|Process Cost Systems
|Average Cost Procedure:
- Under the average cost procedure, the number of equivalent
units for each cost element equals the number of units transferred out
plus the number of equivalent units of that cost element in the ending
- The number of units in beginning inventory and the degree
of completion of the beginning inventory are not considered under the
average cost method.
- A process cost system is appropriate when the products
produced are homogeneous. The important point is that costs are not
traced to each job or batch; rather, costs
are accumulated by process or department and later allocated to
all units of the product worked on during the period.
- Costing a product being processed through several processes
presents no real problem. Total costs of production are assigned to
units produced and these costs attach to the product through the whole
cycle. Thus, if there are five processes for each product, each unit
would be assigned a portion of the cost accumulated in each department.
- A manufacturing company rarely encounters a situation where
there were no beginning work in process inventories and all units
started were completed during a given period.
- Thus, the calculation of cost per unit in the process
costing situation is necessary.
- To calculate the cost per unit, all units worked on during
a period must first be expressed in terms of equivalent units, that is,
as if each unit worked on was started and completed in the current
- The number of equivalent units for materials may be
different than the number of equivalent units for conversion costs
(labor and overhead) since not all production costs are incurred
- Once production is expressed in equivalent units, cost per
equivalent unit for transferred-in, materials, and conversion is simply
the total cost of production (for the current period and in beginning
inventory) divided by the number of equivalent units for each of these
- The total costs accumulated in a production department
during a given period (including amounts in beginning inventory) and
the computation of equivalent units is summarized on the production
cost report. This report is the key document in a process cost system.
- This report shows units and costs charged to a department
and how these units and costs were accounted for.
- The key figure in this report is the average unit cost of processing in a
center because it provides a degree of control over operations.
- Steps in preparing this report include:
Unit costs can be computed on an average, FIFO, or LIFO
- trace actual units into and out of department and convert
into equivalent units
- determine the total costs for materials and for
- compute unit costs for materials and for conversion;
- distribute the total costs between units completed and
transferred out and ending inventory.
Spoilage is the loss of goods during production which may
be normal or abnormal.
The common costs of a joint process are allocated to joint
products commonly on the basis of physical volume or relative sales
- Under the average cost method, unit costs are computed by
dividing costs charged to the department, including beginning
inventory, by equivalent units, which are equal to units transferred
out plus equivalent units in ending inventory.