13/08/2008 20:40

# Process Costing System - Exercises and Problems:

### Learning Objective:

• Prepare the format of cost of production report.
• Calculate equivalent units of production.
• What is the treatment of normal and abnormal loss in process costing system?
• How the timing of normal and abnormal loss is considered in a cost of production report?

## 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.

## 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:

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## Contact

Esmeldo Maputo +258 848 220 802
+258 825 495 107
 Units Dollars Received from department A 12,000 \$84,000