CHAPTER SIX

PROCESS COSTING SYSTEM

6.1 INTRODUCTION
In process costing the whole process is averaging. The averaging process
is affected by the method of process costing employed. Depending on the
nature of the manufacturing process, the company may use the weighted
average or the first in, first out method. In either of the methods there is
a need to accumulate manufacturing costs using separate work in
process general ledger accounts to each department or process.

Then based on the production report, equivalent units are computed,

which are the basis to compute equivalent unit costs. For each cost
element the accumulated material and conversion costs of each process
are divided by the equivalent units of the related cost element in order to
determine the equivalent unit cost of each cost element. Once the
equivalent unit cost by each cost element is determined the accounted
costs of each process are applied to the units completed and transferred
out to the next process and to the units remained in the same process
for further processing in the next period or to the ending work- in
process inventory.

6.2 THE GENERAL CHARACTERISTICS OF PROCESS COSTING

The essential characteristics of process costing system are:

o The production is continuous and mass production and the
final product is the result of a sequence of processes or
departments.
o Costs are accumulated by processes or operations or
department.
o The products are standardized and home generous.
o The cost per unit produced is the average cost which is
calculated by dividing the total process cost by the number
of units produced
o The finished product of each but last process becomes the
row material for the next process.

6.3 COMPARISON OF JOB-ORDER COSTING AND PROCESS COSTING

Similarities between job order and process costing include:
o Both systems have the same basic purpose—to calculate
unit cost
o Both systems use the same manufacturing accounts
o The flow of costs through the manufacturing accounts is
basically the Same
However, there are some important differences between job order and processing costing
as described below.

1
 Job Order Costing
Each job is different
Costs are accumulated by job
Costs are captured on a job
cost sheet
Unit costs are computed by job
Process Costing
All products are identical
Costs are accumulated by
department
Costs are accumulated on a
department production report
Unit costs are computed by
department

6.4 METHODS IN PROCESSING COSTING SYSTEM

o Weighted average – method
o First –in, first –out method.

These two methods will be discussed in detail as follows

6.4.1 WEIGHTED AVERAGE METHOD
o The weighted average method combines the beginning work – in
process inventory and the manufacturing costs incurred in the
current period to determine a single cumulated total costs to be
accounted for, the respective department during a given period of
time usually a month. This cumulative amount is the summation
of the total manufacturing cost elements.
o The total of each cost element is divided by the equivalent units of
the related cost element in order to determine equivalent unit cost
to each cost element. The equivalent unit cost is then the basis to
apply costs to the units completed and transferred out and the
units, which are to remain in the ending, work in process
inventory.

6.4.2 FIFO METHOD

o The FIFO method separates units in beginning inventory
from current production so that a current period cost per
unit can be calculated. 
calculated. 

DESCRIBE THE FIVE KEY STEPS IN PROCESS COSTING

o In process costing system to determine the cost per unit of
the product, you need to follow five key steps
I. Summarize the flow of physical units.
II. Compute output in – terms of equivalent units.
III. Summarize the total costs to account for,
which are the total debits to work – in Process
inventory account of the related process.
IV. Compute equivalent unit costs.
V. Apply costs to units completed and to units in
the ending WIP inventory.

2
 o The above steps should be strictly followed specially when
there are beginning inventories because the final aim of
using these fives steps is in order to determine the amount
to be charged to the subsequent dep’t at the end of the
period.

o The first two steps are based on physical or engineering

terms. The dollar impact of the production process is
measured in the final three steps and these three steps are
affected by the cost flow assumptions.
o These five steps are the same in either of the product costing
methods i.e. either weighted average or FIFO methods are
used.

ILLUSTRATIONS ON WEIGHTED AVERAGE METHOD

CASE ONE: WHEN THERE IS NO BEGINNING WORK IN PROCESS
INVENTORY
A. On January 1, 0 units were in process at a cost of materials of $0
and a cost of conversion costs of $0, during January 12,500 units
were started, during January materials costs of $230,000 and
conversion costs of $430,050 were added to production, during
January 10,000 units were completed, on January 31, 2,500 units
were in process--60% complete in regards to materials and 70%
complete in regards to conversion costs

Equivalent Units
Flow of production physical units Materials Conversion
Beginning Inventory ---
Units Started 12,500
Units to account for 2,500
Units Completed 10,000 10,000 10,000
Ending Inventory 2,500 1,500 1,750
_ _ (60% x 2,500) (70% x 2,500)
Units accounted for 12,500
Work done to date 11,500 11,750

Beginning Inventory Costs --- --- ---

Current Costs 660,050 230,000 430,050
Costs to account for 660,050 230,000 430,050
Cost Per Unit 20.00 36.60
(230,000 / 11,500) (430,050 / 11,750)
Assignment of cost
For Units Completed 566,000 200,000 366,000
(20.00 x 10,000) (36.60 x 10,000)
For Ending Inventory 94,050 30,000 64,050
(20.00 x 1,500) (36.60 x 1,750)
Costs accounted for 660,500 230,000 430,050

3
CASE TWO: WHEN THERE IS BEGINNING WORK IN PROCESS
INVENTORY

B. On February 1, 2,500 units were in process--60% complete in

regards to materials and 70% complete in regards to conversion
costs--at a cost of materials of $30,000 and a cost of conversion
costs of $64,050, during February 13,100 units were started,
during February materials costs of $283,500 and conversion costs
of $428,750 were added to production, during February 13,600
units were completed, on February 28, 2,000 units were in
process--70% complete in regards to materials and 20% complete
in regards to conversion costs

Equivalent Units

Flow of production physical units Materials Conversion

Beginning Inventory 2,500

Units Started 13,100
Units to account for 15,600

Units Completed 13,600 13,600 13,600

Ending Inventory 2,000 1,400 400
(70% x 2,00 (20% x 2,000)
Units accounted for 15,600
Work done to date 15,000
14,000

Beg.Inv. Costs 94,050 30,000 64,050

Current Costs 712,250 283,500 428,750
Costs to account for 806,300 313,500 492,800
Cost Per Unit 20.90 35.20
(313,500 / 15,000) (492,800 / 14,000)

Cost of Units Completed 762,960 284,240 478,720

(20.90 x 13,600) (35.20 x 13,600)
Ending Inventory 43,340 29,260 14,080
(20.90 x 1,400) (35.20 x 800)
Cost accounted for 806,300 313,500 492,800

FIFO IN PROCESS COSTING

o FIFO--the first-in first-out method computes an average cost that

is separate for the current period from the beginning inventory

4
II) Illustrations
A. On January 1, 0 units were in process at a cost of materials
of $0 and a cost of conversion costs of $0, during January
12,500 units were started, during January materials costs of
$230,000 and conversion costs of $430,050 were added to
production, during January 10,000 units were completed, on
January 31, 2,500 units were in process--60% complete in
regards to materials and 70% complete in regards to
conversion costs

Equivalent Units
Flow of production physical units Materials Conversion
Beginning Inventory ---
Units Started 12,500
Units to account for 12,500
Beginning Inventory --- --- ---
Units Started$C 10,000 10,000 10,000
Ending Inventory 2,500 1,500 1,750
(60% x 2,500) (70% x 2,500)
Units accounted for 12,500
Work done to date 11,500 11,750

Beg.WIP --- --- ---

Current Costs 660,050 230,000 430,050
Total cost account for 660,050 230,000 430,050
Cost Per Unit 20.00 36.60
(230,000 / 11,500) (430,050 / 11,750)

Beginning Inventory --- --- ---

Units Stat, $Current 566,000 200,000 366,000
(20.00 x 10,000) (36.60 x 10,000)
Ending Inventory 94,050 30,000 64,050
_ _ (20.00 x 1,500) (36.60 x 1,750)
Costs accounted for 660,500 230,000 430,050

B. On February 1, 2,500 units were in process--60% complete

in regards to materials and 70% complete in regards to
conversion costs--at a cost of materials of $30,000 and a
cost of conversion costs of $64,050, during February 13,100
units were started, during February materials costs of
$283,500 and conversion costs of $428,750 were added to
production, during February 13,600 units were completed,
on February 28, 2,000 units were in process--70% complete
in regards to materials and 20% complete in regards to
conversion costs

5
 Equivalent Units
Flow of production physical units Materials Conversion
Beginning Inventory 2,500
Units Started 13,100
Units to account for 15,600

Beginning Inventory 2,500 1,000 750

(40% x 2,500) (30% x 2,500)
Units Stat.$Comp. 11,100 11,100 11,100
Ending Inventory 2,000 1,400 400
(70% x 2,000) (20% x 2,000)
Unit accounted for 15,600 13,500 12,250

Total cost DM CC
Beg.WIP 94,050 30,000 64,050
Current Costs 712,250 283,500 428,750
Total cost 806,300 313,500 492,800
Cost Per Unit 21.00 35.00
(283,500 / 13,500) (428,750 / 12,250)
Cost assignment
For Beginning 141,300 30,000 64,050
(20.00 x 1,500) (36.60 x 1,750)
21,000 26,250
(21.00 x 1,000) (35.00 x 750)
UnitsStat$Comp. 621,600 233,100 388,500
(21.00 x 11,100) (35.00 x 11,100)
Ending Inventory 43,400 29,400 14,000
(21.00 x 1,400) (35.00 x 400
Cost accounted for 806,300 313,500 492,800

6
Model exam question for the chapter

Multiple choices: choose the best answer for the questions below
1. In a continues process manufacturing, material are added to production

A. only at the beginning of each process

B. only at the end of each process
C. at various point in the process
D. none
2. In a process cost accounting, manufacturing costs are summarized on
A. job cost sheet
B. process cost sheet
C. production cost report
D. none
3. Which one of the following would not appear as a debit in the work in process
account of a second department in a two stage process?
A. transferred in costs
B. overhead applied
C. labor used
D. cost of completed products transferred out
Use the following information to answer the following questions Q4 &Q5

A department adds raw materials to a process at a very beginning of the process and
incurs conversion costs uniformly through out the process. For the month of January,
there were no units in the beginning work in process inventory, 12,000 units were started
in January; and there were 3000 units that were 40% completed in the ending work in
process inventory at the end of January.

4. what were the equivalent unit of production for material for the month of January
A. 13,000 equivalent units
B. 10,800 equivalent units
C. 9,000 equivalent units
D. 12,000 equivalent units
E. none
5. What were the equivalent units of production for conversion costs for the month
of January
A. 9,000 equivalent units
B. 10,800 equivalent units
C. 10,200 equivalent units
D. 12,000 equivalent units
E. none
6. A department adds raw material at the beginning of the process and incurs
conversion costs uniformly throughout the process. For the month of July, there
were no beginning work in process inventory, 10,000 units were completed and
transferred out; and there were 5,000 units in the ending work in process

7
 inventory that were 40% completed. During July 84,000 birr material costs and
42,000 birr conversion costs were charged to the department.

The cost per equivalent unit of production for materials and conversion costs for the
month of July were
Material Conversion

A. 3.20birr 2.80birr
B. 3.20birr 3.50birr
C. 4.00birr 2.80birr
D. 4.80birr 4.20birr
E. None
Use the following information for question Q7&Q8
Department-1 of a two department production process shows
Beginning work in process 1,000 units
Ending work in process 5,000 units
Total units to be accounted for 12,000 units

7. How many units were started in to production in department 1 above

A. 5,000
B. 7,000
C. 12,000
D. 11,000
E. none
8. How many units were transferred to department 2 (the next department)?
A. 5,000
B. 7,000
C. 12,000
D. 11,000
E. None
9. Continuous manufacturing focuses on the production of
A. heterogonous products
B. individual jobs
C. homogenous products
D. low volume products
E. none
10. A process accounting system is most appropriate when
A. A verity of different products are produced
B. The focus of attention is on a particular job or order
C. The same products are continuously products
D. Heterogeneous products are custom made to specifications of
customers.
E. none

8
Illustration-1
Nase food processing companies begin operations on Oct 2, 2002. During the month of
October, 4800 units of its product were started in production in the first department, the
mixing Department. Of these, all but 1000 were completed during the month and
transferred out to the second department, the cooking department. All materials had been
added to the 1000 units but only 50% of the labor & overhead (conversion costs) had
been added. The costs increased during the month were direct materials, $120,000, direct
labor $88,000; and manufacturing overhead, $71,100
Required
1) Summarize Physical units and computation equivalent units for mixing dep’t
2) Determine equivalent unit costs and supply costs to the completed and the
incomplete units
3) Recorded the necessary J. entry to show
N.B:- use the FIFO method and weighted average moving method respectively to
attempter the question

Illustration-2
Faire more steel production and cost information for November 19x7are as follows:-
Beginning inventory (40% complete as to conversion cost) 15,000 units
Units started during current period 977,800
Units completed and transferred to finished goods 980,000
Ending inventory (80% complete as to conversion cost) 12,800
Cost of beginning inventory
Direct material 988,880Br
Direct labor 459,024
Overhead 435,912 1,883,816 Br
Current period cost
Direct material 90,348,720 Br
Direct labor 59,054,400
Overhead 63,385,056 212,788,176 Br

Required

1) Summarize Physical units and computation equivalent units

for mixing dep’t
2) Determine equivalent unit costs and supply costs to the
completed and the incomplete units
3) Recorded the necessary J. entry to show
N.B:- use the FIFO method and weighted average moving method respectively to
attempter the question

9
Illustration-3
Beza Company has two departments and the following information for the month of
March 19X4.
Department 1
Units
Beginning units in process (100%, 40% conversion Cost) 4,000
Units started in process 40,000
Units transferred to department 2 35,000
Ending work in process (100%, 60% conversion cost) 9,000
Costs
Beginning work in process from preceding department -0-
Beginning work in process this department
Direct material 14,000
Direct labor 6,560
Manufacturing over head 11,000
Costs added during the current period
Direct material 140,000
Direct labor 50,000
Manufacturing overhead 90,000

Department 2
Units
Beginning units in process (100% material, 20% conversion cost) 6,000
Units received from department 1 35,000
Units added in production 5,000
Units transferred to finished goods 44,000
Ending work in process (100% material, 30% conversion cost) 2,000
Costs
Beginning work in process from the preceding department 40,000Br
Beginning work in process from this department
Direct material 12,000
Direct labor 10,280
Manufacturing overhead 4,600
Cost added during the period
Direct material 80,000
Direct labor 70,000
Manufacturing over head 40,000
Required:-
Prepare the cost of production report for both departments based on
1. Weighted average method
2. FIFO method

10