Addition of Materials - Increase in Unit Cost:

Learning Objective:

1. What is the effect on the calculation in the preparation of a cost of production report when materials are added in a department subsequent to the first and as a result unit cost is increased but number of units do not increase?
2. In the simplest case, added materials, such as parts of an automobile, do not increase the number of units but increase total cost and unit costs. A materials unit cost must be computed for the department, and a materials cost must be included in the work in process inventory.
   
   
   

   Example:

   The cost of production report of the terminal department of Clonex Corporation is used to illustrate the effect of the addition of materials on total and unit costs of department.
   
   
   
   

   1. Materials Not Added:

   The Clonex Corporation
   Terminal Department (3rd Dept.)
   Cost of Production Report
   For the Month of January, 19        

   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 Cost	unit Cost
   Cost from preceding department:
   Transferred in during the month	$140,400	$3.51
   Cost added by the department:
   Labor	32,400	0.90
   Factory Overhead (FOH)	19,800 -------	0.55 -----
   Total cost added	$52,500	$1.45
   Adjusted for lost units		0.09*
   	-------	------
   Total cost to be accounted for	$192,600	$5.05
   	======	======
   Cost Accounted for as Follows:
   Transferred to finished goods storeroom (35,000 × $5.05)		$176,750
   Work in process - ending inventory:
   Adjusted cost from preceding department [4,000 × ($3.51 + $0.09)]	$14,400
   Labor (4,000 × 1/4 × $0.90)	900
   Factory Overhead (4,000 × 1/4 × $0.55)	550 ------	15,850 ------
   Total cost accounted for		$192,600
   		======
   Additional Computations: Equivalent Production: Labor and factory overhead = 35,000 + 4,000 / 4 = 36,000 units Unit Costs: Labor = $32,400 / 36,000 = $0.90 per unit Factory overhead = $19,800 / 36,000 = 0.55 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

   2. Materials Added in Terminal Department

   Assume that additional materials costing $17,020 are placed in process and charged to the terminal department. Assume further that the materials in work in process are sufficient to complete 2,000 of the 4,000 units; that is, units are 50 percent complete as to materials cost. The effect of the additional materials cost is shown in the cost of production report below:
   
   
   
   
   The Clonex Corporation
   Terminal Department (3rd Dept.)
   Cost of Production Report
   For the Month of January, 19        

   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 Cost	unit Cost
   Cost from preceding department:
   Transferred in during the month	$140,400	$3.51
   Cost added by the department:
   Materials	$17,020	$0.46
   Labor	32,400	0.90
   Factory Overhead (FOH)	19,800 -------	0.55 -----
   Total cost added	$69,220	$1.91
   Adjusted for lost units		0.09*
   	-------	------
   Total cost to be accounted for	$209,620	$5.51
   	======	======
   Cost Accounted for as Follows:
   Transferred to finished goods storeroom (35,000 × $5.51)		$192,850
   Work in process - ending inventory:
   Adjusted cost from preceding department (4,000 × $3.60)	$14,400
   Materials (4,000 × 1/2 × $0.46)	920
   Labor (4,000 × 1/4 × $0.90)	900
   Factory Overhead (4,000 × 1/4 × $0.55)	550 ------	16,770 ------
   Total cost accounted for		$209,620
   		======
   Additional Computations: Equivalent Production: materials = 35,000 + 4,000 / 2 = 37,000 units Labor and factory overhead = 35,000 + 4,000 / 4 = 36,000 units Unit Costs: Materials = $17,020 / 37,000 = $0.46 Labor = $32,400 / 36,000 = $0.90 per unit Factory overhead = $19,800 / 36,000 = 0.55 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

   The only difference in the two cost of production reports (first, where materials are not added in terminal department and second where additional materials are added in terminal department) are the $17,020 materials cost charged to the department and the $.46 materials unit cost ($17,020 / 37,000). The additional materials cost is also reflected in the goods, and in the ending work in process inventory.
   
   
   
   

Process Costing System Addition of Materials, Average and FIFO Costing:

In numerous industries, all materials needed for the product are put in process in the first department. However, additional materials might be required in subsequent  departments in order to complete the units. The addition of materials has two possible effects on units and costs in process:
In numerous industries, all materials needed for the product are put in process in the first department. However, additional materials might be required in subsequent  departments in order to complete the units. The addition of materials has two possible effects on units and costs in process:
greater number.
Increase in Unit Cost Due to Addition of Materials:
In the simplest case, added materials, such as parts of an automobile, do not increase the number of units but increase total cost and unit costs. A materials unit cost must be computed for the department, and a materials cost must be included in the work in process inventory. 
Addition of Materials - Increase in units and Change is Unit Cost:
When additional materials result in additional units, different computations are necessary. The greater number of units causes a decrease in unit cost which necessitates an adjustment of the preceding department's unit cost, since the increased number of units will absorb the same total cost transferred from the preceding department. 

Beginning Work in Process Inventories:

The ending inventories of one period become the beginning inventories of the next period. Several methods are used in accounting for these beginning inventory costs. Two methods are illustrated here:

• Beginning Work in Process Inventories - Average Costing Method: Beginning inventory costs are added to the costs of the new period. 
• Cost of Production Report FIFO:
  Beginning inventory costs are kept separate and the new costs necessary to complete the work in process inventory computed 

Average Costing Method Versus FIFO Costing Method - Process Costing:
Both average costing and FIFO costing have certain advantages. It would be arbitrary to state that one method is either simpler or more accurate than the other. The selection of either method depends entirely upon management's opinion regarding the most appropriate and practical cost determination procedures. 
Difficulties Encountered in Process Costing Procedure:
Certain difficulties likely to be encountered in actual practice should be mentioned with regard to process cost accounting procedures. 
Discussion Questions and Answers:
Find answers of various questions about process costing system. 

Similarities and Differences between Job Order and Process Costing System:

Similarities between job order and process costing systems can be summarized as follows.

1. Both systems have the same basic purposes-to assign material, labor, and overhead costs to products and to provide mechanism for computing unit product cost.
2. Both systems use the same basic manufacturing accountants, including manufacturing overhead, Raw materials, Work in process, and Finished Good.
3. The flow of costs through the manufacturing accounts is basically the same in both systems. 

Operation Costing /Hybrid Costing System:

Operation costing is a hybrid costing system that employs aspects of both job order and process costing. 

Process Costing System - Case Study:

Case A. Accounting for Spoiled Units:

The House Hold Aids Company assembles clip clothespins in three sections, and uses process costing. Under normal operating conditions, each section has a spoilage rate of 2%. However, spoilage can go as high as 5% and is usually discovered when a faulty pin enters process or on final completion by a section.
The spring mechanism is the only material which can be saved from a spoiled unit. The production supervisor assigns a worker once or twice a week to remove the springs from spoiled units. The salvaged springs are placed in bins at the assembly tables in section No1 to be used again. No accounting entry is made of this salvage operation.
In the past, the controller has made no attempt to account for spoilage separately. Lost unit costs have been absorbed by the units transferred out of the section and those remaining in the process. However, because spoilage is increasing, a different method is needed.

Solution:

The spoiled work should be broken into normal and abnormal spoilage. The cost of normal spoilage should be absorbed by good completed units. All materials salvaged should be assigned a value and placed in materials inventory. Sectional materials costs should be reduced by the value assigned to salvaged materials.
Abnormal spoilage should be charged to factory overhead account. The cost to be included in this account should be the amount accumulated against a clothespin up to the point of being scraped, and the total loss in scraped clothespins should be shown in the cost of production report of the department responsible for the loss.

Process Costing System - Exercises and Problems:

Learning Objective:

1. Prepare the format of cost of production report.
2. Calculate equivalent units of production.
3. What is the treatment of normal and abnormal loss in process costing system?
4. How the timing of normal and abnormal loss is considered in a cost of production report?
5. Cost of Production Report
6. Cost of Production Report; Normal Loss
7. Cost of Production Report
8. Equivalent Units of Production
9. Costing of Units Transferred Out; Abnormal Loss
10. Cost of Production Report; Normal and Abnormal Loss
11. Cost of Production Report; Spoiled Units - Normal and Abnormal
12. Computation of Equivalent Production

1. Cost of Production Report:

A company's Department 2 costs for June were:

Cost from Department 1	$16320
Cost added in Department 2:
Materials	43,415
Labor	56,100
Factory overhead (FOH)	58,575

The quantity schedule shows 12,000 units were received during the month from Department 1; 7,000 units were transferred to finished goods; and 5,000 units in process at the end of June were 50% complete as to materials cost and 25% complete as to conversion cost.
Required: Prepare Cost of production report.
 

Solution:

Department 2
Cost of Production Report
For the Month of June, 19___

Quantity Schedule:
Units received from department 1		12,000
Units transferred to finished goods	7,000
Units still in process (50% materials, 25% conversion)	5,000
Cost Charged to the Department:	Total cost	Unit cost
Cost from preceding department:
Transferred in during the month (12,000 units)	$16,320	$1.36
	-------	------
Cost added by department:
Materials	$43,415	$4.57
Labor	56,100	6.80
Factory overhead	58,575	7.10
	-------	-------
Total cost added	$158,090	$18.47
	--------	-------
Total cost to be accounted for	$174,410	$19.83
	=======	=====
Cost Accounted for as Follows:
Transferred to finished goods (7,000 × $19.83)		$138,810
Work in process ending inventory:
Cost from preceding department	$6,800
Materials (5,000 × 50% × $4.75)	11,425
Labor (5,000 × 25% × $6.80)	8,500
Factory overhead (5,000 × 25% × $7.10)	8,875
	--------	35,600
		--------
Total cost accounted for		$174,410
		=======

Additional computations:

Equivalent production:

Materials = 7,000 + (5,000 × 50%) = 9,500 units

Labor and factory overhead = 7,000 + (5,000 × 25%) = 8,250 units

---

2. Cost of Production Report - Normal Loss:

For December, the Production Control Department of Carola Chemical, Inc., reported the following production data for Department 2:
 

Transferred in from Department 1	55,000 liters
Transferred out to Department 3	39,500liters
In process at the end of December (with 1/2 labor and factory overhead)	10,500 liters

All materials were put into process in Department 1. The cost department collected following figures for department 2:
 

Unit cost for units transferred in from department 1	$1.80
Labor cost in department 2	$27,520
Applied factory overhead	$15480

Required: A cost of production report for department 2 for December.
 

Solution:

Carola Chemical Inc.
Department 2
Cost of Production Report
For the Month of December. 19____
 

Quantity Schedule:
Units received from preceding department		55,000
		======
Units transferred to next department	39,500
Units still in process (1/3 labor and overhead)	10,500
Units lost in process	5,000	55,000
	-------	======
Cost Charged to the Department:	Total Cost	Unit Cost
Cost from preceding department:
Transferred in during the month	$99,000	$1.80
	--------	------
Cost added by the department:
Labor [39,500 + (1/3 × 10,500) = 43,000 units]	$27,520	$0.64
Factory overhead	$15,480	$0.36
	--------	------
Total cost added	$43,000	$1.00
Adjustment for lost units		$0.18*
	--------	------
Total cost to be accounted for	$142,000	$2.98
	=======	=====
Cost Accounted for as Follows:
Transferred to next department (39,500 × $2.98)		$117,710
Work in process - ending inventory:
Cost from preceding department (10,500 × $1.98)	$20,790
Labor (10,500 × 1/3 × $0.64)	2,240
Factory overhead (10,500 × 1/3 × $0.36)	1,260	24,290
	--------	-------
Total cost accounted for		$142,000
		======

*Adjustment for lost units:

Formula for Calculation:

(Cost from preceding departments / Units from preceding departments - Lost units) - Unit cost from preceding department

(99,000 / 50,000) - 1.80 = $0.18

OR

(5,000 × 1.80) = $9,000 / 50,000 = $0.18
 

---

3. Cost of Production Report:

Brooks Inc. uses process costing. The costs for Department 2 for April were:
 

Cost from preceding department		$20,000
Cost added by department:
Materials	$21,816
Labor	7,776
Factory overhead (FOH)	4,104	33,696
	--------
The following information was obtained from the department's quantity schedule:
Units received	5,000
Units transferred out	4,000
Units still in process	1,000

The degree of completion of the work in process as to costs originating in department 2 was: 50% of units were 40% complete; 20% were 30% complete; and the balance were 20% complete.
Required: The cost of production report for Department 2 for April.

Solution:

Brooks Inc.
Department 2
Cost of Production Report
For the month of April, 19|____
 

Quantity Schedule:
Units received from preceding department		5,000
		======
Units transferred to next department	4,000
Units still in process (32 labor and overhead)	1,000	5,000
	-------	======
Cost Charged to the Department:	Total Cost	Unit Cost
Cost from preceding department:
Transferred in during the month	$20,000	$4.00
	--------	------
Cost added by the department:
Materials	$21,816	$5.05
Labor [39,500 + (1/3 × 10,500) = 43,000 units]	$7,776	$1.80
Factory overhead	$4,104	$0.95
	--------	------
Total cost added	$33,696	$7.80
	--------	------
Total cost to be accounted for	$53,696	$11.80
	=======	=====
Cost Accounted for as Follows:
Transferred to next department (4,000 × $11.80)		$47,200
Work in process - ending inventory:
Cost from preceding department (1000 × $4.00)	$4,000
Materials (1,000 × 0.32 × $5.05)	1,616
Labor (1,000 × 0.32 × $1.80)	576
Factory overhead (10,500 × 0.32 × $0.95)	304	6,496
	--------	-------
Total cost accounted for		$53,696
		======

Additional Computations

Equivalent units of production:

Materials, labor, and factory overhead = 4,000 + (1,000  32%) = 4,320 units
 

	Units in Process	Equivalent
	50% were 40% complete	0.20
	20% were 30% complete	0.06
	30% were 20% complete	0.06
		--------
	Total	0.32
		=====
	OR
	50% of 1,000 units × 40% = 200 units
	20% of 1,000 units × 30% = 60 units
	30% of 1,000 units × 20% = 60 units
	Total                   =320 units

---

4. Equivalent Units of Production:

During April, 20,000 units were transferred in from department A at a cost of $39,000. Materials cost of $6,500 and conversion cost of $9,000 were added in department B. On April 30, department B had 5,000 units of work in process 60% complete as to conversion as costs. Materials are added in the beginning of the process in department B.
Required:

1. Equivalent units of production calculation.
2. The cost per equivalent unit for conversion costs.
    

Solution:

(1) Quantity Schedule:
Units received from preceding department A			20,000
			======
Units transferred to finished goods		15,000
Units still in process		5,000	20,000
		--------	======
Equivalent Production:
	Transferred in from Department A	Materials	Conversion
Transferred to finished goods	15,000	15,000	15,000
Ending inventory	5,000	5,000	3,000
	-------	--------	-------
	20,000	20,000	20,000
	======	======	======

(2) cost per equivalent unit for conversion costs:
      $9,000 / 18,000 = $0.50 per unit
 

---

5. Costing of Units Transferred Out; Abnormal Loss

During February, the Assembly department received 60,000 units from Cutting department at a unit cost of $3.54. Costs added in the Assembly department were: materials, $41,650; labor, $101,700; and factory overhead. $56,500. There was no beginning inventory. Of the 60,000 units received, 50,000 were transferred out; 9,000 units were in process at the end of the month (all materials, 2/3 converted); 1,000 lost units were 1/2 complete as to materials and conversion costs. The entire loss is considered abnormal and is to be charged to factory overhead.
Required: Cost of production report.
 

Solution:

Assembly Department
Cost of Production Report
For the month of April, 19|____
 

Quantity Schedule:
Units received from preceding department		60,000
		======
Units transferred to next department	50,000
Units still in process (All materials - 2/3 labor and overhead)	9,000
Units lost in process (Abnormal loss - 1/2 materials, labor, and overhead)	1,000	60,000
	-------	======
Cost Charged to the Department:	Total Cost	Unit Cost
Cost from preceding department:
Transferred in during the month (60,000 units)	$212,400	$3.54
	--------	------
Cost added by the department:
Materials	$41,650	$1.70
Labor	$101,700	$1.80
Factory overhead	$56,500	$1.00
	--------	------
Total cost added	$199,850	$3.50
	--------	------
Total cost to be accounted for	$412,250	$7.04
	=======	=====
Cost Accounted for as Follows:
Transferred to next department (50,000 × $7.04)		$352,000
Transferred to Factory Overhead:
From preceding department (1,000 × $3.54)	$3,540
Materials (1,000 × 1/2 × $0.70)	350
Labor (1,000 × 1/2 × $1.80)	900
Factory overhead (1,000 × 1/2 × $1.00)	500	5,290
	--------
Work in process - ending inventory:
Cost from preceding department (9000 × $3.54)	$31,860
Materials (9,000 × 0.70)	6,300
Labor (9,000 × 2/3 × 1.80)	10,800
Factory overhead (9,000 × 2/3 × 1.00)	6,000	54,960
	--------	-------
Total cost accounted for		$412,250
		======

Additional Computations

Equivalent Production:

Materials = 50,000 + 9,000 + 1,000/2 lost units = 59,500 units

Labor and factory overhead = 50,000 + (9,000 × 2/3) + 1,000/2 lost units = 56,500

Unit Cost:

Materials = $41,650 / 59,500 = $0.70 per unit

Labor = $101,700 / 56,500 = $1.80 per unit

Factory overhead = $56,500 / 56,500 = $1.00 per unit
 

---

6. Cost of Production Report; Normal and Abnormal Loss:

The Sterling Company uses process costing. In department B, conversion costs are incurred uniformly throughout the process. Materials are added at the end of the process, following inspection. Normal spoilage is expected to be 5% of good output.
The following information related to department B for January:
 

	Units	Dollars
Received from department A	12,000	$84,000
Transferred to finished goods	9,000
Ending inventory (70% complete)	2,000
Cost incurred:
Materials		18,000
Labor and factory overhead		45,600

Required: Cost of Production report for department B.

Solution:

The Sterling Company
Department B
Cost of Production Report
For the month of January

Quantity Schedule:
Units received from preceding department		12,000
		======
Units transferred to finished goods	9,000
Units still in process	2,000
Units lost in process (Normal Spoilage  9000 × 5%)	450
Units lost in process (Abnormal Spoilage  1,000 - 450)	550	12,000
	-------	======
Cost Charged to the Department:	Total Cost	Unit Cost
Cost from preceding department:
Transferred in during the month (12,000 units)	$84,000	$7.00
	--------	------
Cost added by the department:
Materials	$18,000	$2.00
Labor and factory 0verhead	$45,600	$4.00
	--------	------
Total cost added	$63,600	$6.00
	--------	------
Total cost to be accounted for	$147,600	$13.00
	=======	=====
Cost Accounted for as Follows:
Transferred to finished goods [(9,000 × $13) + (450* × $11)]		$121,950
Transferred to Factory Overhead (550** × $11)		6,050
Work in process - ending inventory:
Cost from preceding department (2000 × $7.00)	$14,000
Labor and factory overhead (2,000 × 70% × $4)	5,600	19,600
	--------	-------
Total cost accounted for		$147,600
		======

*Normal spoilage
**Abnormal spoilage

Additional Computations

Equivalent Production:

Materials = 9,000 units

Labor and factory overhead = 9,000 + (2,000 × 70%) + 450 + 550

Unit Costs:

Materials = $18,000 / 9,000 = $2.00 per unit

Labor and factory overhead = $45,600 / 11,400 = $4.00 per unit
 

---

7. Cost of Production Report; Spoiled Units - Normal and Abnormal:

Hettinger Inc., uses process costing system in its two producing departments. In department 2, inspection takes place at the 96% stage of completion, after which materials are added to good units. A spoilage rate of 3% of good  output is considered normal.
Department 2 records for April shows:
 

Received from department 1	30,000 units
cost	$135,000
Materials	$12,500
Conversion cost (labor + factory overhead)	$139,340
Transferred to finished goods	25,000 units
Ending work in process inventory (50% complete)	4,200 units

Required: Cost of production report.

Solution:

The Sterling Company
Department B
Cost of Production Report
For the month of January

Quantity Schedule:
Units received from preceding department		30,000
		======
Units transferred to finished goods	25,000
Units still in process (50% complete)	4,200
Units lost in process (Normal Spoilage  25,000 × 3%)	750
Units lost in process (Abnormal Spoilage  800 - 750)	50	30,000
	-------	======
Cost Charged to the Department:	Total Cost	Unit Cost
Cost from preceding department:
Transferred in during the month (30,000 units)	$135,000	$4.50
	--------	------
Cost added by the department:
Materials	$12,500	$0.50
Labor and factory 0verhead (Conversion cost)	$139,340	$5.00
	--------	------
Total cost added	$151,840	$5.50
	--------	------
Total cost to be accounted for	$286,840	$10.00
	=======	=====
Cost Accounted for as Follows:
Transferred to finished goods:
Cost of completed units (25,000 × $10.00)	$250,000
Normal spoilage - all related to units transferred to finished goods:
Cost from preceding department (750 × $4.50)	3,375
Conversion cost (720 × $5.00)	3,600	$256,975
	--------
Transferred to Factory Overhead - Abnormal spoilage:
Cost from preceding department (50 × $4.50)	$225
Conversion cost (48 × $5.00)	240	465
	--------
Work in process - ending inventory:
Cost from preceding department (4,200 × $4.50)	$18,900
Labor and factory overhead (2,100 × $5)	10,500	29,400
	--------	-------
Total cost accounted for		$286,840
		======

Additional Computations

Equivalent Production:

Materials = 25,000 units

Labor and factory overhead = 25,000 + (42,00 × 50%) + (750 × 96%)  + (50 ×  96%)

= 27,888 units

Unit Costs:

Materials = $12,500 / 25,000 = $.50 per unit

Labor and factory overhead = $139,340 / 27,888 = $5.00 per unit
 

---

8.Computation of Equivalent Production:

Pietra-Gonatas, Inc. uses process costing to account for the costs of its only product, product D. Production takes place in three departments; Fabrication, Assembly, and Packaging.
At the end of the fiscal year, June 30, the following inventory of product D is on hand:

• No unused raw materials or packaging materials.
• Fabrication department: 300 units, 1/3 complete as to raw materials and 1/2 complete as to direct labor
• Assembly department: 1,000 units, 2/5 complete as to direct labor.
• Packaging department: 100 units, 3/4 complete as to packaging materials and 1/4 complete as to direct labor.
• Shipping for finished goods are: 400 units.

Required:

1. The number of equivalent units of raw materials in all inventories at June 30.
2. The number of equivalent units of the fabrication department's direct labor in all inventories at June 30
3. The number of equivalent units of packaging materials in all inventories at June 30.

Solution:

(1)
Equivalent units of raw materials in all inventories, June 30, 19__
Fabrication department (300 × 1/3)	100
Assembly department	1,000
Packaging department	100
Shipping area	400
	--------
	1,600
	=======
(2)
Equivalent units of Fabrication department's direct labor in all inventories, Jun 30, 19___
Fabrication department (300 × 1/3)	150
Assembly department	1,000
Packaging department	100
Shipping area	400
	---------
	1,650
	=======
(3)
Equivalent units of packaging materials in all inventories, June 30, 19___
Packaging department (300 × 4/3)	75
Shipping area	400
	-------
	475
	======

1.