Operational process system is characterized by a large number of homogeneous products passing

through a series of processes, where each process is responsible for one or more operations that bring a
product one step closer to completion.

Process is a series of activities (operations) that are linked to perform a specific objective.

Cost Flows for a process-costing system are basically similar to those of a job-order costing system.
There are two key differences:

(a) A job-order costing system accumulates production costs by job, and a process-costing system
accumulates production by process.
(b) A job-order costing system uses a single work-in-process (WIP) account, while the process-
costing system has a WIP account for every process

Transferred-in cost is a cost transferred from a prior process to a subsequent process.

Although a process-costing system has more WIP accounts than a job-order costing system, it is a
simpler and less expensive system to operate. In a process-costing system, there are no individual jobs,
no job-order cost sheets, and no need to track materials to individual jobs.

In process-costing systems, costs are accumulated by department for a period of time.

Production report is the document that:

 Summarizes the manufacturing activity that takes place in a process department for a given
period of time.
 Serves as a source document for transferring costs from the WIP account of a prior department
to the WIP account of a subsequent department.
 In the department that handles the final stage, it serves as a source document for transferring
costs from the WIP account to the finished goods account.
 Provides information about the physical units processed in a department and also about the
manufacturing costs associated with them.

Two division of production report:

1. Unit Information Section

Subdivisions:
a.) Units to account for
b.) Units accounted for
2. Cost Information System
Subdivisions:
a.) Costs to account for
b.) Costs accounted for
In summary, a production report traces the flow of units through a department, identifies the costs
charged to the department, shows the computation of unit costs, and reveals the disposition of the
department’s costs for the reporting period.

Basic features of a Process-costing system

1. Homogeneous units pass through a series of similar processes.

2. Each unit in each process receives a similar dose of manufacturing costs
3. Manufacturing costs are accumulated by a process for a given period of time.
4. There is a work-in-process account for each process
5. Manufacturing cost flows and the associated journal entries are generally similar to job-order
costing.
6. The departmental production report is the key document for tracking manufacturing activity
and costs.
7. Unit costs are computed by dividing the departmental costs of the period by the output of the
period.

Unit Costs is a key input to the cost of production report. Calculated as follows:

1. First, measure the manufacturing costs for a process department for a given period of time.
2. Second, measure the output of the process department for the same period of time.
3. Finally, the unit cost for a process is computed by dividing the costs of the period by the output
of the period.

Process costing with no WIP inventories – Services

Information: Warin Wecare specializes in 3D pregnancy sonograms. During the month of April, Warin
had the following cost and output information:

Direct Materials $ 4,000

Direct Labor $ 8,000
Overhead $16,000
No. of sonograms 400

1. Calculate the cost per sonogram for April.

Unit cost = Cost of the period/Output of the period
Unit cost = $ 28,000/400
=$ 70 per sonogram
2. Calculate the cost of services sold for April.
Cost of services sold = Unit cost x Output produced
Cost of services sold = $ 70 x 400
= $ 28,000
The Role of Activity-Based Costing

The role of ABC for both cellular and independent process manufacturing is to assign overhead shared
by processes or cells to the individual processes and cells. Activity rates are used to assign overhead to
individual processes, and this overhead is assigned to process output using the usual approaches.

Process costing with EWIP Inventory – Physical Flow and Equivalent Units

Two steps that make up the Unit Information Section of the Production report:

a.) Preparation of a physical flow schedule

b.) Calculation of the period’s equivalent units

Information: Richardson Testing Center had the following data for CBC production for January (output is
measured in number of tests):

Units, BWIP -
Units Started 36,000
Units completed 30,000
Units, EWIP (25% 6,000
Complete)

1. Prepare a physical flow of schedule

Units started and completed = Units completed – Units, BWIP
= 30,000 – 0
= 30,000
Units Started = Units, EWIP + Units started and completed
= 6,000 + 30,000
= 36,000

Physical flow of schedule:

Units to account for:

Units in BWIP 0
Units Started 36,000
Total 36,000
Units accounted for:
Units Completed:
(From BWIP +
Started &
Completed) (0 +
30,000) 30,000
Units in EWIP 6,000
 Total 36,000

2. Prepare an equivalent unit’s schedule.

Equivalent units schedule:

Units Completed 30,000

Units in EWIP x
Fraction complete:
6,000 x 0.25 1,500
Equivalent Units 31,500

Process costing with EWIP inventory – Unit cost, Inventory valuation, and Cost reconciliation

Three steps that make up the Cost Information Section of the Production Report:

a.) Unit Cost calculation

b.) Inventory valuation
c.) Cost reconciliation

Information: For the month of January, Richardson Testing Center incurred a total production costs of
$787,500 for processing CBC tests and had the equivalent units’ schedule:

Units Completed 30,000

Units in EWIP x
Fraction complete:
6,000 x 0.25 1,500
Equivalent Units 31,500

1. Calculate the cost of preparing one CBC test for January.

Unit cost = $787,000/31,500
= $25 per test
2. Assign costs to tests completed and to EWIP, and then do a cost reconciliation.
Costs assigned:

Tests completed
($25 x 30,000) $ 750,000
EWIP ($25 x 1,500) 37,500
Total Assigned $ 787,500

Reconciliation: The costs assigned equal the costs to account for of $ 787,500.
The Five Steps of the Production Report

1. Analysis of the flow of physical units

2. Calculation of the period’s output (equivalent units)
3. Computation of unit cost
4. Valuation of Inventories (Goods transferred out and EWIP)
5. Cost reconciliation

    Materials Conversion

Quantity Schedule Actual WD EU WD EU

Units started          

Units completed          
Units in process, end

 Cost Charged to the Dept.        

Cost added in the Dept.