THE CPA BOARD EXAMS OUTLINES by John Mahatma Agripa, CPA
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ADVANCED FINANCIAL ACCOUNTING AND REPORTING
PROCESS
COSTING
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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 XX DEDUCT: Ending WIP XX DEDUCT: Normal loss/spoilage XX DEDUCT: Abnormal loss/spoilage XX Started and Completed Units (FIFO) XX ADD: Beginning WIP XX Completed and Transferred Units (average) XX
o Compute for the equivalent units of production, one for materials, conversion costs, and transferred in costs (for
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subsequent departments only), using the following formats for both methods. Every xx below are in units
(FIFO METHOD) Materials Conversion Transferred In Beginning WIP XX XX XX ADD: Started and Completed XX XX XX ADD: Ending WIP XX XX XX ADD: Normal loss XX XX XX ADD: Abnormal loss XX XX XX Equivalent Units of Production XX XX XX
(AVERAGE) Materials Conversion Transferred In
Completed/Transferred XX XX XX
ADD: Ending WIP XX XX XX ADD: Normal loss XX XX XX ADD: Abnormal loss XX XX XX Equivalent Units of Production 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
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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…) XX DIVIDE: EUP of materials, conversion… XX Cost per Equivalent Unit (FIFO) 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 XX DIVIDE: EUP of transferred in costs XX Cost per Equivalent Unit XX
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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 Transferred In Beginning WIP XX XX XX ADD: Beginning costs XX XX XX ADD: Started and completed XX XX XX ADD: Normal loss XX XX XX Total costs XX XX XX
(AVERAGE) Materials Conversion Transferred In
Completed/Transferred XX XX XX
ADD: Normal loss XX XX XX Total costs 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
