Cost

PROCESS COSTING FROM COST ACCOUNTING
Submitted to:
MAM SAIMA
Prepared by:
Umair Saleem (44) {2009-ag-1190}
Khawaja Awais (25) {2009-ag-1324}
M.Waqas Husain (51) (2009-ag-915)
Shahbaz Khalid (09) {2009-ag-1320}
Muhammad Waqas (11) (2009-ag-1037)
Faisal Javed (22) {2009-ag-1036}
Adnan Sherazi (21) {2009-ag-1331}
M.B.A (3rd Semester)
Department of Business, Management & Sciences

Preface
Concepts are built studying theory in class room, and are given specific
shapes and dimension, while observing and analyzing the business activities
in the real world. Getting practical knowledge is one of the major aims of
M.B.A program.
We were assigned a project on the subject of Cost Accounting by MAM

SAIMA. Our objective was preparing the project on any previously read
topic from our course and explains it with the full detail or with related
material that how can we implement in an organization in an industry. During
this Assignment Preparation our beloved teacher MAM SAIMA fully guided
and helped us time to time a lot to refine our Assignment.
During this Process we search a lot from different books, from internet and
get knowledge or information from our beloved teacher MAM SAIMA. On the
basis of the fetched information we try our best to fulfill the needs of the said
Assignment.
Acknowledgement
Person is not perfect in all the contexts of life. He has a limited mind and
minor thinking approaches. It is the mercy of Almighty Allah that shows the
man light in the darkness and the person finds his way in this light. Without
mercy of Allah, person is nothing but a helpless creature. Same is the case
with us as we faced many difficulties during the completion of this report and
have been successful in fulfilling our duty assigned to us only because of the
help of Allah and the prays of our Parents and Well-wishers.
The teachings of the Holy Prophet (PBUH) were also the continuous source
of guidance for us.
We are thankful to our teacher whose throughout guideline helped us for the
completion of this report.
We are also thankful to all our best friends’ cooperation that helped us in our
report time to time and we learnt much from them and we can never forget
their love and kindness.
Process Costing System:
Learning Objectives:
1. Define and explain process costing?

2. Who uses process costing system?
3. What are the advantages and disadvantages of Process Costing System?
Definition and Explanation:

Cost accumulation procedures used by manufacturing concerns are classified as
either job order costing or process costing. The Job Order Costing System
chapter deals with the procedures applicable to job order 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. In fact, process costing procedures are often termed "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. The entire process costing discussion is presented in this chapter and other
two chapters (Process Costing System - Addition of Materials, Average and FIFO
Costing and By-Products and Joint Products Costing). This chapter considers the
(1) Cost of production report,
(2) Calculation of departmental unit costs,
(3) Costing of work in process,

(4) Computations of costs transferred to other departments or to the
finished goods storeroom,
(5) Effect of lost units on unit costs.
Chapter Process Costing System - Addition of Materials, Average and FIFO Costing
deals with (1) special problems involved in adding materials in departments other
than the first, (2) problems connected with the beginning work in process, and (3)
the possibility of using costing methods. Chapter By-Products and Joint Products
Costing discusses the costing of by-products and joint products.
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.
Costing By Departments:
The nature of manufacturing operations in firms using process or job order cost
procedures are 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. The breakdown of costs for the computation of total unit costs and for
costing units transferred and departmental work in process (WIP) inventories is also
desirable for cost control purposes.
Departmental total and unit costs are determined by the use of the cost of
production report, which is described and illustrated in detail on the Cost Of
Production Report page. Most of the activity in process costing system involves the
accumulation of data needed for the preparation of these reports.
Procedures for Materials, Labor, and

Factory Overhead Costs:
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.
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 are 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.
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 peroration. Formulas specify the
type and quantity of materials required in the various products and is 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. This
portion is described in chapter By-Products and Joint Products Costing.
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.
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 - Testing Departments 37,310 Dr.
Work in Process - Terminal Department 32,400 Dr.
Payroll 98,850 Cr.
 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.
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 - Testing Departments 32,800 Dr.
Work in Process - Terminal Department 19,800 Dr.
Factory Overhead Control 80,800 Cr.
Cost of Production Report (CPR):

Definition and Explanation:
A departmental cost of production report (CPR) shows all costs chargeable to a
department. It is not only the source for summary journal entries at the end of the
month but also a most convenient vehicle for presenting and disposing of costs
accumulated during the month. A cost of production report shows:
1. Total unit costs transferred to it from a preceding department.

2. Materials, labor, and factory overhead added by the department.
3. Unit cost added by the department.
4. Total and unit costs accumulated to the end of operations in the
department.
5. The cost of the beginning and ending work in process inventories.
6. Cost transferred to a succeeding department or to a finished goods
storeroom.
It is customary to divide the cost section of the report into two parts: one showing
costs for which the department is accountable, including departmental and
cumulative total and unit costs, the other showing the disposition of these costs. A
quantity schedule showing the total number of units for which a department is
accountable and the disposition made of these units is also part of each department's
cost of production report. Information in this schedule, adjusted for equivalent
production is used to determine the unit costs added by a department, the costing of
the ending work in process inventory, and the cost to be transferred out of the
department.
A cost of production report determines periodic total and unit costs. However, a
report that would merely summarize the total costs of materials, labor, and factory
overhead and shows only the unit cost for the period would not be satisfactory for
controlling costs. Total figures mean very little; cost control requires detailed data.
Therefore, in most instances, the total cost is broken down by cost elements for each
department head responsible for the costs incurred. Furthermore, detailed
departmental figures are needed because of the various completion stages of the
work in process inventories.
Either in the cost of production report itself or in the supporting schedules, each item
of material used by a department is listed; every labor operation is shown
separately; factory overhead components are noted individually; and a unit cost is
derived for each item. To condense the illustrated cost of production reports, only
total materials, labor, and factory overhead charged to departments are considered;
and unit costs are computed only for each cost element rather than for each item.
Example:
The reports of The Clonex Corporation, which manufactures one product in three
producing departments (Blending, Testing, and Terminal), are used to illustrate the
details involved in the preparation of cost of production reports. Click on a link to see
the report of blending, testing or terminal department.
Cost of Production Report - Blending

Department (1st Department):
Learning Objective:
1. Prepare a cost of production report of first department in a process

costing system.
2. How equivalent units are calculated in a process costing system?
3. How the lost units are treated in the cost of production report of first
department?
The cost of production report of the Blending Department, the originating

department of The Clonex Corporation, is shown below. It illustrates the detailed
computations needed to complete a cost of production report.
The Clonex Corporation

Blending Department (1st Dept.)
Cost of Production Report
For the Month of January, 19
Quantity Schedule:
Units started in process 50,000
======
Units transferred to next department 45,000
Units still in process (all materials - 1/2 labor and FOH) 4,000
Units lost in process 1,000 50,000

------- ======
Cost Charged To the Department: Total unit

Cost Cost
Cost added by the department:
Materials $24,500 $0.50
Labor 29,140 0.62
Factory Overhead (FOH) 28,200 0.60

------- -----
Total cost to be accounted for $81,840 $1.72
====== ====
Cost Accounted for as Follows:
Transferred to next department (45,000 × $1.72) $77,400
Work in process - ending inventory:
Materials (4,000 × $0.50) $2,000
Labor (4,000 × 1/2 × $0.60) 1,240
Factory Overhead (4,000 × 1/2 × $0.60) 1,200 4,440

------ ------
Total cost accounted for $81,840
=====
Additional Computations
Equivalent Production:
Materials = 45,000 + 4,000 = 49,000 units

Labor and factory overhead = 45,000 + 4,000 / 2 = 47,000 units
Unit Costs:
Materials = $24,500 / 49,000 = $0.50 per unit

Labor = $29,140 / 47,000 = $0.62 per unit
Factory overhead = $28,200 / 47,000 = 0.60 per unit
Explanation:
The quantity schedule of the cost report shows that Blending Department put
50,000 units in process, with units reported in terms of finished product. Finished
units could be stated in pounds, feet, gallons, barrels, etc. If materials issued to a
department are stated in pounds and finished product is reported in gallons, units in
the quantity schedule will be in terms of the finished product, gallons. A product
conversion table would be used to determine the number of units for which the
department is accountable. The quantity schedule of the Blending Department's
report shows that of the 50,000 units for which the department was responsible,
45,000 units were transferred to the next department (Testing Department - second
department), 4,000 units are still in process, and 1,000 units were lost in processing.
Costs charged to a department come from an analysis of materials used,

payroll distribution sheets, and department expense analysis sheets. The
Blending Department's unit cost amounts to $1.72 ( $0.50 for materials, $0.62 for
labor, and $0.60 for factory overhead).
Calculations of individual unit costs require an analysis of the ending work in process
to determine its stage of completion. This analysis is usually made by a supervisor or
is the result of using predetermined formula. Materials, labor, and factory overhead
have been used on the 4,000 units in the process but not in an amount sufficient for
completion. To assign costs equitably to in process inventory and transferred units,
units still in process must be restated in terms of completed units, which is 4,000
units for materials cost but less than 4,000 for labor and overhead costs. The figure
for partially completed units in process is added to units actually completed in order
to arrive at the equivalent production figure for the period. This equivalent
production figure represents the number of units for which sufficient materials, labor,
and overhead were issued or used during a period. Materials, labor and overhead
costs are divided by the appropriate equivalent production figure to compute unit
costs by elements. Should a cost element be at a different stage of completion with
respect to units in process, then a separate equivalent production figure must be
computed.
In many manufacturing processes, all materials are issued at the start of production.
Unless stated otherwise, the illustrations in this discussion assume such a procedure.
Therefore, the 4,000 units still in process have all the materials needed for their
completion but not all labor and factory overhead (FOH). Only 50% of the labor and
factory overhead needed to complete the units has been used. In terms of equivalent
production, labor and factory overhead in process are sufficient to complete 2,000
units.
Units Costs:
Departmental cost of production reports indicates the cost of units as they leave
department. These individual departmental units costs are accumulated into a
completed unit cost for the period. The report for the Blending Department shows a
materials cost of $24,500, labor cost of $29,140, and factory overhead of $28,200.
The materials cost of $24,500 is sufficient to complete 49,000 units (the 45,000
units transferred out of the department as well as the work in process for which
enough materials are in process to complete 4,000 units). The unit materials cost is,
therefore, $0.50 ($24,500 / 49,000). A similar computation determines the number
of units actually and potentially completed with the labor cost of $29,140 and the
factory overhead of $28,200. The 2,000 equivalent units in process are added to the
45,000 units completed and transferred to obtain a total equivalent production figure
of 47,000 units for both labor and factory overhead (FOH). When the equivalent
production figure of 47,000 units is divided into the monthly labor cost of $29,140, a
unit cost for labor of $0.62 ($29,140 / 47,000) is computed. The unit cost for factory
overhead is $0.60 ($28,200 / 47,000). The unit cost added by the department is
$1.72, which is the sum of the materials, labor, and overhead unit costs - $0.50,
$0.62, and $0.60. This departmental unit cost figure cannot be determined by
dividing the total departmental cost of $81,840 by a single equivalent production
figure, because no such figure exists; units in process are at different stages of
completion as to materials, labor and factory overhead.
Disposition of Departmental Costs:
In the departmental cost report, the section titled "Cost Charged to the Department"
shows a total departmental cost of $81,840. The section titled "Cost Accounted for as
Follows" show the disposition of this cost. The 45,000 units transferred to the next
department have a cost of $77,000 (45,000 × $1.72). The balance of the cost to be
accounted for, $4,440 ($81,840 - $77,400), is the cost of work in process.
The inventory figure must be broken down into its component parts: materials,
labor, and factory overhead. These individual costs are easily determined. The cost
of materials in process is obtained by multiplying total units in process by the
materials unit cost (4,000 × $0.50 = $2,000). The costs of labor and overhead in
process are sufficient to complete only 50 percent or 2,000 of the units in process.
Therefore, the cost of labor in process is $1,240 (2,000 × $0.62) and factory
overhead in process is $1,200 (2,000 × $0.60).
Lost Units:
Continuous processing leads to the possibility of waste, seepage, shrinkage, and

other factors which cause loss or spoilage of production units. Management is
interested not only in the quantities reported as completed production, units in
process, and lost units but also in a comparison of planned and actual results. In
verifying reported figures, the accountant must reconcile quantities put into process
with quantities reported as completed and lost. One method of making such
reconciliation is to establish the process yield, i.e., the finished production that
should result from processing various materials. This yield is computed as follows:
Percent Yield = (Weight of finished product / weight of materials charged) × 100

The yield figure is useful to management for controlling materials consumption and
ties in closely with a firm's quality control procedures. Various yields are established
as normal. Yields below normal are measures of inefficiencies and are some times
used to compute lost units. Frequently quality control data are used to compute
production costs, since the use of incorrect quantities would result in incorrect unit
costs.
Units Lost in the First Department:
Lost units reduce the number of units over which total cost can be spread, causing
an increase in unit costs. The 1,000 units lost in the Blending Department increase
the units costs of materials, labor, and factory overhead. Had these units not been
lost, the equivalent production figure would be 50,000 units for materials and 48,000
for labor and factory overhead. The unit cost for materials would be $0.49 instead of
$0.50; labor, $0.607 instead of 0.62; and factory overhead, $0.588 instead of $0.60.
In the first department, the only effect of losing units is an increase in the unit cost
of the remaining good units. In this situation, the loss is assumed to apply to all
good units and to be within normal tolerance limits.
Cost of Production Report - Testing

Department (2nd Department):
Learning Objective:
1. Prepare a cost of production report of second department in a process

costing system.
2. How lost units are treated in process costing system when a cost of
production report of subsequent to the first department is prepared?

Testing Department (2nd Dept.)
Quantity Schedule:
Units received from the preceding department 45,000
======
Units still in process (1/2 labor and FOH) 3,000

======

Cost Cost
Cost from preceding department:
Transferred in during the month $77,400 $1.72
Labor 29,140 0.91

------- -----
Total cost added $81,840 $1.71
Adjusted for lost units 0.08*
------- ------
====== ======
Transferred to next department (40,000 × $3.51) $140,400
Adjusted cost from preceding department [3,000 ×

($1.72 + $0.08)] $5,400
Labor (4,000 × 1/2 × $0.60) 910
Factory Overhead (4,000 × 1/2 × $0.60) 800 7,110

------ ------
======
Additional Computations
Unit Costs:
Labor = $37,310 / 41,000 = $0.91 per unit
*Adjustment for lost units:
Method No.1: $77,400 / 43,000 = $1.80; $1.80 - $1.72 = $0.08 per unit
Method No.2: 2,000 units × $1.72 = $3,440; $3,440 / 43,000 = $0.08 per unit
Explanation:
The Blending Department (first department) transferred 45,000 units to the Testing
Department, where labor and factory overhead were added before the units were
transferred to the Terminal Department (third or final department). Costs incurred in
the testing department resulted in the additional departmental as well as cumulative
unit costs.
The cost of production report of the testing department differs from that of the
Blending Department (first department) in several respects. Several additional
calculations are made, for which space has been provided on the report. The
additional information deals with:
1. Cost received from the preceding department.

2. An adjustment of the preceding department's unit cost because of
lost units.
3. Cost received from the preceding department to be included in the
cost of ending work in process inventory.
The quantity schedule of the Testing Department shows that the 45,000 units
received from the Blending Department (first department) were accounted for as
follows:
1. 40,000 units sent to terminal department.

2. 3,000 units still in process.
3. 2,000 units lost.
An analysis of the work in process (WIP) indicates that units in process are but one
third complete as to labor and factory overhead. Unit costs, $0.91 for labor and
$0.80 for factory overhead, were calculated as follows:
Equivalent production of the testing department is 41,000 units [40,000 + $1/3 ×

(3,000)], the labor unit cost is $0.91 ($37,310 / 41,000), and the factory overhead
unit cost $0.80 ($32,800 / 41,000). There is no materials unit cost, since no
materials were added by the department. The department unit cost is $1.71, the
sum of the labor unit cost of $0.91 and the factory overhead unit cost of $0.80.
The testing department is responsible for the labor and factory overhead used as
well as for the cost of units received from the Blending Department (first
department). This latter cost is inserted as a cost charged to the department under
the title "cost from preceding department" which is immediately above the section of
the report dealing with cost added by the department. The cost transferred in was
$77,400, previously shown in the cost report of the Blending Department (first
department) as cost transferred out of that department by this journal entry:
Work in process - Testing department 77,400

Work in process - Blending department 77,400
The work in process account of the testing department is charged with cost received
from the preceding department and with $70,110 of departmental labor and factory
overhead (FOH), a total cost of $147,510 to be accounted for by the department.
Units Lost in the Department Subsequent to the First:

The Blending Department (first department) unit cost was $1.72 when 45,000 units
were transferred to the Testing Department. However, because 2,000 of these
45,000 units were lost during processing in the Testing Department, the $1.72 unit
cost figure no longer applies and must be adjusted. The total cost of the units
transferred remains at $77,400, but 43,000 units must now absorb this total cost,
causing an increase of $0.08 in the cost per unit due to the loss of 2,000 units in the
testing department.
The lost units cost can be computed by one of two methods.
Method No.1:
Determines a new unit cost work done in the preceding department and subtracts
the preceding departments old unit costs figure from the adjusted unit cost figure.
The difference between the tow figures is the additional cost due to the lsot units.
$1.80 new adjusted unit cost for work done in the preceding department is obtained
by dividing the remaining good units, 43,000 (45,000 - 2,000), into the cost
transferred in, $77,400. The old unit cost figure of $1.72 is subtracted from the
revised unit cost to arrive at the adjustment of $0.08.
Method No. 2:
Determines the lost units share of total cost and allocates this cost to the remaining
good units. total cost previously absorbed by the units lost is $3,440, which is the
result of multiplying the 2,000 lost units by their unit cost of $1.72. The $3,440 cost
must now be absorbed by the remaining good units. The additional cost to be picked
up by each remaining good unit is $0.08 (3,440 / 43,000 units).
The lost unit cost adjustment must be entered in the cost of production report.
The$0.08 is entered on the "Adjustment for lost units" line. The departmental unit
cost of $1.71 does not have to be adjusted for units lost. In the testing department,
the cost of any work done on lost units has automatically been absorbed in the
departmental unit cost by using the equivalent production figure of 41,000 instead of
43,000. The $1.72 unadjusted units cost for work done in the preceding department,
the $1.71 departmental unit cost, and the $0.08 adjustment for lost units are totaled
in order to obtain the $3.51 cumulative unit cost for work done up to the end of
operations in the testing department.
Timing of Lost Units:

Lost units may occur at the beginning, during, or at the end of a manufacturing
process. For purposes of practicality and simplicity, it is ordinarily assumed that units
lost at the beginning or during the process were never put in process. The cost of
units lost is spread over the units completed and units still in process.
When units are lost or are identified as lost at the end of a process, the cost of the
lost units is charged to completed units only. No part of the loss is charged to units
still in process. Assume that the 2,000 units lost by the testing department were the
result of spoilage found at final inspection by the quality control department; their
cost would be charged only the 40,000 finished units, as illustrated below:

Testing Department (2nd Dept.)
Quantity Schedule:

======

======

Cost Cost

-------- -------
Labor 37,310 0.87

------- -----
------- ------
====== ======
Transferred to next department [(40,000 × $3.51+ $140,720

$0.167)]*
From preceding department (3,000 × $1.72) $5,160
Labor (3,000 × 1/3 × $0.87) 870

------ ------
======
Additional Computations:
Labor and factory overhead = 40,000 + 3,000 / 3 + 2,000 lost units = 41,000
units
Unit Costs:
Labor = $37,310 / 43,000 = $0.87 per unit
Factory overhead = $32,800 / 43,000 = $0.76 per unit
Lost unit cost = $3.35 × 2,000 units = $6,700 + 40,000 units $0.1675 per unit
to be added to $3.35 to make the transfer cost $3.5175.
*40,000 units $3.5175 = $140,700. To avoid a decimal discrepancy, the cost

transferred is computed: $147,510 - $6,790 = $140,720.
A comparison of the differences between the two cost of production reports for the
testing departments as to amounts for costs of units transferred and work in process
inventory is shown below the production report. Not the offsetting increases and
decreases.
In this illustration, the assumption has been made that the lost units, identified at
the end of the process, were complete as to all costs. In sum companies, members
of the quality control or inspection departments make production checks prior to the
end of the process. Such a procedure uncovers lost units that are not complete when
the loss is incurred or the spoilage discovered and yet the loss may pertain only to
units completed and not to units still in process. In such a case the lost units should
be adjusted for their equivalent stage of completion. For example, 2,000 units lost at
the 90% stage of conversion would appear as 1,800 equivalent units with regard to
labor and factory overhead costs.
Normal Vs Abnormal Loss of units:

Units are lost through evaporation, shrinkage, substandard yields, spoiled work, poor
work man ship, or inefficient equipment. In many instances the nature of operations
makes certain losses normal or unavoidable, because they are considered with in
normal tolerance limits for human and machine errors. The cost of these normally
lost units does not appear as a separate item of cost but is spread over the
remaining good units.
A different situation is created by abnormal or avoidable spoilage or losses that are

not expected to arise under normal, efficient operating conditions. The cost of such
abnormal spoilage or losses is charged either to factory overhead as shown below,
thereby appearing as an additional unfavorable able factory overhead variance, or
directly to a current period expense account and reported as a separate item in the
cost of goods sold statement.
Factory Overhead Control 6,700

Work in process - Testing Department 6,700
(lost units)
The cost of production report would show the abnormal spoilage or loss as follows:
Transferred to next department (40,000 units × $3.35) ..............$134,020*

Transferred to factory overhead [40,000 units × $0.1675) or
(2,000 lost units × $3.35)].......................................................6,700
*40,000 units × $3.35 = $134,000. To avoid decimal discrepancy, the cost

transferred is computed: $147,510 - $6,790 ending inventory - $6,700 = $134,020
If the lost units were only partially complete, equivalent production calculations
should consider their stage of completion when lost or spoiled, and the costing of the
abnormal loss should be weighted accordingly. If one part of the loss is normal and
another abnormal, each portion must be treated in accordance with the above
discussion. The critical factor in distinguishing between normal and abnormal
spoilage or loss is the degree of controllability. Normal or unavoidable spoilage or
loss is produced by the process under efficient operating conditions, referred to as
uncontrollable. Abnormal or avoidable spoilage or loss is considered unnecessary,
because the conditions resulting in the loss are controllable. For this reason, within
the limits set by the state of the art of production, the difference is a short-run
condition; in the long run, management should adjust and control all factors of
production and eliminate all abnormal conditions.
The cost of production report at the beginning of this page shows a total cost of
$147,510 to be accounted for by the Testing department. The department completed
and transferred 40,000 units to the Terminal Department (third or final department)
at a cost of $140,000 (40,000 × $3.51). The remaining cost is assigned to the work
in process inventory. This balance is broken down by the various costs in process.
When computing the cost of the ending work in process inventory of any department
subsequent to the first, costs received from the preceding departments must be
included.
The 3,000 units still in process, completed by the Blending Department (first
department) at a unit cost of $1.72, were later adjusted by $0.08 (to $1.80) because
of the loss of some of the units transferred. Therefore, the Blending Department's
(first department) cost of the 3,000 units still in process is $5,400 figure is not
broken down further , since such information is not pertinent to the Testing
Department's operations. However, the amount is listed separately in the cost of
production report, because it is part of the Testing Department's ending work in
process inventory.
Materials (if any), labor, and factory overhead (FOH) added by a department are
costed separately in order to arrive at total work in process (WIP). In the testing
department, no materials were added to the units received; thus, the ending
inventory shows no materials in the process. However, labor and factory overhead
costs were incurred. The work in process analysis stated that labor and factory
overhead used on the units in process were sufficient to complete 1,000 units. The
cost of labor in process is $910 (1,000 × $0.91) and factory overhead is process is
$800 (1,000 × $0.80). The total cost of the 3,000 units in process is $7,110 ($5,400
+ $910 + $800). This cost, added to that transferred to the Terminal Department
(third or final department), $140,400, accounts for the total cost of $147,510
charged to the Testing Department.
Cost of Production Report - Terminal

Department (3rd - Final Department):
The cost of production report of 3rd and final department is illustrated below:

Terminal Department (3rd Dept.)
Quantity Schedule:
======
Units transferred to finished goods storeroom 35,000

======

Cost Cost
Labor 32,400 0.90

------- -----
Adjusted for lost units 0.09*
------- ------
====== ======
Transferred to finished goods storeroom (35,000 × $176,750

$5.05)
Adjusted cost from preceding department [4,000 ×

($3.51 + $0.09)] $14,400
Labor (4,000 × 1/4 × $0.90) 900

------ ------
======
Additional Computations:
Unit Costs:
Labor = $32,400 / 36,000 = $0.90 per unit
*Adjustment for lost units:
Method No.1: $140,400 / 39,000 = $3.60; $3.60 - $3.51 = $0.09 per unit
Method No.2: 1,000 units × $3.51 = $3,510; $3,510 / 39,000 = $0.09 per unit
Explanation:
Total and unit cost figures were derived by using procedures discussed for the cost of
production report of the Testing Department. The work completed is transferred to
the finished goods storeroom; thus, the title "Transferred to finished goods
storeroom" is used in place of the title "Transferred to next department." Cost
charged to the Terminal Department come from the payroll distribution and the
department's expense analysis sheet. The journal entry transferring costs from the
Testing Department follows:
Work in process - Terminal Department 140,000

Work in process - Testing Department 140,000
The entry to transfer finished units to the finished goods storeroom is presented
below:
Finished Goods 176,750

Work in process - Terminal Department 176,750
Combined Cost of Production Report

(CPR) - Process Costing:
The three cost of production reports for the Clonex Corpora have been discussed and
computed separately.
These reports would most likely be consolidated in a single report summarizing

manufacturing operations of the firm for a specific period. Such a report, as
illustrated below, should be reviewed in order to observe the interrelationship of the
various department reports.

All Producing Departments
Quantity Schedule: Blending 1st Testing 2nd Terminal 3rd

Department Department Department
Units started in process 50,000

======
Units received from the preceding 45,000 40,000

department ====== ======
Units transferred to next 45,000 40,000

department
Units transferred to finished goods 35,000

storeroom
Units still in process 4,000 3,000 4,000
Units lost in process 1,000 2,000 1,000

------- ------- -------
50,000 45,000 40,000

====== ====== ======
Cost Charged To the Total unit Total unit Total cost unit
Department: Cost cost cost Cost Cost
Transferred in during the month $77,400 $1.72$140,400$3.51
-------- ----- -------- -----
Materials $24,500 $.50
Labor 29,140 .62 $37,310 $.91 $32,400 $.90
Factory Overhead (FOH) 28,200 .60 32,800 .80 19,800 .55

------- ---- ----- ---- ------- ----
Total cost added $81,840 $1.72 $70,110 $1.71 $52,200 $1.45
Adjusted for lost units $.08 $.09

------- ---- ------- ----- -------- ----
Total cost to be accounted for $81,840 $1.72$147,510$3.51$192,600$5.05
====== === ====== === ====== ===
Transferred to next department $77,400 $140,400
Transferred to finished goods $176,750

storeroom (35,000 × $5.05)
Work in process - ending

inventory:
Adjusted cost from preceding

department [4,000 × ($3.51 + $5,400 $14,400
$0.09)]
Materials $2,000
Labor (4,000 × 1/4 × $0.90) 1,240 910 900
Factory Overhead (4,000 × 1/4 × 1,200 800 550

$0.55) ------ ------ ------
4,440 7,110 15,850

-------- ------ --------
Total cost accounted for $81,840 $147,510 $192,600
====== ====== ======
Answers of that Questions which come during

Assignment about Process Costing System:
Questions:
1. What is the primary objective in process costing?
Answer:
“The primary objective in process costing is to determine the costs of

materials, labor, and factory overhead (FOH) used to process units of
production through each department, thereby determining the cost of a
finished unit. The ultimate objective is to control costs.”
2. Job order and process costing procedures are used by
different types of industries. Discuss the procedure
appropriate for each type.
Answer:
The nature a firm's manufacturing operations determines whether job order

costing or process costing procedures are used. If costs can be associated and
accumulated by orders, job order costing will be used; if operations are more or
less continuous and identity of orders is lost, process cost is applicable.
3. For the following products indicate whether job order

costing or process costing procedures would be required.
(a) Gasoline (b) Sewing machines (c) Chocolate syrup (d) Text books
(e) Dacron yarn (f) Cigarettes (g) Space capsules (h) Men's and women's
suites.
Answer:
(a) Process (b) Process - for stock items (c) Process (d) Job order (e) process (f)
process (g) Job order (h) process
4. What are the distinguishing characteristics of process

costing procedures?
Answer:
1. The distinguishing characteristics of process cost procedures are:

(a) A cost of production report is used.
(b) Production is accumulated and reported by departments.
(c) Costs are posted to departmental work in process accounts.
(d) Production in process at the end of a period is restated in terms of
completed units.
(e) Total departmental costs is divided by total departmental production to
complete unit costs.
(f) Costs are transferred from one department to another to arrive at a final
unit cost for the completed product.
5. Discuss three product flow formats.
Answer:
Three product flow formats are: sequential, parallel, and selective:
Sequential Product Flow:

In a sequential product flow, each item manufactured goes through the same set
of operation. 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.
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.
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, discussed on By-
Products and Joint Products Costing page.
6. Compare the cost accumulation and summarizing

procedures of job order costing and process costing.
Answer:
Materials costs - In job order costing, materials requisitions are used and
charges made to order; in process costing, charges are to departments, with
infrequent use of materials requisitions.
Labor Costs - Time tickets are use din job order costing to accumulate costs by
jobs; In process costing, labor costs are charged to departments, and therefore
detailed time records are not necessary.
Factory Overhead - Job costing requires the use of predetermined overhead

rates for charging overhead to orders; In process costing, actual overhead may
be used, and the need to distinguish carefully between direct and indirect
materials and labor does not exist. However, predetermined rates are desirable
under certain conditions.
Summarizing Costs - A job order cost sheet is used to accumulate the costs of
an order in job order costing system; a cost of production report is used in
process costing system. In job order costing, costs are summarized on
completion of an order; in process costing, periodic weekly or monthly
summaries determine unit costs.
7. Can predetermined overhead rates be used in process
costing?
Answer:
Predetermined overhead rates can and should be used if production is not stable
or if factory overhead is significant cost. As stated frequently, the charging of
actual overhead to orders or products may result in improper costs Furthermore,
the clerical detail connected with actual overhead can become quite cumbersome
and cause delay in the execution of efficient and timely costing.
8. Would one expect to find service departments in a firm

using process costing? If so, how would they be be
handled? Would cost of production reports be used for
service departments?
Answer:
The existence of service departments does not depend on a company's order or

process cost procedures. It depends mainly on the needs of the manufacturing
operations. Therefore, in process costing, service departments are also used and
handled. In the same way as in job order costing. Of course, no cost of
production reports for service departments would be needed, but departmental
expense analysis sheets would still be used.
9. What is the purpose of a cost of production report?
Answer:
A cost of production report is an effective weekly or monthly summary of

materials, labor, and factory overhead consumed by each department or cost
center, along with a record of units of output. It provides essential data to those
responsible for cost control.
10. What are the various sections of a cost of production

report?
Answer:
A cost of production report is an effective weekly or monthly summary of

materials, labor, and factory overhead consumed by each department or cost
center, along with a record of units of output. It provides essential data to those
responsible for cost control.
11. Separate cost of production reports are prepared for
each producing department. Whey is this method used in
preference to one report for the entire firm?
Answer:
Separate departmental cost of production reports are used to control costs

successfully and to accumulate costs more accurately. In many instances total
company cost of production reports could not be used because of the various
stages of work in process.
12. Are month-to-month fluctuations in average unit

cost computed in a cost of production report meaningful
data in attempting to control costs?
Answer:
Separate departmental cost of production reports are used to control costs

successfully and to accumulate costs more accurately. In many instances total
company cost of production reports could not be used because of the various
stages of work in process.
13. What are the equivalent units of production? explain in

terms of its effect on computed unit costs.
Answer:
The equivalent production figure for a department represents the number of units
that could have been completed from materials, labor, and overhead used during
a period. It is computed by restating units in process at the end of a period in
terms of completed units and adding this figure to the number of units actually
completed. This explanation assumes no beginning work in process inventories. A
department's equivalent production is divided into its costs to compute
departmental unit costs. Therefore, production figures have a direct effect on
computed unit costs.
14. In process costing, physical inventories of work in

process must be taken at the end of each accounting
period. Ordinarily, all department heads are responsible
for their own inventories, and the methods they use to
determine such data are crude by comparison with
procedures used for determining year end physical
inventory. It is not unusual for a department head to
estimate rather than count inventories is process.
Consequently, figures are bound to save errors. Is this
good practice or should more accurate methods be used,
such as having inventory teams determine inventories?
Answer:
The need for accuracy in determining work in process is in a large part

determined by the materiality of the inventory which, in many instances, is rather
small or insignificant. Whenever an inventory figure is needed, the quantitative
data will ordinarily come from departmental supervisors. The cost department will
apply cost data. Quantitative data based on actual physical counts are desirable,
but estimates based on the capacity of various equipment such as holding tanks,
can be quite acceptable. The validity of estimates can be determined through
analysis of reasons for higher or poor estimate of work in process. In most
instances, the use of a permanent inventory team is impractical not only because
work in process values are usually not substantial, but because determination of
the quantity of work in process can be performed best by departmental personnel
familiar with the product and factory operations.
15. What is the justification for spreading the cost of

lost units over the remaining good units? Should the cost
of these units ever be charged to overhead? Will the
answer be different if un its are lost (a) in the originating
department, (b) at the beginning of a department's
operations, (c) during operations, or (d) at the end of
operations?
Answer:
Whenever a loss of units is normal in producing the final units, the good units
completed absorb all costs, resulting in a spreading of the cost of lost units over
the remaining good units. When abnormal or unusual losses occur, the cost
ordinarily assigned to any such lost units might be charged to factory overhead
or to a current period expense account. This method results in the assignment of
normal (nonplus) costs to remaining good units.
16. (a) What is difference between normal and abnormal

loss?
(b) Explain how both should be reported for management

purposes.
Answer:
(a) Normal spoilage arises under normal, efficient operating conditions; i.e., it
is inherent in the production process and is uncontrollable in the short run.
Abnormal spoilage is not expected under the normal, efficient operating
conditions; i.e., it is not inherent in the production process and management
usually considers it avoidable or controllable.
Thus, by definition, the critical factor in distinguishing between normal and

abnormal spoilage is the degree of controllability of units spoiled. Any spoilage
that occurs during a production process functioning within the expected usual
range of performance is considered normal. Any spoilage occurring in amounts in
excess of the defined usual range is considered abnormal (controllable).
(b) Conceptually the cost of normal loss should be included in the cost of good
units produced because of its association with normal production. Likewise, the
cost of abnormal loss should be accounted for as a loss because of its abnormal
unusual nature and should be separately identified as a loss on reports for
management.
For practical reasons, there may be no distinction between normal and

abnormal loss in reports for management, since it is sometimes very difficult (or
impossible) to do so. The production process may be relatively new or the
process may be altered often enough to make such a distinction impractical or
too costly. Whenever possible, however should be made and accounted for as
discussed in the preceding paragraphs.
17. Select the answer which best completes the

statement.
(a) A characteristics which applies to process costing but not to job order
costing system:
(1) Identifiable batches of production;
(2) Equivalent units of production;
(3) Averaging process;
(4) Use of standard costs
(b) In processing goods through a factory, materials are successively run

through producing departments A, B, and C. For product costing purposes,
Department B should treat items received from department A as:
(1) Materials;
(2) Work in process;
(3) Finished goods;
(4) Equivalent units.

(c) The type of spoilage that should not effect the recoded cost of
inventories is:
(1) Abnormal spoilage;
(2) Normal spoilage;
(3) Seasonal spoilage;
(4) Standard spoilage.
(d) Transferred in costs in a cost of production report are most similar to:
(1) Materials added at the beginning of the process;
(2) Conversion costs added during the process;
(3) Costs transferred to the next process;
(4) Costs included in beginning inventory.
Answer:
(a) 2
(b) 1
(c) 1
(d) 1
 BEING A FINANCE MANAGER:

BUDGETING AND COSTING IS A BIG MATTER
• A MANGER HAS TO KNOW THAT HOW CAN HE

ALLOCATE THA COST IN DIFFERENT PROCESS
IF HE HAS THE FULL GRIP ON THE DIFFERENT METHODS AND HAS THE GOOD
DECISION MAKING POWER THROUGH HIS ANALYTICAL SKILLS SO HE CAN SAVE
THE FIRM FROM BIG LOSSES AND BECOME THE CAUSE OF FIRM’S BIG
PROFITS……..
LEARNINGS:
a. If you have HARDSHIPS it means you are getting polished.

b. Professional life is completely different from this spring season of MBA.
c. Recent market is very cruel and it demands a completely skilled person and
thing more like references etc.
d. Personal skill and personality like good looking girls can be good receptionist
even they are good communications but not always.
e. WHO is your Biggest Reference? ALLAH…!
f. Professional life requires active moderate and continuous hard working
behavior if you want to be a successful one.
g. Emotional Attachments are ignored in PROFESSIONAL LIFE.
h. Employee should be well dressed but not more than the employer.
i. Might is Right, if Might especially anger even if you are right, so never messes
with him, you know what we m saying……!
j. There is Punjabi Proverb: “HIK TAE PEYA BAER VI MUNH VICH MAHI
MANGDA” means “NO PAIN NO GAIN”. You have to work hard to get your
dreams come true.
k. Always ask your visitor about tea, cold drink or some thing else to give him a
good hospitality image.
l. Three kinds of people in this world:
 Who Does gossips about others.

 Who have not any kind of aim or destiny to achieve in LIFE?
 “IDEA PEOPLE” Those who always try to find solutions for
problems and situations.
“SO BE IDEA PEOPLE”

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PROCESS COSTING FROM COST ACCOUNTING

Umair Saleem (44) {2009-ag-1190}

Khawaja Awais (25) {2009-ag-1324}

M.Waqas Husain (51) (2009-ag-915)

Shahbaz Khalid (09) {2009-ag-1320}

Muhammad Waqas (11) (2009-ag-1037)

Faisal Javed (22) {2009-ag-1036}

Adnan Sherazi (21) {2009-ag-1331}

M.B.A (3rd Semester)

Department of Business, Management & Sciences

We were assigned a project on the subject of Cost Accounting by MAM

1. Define and explain process costing?

Definition and Explanation:

Process costing method is used for industries producing chemicals, petroleum,

The type of manufacturing operations performed determines the cost procedures

(1) Cost of production report,

(2) Calculation of departmental unit costs,

(3) Costing of work in process,

(5) Effect of lost units on unit costs.

Characteristics and Procedure of Process

1. A cost of production report is used to collect, summarize and compute total

The procedures of process costing are designed to:

1. Accumulate materials, labor, and factory overhead costs by

If accurate units and inventory costs are to be established by process costing

With either procedure, departmentalization of materials, labor, and factory

Procedures for Materials, Labor, and

Work in Process - Blending department 24,500 Dr.

Materials 24,500 Cr.

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.

 Factory Overhead Costs:

Normally it is emphasized to use the predetermined overhead rates for charging

1. Production is not stable.

Fluctuations in production can lead to the unequal incurrence of actual factory

Prior to charging factory overhead to departments via their respective work in

Factory overhead control xxxxx Dr.

Accounts Payable xxxxx Cr.

Accumulated Depreciation - Machinery xxxxx Cr.

Prepaid Insurance xxxxx Cr.

Materials xxxxx Cr.

Payroll xxxxx Cr.

Work in Process - Testing Departments 32,800 Dr.

Work in Process - Terminal Department 19,800 Dr.

Factory Overhead Control 80,800 Cr.

Cost of Production Report (CPR):

1. Total unit costs transferred to it from a preceding department.

Cost of Production Report - Blending

1. Prepare a cost of production report of first department in a process

The cost of production report of the Blending Department, the originating

The Clonex Corporation

Units transferred to next department 45,000

Units lost in process 1,000 50,000

Cost Charged To the Department: Total unit

Materials $24,500 $0.50

Labor 29,140 0.62

Factory Overhead (FOH) 28,200 0.60

Total cost to be accounted for $81,840 $1.72

Cost Accounted for as Follows:

Transferred to next department (45,000 × $1.72) $77,400

Work in process - ending inventory:

Materials (4,000 × $0.50) $2,000