Chapter 5 – Process Costing

LEARNING OBJECTIVES
After completing this module, you should be able to know the
following:
1. What is equivalent units of production?
2. What are the methods of accounting for cost flows in process
costing?
3. How unit costs are computed under process costing?
4. How equivalent units of production is computed?
5. How costs are computed in multi-departments production
site?
As mentioned in the previous module, process costing is the cost accumulation system being
used by companies who produce similar units and go through continuous production flow.
Thus, total costs are being spread-out to all identical units produced, requiring the use of
averaging process.
Generally speaking, cost per unit is being calculated by dividing the total costs incurred to the
total units produced. However, it is critical to note that finish products go through multiple
departments. With this, costs are being incurred in each department and it is being passed on
in the next department as goods still in-process, so for purposes of calculation of unit costs, the
denominator to be used are not the total units produced, but rather, equivalent units of
production.

Equivalent Units of Production (EUP)

These are partially completed units which are being estimated based on the total number of
units to be produced. It measures the quantity of production completed during a period and is
being used to allocate production costs to units during the production process
Example:
ABC Manufacturing Company started producing 100 units for the period of January.
At the end of the month, it was determined that these 100 units are only 70 percent the
way through the production process. Thus, the company's equivalent units of
production for the period is 70 EUP.

Methods of Accounting for Cost Flows in Process Costing

1. Weighted Average Method
Under this method, costs that are incurred from different periods are being
consolidated and divides it by the EUP which is based on the aggregate of work-in-
process beginning inventory and units placed on production during the period.

2. First-in First-out (FIFO) Method

FIFO Method is the method wherein an assumption of those units which are
first used to production are the first ones to be completed, thereby completed
first and the ones to be transferred-out to the next department.
Steps in Process Costing
Prior to proceeding to calculation of costs, it is important to determine first which
method of cost flow in process costing is being used by the company.
The following are the step-by-step procedures in each method of cost flow in
process costing system for allocating the costs to units completed and to those which
are still in the work-in- process inventory:

Weighted Average Method