20/01/2023

PROCESS COSTING
LECTURE 5

Outline

Job versus process costing

Process costing assumptions

Steps in process costing

Transferred-in costs

Process costing - WAC

Process costing - FIFO

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Job-Costing Process-Costing
Systems Systems

Distinct, identifiable Masses of identical

units of a product or similar units of a
or service product or service

Examples: Examples:
Custom-made Food,
machines, chemical
houses processing

Job versus Process Costing

Process Costing

• Process costing is a system where the unit cost of a product or

service is obtained by assigning total costs to many identical or
similar units.
• Each unit receives the same or similar amounts of direct materials
costs, direct labor costs, and manufacturing overhead.
• Unit costs are computed by dividing total costs incurred by the
number of units of output from the production process

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Process-Costing Assumptions

• Direct materials are added at the beginning of the

production process, or at the start of work in a
subsequent department down the assembly line.
• Conversion costs are added equally along the
production process.

Five-Step Process-Costing Allocation

• Summarize the flow of physical units of output.

Step 1

• Compute output in terms of equivalent units.

Step 2

• Summarize total costs to account for .

Step 3

• Compute cost per equivalent unit.

Step 4

• Assign total costs to units completed and to units in ending work-in-process

Step 5

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A derived amount of output units that:

Takes the quantity of each input in units Converts the quantity of input into the
completed and in unfinished units of work in amount of completed output units that could
process and be produced with that quantity of input

Equivalent Are calculated separately for each input (direct

Units materials and conversion cost)

When calculating equivalent units in step 2,

focus on quantities and disregard dollar amounts
until after the equivalent units are computed

Are costs incurred in previous departments that are

carried forward as the products cost when it moves
to a subsequent process in the production cycle.

Also called previous department costs.

Transferred-In
Costs Journal entries are made to mirror the progress in
production from department to department.

Transferred-in costs are treated as if they are a

separate type of direct material added at the
beginning of the process

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Physical Direct Conversion

Transferred in
units materials costs
Work in process, beginning (March 1) 240 $ 33,600 $ 18,000
Degree of completion, BWIP 100% 0% 62.5%
Transferred in during March 400
Completed and transferred out during March 440
Work in process, ending (March 31) 200
Degree of completion, EWIP 100% 0% 80%
Total costs added during March
Direct material and conversion costs $ 13,200 $ 48,600

Transferred in (WAC) $ 52,000

Transferred in (FIFO) $ 52,480

Lecture example

Weighted-Average
Process-Costing Method

Weighted-average costs is the total of all costs in the work-in-process

account divided by the total equivalent units of work done to date.

The beginning balance of the work-in-process account (work done in a prior

period) is blended in with current period costs

Calculates cost per equivalent unit of all work done to date (regardless of the
accounting period in which it was done)

Assigns this cost to equivalent units completed and transferred out of the
process, and to incomplete units in still-in-process

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Lecture example – WAC

Step 2
Step 1 Equivalent units
Transferred Direct Conversion
Physical units
in materials costs
Work in process, beginning (March 1)
Transferred in during March
To account for
Completed and transferred out during March
Work in process, ending (March 31)
To account for

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Lecture example – WAC

Total Transferred Direct Conversion

costs in materials costs
Step 3 WIP, beginning
Costs added during March
Total costs to accounted for

Cost per equivalent unit of work done to

Step 4 date

Step 5 Assignment of costs:

Completed and transferred out during March
Work in process, ending (March 31)
Total costs accounted for
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First-in, First-Out
Process-Costing Method
• Assigns the cost of the previous accounting period’s equivalent units
in beginning work-in-process inventory to the first units completed
and transferred out of the process
• Assigns the cost of equivalent units worked on during the current
period first to complete beginning inventory, next to stat and
complete new units, and lastly to units in ending work-in-process
inventory
• A distinctive feature of FIFO process-costing method is that work
done on beginning inventory is kept separate from work done in the
current period

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Lecture example – FIFO

Step 2
Step 1 Equivalent units
Direct Conversion
Physical units Transferred in
materials costs
Work in process, beginning (March 1)
Transferred in during March
To account for
Completed and transferred out during March
From BWIP
Started and completed
Work in process, ending (March 31)
To account for
Equivalent units of work done in March

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Lecture example – FIFO

Transferred Direct Conversion
Total costs
in materials costs
Step 3 WIP, beginning
Costs added during May
Total costs to accounted for

Step 4 Cost per equivalent unit of work done to date

Step 5 Assignment of costs:

Completed and transferred out during March
Work in process, beginning (March 1)
Costs added to BWIP
From beginning
Started and completed
Work in process, ending (March 31)
Total costs accounted for

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