Class Meeting 11

PROCESS COSTING

Riwayadi
 Application of Process Costing
 Process costing is applied to the
companies that produce homogeneous
or standardized products).
 Because the products are
standardized, each product consumes
the same resources and costs.
 The examples of manufacturing firms:
PT Semen Padang, PT Coca Cola, the
firms that sell mineral water such as
Aqua, ELBI, Amia, Sling, Asia Bagus,
and the like, PT Gudang Garam, PT
Unilever, etc.
 The examples of service firms:
educational institutions, teeth cleaning
services, cost of rooms in the hotel etc.
 Job order vs process costing
Job Process

Product Customized or Standardized or

heterogenous homogenous
Examples: Printing companies, Cement, mineral water,
furniture manufacturing, airline, soft drink, etc.
public accoutant firm,
tailor etc.
Product cost Calculated for each job Calculated for each process

Cost Normal costing Actual costing (RM, DL,

assignment FOH are assigned using
actual cost)
Product cost After job completed At the end of period
calculation
Media used to Job order cost sheet Cost of production report
accumulate the
manufacturing
Characteristics of Process Costing
 The cost of products is calculated
at the end of period.
 Manufacturing costs are assigned
to products using actual costing in
which raw material cost, direct
labor cost, and factory overhead
cost are assigned to product based
on the actual costs
 the media that is used to accumulate
the manufacturing cost is a cost of
production report.
 If products are manufactured through
more than one department, the cost of
product is calculated for each
department
 Units (work) in process at the end of a
period is restated in terms of completed
units (equivalent units) using weighted
average costs or FIFO.
 Unit cost is calculated as follows:
Unit cost = total cost / equivalent units
DETERMINING THE EQUIVALENT
UNITS

Weighted-Average Cost Method

 Equivalent units (EU)= Units Completed +

[Ending Work In Process Inventory x Stage
of Completion].
 Flow of Units 2000 units
1.000 units ending work
beginning work in process
in process (40% (20%
completed) completed)

Process
10.000 units

9.000 units 8.000 units

put in process completed
 Based on flow of unit above, equivalent
unit using average cost method is
calculated as follows:

EU = 8.000 + 2.000 (20%) = 8.400 units

First In, First Out (FIFO) Method

 Equivalent units (EU)= [Beginning WIP x

additional stage of completion required] +
Units Completed From Current Process +
[Ending Work In Process Inventory x Stage
of Completion].
 Based on Flow of Unit above, equivalent unit
using FIFO method is calculated as follows:

EU = 1.000 (60%) + 7.000 + 2.000 (20%)

= 8.000 units
COST OF PRODUCTION
REPORT CONTENT
A. QUANTITY SCHEDULES
 Providing quantity information
B. COSTS TO ACCOUNT FOR
 Calculating the unit cost
 Unit cost = total cost / equivalent units

C. COSTS ACCOUNTED FOR

 Distributing
total costs to account for to
units completed and units uncompleted
(ending WIP inventory)
 Illustration
Data obtained from PT SP for Nov. 200X are as follows:
Beginning WIP (RM 100%, CC 70%) 1.000 units
Ending WIP (RM 80%, DL 50%, FOH 60%) 2.000 units
Units completed and transferred to warehouse 10.000 units
Cost of beginning WIP: RM Rp 500.000, DL Rp 600.000, and
FOH Rp 400.000
Current manufacturing cost: RM Rp 4.000.000, DL Rp
2.000.000, and FOH Rp 2.500.000
Required:
1. Prepare cost of production report for Nov. 200X using
average cost method and FIFO method
2. Determine selling price per unit if company desires profit of
40% of unit cost using average cost and FIFO
3. Journal entries using FIFO method
 Class Meeting 12

LOST UNITS, DEFECTIVE UNITS, SPOILED

UNITS, AND ADDITIONAL UNITS BECAUSE
OF ADDITIONAL RAW MATERIALS IN THE
NEXT DEPT. AS WELL AS PRODUCT
PRODUCED THROUGH MORE THAN 1
DEPT.

Riwayadi
Lost Units
 Lost units are the units that evaporate,
crystallize, and shrink in the production
process because of the material natures
such as gas, water, sugar, etc. (lost
units in this case is normal)
 Units might be lost in the beginning of
process, in the midpoint of the process
or in the end of process. For simplicity,
units lost in the beginning and the end
of process will be discussed.
The impact of lost units on
product costing
Units lost in the beginning of process:
 It is assumed that Lost units have not
absorbed the manufacturing cost yet.
 Costs of Lost units are not computed
 Lost units are not computed in the equivalent
units.
 Lost units in the beginning of process on the
next departments will result in the adjustment
of cost per unit. Cost per unit will be higher.
Lost unit in the end of process:
 Lost units have absorbed the manufacturing
cost.
 Costs of Lost units are computed
 Lost units are computed in the equivalent
units.
 EU: Beg WIP x additional stage of
completion required + Unit Completed from
current process + lost unit at the end of
process+ Ending WIP x % of completion
(FIFO)
 EU: Units completed + lost units at the end
of process + ending WIP x stage of
completion (Average cost method)
 Costs of lost units are assigned
to the units completed (because the
occurance is normal) and will result in
the higher costs per unit of units
completed.
Defective Units
 Units that do not meet the specification or
quality standard and can still be
economically corrected.
 “Economically” is the price of product > cost
of product (product is still profitable).
 Example: longer shirt hand
 Cost of tailoring shirt (units completed) but
defect Rp 50.000
 Rework cost Rp 10.000
 Price Rp 75.000
 How much is the cost of tailoring shirt (unit
completed after rework )? Rp 50.000 or Rp
60.000?
 The treatment of rework costs:
 If the defective units are normal in nature
(beucase of work difficulties), costs of rework will
add the manufacturing cost. Cost of tailoring shirt
is Rp 60.000 (50.000 + 10.000). Debit: WIP
inventory, credit: manufacturing costs used (RM,
DL, FOH). Cost per unit will be higher.
 If the defective units are abnormal in nature
(because of human error), costs of rework will be
treated as loss on defective units. Cost of tailoring
shirt is Rp 50.000. Debit: loss on defective units,
credit: manufacturing costs used (RM, DL, FOH).
Spoiled Units
 Units that do not meet the specification
or quality standard and can not
economically corrected.
 Example: over cooked cake
 Spoiled units are known in the end of
process, therefore they are computed in
the equivalent units. Cost of spoiled
units are also computed.
 The treatment of spoiled units
 Normal
 Costs of spoiled units are assigned to
units completed
 Cost of units completed Rp 1.000,
and cost of spoiled unit Rp 200, how
much is cost of units completed?
1.200.
 Abnormal
 Costs of spoiled units are treated as
loss on spoiled units. Debit: loss on
spoiled units, credit: WIP inventory.
Cost of units completed Rp 1.000.
Spoiled units are saleable:
 Normal
 Sales revenue will be treated as the
deduction of costs of units completed.
Spoiled units can be sold Rp 50. Debit:
cash Rp 50, credit: FG inventory Rp 50.
 Abnormal
 sales revenue will be treated as the
deduction of loss on spoiled units.
 Debit: Cash Rp 50, credit: loss on spoiled units Rp
50. Net loss on spoiled units is Rp 150 (200-50).
 Lost Units at the Lost units at the Defective units Spoiled units
beginning of end of process
process
1. Cost of lost unit 1. Cost of lost 1. Rework cost 1. Cost of spoiled units is
is not calculated unit is of normal calculated
2. Lost units in the calculated defective will 2. Cost of normal spoiled
next dept. 2. Lost units are be added to units adds cost of units
influences unit accounted for the completed
cost from in the formula manufacturin 3. Cost of abnormal spoiled
previous dept. of equivalent g cost units is treated as a loss
(become higher) units 2. Rework cost
4. Revenues from sales of
3. Cost of lost of abnornmal spoiled units reduce cost of
unit adds defective units completed (normal),
cost of units unit is or reduce a loss
completed treated as a (abnormal)
loss
5. Spoiled units are
accounted for in the formula
of equivalent units

TREATMENT OF LOST UNITS, DEFECTIVE UNITS AND SPOILED UNITS SUMMARY

 Additional Materials in Subsequent
Departments

Two possible effects on units and costs:

1. The additional materials merely increase the
unit cost since these materials become a part
of the product manufactured and do not
increase the number of final units.Adding
buttons in finishing department of shirt
manufacturing does not increase the no. of
shirt.
2. The added materials increase the
number of units and also cause a
change in unit cost. In processing a
chemical, water is often added to the
mixture causing an increase in the no.
of units and a spreading of costs over
greater no. of units.
a. Unit cost from previous dept. is adjusted
so unit cost become lower
b. Additional material will increase unit cost
in the next departments.
Products are produced
through > 1 Dept.
 Cost of units completed are calculated for
each dept. For example, in PT SP, there will
be :
 cost of raw mix (raw mill dept),
 cost of clinker (kiln dept.),
 cost of fine cement (cement mill), and
 cost of bag cement (packing dept.)
 WIP inventory account is made for each dept.
 Flow of Costs – Cement Corp.

DM
Dept. Dept.
Dept. Finished Cost of
DL Raw Cement Goods Goods
Mill Kiln Mill
FOH Sold

WIP Inv-Raw Mill WIP Inv -Kiln WIP Inv CM FG Inv

DM Cost XX Cost XX Cost XXX XXX
DL Transf. DM transf. DM Transf.
FOH DL DL COGS

FOH FOH XXX

 Journal entry to record the units completed in
Raw Mill Dept. and transferred to Kiln dept.
WIP Inv – Kiln Dept. Xxx
WIP Inv – Raw Mill Dept. xxx
 Journal entry to record the units completed in
Kiln Dept. and transferred to Cement Mill
WIP Inv – CM Dept. xxx
WIP Inv – Kiln Dep. xxx
 Journal entry to record the units completed in
packing dept. and transferred to warehouse
FG Inventory xxx
WIP Inv – Packing Dept. xxx
 Class Meeting 13

LOST UNITS, DEFECTIVE UNITS, SPOILED

UNITS, AND ADDITIONAL UNITS BECAUSE
OF ADDITIONAL RAW MATERIALS IN THE
NEXT DEPT. AS WELL AS PRODUCT
PRODUCED THROUGH MORE THAN 1 DEPT.
(CONTINUING)

Riwayadi
 Exercise
Dept. A Dept. B
Beg. WIP (100% RM, 60% DL, 40% FOH 1.000 units
(100% RM, 60% CC) 500 units
Units put in process 9.000 units
Additional units because of additional RM 2.000 units
Defective units 400 (normal) 500 (abnormal)
Lost units 100 (ending) 500 (beginning)
Spoiled units 200 (normal) 300 (abnormal)
Ending WIP (100% RM, 60% CC) 1.500 units
(100% RM, 40% CC) 1.000 units
Cost of Beg. WIP (cost from previous month)Rp 1.000.000 Rp 800.000
Current manufacturing cost (including rework cost)
RM cost Rp 5.000.000 Rp 6.000.000
DL cost 3.000.000 4.000.000
FOH cost 2.000.000 5.000.000
 Dept.A Dept. B
Rework cost:
Labor cost 300.000 600.000
FOH cost 200.000 400.000
Required:
a. Prepare cost of production report using FIFO method for each
producing dept.
b. Determine unit selling price if profit desired is 30% of its cost
c. Make journal entries needed
d. Assume that detailed cost of beginning WIP is as follows:
Dept. A Dept. B
Cost from Dept. A 300.000
RM cost 400.000 200.000
DL cost 500.000 150.000
FOH cost 100.000 150.000
Total 1.000.000 800.000
Prepare cost of production report using average cost method for each
producing dept.
exercise
Cost per unit Dept. II $ 500
products completed and transferred to
warehouse: 5.000 units
Spoiled products: 100 units
Required:
Calculate cost of units completed per unit
assuming that:
a. Spoiled units are normal
b. Spoiled units are abnormal
Exercise
 Ending WIP (100% RM, 60%DL, 40%
FOH) 1.000 units
 Cost of ending WIP:
RMC $ 100.000
DLC $ 48.000
FOH $ 28.000
Required: Calculate total cost per unit?
 Exercise
Units completed in Dept. A and transferred to Dept. B
20.000 units with cost per unit Rp 1.000
The process of Dept. B produces 500 normal spoiled units,
1.000 abnormal defective units, and 400 lost units in the
beginning of process. Additional units because of
addtional raw material are 5.400 units. Beginning WIP
(RM 100%, CC 3/4 ) 4.000 units, and ending WIP (RM
60%, CC 1/5) 5.000 units. Cost of beginning WIP Rp
5.000.000. Manufacturing cost for this month: RMC Rp
8.000.000 and CC Rp 7.000.000. Conversion cost of Rp
1.000.000 is required to repair defective units.
Required:
a. Prepare cost of production report for Dept. B
b. Make journal entries needed
Activity-based process costing
 The assignment of DRMC and DLC is
similiar between volume-based process
costing and activity-based process
costing
 FOH is assigned to products using unit
driver for volume-based process costing
and using unit and non-unit driver for
activity-based process costing
FOH ASSIGNMENT PROCESS TO
PRODUCTS

FOH FOH

PLANT / ACTIVITY
PRODUCING DEPT

PRODUCT PRODUCT

Volume-Based Activity-Based
Process Costing Process Costing
Exercise - Activity-Based Process Costing
Cost data for Product A is as follows:
Beginning WIP (100% RM, 80% DLC,
40% FOH) 1.000 units
Ending WIP (60% RM, 30% DLC, 20%
FOH) 3.000 units
Put in processed 19.000 units
Cost of Beginning WIP $ 50.000
Current manufacturing cost:
DRMC $ 500.000, and DLC $ 400.000
FOH are as follows:
 Setup cost $ 100.000
 Inspection cost $ 300.000
 Material handling cost $ 200.000
FOH activites for product A, B, and C are as
follows:
A B C
No. of setups 20 15 15
No. of inspections 60 15 25
No. of moves 10 4 6
Machine hours 100 500 400
Prepare cost of production report for product A
using ABC