The document discusses process costing systems used in manufacturing. Process costing is used for continuous production of similar goods and involves accumulating costs by department. Key points include: 1. Costs are accumulated by department and a unit cost is calculated for each department by dividing total costs by units produced. 2. Costs and units are transferred between departments until reaching finished goods. 3. Inventory of work in process is tracked and assigned costs for incomplete units.

1. Process Costing System:
Cost accumulation procedures used by manufacturing concerns are classified as either job order
costing or process costing. The Job Order Costing System 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 – a system applicable to a continuous process of production of the same or similar
goods. It 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, 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. This
matter 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, and (5) effect of lost units on unit costs. 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.
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.

2. Costing By Departments:
The nature of manufacturing operations in firms using process or job order cost procedures is usually
such that work on product takes place in several departments.
With either procedure, departmentalization of materials, labor, and factory overhead costs facilitates
application of responsibility accounting. Each department performs a specific operation or process
towards the completion of the product. For example, after the blending department has completed the
starting phase of the work on product, units are transferred to the testing department, after which they
may go to the terminal department for completion and transferred to the finished goods storeroom.
Both units and costs are transferred from one manufacturing department to another manufacturing
department. Separate departmental work in process (WIP) accounts are used to charge each
department for the materials, labor, and factory overhead used to complete its share of manufacturing
process.
Process costing involves averaging costs for a particular period in order to obtain departmental and
cumulative unit costs. The cost of a completed unit is determined by dividing the total cost of a period
by the total units produced during the period. Determining departmental production for a period
includes evaluating units still in process. 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.
Product Flow in Process Costing System:
A product can flow through a factory in numerous ways. Three product flow formats associated
with process costing - sequential, parallel, and selective - are illustrated here to indicate that basically
the same costing procedures can be applied to all types of product flow situations.
Sequential Product Flow:
In a sequential product flow, each item manufactured goes through the same set of operation, as
illustrated below.
Work in Process Work in Process Work in Process
Finished Goods
Blending Department Testing Department Terminal Department
Materials
Labor Labor Labor
FOH* FOH* FOH*
→ → →
*Factory Overhead
Materials are placed into production in the Blending Department, and labor and factory overhead are
added. When the work is finished in the Blending Department, it moves to the Testing Department.
The second process, and any succeeding processes, may add more materials or simply work on the
partially completed input from the preceding departments, adding only labor and factory overhead, as
in this example. After the product has been processed by the Terminal Department, it is a completed
product and becomes a part of finished goods inventory.
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.

3. Selective Product Flow:
In a selective product flow, the product moves to different departments within the plant, depending
upon the desired final product. For example, in meet processing, after the initial butchering process,
some of the product goes directly to the Packaging Department and then to finished goods inventory;
some goes to the Smoking Department and then to the Packaging Department and finally
to finished goods inventory; Some goes to the grinding department, then to the
packaging department and lastly to finished goods inventory. Transfer of costs from the
Butchering Department involves joint cost allocation, discussed on By-Products and Joint Products
Costing page.
Procedures for Materials, Labor, and Factory Overhead Costs Accumulations:
In process costing, materials, labor, and factory overhead costs are accumulated in the usual accounts,
using normal cost accounting procedures. Costs are then analyzed by departments or processes and
charged to departments by appropriate journal entries. The details involved in process costing are
usually fewer than those in the job order costing, where accumulation of costs for many orders can
become unwieldy.
Materials Costs:
In job order costing system, materials requisitions are used to charge jobs for direct materials used. If
requisitions are used in process costing, details are considerably reduced because materials are charged
to departments rather than to jobs, and the number of departments using materials is usually less than
the number of jobs a firm might handle at a given time. Frequently materials are issued only to the
process-originating department; subsequent department other than the first, they are charged to that
department performing the specific operation.
For materials control purposes, materials need not always be priced individually on requisition forms.
The cost of materials used can be determined at the end of the production period through inventory
difference procedures, i.e., adding purchases to beginning inventory and then deducting ending
inventory. Or consumption reports which state the cost of materials or quantity of materials put into
process by various departments can be used. Costs or quantities charged to departments by
consumption reports may be based on formulas or proration. Formulas specify the type and quantity of
materials required in the various products and are applied to finished production in order to calculate
the materials consumed. Chemical and pharmaceutical industries use such procedures, particularly
when more than one product is manufactured by a department. Frequently the cost of materials
used by a department must by prorated to different products on various estimated bases. This topic will
be discussed 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
Materials 24,500
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 - Blending department 29,140
Work in Process - Testing Departments 37,310
Work in Process - Terminal Department 32,400
Payroll 98,850

4. 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 an 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
Accounts Payable xxxxx
Accumulated Depreciation - Machinery xxxxx
Prepaid Insurance xxxxx
Materials xxxxx
Payroll xxxxx
The use of factory overhead control account requires a subsidiary ledger for factory overhead, with
departmental expense analysis sheet to which all expenses are posted. Service
department expenses are kept in like manner and distributed later to producing departments. At the
end of each period, departmental expense analysis sheets are totaled. These totals, which also include
distributed service department costs, represent factory overhead for each department.
By debiting the actual cost incurred or by using the predetermined overhead rates multiplied by the
respective actual activity base (e.g., direct labor hours) for each producing department, the entry
charging these expenses to work in process is as follows:
Work in Process - Blending department 28,200
Work in Process - Testing Departments 32,800
Work in Process - Terminal Department 19,800
Factory Overhead Control 80,800

5. Cost of Production Report (CPR):
Definition and Explanation of Cost of Production Report (CPR):
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 was 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 Starex 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.
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 Starex
Corporation, is shown on the following page. It illustrates the detailed computations needed to
complete a cost of production report.

6. The Starex Corporation
Blending Department (1st Dept.)
Cost of Production Report
For the Month of January, 2011
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 P24,500 P0.50
Labor 29,140 0.62
Factory Overhead (FOH) 28,200 0.60
------- -----
Total cost to be accounted for P81,840 P1.72
====== ====
Cost Accounted for as Follows:
Transferred to next department (45,000 × P1.72) P77,400
Work in process - ending inventory:
Materials (4,000 × P0.50) P2,000
Labor (4,000 × 1/2 × P0.60) 1,240
Factory Overhead (4,000 × 1/2 × P0.60) 1,200 4,440
------ ------
Total cost accounted for P81,840
=====
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 = P24,500 / 49,000 = P0.50 per unit
Labor = P29,140 / 47,000 = P0.62 per unit
Factory overhead = P28,200 / 47,000 = 0.60 per unit

7. 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.
Equivalent Production:
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 P1.72 (P0.50
for materials, P0.62 for labor, and P0.60 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 P24,500, labor cost of P29,140, and
factory overhead of P28,200. The materials cost of P24,500 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, P0.50
(P24,500 / 49,000). A similar computation determines the number of units actually and potentially
completed with the labor cost of P29,140 and the factory overhead of P28,200. 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 P29,140, a
unit cost for labor of P0.62 (P29,140 / 47,000) is computed. The unit cost for factory overhead is P0.60
(P28,200 / 47,000). The unit cost added by the department is P1.72, which is the sum of the materials,
labor, and overhead unit costs - P0.50, P0.62, and P0.60. This departmental unit cost figure cannot be
determined by dividing the total departmental cost of P81,840 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 P81,840. 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 P77,000 (45,000 ×
P1.72). The balance of the cost to be accounted for, P4,440 (P81,840 - P77,400), is the cost of work in
process.

8. 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 × P0.50 = P2,000). The costs of
labor and overhead in process is sufficient to complete only 50 percent or 2,000 of the units in process.
Therefore, the cost of labor in process is P1,240 (2,000 × P0.62) and factory overhead in process is
P1,200 (2,000 × P0.60).
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 P0.49
instead of P0.50; labor, P0.607 instead of 0.62; and factory overhead, P0.588 instead of P0.60. 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?
The Starex Corporation
Testing Department (2nd Dept.)
Cost of Production Report
For the Month of January, 2011
Quantity Schedule:
Units received from the preceding department 45,000
======
Units transferred to next department 40,000
Units still in process (1/2 labor and FOH) 3,000
Units lost in process 2,000 45,000
======

9. Cost Charged To the Department: Total unit
Cost Cost
Cost from preceding department:
Transferred in during the month P77,400 P1.72
Cost added by the department:
Labor 29,140 0.91
Factory Overhead (FOH) 28,200 0.80
------- -----
Total cost added P81,840 P1.71
Adjusted for lost units 0.08*
------- ------
Total cost to be accounted for P147,510 P3.51
====== ======
Cost Accounted for as Follows:
Transferred to next department (40,000 × P3.51) P140,400
Work in process - ending inventory:
Adjusted cost from preceding department [3,000 ×
(P1.72 + P0.08)] P5,400
Labor (4,000 × 1/2 × P0.60) 910
Factory Overhead (4,000 × 1/2 × P0.60) 800 7,110
------ ------
Total cost accounted for P147,510
======
Additional Computations
Equivalent Production:
Labor and factory overhead = 40,000 + 3,000 / 3 = 41,000 units
Unit Costs:
Labor = P37,310 / 41,000 = P0.91 per unit
Factory overhead = P32,800 / 41,000 = 0.80 per unit
*Adjustment for lost units:
Method No.1: P77,400 / 43,000 = P1.80; P1.80 - P1.72 = P0.08 per unit
Method No.2: 2,000 units × P1.72 = P3,440; P3,440 / 43,000 = P0.08 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

10. (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 differ 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, P0.91 for labor and P0.80 for factory overhead, were calculated
as follows:
Equivalent production of the testing department is 41,000 units [40,000 + P1/3 × (3,000)], the labor
unit cost is P0.91 (P37,310 / 41,000), and the factory overhead unit cost P0.80 (P32,800 / 41,000).
There is no materials unit cost, since no materials were added by the department. The department unit
cost is P1.71, the sum of the labor unit cost of P0.91 and the factory overhead unit cost of P0.80.
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 bythe department. The cost transferred in was
P77,400, 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 P70,110 of departmental labor and factory overhead (FOH), a total cost of
P147,510 to be accounted for by the department.
Units Lost in the Department Subsequent to the First:
The Blending Department (first department) unit cost was P1.72 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 P1.72 unit cost figure no longer applies and must be adjusted. The total
cost of the units transferred remains at P77,400, but 43,000 units must now absorb this total cost,
causing an increase of P0.08 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 two
figures is the additional cost due to the lost units. P1.80 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, P77,400. The old unit cost figure of P1.72 is subtracted from the revised unit
cost to arrive at the adjustment of P0.08.

11. 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 P3,440, which is the result of multiplying the 2,000 lost
units by their unit cost of P1.72. The P3,440 cost must now be absorbed by the remaining good units.
The additional cost to be picked up by each remaining good unit is P0.08 (3,440 / 43,000 units).
The lost unit cost adjustment must be entered in the cost of production report. TheP0.08 is entered on
the "Adjustment for lost units" line. The departmental unit cost of P1.71 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 P1.72 unadjusted units cost for work done in the preceding department, the P1.71
departmental unit cost, and the P0.08 adjustment for lost units are totaled in order to obtain the P3.51
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:
The Starex Corporation
Testing Department (2nd Dept.)
Cost of Production Report
For the Month of January, 2011
Quantity Schedule:
Units received from the preceding department 45,000
======
Units transferred to next department 40,000
Units still in process (1/2 labor and FOH) 3,000
Units lost in process 2,000 45,000
======
Cost Charged To the Department: Total unit
Cost Cost
Cost from preceding department:
Transferred in during the month P77,400 P1.72
-------- -------
Cost added by the department:
Labor 37,310 0.87
Factory Overhead (FOH) 32,800 0.76
------- -----
Total cost added P70,110 P1.63
------- ------
Total cost to be accounted for P147,510 P3.35
====== ======

12. Cost Accounted for as Follows:
Transferred to next department [(40,000 × P140,720
P3.51+P0.167)]*
Work in process - ending inventory:
From preceding department (3,000 × P1.72) P5,160
Labor (3,000 × 1/3 × P0.87) 870
Factory Overhead (3,000 × 1/2 × P0.76) 760 6,790
------ ------
Total cost accounted for P147,510
======
Additional Computations:
Equivalent Production:
Labor and factory overhead = 40,000 + 3,000 / 3 + 2,000 lost units = 41,000 units
Unit Costs:
Labor = P37,310 / 43,000 = P0.87 per unit
Factory overhead = P32,800 / 43,000 = P0.76 per unit
Lost unit cost = P3.35 × 2,000 units = P6,700 + 40,000 units P0.1675 per unit to be
added to P3.35 to make the transfer cost P3.5175.
*40,000 units P3.5175 = P140,700. To avoid a decimal discrepancy, the cost transferred
is computed: P147,510 - P6,790 = P140,720.
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)

13. The cost of production report would show the abnormal spoilage or loss as follows:
Transferred to next department (40,000 units × P3.35) ..............P134,020*
Transferred to factory overhead [40,000 units × P0.1675) or
(2,000 lost units × P3.35)].......................................................6,700
*40,000 units × P3.35 = P134,000. To avoid decimal discrepancy, the cost transferred is computed:
P147,510 - P6,790 ending inventory - P6,700 = P134,020
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 P147,510 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 P140,000 (40,000 × P3.51). 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 P1.72, were later adjusted by P0.08 (to P1.80) 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
P5,400 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 P910 (1,000 × P0.91) and factory overhead is process is P800 (1,000 × P0.80). The total cost
of the 3,000 units in process is P7,110 (P5,400 + P910 + P800). This cost, added to that transferred to
the Terminal Department (third or final department), P140,400, accounts for the total cost of P147,510
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:
The Starex Corporation
Terminal Department (3rd Dept.)
Cost of Production Report
For the Month of January, 2011
Quantity Schedule:
Units received from the preceding department 40,000
======
Units transferred to finished goods storeroom 35,000
Units still in process (1/4 labor and FOH) 4,000
Units lost in process 1,000 40,000
======
Cost Charged To the Department: Total unit
Cost Cost
Cost from preceding department:
Transferred in during the month P140,400 P3.51

14. Cost added by the department:
Labor 32,400 0.90
Factory Overhead (FOH) 19,800 0.55
------- -----
Total cost added P52,500 P1.45
Adjusted for lost units 0.09*
------- ------
Total cost to be accounted for P192,600 P5.05
====== ======
Cost Accounted for as Follows:
Transferred to finished goods storeroom (35,000 × P176,750
P5.05)
Work in process - ending inventory:
Adjusted cost from preceding department [4,000 ×
(P3.51 + P0.09)] P14,400
Labor (4,000 × 1/4 × P0.90) 900
Factory Overhead (4,000 × 1/4 × P0.55) 550 15,850
------ ------
Total cost accounted for P192,600
======
Additional Computations:
Equivalent Production:
Labor and factory overhead = 35,000 + 4,000 / 4 = 36,000 units
Unit Costs:
Labor = P32,400 / 36,000 = P0.90 per unit
Factory overhead = P19,800 / 36,000 = 0.55 per unit
*Adjustment for lost units:
Method No.1: P140,400 / 39,000 = P3.60; P3.60 - P3.51 = P0.09 per unit
Method No.2: 1,000 units × P3.51 = P3,510; P3,510 / 39,000 = P0.09 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 thefinished 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 Departmentcome 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 Starex Corpora have been discussed and computed
separately.

15. 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.
The Starex Corporation
Cost of Production Report
All Producing Departments
For the Month of January, 2011
Quantity Schedule: Blending Testing Terminal
1stDepartment 2ndDepartment 3rdDepartment
Units started in process 50,000
======
Units received from the 45,000 40,000
preceding department ====== ======
Units transferred to next department 45,000 40,000
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 Department: Total unit Total unit Total cost unit
Cost cost cost Cost Cost
Cost from preceding department:
Transferred in during the month P77,400 P1.72 P140,400 P3.51
-------- ----- -------- -----
Cost added by the department:
Materials P24,500 P.50
Labor 29,140 .62 P37,310 P.91 P32,400 P.90
Factory Overhead (FOH) 28,200 .60 32,800 .80 19,800 .55
------- ---- ----- ---- ------- ----
Total cost added P81,840 P1.72 P70,110 P1.71 P52,200 P1.45
Adjusted for lost units P.08 P.09
------- ---- ------- ----- -------- ----
Total cost to be accounted for P81,840 P1.72 P147,510 P3.51 P192,600 P5.05
====== === ====== === ====== ===
Cost Accounted for as Follows:
Transferred to next department P77,400 P140,400
Transferred to finished goods P176,750
storeroom (35,000 × P5.05)
Work in process - ending inventory:
Adjusted cost from
preceding department [4,000 × (P3.51 P5,400 P14,400
+ P0.09)]
Materials P2,000
Labor (4,000 × 1/4 × P0.90) 1,240 910 900
Factory Overhead (4,000 × 1/4 × 1,200 800 550
P0.55) ------ ------ ------
4,440 7,110 15,850
-------- ------ --------
Total cost accounted for P81,840 P147,510 P192,600
====== ====== ======