System Design - Process

Costing
4

As discussed in unit 3, cost information is useful for purposes of

planning and control, inventory valuation, and decision making.
Techniques of assigning costs to manufactured products are ordinarily
tailored to the particular nature of the products and manufacturing
operations involved. Fundamentally there are two basic cost accounting
systems: (i) job-order costing, and (ii) process costing. Job order costing
system is used to those manufacturing activities that are characterized by
the production of certain items to the unique specifications of the
customer or by the performance of some specified activity under a
negotiated contract. While process costing system is under to
manufactured mass production of a single product or a few products in
repetitive production environments, where large number of homogeneous
or very similar products are manufactured in a continuous fashion. The
basic aim of this unit is to present the basic ideas of process cost
accounting system.
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Lesson 1: Process Costing: Introduction

Learning Objectives
After completing this lesson, you are expected to be able to:
 Define process costing.
 Explain the features of process costing.
 Explain important differences between job order and process costing.
 Understand cost accumulation procedures in process costing system.
 Prepare journal entries to record the flow of costs in a process
costing system.

Introduction
Process costing is the second principal method of product costing
system. Like job-order costing system, this product costing system has
the ultimate purposeassignment of production costs to units of output. Process costing is a
method of costing by
Process costing is better adapted to the production of large quantities of which costs are
similar or identical units of standardized products. Process costing is a accumulated for each
method of costing by which costs are accumulated for each separate separate process or
process or operations, and subsequently related to production quantities operations, and
passing through the process to ascertain the unit cost. By process costing, subsequently related
to production
we mean the situation such as the processing of chemicals, petroleum, quantities passing
plastics, pharmaceuticals, textiles, cement, sugar, coal and electric through the process to
utilities, to mention but a few. ascertain the unit cost.

Process costing is a form of operation costing. It is method of cost

accounting whereby costs are charged to processes of operations and
averaged over units produced; it is employed principally where a finished
product is the result of a more or less continuous operation. Moreover,
process cost accounting is a method of averaging the cost of production,
either by separate elements of cost or in total, for a particular period of
time over the number of units of product accomplished during the same
period.
A manufacturing concern’s decision to use process costing is based on
the number of different products, the length of production cycle, the
amount of work-in-process at the end of accounting period, and the
number of departments involved in the production process.
Features of Process Costing
Process costing system has the following distinctive characteristics:
(a) Manufacturing costs are accumulated for each production department
or process.
(b) As it is impossible to identify the elements of prime cost with a
particular unit of finished product, the average cost per unit is obtained
by accumulating all manufacturing cost and dividing it by the total
output for that period at the various stages of manufacture.
(c) Manufacturing costs are accumulated by department or process for
specific time periods, say a month, and the process costing is designed to

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measure units produced during this time period.

(d) The output of one process becomes the input of the next process.
(e) Wastage, possibly due to scrap, reaction, evaporation, is unavoidable
but must be reduced as near as possible to the minimum.
(f) More than one product may emerge at the end of different process,
depending upon the sale value of the products, these are either termed as
"joint products" or "by products".
(g) Process costs for a period are apportioned between completed output
(transferred to stock or the next process) and unfinished production at the
end of the period (work-in-process).
Differences between Job-order and Process Costing System
Job-order Costing System and Process costing system have the same
objective. Both types of systems assign material, labor, and
manufacturing overhead costs to products. However, some important
differences exist between the two systems as given below:
FACTORS JOB ORDER COSTING PROCESS COSTING
SYSTEM SYSTEM
(1) Production Job-costing is applicable to Process costing is
goods manufactured to applicable to production
customers specification. consisting of succession
of continuous operations
or processes.
(2) Production Different for different jobs. Homogeneous across
requirements products on jobs.
(3) Costs Costs are accumulated for Costs are accumulated for
each job. each process.
(4) Computation Job cost is computed only Costs are compiled on
when a job is complete. time basis, i.e. for a given
accounting period and
costs per unit is
determined by averaging
the process costs.
(5) Transfer of Job costing does not involve In case of process costing,
costs transfer of costs from one job transfer of output from
to another. one process to another
involves the transfer of its
costs also.
(6) Control Being each job different from Control over production
others and production not and costs is much easier
being continuous, control in the case of process
becomes difficult. costing since production
is standardized.
(7) Variances Between actual and estimated Between actual and
direct material and direct estimated costs are
labour costs are determined determined for individual
for individual jobs. process stages.
(8) Expensive Job costing is expensive as it In process costing,

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involves a considerable however, paper work is

amount of paper work and reduced to a minimum as
effort in recording the cost of the method is simple, and
each job as it is incurred. it lends itself to the
technique of standard
costing.

Cost Accumulation in a Process Costing System

The task of accumulating the major manufacturing cost elements is not
In a process costing
different under process costing than under job-order costing. Essentially system, costs are
the same source documents and bookkeeping techniques will develop accumulated by
the input of direct material, direct labor, and factory overhead. In a departments for a
process costing system, costs are accumulated by departments for a specific time period
where as in job order
specific time period where as in job order costing costs are accumulated costing costs are
by jobs. But the main differences lie in the method of measuring units accumulated by jobs
produced, reporting the product costs, and valuing work-in-process
inventories. Cost accumulation is much simpler for a process cost system
than for a job order system.
Direct Materials: Usually materials are issued for use in the first process
and are, after processing, transferred to the next process and so on. The
prices of the direct material include all costs incurred in connection with
procuring that material, provided such costs can be traced to a specific
lot of material and nothing else. A manufacturing concern that uses a
process costing system may have only one product on a few products in
process at any one time, and thus may have just a few requisitions per
month. The number of requisitions would depend on how often a batch
of product is started. However, since costs are accumulated by
departments for a time period of time, it is customary to departmentalize
the work-in-process account. The journal entry required to record issue
of raw materials for production is as follows:
Work-in-process - (Say cutting department)
Work-in-process - (Say, Finishing department)
Raw Materials Inventory
Direct Labor: The employees in a factory or other places where
manufacturing is carried out are directly connected with the conversion
of the direct material in its various stages of manufacture to the finished
product are known as "direct labor". Direct labor/payroll costs are
accumulated by department for a specified period of time, and the
department payroll costs can usually be taken directly from the payroll
records without much additional effort. If workers are continuously
engaged in one process, the time spent by them is analyzed and their
wages are charged to the process concerned. However, if employees
perform work for more than one department, they will need to keep
records of the time they spend in each department process, and the time
spent by workers is apportioned on the basis of the time sheet. The
journal entry required to record direct labor is:
Work-in-process (cutting)
Work-in-process (finishing)
Accrued wages payable

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Manufacturing Overhead: All indirect expenditure incurred by a

business in connection with the actual manufacture of a product is
All indirect
expenditure incurred indirect production cost or manufacturing overhead. Expenses which are
by a business in common to two or more processes, and which cannot be directly
connection with the allocated to any cost centre, are apportioned to the various cost centres
actual manufacture of on a suitable basis are called manufacturing overhead. An appropriate
a product is indirect
base -direct labor cost, a direct labor hours a, machine hours - would be
production cost or
manufacturing selected in the same manner as in job order costing, and any under
overhead. applied or over applied overhead would be disposed of. The journal entry
required to record manufacturing overhead is :
Work-in-process (cutting)
Work-in-process (Finishing)
Manufacturing Overhead Applied.
Under process The application of manufacturing overhead, under job order and process
costing, the depar- costing, is essentially an averaging process. Under process costing, the
tment is considered to department is considered to be the costing unit. Overhead is frequently
be the costing unit. applied using a predetermined rate. The point is that overhead costs are
Overhead is frequ-
ently applied using a incurred by all manufacturing companies and must be distributed to units
predetermined rate. produced, regardless of the techniques used for accumulating costs.

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Demonstration Problem
Problem # 4.1.1
The manufacturing costs of the Assembly department for the month of
June are as follows:
Direct materials added Tk.1,20,000
Conversion costs:
Direct Labor Tk.90,000
Factory overhead 60,000
1,50,000
Costs to account for ................ Tk.2,70,000
The cost of goods completed and transferred to finished goods was
Tk.2,31,500 in June.
Required: Prepare a summary journal entries for the use of direct
materials, direct labor and factory overhead applied. Also
show the journal entry for the transfer of goods completed.
Solution to the Demonstrated Problem:
(i) Work-in-process - Assemble 1,20,000
Direct Material Inventory 1,20,000
(ii) Work-in-process - Assembly 90,000
Accrued Payroll 90,000
(iii) Work-in-process - Assembly 60,000
Factory overhead 60,000
(iv) Finished Goods Inventory 2,31,500
Work-in-process- Assembly 231,500

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PRACTICE TEST
A. Self-Assessment Questions (SAQs)
True False
1. Which of the following statements are true and which are false?
(i) A process cost system is suitable for a company with a large
volume of standard products produced on relatively
continuous basis, for example, soft drinks or petroleum.
(ii) Under process costing it is important to identify the
materials, labor, and manufacturing overhead costs
associated with a particular customer's order, the same as
with job order costing.
(iii) In one single process more than one product is produced
simultaneously.
(iv) In process costing system, the production report replaces the
job cost sheet.
(v) Costing is more difficult in a process costing system than it
is in a job-order costing system.
(vi) Predetermined overhead application rates are necessary
under a process cost system but are not used to compute per-
unit costs under a job-order cost system.
(vii) In a process costing system, a work-in-process account is
maintained for each department.
(viii) In process costing, costs incurred in a department are not
transferred to the next department.
(ix) Since costs are accumulated by department, there is no need
for a finished goods inventory account in a process costing
system.
(x) In a process cost system, the per unit cost of direct materials
equals the total cost of materials purchased in the current
month divided by the equivalent full units produced in the
current month.
(xi) Moon Manufacturing has operations that involve three
processing departments: Assembly, finishing and packaging.
Any debit to work-in-process Inventory: Finishing
Department Account must also involve a credit to the work-
in-process inventory : Assembly Department.
B. Multiple Choice Questions (MCQs)
2. Choose the best answer for each of the following questions by
placing the identifying letter in the space provided to the left.
(i) The system which applies costs to like products that are usually
mans produced in continuous fashion through a series of
production processes is known as:
(a) Process costing
(b) Variable costing
(c) Job-order costing
(d) JIT costing

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(ii) Which of the following is not a characteristics of process cost

system?
(a) The costs incurred in each process are accumulated in
separate work-in-process inventory accounts.
(b) It is suitable for mass-produced operations.
(c) Cost are accumulated separately for each unit of production
as it moves through the factory.
(d) The cost of finished unit is the sum of the unit costs of
performing each manufacturing process.
(iii) Which of the following is not an example of a product that would
be manufactured in a process costing system?
(a) Flour, (b) Glass, (c) Toothpaste, (d) A house
(iv) A process cost system differs from a job order cost system in that:
(a) There is no need for overhead application rates in process
cost systems.
(b) Process cost systems are used primarily in service industries;
job order cost systems are used in manufacturing operations.
(c) Per unit costs are not computed in process cost systems.
(d) The concept of the equivalent full unit is necessary to
determine unit costs only in process cost systems.
(v) In an industry for which process costing method is suitable for
determining product cost.
(a) There is always work-in-process at the end of the each
accounting period.
(b) There may or may not be any work-in-process at the end of
an accounting period.
(vi) In process costing, the journal entry to record direct materials used
would be:
(a) credit to Direct Materials Inventory
(b) debit to Cost of Goods Sold
(c) credit to respective department's Work-in-Process
(d) debit to Finished Goods
(vii) In process costing, the journal entry to record direct labor would
be:
(a) debit to Accrued Payroll
(b) credit to Factory Overhead
(c) debit to respective department's Work-in-Process
(d) credit to Finished Goods.
(viii) In process costing, the journal entry to record factory overhead
applied would be:
(a) debit to Factory Overhead

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(b) debit to respective department's Work-in-Process

(c) credit to Cost of Goods Sold
(d) credit to Finished Goods.
(ix) Which of the following is not a step in process costing?
(a) calculate output in terms of equivalent units
(b) calculate unit costs
(c) Summarize the total costs to account for
(d) Summarize the total costs by job.

C. Descriptive Questions:
1. What are the typical characteristics of a company that should
employ a process costing system?
2. List five types of manufacturing business in which process costing
would be an appropriate product costing system.
3. List three non-manufacturing business in which process costing
could be used. For example, a public accounting firm could use
process costing to accumulate the costs of processing clients' tax
returns.
4. How are job order and process costing similar? How do they
differ?
5. How are costs accumulated for firms that use a process cost
accounting system? How does this differ from cost accumulation
under a job order cost accounting system?
6. How many Work-in-process accounts are maintained in a company
using process costing?
7. Why is cost accumulation easier under a process costing system
than it is under a job-order costing system?
8. Is it appropriate to use a predetermined overhead rate for applying
overhead to production when a process cost accounting system is
under? Under what it be acceptable to use actual overhead instead
of applied overhead? When should applied overhead be used?
9. Show how to prepare a journal entry to enter direct material costs
into the Work-in-Process Inventory account for the first
department in a requential production process. Show how to
prepare the journal entry recording the transfer of goods from the
first to the second department in the sequence.
10. Assume that a firm has two departments, cutting and finishing.
Prepare sample journal entries to illustrate the cost accounting
cycle for direct materials, direct labor and applied manufacturing
overhead.

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Lesson 2: Determining Production

Learning objectives
After completing this lesson, you are expected to be able to:
 Describe what is meant by determining production.
 Calculate unit cost in process costing.
 Understand the term equivalent units of production (EUP).
 Calculate EUP.
 Explain the methods of EUP.
 Determine EUP using the weighted average and FIFO method of
process costing.
 Determine unit cost, inventory values using weighted average and
FIFO method of process costing.

Introduction
As discussed earlier both job order, process costing system accumulates
costs by cost component in each production department. However, the
two systems assign costs to departmental output differently. In both the
method, unit costs are transferred as goods are moved from one
department to the next so that a total production cost can be
determined/accumulated. As we know that, a unit of production for a
product or a department is a natural amount or quantity of the finished
product or of the work done by the department which can be used for the
measurement of other amounts or quantities of the same product or work.
If the entire quantity of the product manufactured is divided by this unit
of measurement, the quotient is the production expensed in units of
product. In this lesson procedure followed to determine production and a
detail of production report will be taken into consideration.
Determining Production
Assigning costs to units of production is an averaging process. As it is
necessary to determine the period's true production so that the current
months costs can be divided by the result of that months' efforts. In the
easiest possible situation, a product's actual units costs is found by
dividing a period's departmental production costs by that period's
departmental production quantity. This average is expressed by the
following formula :
Sum of Production Costs
Unit Cost =
Production Quantity

The principal difficulties encountered in process costing center on the

determination of the denominator of the basic formula used to calculate
cost per unit. The problem arises because units in a process at the
beginning and at the end of a period are by definition less than fully
complete. Were they complete, they would be included in the finished
goods inventory.

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There may be units in beginning Work-in-Process (WIP) inventory

which were started last periods but will be completed during the current
period. This two-period production sequence means that some costs for
these units were incurred last period and additional costs will be incurred
in the current period. Additionally, the partially completed units in
ending WIP Inventory were started in the current period production
efforts on ending WIP Inventory units caused some costs to be incurred
in this period and more costs will need to be incurred next period.
So, in order to spreading costs equitably over fully completed units and
WIP Inventory comprising partly finished goods on a common basis, the
concept of equivalent unit production or, more simply, equivalent
production is used.
Equivalent Units of production (EUP)
The concept of equivalent units of production is the Key to spreading
costs equitably in process costing. When a firm uses a process costing
system, it usually manufactures one or a few items repetitively and
would thus be highly likely to have work-in-process inventory at the end
of an accounting period. The following three possibilities may normally
occur with regard to work-in-process or the question of equivalent units
of production.
(a) Units started in the earlier period/process and finished in the present
period/process.
(b) Units started in the present period/process and finished in the same
period/process
(c) Units started in the present period/process and not finished in the
present period/process.
So, the degree of partial completion is the clue to the equivalent units in
the work-in-process. A four-step method is suggested for determining the
units of equivalent production in a period, as well as related cost per
equivalent unit.
 Analyze the physical flow of units for the period/process.
 Determine the equivalent units in the production for the period.
 Accumulate the costs in process for the period.
 Calculate the cost per equivalent unit in the production for the period.
Equivalent units of production (EUP) measure the output in terms of the
Equivalent units of
production are an quantities of each of the factors of production applied thereto. In other
approximation of the words, Equivalent units of production are an approximation of the
number of whole units number of whole units of output that could have been production during
of output that could a period from the actual effort expended during that period. EUP are
have been production
calculated by multiplying the number of actual but incompleted units
during a period from
the actual effort produced by the respective percentage of completion.
expended during that
period.
The meaning of EUP can be readily seen in the following example.
Assume Department X of a company had no beginning inventory in
April. During April, the department worked on 1,10,000 units; of which
1,00,000 units were completed and 10,000 units were 50% completed at

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the end of the period. The Equivalent unit of production (EUP) for the
period are: 1,05,000 [(1,00,000 X 100%)+(10,000 X 50%)].
Thus, 10,000 units that are 50% complete are equivalent to 5,000 units
that are fully complete. In other words, the total costs are the same to
produce either 10,000 units that are 50% complete or 5,000 units that are
complete. The adjusted figure for partially complete units is then added
to the number of completed units to arrive at equivalent units of
production.
So, the equivalent units of production is calculated by the following
formula:
Equivalent Units of Production = (# of units in process)  (Degree of
completion in %)
Methods of Equivalent Units of Production
There are two ways of computing a process's equivalent units of
production (a) Weighted Average Method, and (b) First-in, First-out
(FIFO) Method. Both the methods relate to the manner in which cost
flow is assumed to occur in the production process, because cost flow
assumption primarily affects what costs are attached to opening work-in-
process inventory. These two methods are described below for better
understanding.
(a) Weighted Average Method: The weighted average method
computes an average cost per unit of beginning inventory and current
period production. In this method, the cost of opening work-in-process is
not kept separate but is averaged with the additional costs incurred
during the period. Weighted average equivalent units of production is
computed by the following formula:
(Weighted EUP average) = (Units completed) + [(Units in ending
inventory)  (percentage complete)]
The key point in the computation of EUP under the weighted average
method is that, units in the beginning inventory are always treated as if
they were started and completed during the current period. Thus, no
adjustment is made for these units, regardless of how much work was
done on them before the period started. The above formula must be
applied separately to each cost factor.
Cost Per Unit, Weighted Average Method
The basic formula for the calculation of unit cost on a weighted average
method is:
EU of Prod FIFO = (Units completed/transferred out)- [(Units in
begining inventory)  (% of complete)] + [(Units in ending inventory) 
(% of complete)]
or
EU to complete beginning inventory [(units in beginning inventory) 
(100% - % of complete of beginning inventory)
+Units started and completes during the period.

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+ EU in ending WIP inventory

Equivocal UP:
EU to complete beginning inventory EU to complete beginning
inventory units in beginning inventory  (100% - % completion of
beginning inventory
+ Units started and completed during the period
+ EU in ending WIP inventory
EU of period (FIFO) = Units transferred out
- EU in beginning inventory
+ EU in ending WIP inventory
(Cost of beginning inventory) +
(Cost incurred in current period)
Cost per unit, weighted average = ----------------------------------------------
Equivalent units of production
The above formula is consistent with the calculating of EUP, since costs
associated with beginning inventory are pooled with current period cost
to arrive at an average cost per unit. This formula, like that for EUP
under weighted average method must be applied to each cost factor
separately.
(b) FIFO Method: The principal difference between FIFO and weighted
average method occurs in the computations of equivalent units of
production and unit cost. The FIFO method separates beginning
inventory and current period production and their associated costs so that
a current period cost per unit can be calculated. So under FIFO method,
we try to calculate the cost of work done this period, and we want the
equivalent production done this period rather than a weighted average of
this period and prior periods. The formula for FIFO equivalent unit of
production is as follows:
(Equivalent Units of Production, FIFO) = (Units completed) - [(Units in
beginning inventory)  (percentage complete)] + [(Units in ending inventory) 
(percentage complete)
The key point in the computation of EUP under FIFO method is that,
opening inventory of work-in-process is kept as a separate figure. Costs
incurred to completed this opening work-in-process are added to the
opening work-in-process cost and the sum of these two costs is the total
cost of completed units of opening work-in-process at which it is
transferred to the next process. Like the formula for weighted average
equivalent units of production, this formula must be applied separately to
each cost factor.
Cost Per Unit, FIFO Method
FIFO method evaluates the current period activity. The formula for
computing FIFO cost per unit is:
Current-period costs
Cost per unit, FIFO = ---------------------------------------
Equivalent units of production

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In the above formula, the cost figure that we divide by equivalent units of
production is just the cost of current period, instead of the sum of the
cost in the beginning inventory and the cost of the current period. As
earlier, this calculation must be done for each cost factor.
Illustration: 4.1
Using the following data, compute Equivalent units of production under
(a) weighted average method, and (b) FIFO method.
Units in beginning work-in-process (100% complete as to 15,000
material; 40% complete as to conversion cost)
Units started during the month 5,00,000
Units completed during the month 5,13,000
Ending work-in-process (100% complete as to material 80% 10,000
complete as to conversion costs)

Solution: As the formula is applicable for each cost factor, using the
formula, EUP is calculated in tabular form:
Weighted Average Direct Conversion
Material
Units completed 5,13,000 5,13,000
(+) Ending work-in-Process inventory
(10,000 units @100% and 80% complete) 10,000 8,000
Weighted Average EUP 5,23,000 5,21,000

FIFO Direct Conversion

Material
(-) Beginning Work-in-Process Inventory
(100% Complete as to material and 40% as to
conversion cost) (15,000) (6,000)
Units completed 5,13,000 5,13,000
(+) Ending work-in-Process inventory
(10,000 units @100% and 80% complete) 10,000 8,000
5,23,000 5,21,000
FIFO EUP: 5,08,000 5,15,000

From the above illustration it is clear that weighted average method

emphasises on the units that where completed during the period as well
as the units that were started but not completed during the period. Unlike,
FIFO method, the weighted average method does not exclude the
equivalent units that were in beginning inventory. thus, one easiest way
to shift weighted average to FIFO, just simply remove the equivalent
units of production in the previous period from beginning work-in-
process.

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Illustration: 4.2
DEMONSTRATION PROBLEM
Munim Manufacturing Company uses a process cost system to account
for the costs of its only product, Product X. Production takes place in
three departments: Fabrication, Assembly, and Packaging.
At the end of the fiscal year, June 30, 2004, the following inventory of
Product X is on hand.
(a) No unused raw materials or packaging materials.
(b) Fabrication Department: 300 units, 1/3 complete as to raw
materials and ½ complete as to direct labor.
(c) Assembly Department: 1000 units, 2/5 complete as to direct
labor.
(d) Packaging Department: 100 units, ¾ complete as to packaging
and ¼th complete as to direct labor.
(e) Shipping on finished goods are: 400 units.
Required: (i) The number of equivalent units of raw materials in al
inventories at June 30, 2004.
(ii) The number of equivalent units of Fabrication
Department's direct labor in all inventories at June 30,
2004.
(iii) The number of equivalent units of packaging materials
in all inventories at June 30, 2004.
Solution to Demonstration Problem
(i) Calculation of Equivalent units of Raw Materials in all inventories,
June 30, 2004:
Fabrication Department (300 units  1/3 complete ........ 100
Assembly Department ...................................................
1,000
Packaging Department ..................................................
100
Shipping area ................................................................
400
--------
1,600
=====
(ii) Calculation of Equivalent units of Fabrication Department's direct
labor in all inventories, June 30, 2004:
Fabrication Department (300  1/2) ....................... 150
Assembly Department ...................................................
1,000
Packaging Department ..................................................
100
Shipping area ................................................................
400
-------
1,650
====
(iii) Calculation of Equivalent units of Packaging materials in all
inventories, June 30, 2004:
Packaging Department (100  3/4) .................................. 75
Shipping area ................................................................ 400
------
475
===

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Problem- 4.2.2
Collins Company operates two producing departments, whose quantity
reports appear as follows:
Department 1 Department 2
Beginning inventory 200 80
Department 1 - all materials, 25%
Conversion cost
Department 2 - 60% conversion cost
Started in process 2,260 2,160
2,460 2,240
Transferred out 2,160 2,000
Ending inventory 300 240
Department 1 - all materials, 60% -------- --------
conversion cost
Department 2 - 80% conversion cost
2,460 2,240

Required:
Computer equivalent units of production figures for each department,
using:
(1) Weighted average method and
(2) FIFO method.

Solution to Demonstration Problem

(1) Calculation of Equivalent units of Production (EUP): Weighted
Average Method.
Materials Conversion
Unit Unit
Department 1:
Transferred out (i.e. 2,160 2,160
units completed)
Add: Ending inventory 300 (100%) 180 (24060%)
EUP : 2,460 2,340

Materials Conversion
Units Units
Department 1:
Transferred out (i.e. 2,160 2,160
units completed)
Less: Beginning inventory 200 200
(all units)

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Shorted and finished 1,960 1,960

during period
Add: Beginning inventory -0- 150 (20075%)
(work this period)
Add: Ending inventory 300 180 (30060%)
EUP: 2,260 2,290

Units from Conversion

Department 1 Cost
Department 2:
Transferred out 2,000 2,000
Less: Beginning inventory 80 80
(all units)
Shorted and finished 1,920 1,920
during period
Add: Beginning inventory -0- 32 (8040%)
(work this period)
Add: Ending inventory 240 192 (24080%)
EUP: 2,160 2,160

Problem 4.2.3
In attempting to verity the costing of the December 31st, 2004, inventory
of work-in-process and finished goods recorded in Joy Corporation's
books, the auditor general finds:
Finished goods, 4,00,000 units ....................... Tk.20,19,600
Work-in-Process, 6,00,000 units, 50% complete
as to labor and factory overhead ..................... Tk.13,21,920
The company uses average costing. Materials are added to production at
the beginning of the manufacturing process and factory overhead is
applied at the rate of 60% of direct labor cost. Toy's inventory cost
records disclosed zero finished goods on January 01, 2004, and the
following additional information for 2004:
Cost
Units Materials Labor
Work-in-Process, January 01 4,00,000 Tk.4,00,000 6,30,000
(80% complete as to labor and
factory overhead)
Units started in production 20,00,000
Materials cost Tk.26,00,000
Labor cost Tk.39,90,000
Unit completed 18,00,000

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Required:
(1) Compute the equivalent units of production.
(2) Compute the unit production cost of materials, labor, and factory
overhead.
(3) Cost the ending finished goods and work-in-process inventories
and compare to book balances.
(4) Show journal entry to correctly state the finished goods and work-
in-process ending inventories.
Solution:
(1) Materials Labor and
Factory
Overhead
Units completed during the year 18,00,000 18,00,000
Add: Ending inventory 6,00,000 3,00,000
Equivalent units of production 24,00,000 21,00,000 (8050%)

(2) Total Materials Labor Factory

Overhead
Beginning work-in- 14,08,000 4,00,000 6,30,000 3,78,000 (6,00,000
process 60%
Add: Costs added 89,84,000 26,00,000 39,90,000 23,94,000 (39,00,000
during the process 60%
Total: 1,03,92,000 30,00,000 46,20,000 27,72,000
() Equivalent units 24,00,000 21,00,000 21,00,000
of production
(Calculated in
requirement 1)
Unit production cost Tk.477 Tk.1.25 Tk.2.20 Tk.1.32

(3) Total Tk. Finished Work-in

Goods Tk. Process Tk.
Finished Goods 19,08,000 19,08,000
(40,00,000 units  Tk.4.77)
Work-in-process:
Materials (6,00,000 units  7,50,000 7,50,000
Tk.1.25)
Labor (3,00,000 units  6,60,000 6,60,000
Tk.2.20)
Factory overhead (3,00,000 3,96,000 3,96,000
unit  Tk.1.32
Cost as per test 37,14,000 19,08,000 18,06,000
Cost as per books 33,41,520 20,19,600 13,21,920
Difference 3,72,480 (1,11,600) 4,84,080

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PRACTICE TEST
A. Self-Assessment Questions (SAQs):
1. Which of the following statements are true and which are false?
(i) Production in terms of equivalent units under weighted
average method of accounting, in reference to the Process
Costing septum, shows total work done during the current
period. 
(ii) Under the FIFO method, units transferred out are treated in
separate blocks-one block consisting of the units in the
beginning inventory, and the other block consisting of the
units started and completed during the period. 
(iii) With reference to Process Costing system FIFO method can
be used even if information on the degree of completion of
opening work-in-process in not available. 
(iv) In a process cost system, the per unit cost of direct materials
equals the total cost of materials purchased in the current
month divided by the equivalent full units produced in the
current month. 
(v) In a process cost system, the per unit cost of direct materials
equals the total cost of materials used in the current month
divided by the number of units completed in the current
month. 
(vi) The number of equivalent full units of production during a
period may be greater than, equal to, or similar than the
actual number of units completed and transferred to the
Finished Goods Inventory. 
(vii) Under the FIFO method, units in the beginning work-in-
process inventory are treated as if they were completed
before any new units are completed. 
(viii) Under the FIFO method of computing equivalent units of
production, costs in the beginning work-in-process inventory
are kept separate from costs of the current period. 
(ix) Completing 2,500 units which were each 70% completed at
the beginning of the period represents 1,750 equivalent full
units of work during the current period. 
(x) If beginning work-in-process inventory contains 500 units
that are 60% complete, then the inventory contains 300
equivalent units. 
(xi) The weighted average and FIFO methods will typically
produce widely different unit costs - particularly when there
are no beginning work-in-process inventories. 
(xii) From a standpoint of cost control, the weighted average
method is superior to the FIFO method. 

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(xiii) Reducing the size of work-in-process inventories will tend to

reduce the difference between FIFO and weighted average
method unit costs. 
B. Multiple Choice Questions (MCQs):
2. Choose the best answer for each of the following questions by
placing the identifying letter in the space provided to the left.
(i) Per unit costs:
(a) Are relevant only when a company is engaged in
manufacturing activities.
(b) Are determined in the job order cost systems but cannot be
computed when a process cost system is in use.
(c) Are relevant in manufacturing, merchandising ,
merchandising, and service industries, regardless of the type
of cost accounting system is in use.
(d) Are determined by relating manufacturing costs to the
number of units sold.
(ii) Which of the following is not an accurate statement regarding
process cost summaries?
(a) A process cost summary is prepared only at the end of the
production process as units are transferred to the finished
Goods Inventory.
(b) A process cost summary determines the departmental unit
cost of production.
(c) A process cost summary determines the cost allocated to
unfinished units in a particular department.
(d) A process cost summary determines the cost allocated to
units completed and transferred to the next department on to
the finished goods warehouse.
(iii) The number of equivalent full units of production:
(a) Is equal to the number of units completed by a department.
(b) May not be greater than the number of units completed by a
department.
(c) Is used to compute the overhead application rate.
(d) May be less than, equal to, or greater than the number of
physical units completed by a department.
(iv) Department X of a Manufacturing company works on only one
product, and all costs are incurred uniformly as the product goes
along the assembly line. The 8,000 units in process on December 1
were 60% completed. An additional 80,000 units were placed in
production during December. At December 31, the 20,000 units
still in process were 80% completed. The equivalent full units of
production during December amounted to:
(a) 79,200
(b) 80,800
(c) 99,200
(d) 1,00,800.

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(v) Simple Company started 4,800 units into process during the
month. 500 units were in the beginning inventory and 300 units
were in the ending inventory. How many units were completed and
transferred out during the month?
(a) 5,000
(b) 4,600
(c) 5,300
(d) 5,100

(vi) During May, Department X started and completed 55,000 units

and also finished 10,000 units that were 60% completed on April
30. There 65,000 units were transferred to storage. On May 31,
Department X's ending inventory consisted of 5,000 units that
were 30% completed. Department X's ending inventory consisted
of 5,000 units that were 30% completed. Department X's
equivalent full units of production for May amounted to:
(a) 55,000
(b) 60,500
(c) 65,000
(d) 70,000

(vii) Last month Neil Company started 8,000 units into production. The
Company had 2,000 units in process on January 1 of that year,
which were 60% complete with respect to conversion, and 3000
units in process on December 31 which were 50% complete. 7,000
units were completed and transferred to he next department during
the year. Using the weighted average method, the equivalent units
of production for conversion for the year would be:
(a) 8,300
(b) 8,500
(c) 9,200
(d) 9,500

(viii) Refer to the date in the question (vii) above; using the FIFO
method, the equivalent units of production for conversation costs
for the year would be:
(a) 8,300
(b) 7,700
(c) 7,300
(d) 6,700

(ix) Dolly Corporation uses the FIFO method in its process costing
system. The company had Tk.6,000 of materials cost in its
beginning work-in-process inventory and the Company added
Tk.75,000 in materials cost during the period. The equivalent units
of production for materials was 20,000. The unit cost per

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 Bangladesh Open University

equivalent unit for materials would be:

(a) Tk.3.75
(b) Tk.4.05
(c) Tk.0.30
(d) Tk.3.30

(x) Costs in the beginning work-in-process inventory are added to the

costs of the current period when making unit cost calculations by:
(a) the FIFO cost method
(b) the weighted average cost method
(c) the quantity schedule method
(d) none of these.

C. Descriptive Questions:
1. Why are equivalent units of production used as an output measure
in process costing? In your answer, be sure to address the problems
created by partially completed inventories.
2. What creates the difference between weighted average and FIFO
equivalent units of production? Which EUP calculation mere
accurately portrays the actual flow of units through a
manufacturing process and why?
3. Explain the reasoning underlying the name of the weighted-
average method.
4. How are the costs of the beginning work-in-process inventory
treated differently under the weighted average and FIFO methods?
5. Why it is necessary to calculate separate equivalent unit of
production for each cost component of a product? Are there times
when separate EUP schedules are to necessary and, if so, why?
6. How are units "started and completed" in the current period
calculated? Is this figures used in both weighted average and FIFO
cost assignment? Why or why not?
7. How is the unit cost for each cost component assigned to the units
produced during the current period (a) the weighted average
method and (b) the FIFO method.
8. Why might the FIFO method of process costing be more effective
than the weighted average method from a behavioral stand point?

Answer to SAQs:
True-False
(i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xii), (xiii)
MCQs: (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x)

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Lesson 3: The Production Report

Learning Objectives
After completing this lesson, you are expected to be able to:
 Explain the purposes of cost of production report.
 Understand the steps followed to prepare cost of production report.
 Under stand the procedure of cost reconciliation.
 Combine the quantity schedule, equivalent units of production and
cost reconciliation into a production report.
 Prepare cost of production report under the weighted average and
FIFO methods.

Introduction
The production report is the key document in a typical process costing
system and is vital to the proper operation of the system. Generally this
report is prepared in such a way as to disclose the cost per unit of product
for each element of cost. In most instances where many kinds of material
are involved, it is not practical to subdivide the direct material by kind.
Instead, the direct material is shown as a single item, as are direct labor
and applied factory overhead. The procedure involved in a production
report is a combination of costs that have already been used or converted
into the product. Thus the production report is a useful tool that provides
the information used in all calculations in process costing.

Definition of Production Report

Production report is a process cost accounting report that summarizes
Production report is a
process cost unit costs and costs of inventories. The purpose of the production report
accounting report that is to summarize for the manager all of the activity that takes place in a
summarizes unit costs
and costs of
departments Work-in-Process account for a period. This activity includes
inventories. the flow of production quantities through the department, and it shows
the amount of production cost transferred out of the departments Work-
in-Process Inventory account during the period.

A cost of production report shows:

1. any cost, total and unit, transferred to it from a preceding department;
2. materials, labor, and factory overhead added by the department;
3. unit costs added by the department;
4. cumulative costs, total and unit, to the end of operations in the
department;
5. the cost of opening and closing work-in-process inventories; and
6. cost transferred to a succeeding department or to a finished goods
storeroom.

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The following steps are followed to prepare production report.

Prepare a Quantity Schedule: The first step to prepare production A quantity schedule
report is to prepare quantity schedule, which accounts the physical flow shows the total
of units through a department, In other words. A quantity schedule shows number of units for
the total number of units for which a department is held accountable and which a department is
the disposition made of these units is also part of each departments cost held accountable and
the disposition made
of production report. As the quantity schedule analyse the physical flow of these units is also
of units, it is prepared in the following tabular form: part of each
departments cost of
Physical Units production report.
Work-in-Process-beginning inventory -----------------
Units started during the period -----------------
Total units to account for -----------------
Units completed and transferred out during the period -----------------
Work-in-Process- ending inventory -----------------
The above table can be reflected by the following inventory formula.

( Work-in-process ) (
Physical units in beginning
+ started ) (
Physical units
 and transferred out ) (
Physical units completed
= )
Physical units in ending
work-in-process

Compute Equivalent Units and Unit Costs: The second step in the
process of preparing production report is to calculate equivalent units and
unit cost of direct material and conversion activity. As we have confined
our discussion to weighted average method and FIFO method, the
procedure of computation equivalent units and unit cost have already
discussed in earlier lesson.
To recapitulize we can say that, weighted average method treats units in
the beginning work-in-process inventory as if they were started and
completed during the current period. The otherhand, only work needed to
complete units in the beginning inventory is included in the computation
of equivalent units. Units started and completed during the current period
is shown as a separate figure.
Under weighted average method, unit cost will contain some elements of Under weighted
cost from the earlier period. On the otherhand, in FIFO method, unit cost average method, unit
well contain only elements of cost from the current period. cost will contain some
elements of cost from
Prepare a Cost Reconciliation: The third step in the process of the earlier period. On
the otherhand, in
preparing cost reconciliation is to show (i) what costs have been charged FIFO method, unit
to a department during a production period; and (ii) how these costs are cost well contain only
accounted for. Usually, the costs engaged to a department will consist of: elements of cost from
the current period.
(a) Cost in the beginning work-in-process inventory.
(b) Materials, labor, and manufacturing overhead added during the
period.
(c) Costs (if any) transferred in from the preceding department.
So, the cost section of this report is generally divided into two parts; (a)
one showing total cost for which the department is accountable, and (b)
another showing the disposition of these costs.

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The cost of production report and its supporting schedule indicate each
element of cost for each department because these detailed data are
needed for cost control and for determining the cost of the ending work-
in-process inventory. As this step is known as cost reconciliation, cost
transferred out to the next department or into Finished Goods Inventory
must be equal to the costs remaining in the ending work-in-process
inventory.
We have now completed our discussion to all the three steps necessary to
prepare a cost of production report. Now at the stage of demonstration,
we will demonstrate problems relating to weighted average method and
first-in-first out or FIFO method process costing.
Demonstration Problem
Problem # 4.3.1: Weighted Average Costing
A product called Aggregate is manufactured in one department of West
Corporation. Materials are added at the beginning of the process.
Shrinkage of 10% to 14% all occurring at the beginning of the process, is
considered normal. Labor and factory overhead are added continuously
throughout the process.
The following information relates to November production:
Work-in-Process, November 1 (4,000 Kg, 75% complete):
Materials Tk. 22,800
Labor 24,650
Factory overhead 21,860
November costs:
Materials (FIFO costing)
Inventory, November 1, 2,000 Kgs 10,000
Purchase, November 3, 10,000 Kgs 51,000
Purchase, November 18, 10,000 Kgs 51,500
Released to production during November, 16,000 Kgs
Labor 1,03,350
Factory overhead 93,340
Transferred out, 15,000 Kgs.
Work-in-process, November 30, 3,000 Kgs, 331/3%
Complete (average costing)
Required: Prepare a Cost of Production Report for November.
Solution to the Demonstration Problem
West Corporation
Cost of Production Report
For November 200__
Quantity Schedule:
Units in process at beginning (all materials - 75% 4,000
labor and factory overhead)
Units started in process 16,000
20,000
Units transferred to next department 15,000

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 Bangladesh Open University

Units still in process (all materials - 331/3% labor 3,000

and factory overhead)
ShrinKage (2000 / 6000 = 12.5% with the normal 2,000
20,000
Cost Reconciliation: Total Cost Unit Cost
Cost Charged to the Department:
Cost added by department:
Work-in-Process-beginning inventory:
Materials Tk.22,800
Labor 24,650
Factory overhead 21,860
Cost added during period:
Materials (Tk.10,000+Tk.51,000+ 81,600 Tk.5.80
(40005.15)]
Labor 1,03,350 8.00
Factory overhead 93,340 7.20
Total cost to be accounted for Tk.3,47,600 Tk.21.00
Cost Accounted for as Follows:
Transferred out (1,500  Tk.21) Tk.3,15,000
Work-in-process - ending inventory:
Materials (3,000  Tk.5.80) Tk.17,400
Labor (3,000  331/3% Tk.8.00) 8,000
Factory overhead (3,000  331/3% 7,200
Tk.7.20)
32,600
Total Cost accounted for Tk.3,47,600
Additional Computations:
Equivalent Units of Production:
Materials = 15,000 + 3,000
= 18,000 units
Labor and Factory overhead = 15,000 + (3,000  331/3%)
= 16,000 units
Unit costs: Materials = Tk.22,800 + Tk.81,600
= Tk.1,04,400
 Tk.1,04,400/18,000 units
= Tk.5.80 per unit
Labor = Tk.24,650 + Tk.1,03,350
= Tk.1,28,000
 Tk.1,28,000/16,000 units
= 8.00 per unit
Factory overhead = Tk.21,860 + Tk.93,340
= Tk.1,15,200
 Tk.1,15,200/16,000 units
= Tk.7.20 per unit

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Problem # 4.3.20: FIFO Costing

OHM Plastics Corporation produces non-breakable containers for
cosmetics, using three departments: Mixing, Molding, and Finishing. On
July 1, the work-in-process inventory in the Molding Department was
1,000 units, 50% complete as to materials and conversion costs, while
July 31, work-in-process inventory consisted of 2,800 units, 75%
complete as to materials and conversion costs. During July, the Finishing
Department received 20,000 units from the Molding Department. In the
Molding Department, 800 units, a normal quantity, were lost during
processing. FIFO method of costing is used.
Relevant Cost data are as follows:
Work-in-process, July 1, Tk.3,000
July Costs:
Cost from Mixing Department Tk.97,632
Materials 16,200
Labor 26,658
Factory overhead 19,872
Required: Using the FIFO costing method, prepare the cost of
production report for the Molding Department for July. Round unit costs
to the nearest ceat.

Solution to the Demonstration Problem

OHM Plastics Corporation
Molding Department
Cost of Production Report
For July 200__
Quantity Schedule:
Units in the process at beginning (50% material and 1,000
conversion cost)
Units received from preceding department 22,600
23,600
Units transferred to next department 20,000
Units still in process (75% materials and conversion 2,800
cost)
Units lost in process 800
23,600
Cost Reconciliation: Total Cost Unit Cost
Cost Charged to the Department:
Work-in-Process- beginning inventory: Tk.3,000
Cost from preceding department:
Transferred in during the month (22,600 units) 97,632 Tk.4.32
Cost added by department:
Materials 16,200 0.75
Labor 26,568 1.23
Factory overhead 19,872 0.92
Total cost added 62,640 2.90
Adjustment for lost unit 0.16
Total Cost to be accounted for Tk.1,63,272 Tk.7.38
Cost Accounted for as Follows:
Transferred to next department-
From beginning inventory:

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Inventory cost Tk.3,000

Materials added (1000  ½  Tk.0.75) 375
Labor added (1000  ½  Tk.1.23) 615
Factory overhead added (1000  ½  Tk.0.92) 460
From Current production: Tk.4,450
Units started and finished (19000 
Tk.1,40,188*1 7.38)
Tk.1,44,638
Work-in-process- ending inventory:
Adjusted cost from preceding department
[2800  (Tk.4.32 + Tk.0.16)]
Tk.12,544
Materials (2800  ¾  Tk.0.75) 1,575
Labor (2800  ¾  Tk.1.23) 2,583
Factory overhead (2800  ¾  Tk.0.92) 1,932
18,634
Total Cost accounted for Tk.1,63,272

Workings:
(a) *1, 19,000 units  Tk.7.38 = 1,40,220.
Inorder to avoid decimal discrepancy, the cost transferred from current
production is computed as follows:
Tk.1,63,272 - (Tk.4,450 + Tk.18,634) = Tk.1,40,188.
(b) Calculation of Equivalent Units of Production:

Transferred out 20,000

Less: Beginning inventory (all units) 1,000
Started and finished this period 19,000
Add: Beginning inventory (work this period) 500
Add: Ending inventory (Work this period) 2,100
21,600 Units
(c) Calculation of Unit Cost:
Tk.16,200
Materials = --------------- = Tk.0.75 per unit
21,600 units

Tk.26,568
Labor = --------------- = Tk.1.23 per unit
21,600 units

Tk.19.872
Factory Overhead = --------------- = Tk.0.92 per unit
21,600 units
(d) Adjustment for Lost Units:
Tk.97,632
Method No. 1: ----------------------------- = Tk.4.48
(22,600 - 800) Units

Tk.(4.48-Tk.4.32) = Tk.0.16

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Method No. 2: 800 units  Tk.4.32 = Tk.3,456

Tk.3456
 ------------------- = Tk.0.16
21,600 units

Problem # 4.3.3: FIFO method Vs Weighted Average Method

Puspa, Inc. uses three departments to produce a detergent. The Finishing
Department is the third and last step before the product is transferred to
storage.
All materials needed to give the detergent its final composition are added
at the beginning of the process in the Finishing Department. Any lost
units occur only at this point and are considered to be normal.
The company uses FIFO costing. The following data for the Finishing
Department for September have been made available:
Production data:
In process, September 1 (labor and factory overhead, ¾ 20,000 gals.
complete)
Transferred in from preceding department 80,000 gals.
Finished and transferred to storage 70,000 gals.
In process, September 30 (labor and factory overhead, ½ 20,000 gals.
complete)
Additional data:
Work-in-process inventory, September 1:
Cost from preceding department Tk.76,000
Cost from this department:
Materials 43,000
Labor 78,000
Factory overhead 84,000
Total Work-in-process inventory, September 1 2,81,000
Transferred in during September 2,80,000
Cost added in this department:
Materials 1,40,000
Labor 3,25,000
Factory overhead 2,60,000
Total cost added 7,25,000
Total cost to be accounted for Tk. 12,86,000

Required: (1) Prepare a cost of production report for the Finishing

Department for September using FIFO costing.
(2) Prepare a cost of production report for the Finishing
Department for September, using weighted average
costing (Carry unit cost computations to three decimal
places, and round up the digit's in the fourth decimal
place).

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Solution to the Demonstration Problem

Puspa Inc.
Finishing Department - FIFO costing
Cost of Production Report
For September 200__

Quantity Schedule:
Gallons in process at beginning (3/4 conversion cost) 20,000
Gallons received from preceding department 80,000
1,00,000
Gallons transferred to storage 70,000
Gallons still in process (1/2 conversion cost) 20,000
Gallons lost in process 10,000
1,00,000
Cost Reconciliation: Total Cost Unit Cost
Cost Charged to the Department:
Work-in-Process inventory, September 1 Tk.2,81,000
Transferred in during September Tk.2,80,000 Tk.3.50
Cost added by department:
Materials Tk.1,40,000 Tk.2.00
Labor 3,25,000 5.00
Factory overhead 2,60,000 4.00
Total cost added Tk.7,25,000 11.00
Adjustment for lost unit 0.50
Total Cost to be accounted for Tk.12,86,000 Tk.15.00
Cost Accounted for as follows:
Transferred to Storage-
From beginning inventory Tk. 2,81,000
Labor (5000  Tk.5.00) 25,000
Factory overhead (5000  Tk.4.00) 20,000
Tk.3,26,000
From Current production:
Units started and finished 7,50,000
(50000  Tk.15.00)
Tk.10,76,000
Work-in-process inventory,
September 30:
Adjusted cost from preceding department [20000 Tk.80,000
units  (Tk.3.50 + Tk.0.50)]
Materials (20000 units  Tk.2.00) Tk.40,000
Labor (20000 units  ½  Tk.5.00) 50,000
Factory overhead (20000 units  ½  Tk.4.00) 40,000
2,10,000
Total cost accounted for Tk.12,86,000

Workings: (a) Calculation of Equivalent Units of Production:

Materials Labor and
Factory
Overhead
Transferred out 70,000 70,000
Less: Beginning inventory (all 20,000 20,000
units)
Started and Finished this period 50,000 50,000

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Add: Beginning inventory (work ---- 5,000

this period) (1/4 of 20,000
converted)
Ending inventory (1/2 20,000 20,000 10,000
converted)
70,000 Units 65,000 Units

(b) Adjustment for lost units:

Tk.2,80,000 Cost transferred in during September Tk.2,80,000
---------------------------------------------------------------- = ----------------- = Tk.4.00
80,000 Equivalent Units - 10,000 Lost Units 70,000

Tk.2,80,000 Cost transferred in during September Tk.2,80,000

---------------------------------------------------------------- = ----------------- = Tk.3.50
80,000 Units transferred in during September 80,000
----------
Lost Units Cost adjustment Tk.0.50

10,000 units  Tk.3.50 Tk.35,000

Or, ----------------------------- = ----------------- = Tk.0.50
70,000 Units 70,000 units

(2)
Puspa Inc.
Finishing Department - Weighted Average Costing
Cost of Production Report
For September 200___

Quantity Schedule:
Gallons in process at beginning (3/4 conversion cost) 20,000
Gallons received from preceding department 80,000
1,00,000
Gallons transferred to storage 70,000
Gallons still in process (1/2 conversion cost) 20,000
Gallons lost in process 10,000
1,00,000
Cost Changed to the Department: Total Cost Unit Cost
Cost Charged to the Department:
Work-in-Process beginning inventory Tk.76,000 Tk.3.800
Transferred in during September 2,80,000 3.500
Total Tk.3,56,000 Tk.3.560
Cost added by department:
Materials Tk.43,000
Labor 78,000
Factory overhead 84,000
Cost added during period:
Materials 1,40,000 Tk.2.033
Labor 3,25,000 5.038
Factory overhead 2,60,000 4.300
Total cost added Tk.9,30,000 11.371
Adjustment for lost unit 0.396
Total Cost to be accounted for Tk.12,86,000 Tk.15.327

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 Bangladesh Open University

Cost Accounted for as Follows:

Transferred to storage Tk.10,72,840*
Work-in-process-ending inventory
Adjusted cost from preceding department [20000 Tk.79,120
units  (Tk.3.560 + 0.396)]
Materials (20000  Tk.2.033) 40,660
Labor (20000  ½  Tk.5.038) 50,380
Factory overhead (20000  ½  Tk.4.300) 43,000
Tk.2,13,160
Total cost accounted for Tk.12,86,000
* Finished and Transferred to storage 70,000 units Tk.15.327 per unit =
Tk.10,72,890
In order to avoid decimal discrepancy, the cost transferred to storage is
computed as follows:
(Tk.12,86,000-2,13,160) = Tk.10,72,840

Workings:
(a) Calculation of Equivalent Units of Production:
Materials Labor and
Factory
Overhead
Transferred out 70,000 70,000
Add: Ending inventory (½ of 20,000 20,000
20,000 converted)
90,000 Units 80,000 Units

(b) Calculation of Units Cost:

Materials = Tk.43,000 + Tk.1,40,000 = Tk.1,83,000
Labor = Tk.78,000 + Tk.3,25,000 = Tk.4,03,000
 Tk.4,03,000/80000 units = Tk.5.038 per unit
Factory Overhead = Tk.84,000 + Tk.2,60,000 = Tk.3,44,000
 Tk.3,44,000/80000 units = Tk.4.300 per unit

(c) Adjustment for Cost Units:

Method No.1:
Tk.3.56,000
--------------- = Tk.3.956; (Tk.3.956-Tk.3.560) = Tk.0.396 per unit
90,000 units
Method No. 2: 10,000 units  Tk.3.560 = Tk.17,800
 Tk.17,800/90,000 units = Tk.0.396 per unit

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School of Business

PRACTICE TEST
A. Self-Assessment Questions (SAQs):
1. Which of the following statements are true and which are false?
(i) In process costing system, the production report takes the
place of the job cost sheet.
(ii) The purpose of the quantity schedule is to show the
equivalent units for the period.
(iii) The term conversion cost includes the cost of manufacturing
overhead as well as the cost of direct materials.
(iv) The first step in preparing a cost of production report is to
calculate unit cost.
(v) The cost associated with beginning inventory is not included
in the computation to determine the cost per equivalent unit
for the current period for a particular department.
(vi) The last step is preparing cost of production report is to
determine equivalent units of production.
(vii) The cost associated with beginning inventory is included in
the process cost summary figure for "total cost to be
accounted for" by a department for a particular month.
(viii) When there is beginning work-in-process inventory, the
weighted average method of process costing must be used.
(ix) A process cost summary is used to determine the cost
allocated to units completed by a department as well as the
cost allocated to unfinished units remaining in the
department at the end of the period.
(x) The FIFO process costing method sharply distinguishes the
current work done from the previous work done on the
beginning inventory of work-in-process.
(xi) The cost allocated to completed units plus the cost allocated
to ending inventory of unfinished units equals the total
amount of manufacturing costs incurred by a department
during the period.
(xii) The key difference between the FIFO and weighted average
computations for work-in-process inventory is equivalent
units.
B. Multiple Choice Questions (MCQs):
2. Choose the best answer for each of the following questions by
placing the identifying letter in the space provided to the left.
(i) With reference to Process costing, under weighted average
method of accounting, in the "cost production report" in
terms of equivalent units.
(a) Opening Work-in-process does not appear.

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 Bangladesh Open University

(b) Opening WIP is shown at the percentage which

represents balance work done during the current period
to complete these partly completed units.
(ii) When there are unfinished units in hand at the end of an
accounting period and a process cost system is in use,
(a) Unit cost is determined by dividing total cost for the
period by the number of units completed during the
period.
(b) Unit cost is determined by dividing total cost for the
period by the number of units worked on during the
period.
(c) Unit cost is determined by dividing total cost for the
period by the number of equivalent units produced
during the period.
(d) Unit cost cannot be determined until all units are
completed.
(iii) The number of completed units that could have been
produced from the inputs applied is called.
(a) Equivalent units
(b) Physical units
(c) Partial units
(d) Conversation units
(iv) The total cost to account for in a cost of production report
must equal the:
(a) Ending work-in-process
(b) Cost of units completed and transferred
(c) Total costs accounted for
(d) Total of direct materials and conversion costs for the
units not completed.
(v) The unit cost on a cost of production report is found by
dividing the total cost by:
(a) units started and completed
(b) equivalent units of production
(c) units in ending work-in-process
(d) units completed and transferred.
(vi) In a cost of production report, the total cost accounted for is
equal to the cost of units completed and transferred plus the
cost of:
(a) beginning work-in-process
(b) the units started and finished
(c) the units completed but still on hand
(d) ending work-in-process.
(vii) The weighted average process costing adds the cost of all
work done in the current period to the:
(a) work done in the preceding period on the current

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School of Business

period's beginning inventory of work-in-process

(b) the ending inventory of work-in-process
(c) all costs estimated to be incurred in the next department
(d) the work done in the preceding department of the current
period's ending inventory of work-in-process.
(viii) Under process costing, the method of handling beginning
work-in-process inventory that is almost never used in
practice is:
(a) weighted average
(b) FIFO
(c) LIFO
(d) specific identification
(ix) Costs incurred in a previous department for items that have
been received by a subsequent department are called:
(a) subsequent costs
(b) variable costs
(c) transferred in costs
(d) moving costs.
(x) During June, the equivalent full units of direct materials
added to the product worked on by Department M amounted
to a total of 40,000 applies as follows: beginning inventory –
8,000 units; units started and completed in June - 28,000;
and ending inventory – 4,000 units. Assuming that the cost
of direct materials requisitioned by the department in June
was Tk.65,000, the amount of the materials cost to be
assigned to the ending inventory would be:
(a) Tk.5,000
(b) Tk.6,000
(c) Tk.4,2000
(d) Tk.5,4000
(xi) The conversion cost (direct labor plus factory overhead) for
the month of April is Tk.5 per unit; the beginning goods in
process inventory consisted of 1,000 unit 100% completed as
to materials and 40% completed as to conversion costs, with
a cost of Tk.2,810. The total cost of these 1,000 units upon
completion is:
(a) Tk.5,810
(b) Tk.4,810
(c) Tk.7,810
(d) Tk. some other amount.
(xii) The Finishing Department of Gunu Manufacturing works on
only one product, and all costs are incurred uniformly while
the units remain in the department. On March 01, there were
7,000 units in process that were 40% completed. An
additional 60,000 units were transferred into the Finishing

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 Bangladesh Open University

Department during March. At March 31, there were 10,000

units in process that were 70% completed. Compute the
equivalent full units of production for the finishing
Department during March.
(a) Tk.59,800
(b) Tk.61,200
(c) Tk.69,800
(d) Tk.71,200
(xiii) Dolly Company uses the weighted average method. It had
Tk.8,000 of conversion cost in its beginning work-in-process
inventory and added Tk.64,000 of conversion cost. The
amount of cost assignment to these units would be:
(a) Tk.12,600
(b) Tk.4,800
(c) Tk.11,200
(d) Tk.5,400
(xiv) The Head treatment department is the third department in a
sequential process. The work-in-process account for the
department would consist of:
(a) costs transferred in from the prior department.
(b) materials costs added in the head treatment department
(c) conversion costs added in the heat treatment department
(d) all of the above.
(xv) Merry Company had Tk.6,000 cost in its beginning work-in-
process inventory for materials and the company added
Tk.75,000 in cost for materials during the period. The
company completed 20,000 equivalent units of production
for materials and it uses the FIFO method. The unit cost for
materials would be:
(a) Tk.3.75
(b) Tk.4.05
(c) Tk.0.30
(d) Tk. none of the above
(xvi) The beginning inventory of Department N consisted of 3,000
units, 80% completed as to materials and 25% completed as
to conversion costs. Conversion costs is Tk.6 per unit for
Department N; direct materials cost per unit for Department
N is Tk.10.
(xvii) Refer to the information above Assuming that the per unit
costs for materials and conversion cost have remained stable
for several months, the cost of Department B's beginning
inventory is:
(a) Tk.19,500
(b) Tk.28,500
(c) Tk.48,000
(d) Tk.21,900

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School of Business

(xviii) Again refer to the information above, the additional cost to

complete the processing of these 3000 units through
Department N amounts to:
(a) Tk.28,500
(b) Tk.48,000
(c) Tk.26,100
(d) Tk.19,500

C. Descriptive Questions:
1. What is the propose of the cost of production report? How would
such a report assist cost accountants in making entries for a period?
2. What is the purpose of a department production report prepared
using process costing?
3. What is a quantity schedule, and what purpose does it serve?
4. Why are the Equivalent unit of production calculations made for
standard process costing the same as the EUP calculations for
FIFO process costing?
5. On the cost reconciliation part of production report, the weighted-
average method treats all units transferred out in the same way.
How does this differ from the FIFO method of handling units
transferred out?
6. From the standpoint of cost control, why is the FIFO method
superior to the weighted average method?
7. How are inventories accounted for under a standard process
costing system? What information is provided to management
when inventories are accounted for in this manner?
Answer to SAQs:
True - False : 1. (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x)
2. (i), (ii), (iii)

Unit - 4 Page - 38