THE

CPA
BOARD EXAMS
OUTLINES
by John Mahatma Agripa, CPA

#4

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

PROCESS
COSTING
Based on lectures by Rodiel C. Ferrer, CPA, Ph.D. (CPAR)

DEFINITIONS

The process costing system accumulates manufacturing costs by

department, used for products of homogenous nature pass
through departments until finished. Unit costs are computed per
department at the end of the period while goods are processed.
Several work-in-process accounts are maintained, one per
department
By comparison, job-order costing cumulates costs upon finishing
of the product (heterogeneous in nature), and only one WIP
account is maintained. It is generally more costly to use than
process costing
Process costing involves preparation of cost of production report
per department, and computation of equivalent units of production
(EUP) measure of the work done during the month, expressed at
fully complete units

EQUIVALENT UNITS OF PRODUCTION:

FIFO/AVERAGE METHODS

If silent, computation of EUP follows the FIFO method. The

following are procedures for computing EUP and unit costs under
both methods:
o Compute for the started and completed units (FIFO) and
completed and transferred units (average) for the period using
the following formula (to be accounted for):
Units started
DEDUCT: Ending WIP
DEDUCT: Normal loss/spoilage
DEDUCT: Abnormal loss/spoilage
Started and Completed Units (FIFO)
ADD: Beginning WIP
Completed and Transferred Units (average)

XX
XX
XX
XX
XX
XX
XX

Compute for the equivalent units of production, one for

materials, conversion costs, and transferred in costs (for

subsequent departments only), using the following formats for

both methods. Every xx below are in units
(FIFO METHOD)
Materials Conversion
Beginning WIP
XX
XX
ADD: Started and Completed
XX
XX
ADD: Ending WIP
XX
XX
ADD: Normal loss
XX
XX
ADD: Abnormal loss
XX
XX
Equivalent Units of Production XX
XX

Transferred In
XX
XX
XX
XX
XX
XX

(AVERAGE)
Materials Conversion
Completed/Transferred
XX
XX
ADD: Ending WIP
XX
XX
ADD: Normal loss
XX
XX
ADD: Abnormal loss
XX
XX
Equivalent Units of Production XX
XX

Transferred In
XX
XX
XX
XX
XX

Note that the units placed in the tables are based on the
previous formula
Also, the beginning and ending WIP units above follow certain
rules. For the materials column above, the following must be
remembered:
Usually (and if silent), all materials are added to the
product at the start of the process. In such case,
beginning WIP would be zero, and ending WIP would be
at 100% of the units in the to be accounted for formula
If the materials are added at the end of the process,
beginning WIP would be at 100%, and ending WIP would
be zero
If 75% of the materials are added at the start, then
beginning WIP would be at 25%, and ending WIP at 75%
For the conversion column, the following are noted:
The units placed are based on the percentage of work
performed during the period. Beginning WIP shall be at
the percentage still incomplete, while ending WIP shall
be at the percentage complete
Thus, if beginning WIP is 60% incomplete, it will be at
60% of the beginning WIP units in the to be accounted
for formula (or if it is 60% complete, it will be at 40%). If

ending WIP is 80% complete, it will be at 80% (or if it is

80% incomplete, it will be at 20%)
Normal and abnormal losses also follow certain rules:
Losses in process costing are accounted for using either
the discrete method or continuous method. If silent, the
continuous method is used
In the continuous method, normal losses are always zero
and abnormal losses at 100% for both columns. Here,
the products are inspected throughout production
Under the discrete method, normal losses and abnormal
losses are at the percentage of ending WIP for materials.
For conversion, the two are at the percentage of
completion when the inspection is performed
All the other items are at 100% of the units in the to be
accounted for formula

COMPUTATION OF COSTS

After EUP is determined for materials and conversion costs, cost

per equivalent unit is next computed for each one, as follows:
Current costs (each for materials, conversion)
DIVIDE: EUP of materials, conversion
Cost per Equivalent Unit (FIFO)

XX
XX
XX

Current costs (each for materials, conversion)

XX
ADD: Beginning costs (each for materials, conversion) XX
XX
DIVIDE: EUP of materials, conversion
XX
Cost per Equivalent Unit (average)
XX

For both methods, the cost per equivalent unit of transferred in

costs is computed as follows:
Transferred in costs
DIVIDE: EUP of transferred in costs
Cost per Equivalent Unit

XX
XX
XX

 Thereafter, the total costs transferred/cost of goods manufactured

for the department is computed, which will be the transferred in
cost for the next department
(FIFO METHOD)
Materials Conversion
Beginning WIP
XX
XX
ADD: Beginning costs
XX
XX
ADD: Started and completed
XX
XX
ADD: Normal loss
XX
XX
Total costs
XX
XX

Transferred In
XX
XX
XX
XX
XX

(AVERAGE)
Completed/Transferred
ADD: Normal loss
Total costs

Transferred In
XX
XX
XX

Materials Conversion
XX
XX
XX
XX
XX
XX

Each xx in the above table (except for the beginning costs in FIFO,
which is a given peso amount) is obtained by multiplying cost per
equivalent unit (respectively for materials, conversion and
transferred in) with the corresponding item in that column. For
example, to find normal loss for materials, multiply the cost/EUP
of materials with the EUP of normal loss in the materials column.
The total costs are added together for the total costs transferred
If the entity is using discrete method, there is a possibility that the
percentage of completion of ending EWIP exceeds the point of
inspection (the percentage of completion at which inspection of
products is to be made). In such case, the cost of normal losses
are allocated to ending WIP and started/completed (FIFO) or
completed/transferred (average) using their equivalent units of
production