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 inventory.
  • The number of units in beginning inventory and the degree of completion of the beginning inventory are not considered under the average cost method.
Process Costing: 
  • 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.
Equivalent Units: 
  • 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 period.
  • 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 simultaneously.
  • 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 cost elements.
  • 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.
The Production Cost Report: 
  • 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:
    1. trace actual units into and out of department and convert into equivalent units
    2. determine the total costs for materials and for conversion;
    3. <>
    4. compute unit costs for materials and for conversion; and
    5. distribute the total costs between units completed and transferred out and ending inventory.
  • Unit costs can be computed on an average, FIFO, or LIFO basis.
    • 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.
  • 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 value.


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this page is maintained by Reed Fisher
last updated January 15, 2011