Process Costing

Dr.M.Venkateshwarlu

Process Cost Flows

In a single production department situation, direct-material,

direct-labor, and manufacturing-overhead costs are added to

a Work-in-Process Inventory account.
As goods are finished, costs are transferred to Finished-Goods
Inventory. During the period when goods are sold, the
product costs are transferred to Cost of Goods Sold.

Equivalent Units: A Key Concept

Costs are accumulated for a period of time for
products in work-in-process inventory.
Products in work-in-process inventory at the
beginning and end of the period are only
partially complete.
Equivalent units is a concept expressing these
partially completed products as a smaller
number of fully completed products.

Equivalent Units Example

Two one-half completed products are
equivalent to one completed product.

So, 10,000 units 70 percent complete are equivalent to 7,000

complete units.

Calculating and Using Equivalent Units of

Production
To calculate the cost per equivalent unit for
the period:
Cost per equivalent Unit = Cost for the period
Equivalent units for the period

Calculating and Using Equivalent Units of

Production
To calculate the direct materials and conversion costs
per equivalent unit for the period:
Materials cost per
equivalent
unit

Materials cost for the period

= Materials equivalent units for the period

Labor cost per

equivalent
unit

Labor cost for the period

=
Labor equivalent units for the period

Departmental Production Report

Analysis of
physical flow
of units.

Calculation
of equivalent
units.

Production
Report
Computation
of unit costs.

Analysis of
total costs.

Equivalent Units of Production WeightedAverage Method

The weighted-average method . . .
Makes no distinction between work done in the
prior period and work done in the current period.
Blends together units and costs from the prior
period and the current period.
The FIFO method is a more complex method and is rarely used
in practice.

Production Report Example

MVP Sports Equipment Company makes baseball
gloves in two departments, Cutting and Stitching.
MVP uses the weighted-average cost procedure.
Material is added at the beginning of the Cutting
Department, and conversion is incurred uniformly
throughout the process.
Using the following information for the month of
March, prepare a production report for the
cutting Department.

Production Report Example

Work in process, March 1: 20,000 units
Materials:
100% complete.
Conversion:
10% complete.

Cost
$ 50,000
7,200

Units started into production in March:

Units completed and transferred out in March:

30,000 units
40,000 units

Work in process, March 31:

Materials
Conversion

10,000 units
100% complete.
50% complete.

Costs incurred during March

Materials cost
Conversion costs:
Direct labor
Applied manufacturing overhead
Total conversion costs
Total costs to account for

90,000
$ 86,000
107,500

193,500
340,700

Production Report Example

Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1
Units started during March
Total units to account for

20,000
30,000
50,000

Units completed and transferred out during March

Work in process, March 31
Total units accounted for

40,000
10,000
50,000

Analysis of Physical Flow of Units

Calculation of Equivalent Units
Physical
Units

Conversion
Percentage
Complete

Work in process, March 1

Units started during March
Total units to account for

20,000
30,000
50,000

10%
10%

Units completed and transferred

Work in process, March 31
Total units accounted for
Total equivalent units

40,000
10,000
50,000

100%
50%

Equivalent Units
Direct
Material Conversion

50% of 10,000 units

40,000
10,000

40,000
5,000

50,000

45,000

Beginning inventory % is not used in weighted-average method.

Production Report Example

Calculation of Equivalent Units
Physical
Units

Conversion
Percentage
Complete

Work in process, March 1

Units started during March
Total units to account for

20,000
30,000
50,000

10%

Units completed and transferred

Work in process, March 31
Total units accounted for
Total equivalent units

40,000
10,000
50,000

100%
50%

Equivalent Units
Direct
Material
Conversion

100% of 10,000 units, all

material added at beginning
40,000
10,000

40,000
5,000

50,000

45,000

With respect to direct material, the 10,000 units in the Cutting Departments ending
work-in-process inventory are 100 percent complete. Therefore, the ending work-inprocess inventory represents 10,000 equivalent units of direct material

Production Report Example

Computation of unit costs
Direct
Material
Work in Process, March 1
Costs incurred during March
Total costs to account for

$ 50,000
90,000
$ 140,000

Equivalent units
Cost per equivalent unit

50,000
$
2.80

Conversion
$

7,200
193,500
$ 200,700
$

45,000
4.46

Total
$ 57,200
283,500
$ 340,700
$

7.26
7.26

$140,000 50,000 equivalent units

$200,700 45,000 equivalent units

$2.80 + $4.46

Production Report Example

Cost of goods completed and transferred during March
40,000 units $7.26 per equivalent unit
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units $2.80 per equivalent unit
Conversion:
5,000 equivalent units $4.46 per equivalent unit
Total cost of March 31 work in process
Total costs accounted for

$ 290,400

$ 28,000
22,300
50,300
$ 340,700

The final step is to determine the total cost to be transferred out of the Cutting
Departments Work-in-Process Inventory account and into the Stitching Departments
Work-in-Process Inventory account. The cost per equivalent unit, $7.26, was calculated
in step 3. The number of units transferred is multiplied by the cost per equivalent unit.

Production Report Example

Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit
Convserion:
5,000 equivalent units x $4.46 per equivalent unit

28,000
22,300

Total cost of March 31 work-in-process

Total costs accounted for

290,400

50,300
$

340,700

Production Report Example

Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit

$ 290,400

$ 28,000

Convserion:
5,000 equivalent units x $4.46 per equivalent unit
Total cost of March 31 work-in-process
Total costs accounted for

All costs
accounted for

22,300
50,300
$ 340,700

Actual Costing

Actual costs of
manufacturing overhead
are entered in Work-inProcess Inventory

vs.

Normal Costing

Manufacturing
overhead is applied
to Work-in-Process
Inventory using a
predetermined
overhead rate

Departmental Production Report

Analysis of
physical flow
of units.

Calculation
of equivalent
units.
Computation
of unit costs.
Analysis of
total costs.

1-19

Operation Costing
Operation costing employs some aspects
of both job-order and process costing.
Job-order
Costing

Operation Costing
(Products produced in batches)

Process
Costing

Conversion costs
Material Costs charged
assigned to batches
to batches as in
as in process costing.
job-order costing.
Job-order and process costing represent the polar extremes of product-costing systems. But some
production processes exhibit characteristics of both job-order and process costing environments. These
production processes often are referred to as batch manufacturing processes. Such processes are
characterized by high-volume production of several product lines that differ in some important ways but are
nearly identical in others. Since batch manufacturing operations have characteristics of both job-order
costing and process-costing environments, a hybrid product-costing system is required. One common
approach is called operation costing.

Thank You