonrecurring factors, such as fire or water damage. Candidates should be familiar with the following procedures in presenting spoilage in the cost of production report. Quantity Schedule. Normal and abnormal spoilage are presented separately and the equivalent units of production computed bases on the work done. Cost Analysis. The costs of units lost through normal spoilage are absorbed by the remaining god units produced during the month. Costs of abnormal spoilage are presented separately and charged to a Loss Abnormal Spoilage account so that the completed units do not absorb the costs related abnormal lost units. Computation of the cost of normal spoilage: Spoiled units may be discovered at the start of the process, during the process or at the end of the process. The computation of the cost of lost units depends on the point of discovery as follows: a. if lost units are discovered at the start or during the process – In the first department = no cost In the subsequent department = lost units x unit cost from preceding department b. if lost units are discovered at the end of the process – In the first department = lost units x total unit costs in this department In the subsequent department = lost units x total unit cost from preceding and in this department c. if lost units are discovered at inspection point-

In the first department = EUP of lost units x unit cost In the subsequent department = cost from preceding department plus cost in this department (EUP x UC) Allocation of cost of normal spoilage Cost of normal spoilage is to be absorbed by the good units because good units cannot be made without also making some units that are spoiled. Cost of normal spoilage should be alloxated pro-rate among the good units on the bases of actual units or EUP. The allocations procedures are: a. If lost units are discovered at the start or during the process – First In, First Out Costing – To all the goods units started finished this month and units in process at the end. Average costing – To all the good units, finished and in process. b. If lost units are discovered at the end of the process – First in, First out costing – To all the units finished and transferred out. Average costing – to all the good units finished and in process. c. if lost units are discovered at inspection point. To all the good units that passed the inspection point.

PROBLEMS 1. Department of Hope Manufacturing Company presents the following production data for the month of May, 2013: Opening inventory 3/8 completed Started in process Transferred Closing inventory, 1/2 completed 3/4 completed

4,000 units 13,000 units 9,000 units 4,000 units 4,000 units

What are the equivalent units of production for the month of May, 2013. FIFO a.12,500 units b.17,000 units C. 12,500 units d. 15,000 units

AVERAGE 13,000 units 12,500 units 14,000 units 14,000 units

2. Rose Co, bad 3,000 units in work in process at April 1, 2013, which were 60% complete as to conversion cost, During April, 10,000 units was completed. At April 30, 4,000 units remained in work in process which were 40% complete as to conversion cost. Direct materials are added at the beginning of the process. How many units were started during April? a. 9,000 b. 9,800 c. 10,000 d. 11,000 3. The Ilang-llang Corporation, engaged in a manufacturing business and using process costing, gave the following production data for three different situations. Stages of completion of the inventories apply to all cost elements. (1) Started in process, 6,500 units; transferred, 5,500 units; in process, 400 units 50% completed and 600 units 25% completed. (2 ) Beginning inventory, 6,250 units 40% completed; started in process, 25,000 units; transferred, 26,250 units; in process at the end, 3,000 units 50% completed and 2,000 units 25% completed. (3) Beginning inventory, 6,000 units 30% completed; started in process. I3,000

units; lost in processing, 500 units from production started this period (loss was normal and occurred throughout the production process); transferred, 14,000 units; in process at the end, 3,000 units 50% completed and 1,500 units 75% completed. What are the equivalent production of the three different situations under FIFO and average costing? FIFO 1 a.5,850 b. 5,850 c.8,550 d. 5,058

2 25,750 27,550 20,575 20,775

3 14,825 18,425 15,428 12,524

AVERAGE 1 5,850 5,580 5,508 5,850

2 28,250 22,850 28,025 28,250

3 16,625 15,662 16,265 16,625

4. Orchids Company has a process cost system using the FIFO cost flow method. All materials are introduced at the beginning of the process in Department One. The following information is available for the month of January 2012: Units Work in process, 1/1/08 (40% complete as to conversion 500 costs) Started in January 2,000 Transferred to Department Two during January 2,100 Work in process, 1/31/08 (25% complete as to 400 conversion costs) What are the equivalent units of production for the month of January 2013? Materials a.2,500 b.2,500 c.2,000 d.2,000

Conversion 2,200 1,900 2,200 2,000

5. Anahaw Company's production cycle starts in the Mixing Department. The following information is available for the month of April 2013? Units Work inprocess, April 1 (50% complete) 40,000 Started in April 240,000 work-in-process, April 30 (60% complete) 25,000 Materials are added in the beginning of the process in the Mixing Department. Using the weighted average method, what are the equivalent units of production for the month of April 2013?

Materials a.240,000 b.255,000 c.270,000 d.280,000

Conversion 250,000 255,000 280,000 270,000

6. Materials are added at the start of the process in Jasmin company's cutting department, the first stage of the production cycle. The following information is available for the month of March 2013. units Work in process, March 1 (60% complete as to 60,000 conversion costs) Started in March 150,000 Transferred to the next department 110,000 Lost in production 30,000 Work in process, March 31 (50% complete as to 70,000 conversion costs Under Jasmin's cost accounting system, the costs incurred on the lost units are absorbed by the remaining good units. Using the First in, First out method, what are the equivalent units for the materials unit cost calculation? a. 120,000 b.145,000 c. 180,000 d. 210,000

7. Bayani Manufacturing Company, using the FIFO process cost system, has the following data for the month of April: Percent Complete Actual Units Materials Conversion cost Beginning Inventory 15,000 * I 00% 40% Transferred in 150,000 Transferred out 120,000 Ending Inventory 45,000 100% 30% What are the equivalent units of production for the month of April? Materials a.150,000 b.165,000 C. 135,000 d. 150,000

Conversion Costs 127,500 139,500 124,500 133,500

8. Eastern Products Inc., Input all materials at the start of operations in Process 1. The inventory is process at the beginning of January consisted of 4,000 units with a total cost of materials of P100,000 and labor and overhead of P20,000 . In January, 20,000 units were started in process with material cost of P500,000. Labor and overhead in January cost P280,000. As of end of January., the inventory was 100% complete in materials but only 60% in labor and overhead. The ending inventory consisted of 10,000 units. The equivalent units of labor and overheard for the month of January amounted to: a.20,000 b.10,000 C. 26,000 d. 30,000 9. Yakal Company computed the flow of physical units completed for Department M for the month, of March 2013 as follows: Units completed: From work-in process on March 1, 2008 15,000 From March production 45,000 No. 9 – Continued Materials are added at the beginning of the process. The 12,000 units of work in process at March 31, 2013, were 80% complete as to conversion costs. The work in process at March 1, 2043 was 80% complete as to conversion costs. Using the FIFO method, the equivalent units for March conversion costs were: a. 55,200 b. 57,000 C. 60,600 d. 63,600 10. Mataba Company sells food processors and manufactures them in a single continuous process. At the end of August there were 200 units valued at P30,095, which consists of P25,200 in materials cost and P4,895 in conversion cost. These were 100% complete as to materials and 25% complete as to conversion cost 1200 units were added to production during September, and these had materials costs of P168,000. Processors which have not been completed at the end of September total 200 units and were 100% complete as to materials and 50% complete as to conversion cost. Conversion cost during September were P158,125. There were no units lost in process. What are the equivalent units of production for September? Materials

Conversion Cost

a.1,400 b.1,200 c.1,200 d.1,200

1,350 1,100 1,150 1,250

11. The Wiring Department is the second stage of Acacia Company's production cycle. On May 1, the beginning work-in process contained 25,000 units which were 60% complete as to conversion costs. During May, 100,000 units were transferred-in from the first stage of Acacia's production cycle. On May 31, the ending work in Process contained 20,000 units which were 80% complete as to conversion costs. Material costs are added at the end of the process, using the weighted-average method, the equivalent units were: Materials a.125,000 b.105,000 c.105,000 d.125,000

Conversion costs 100,000 105,000 121,000 121,000

12. Dhalia Company adds materials at the beginning of the process in Department A Information concerning the materials used in April 2013 production is as follows:

Work-in-process at April Started during April Completed and transferred to next department during April Normal spoilage incurred Abnormal spoilage incurred Work in process at April 30

Units 10,000 50,000 36,000 3,000 5,000 16,000

Under Dhalia's cost accounting system, costs of normal spoilage are treated as part of the costs of good units produced. However, the costs of abnormal spoilage are charged to factory overhead. Using the weighted-average method, what are the equivalent units for the materials unit cost calculation for the month of April? a.47,000 b.52,000 C. 55,000 d. 57,000 13. The following information pertains Lanao's First Department for the month of April:

Beginning work-in-process Started in April Units completed Ending work-in-process

Number of units 15,000 40,000 42,000 12,000

Cost of Materials P 5,000 18,000

All materials are added at the beginning of the process. Using the weighted average method, the cost per equivalent unit for materials is: a.P0.59 b.P0.55 C. P0.45 d. P0.43 14. Information concerning Dept. B of Simon Co. follovvs: Units Beg. work in process 5,000 P6,300 P2,90 Units transferred in 35,000 58,000 17,500 40,000 P64,300 P20,400 Units completed End. work in process

P25,500 25,500

P 3,400 15,000 P18,400

37,000 3,000

Conversion costs were 20% complete as to the beginning work in process and 40% complete as to the ending work in process. All materials are added at the end of the process. Simon Co. uses the weighted average method. The unit cost for conversion costs and for transferred-in cost rounded to the nearest centavo are: a. P0.44 and P0.48 b. P0.46 and P0.51 c.P0.48 and P0.51 d. P0.50 and P0.53 15. Reyna Company manufactures product X in a two-stage production cycle in Departments A and B, Materials are added at the beginning of the process in Department B. Roy uses the weighted-average method. Conversion costs for department B were 50% complete as to the 6,000 units in the beginning work-in- process and 75% complete as to the 8,000 units in the ending work-in-process,12,000 units were completed and transferred out of Department B during February 2013. An analysis of the costs relating to work-in-process and production activity in Department B for February 2013 is as follows:

Work-in-process, February 1: costs attached February activity: costs added

Transferred In

Cost Materials

Conversion

P12,000

P2,500

P1,000

29,000

5,500

5,000

The total cost per equivalent unit transferred out for February 2013 of product X, rounded to the nearest centavo, was: a. b. c. d.

P2.75 P2.78 P2.82 P2.85

16. On April 1,2013, the Hari Company had 6,000 units of WIP in Department B, the second and last stage of their production cycle. The costs attached to these 6,000 units were P12,000 of costs transferred in from Department A, P2,500 of material cost added in department B and P2,000 of conversion cost added in Department B. Materials are added in the beginning of the process in Department B. Conversion was 50% complete on April 1,2013. During April, 14,000 units were transferred in from Department A at a cost of P27,000; and a materials costs of P3,500 and conversion costs of P3,000 were added in Department B. On April 30, 2011, Department B had 5,000 units were added in Department B. On April 30,2011 Department B had 5,000 units of WIP 60% complete as to conversion costs. The costs attached to these 5,000 units were P 1 0,500 of costs transferred in from Department A, P1,800 of material costs added in Department B and P800 of conversion costs added in Department B. Using the weighted-average method, what are the unit costs? Transferred Materials in a.P1.95 P.25 b.P1.95 P.30 c.P1.80 P.30 d. P1.70 P.25

Conversion cost P.27 P.28 P.27 P.28

I 7. Department CC has the following April production information: Beginning work in process Units started during the month Units transferred to next operation in April Ending work in process (40% complete) Beginning work in process cost April's production cost

24,000 units 780,000 units 744,000 units 60,000 units P 120,000 5,256,000

No 17 Continued The unit cost of production is: a.P 7.00 b. P20.22 c. P 6.89 d. P 6.69 I 8. For the month of March, Payaso Inc. registered the following information: Beginning work in process (70% complete) Started in March Ending work in process (80% complete)

40,000 units 300,000 units 60,000 units

The cost of beginning work in process was FP 140,000 while the production costs for the month registered at P 1 ,172,000. Using the average method, what is the unit cost of production for March? a.P4.00 b.P3.86 C. P3.91 d. P4.69

I 9. The Masaya Corporation manufactures only one product, and the raw materials must pass through Processes A, B, and C, in that order, before completion. On October 1, the inventories of Process C and Finished Goods were: Process C Finished Goods

---

1,200 units, 2/3 completed, P4,200. 1,000 units, at P3.00 per unit.

During October, 2,000 units valued at P5,000 were transferred in from Process B. Direct labor cost in Process C was P3,100 and the overhead cost applied to Process C was P3,200.

The inventories on October 31 were: Process C -660 units, 1/2 completed. Finished Goods -1,300 units

The conversion cost per equivalent unit for October is: No. 19 --- continued a.P1.50 b.P2.75 C. P3.00 d. P3.50 20. Materials are added at the start of the process in Arce Company's Blending Department, the first stage of the production cycle. The following information is available for the month of July, 2013. Work-in-process, July 1 (60% complete as to conversion 60,000 units costs) Started in July 150,000 units Transferred to the next department 110,000 units Lost in production 30,000 units 'Work-in-process, July 31 (50% complete as to 70,000 units conversion costs) Under Arce's cost accounting system, the costs incurred on the lost units are absorbed by the remaining good units. Using the weighted-average method, what are the equivalent units for the materials unit cost calculation? a. b. c. d.

120,000 145,000 180,000 210,000

21. Information for the month of May concerning Department A, the first stage of Pinay Corporation's production cycle is as follows:

Work-in-process, beginning Current costs Total costs Equivalent units based on Weighted-average method Average unit costs Goods completed Work in process, end

Materials P 4,000 20,000 P24,000