PROCESS COSTING

Process costing is a system of averaging.

When items are competed, multiplying the
number of units completed by the average unit
cost determines the cost to be removed from
Work in Process Inventory and included in
Finished Goods Inventory.
Labor and overhead are often grouped together
and referred to as conversion costs. These
costs are often assumed to be added evenly
throughout he process.
Transferred-in-cost is the cost incurred in one
processing department that is transferred to
the next processing department.
When partially completed units are converted
to a comparable number of completed units,
they are referred to as equivalent units.

COST PER EQUIVALENT UNIT

Cost per
Cost in beginning WIP + Cost
incurred in current period
equivalent
unit
=
-------------------------------------------------------------------------
- At the start of April, the Mixing Department has
on hand beginning
in process
inventory
Units work
completed
+ Equivalent
units
in consisting
ending WIP
of
10,000
gallons
of
wood

preservative that are 80 percent complete.

During the month, 70,000 gallons are started
and 60,000 are completed. At the end of April,
20,000 gallons are on hand that are 50 percent
complete. The cost in beginning Work in
Process consists of $18,000 of material cost,
$7,800 of labor cost, and $23,400 of overhead
cost. During April, the Mixing Department
incurs $142,000 of material cost and $62,200 of

Cost
Material
Labor
Overhead Total
Beginning WIP
$ 18,000
$ 7,800
$
23,400
$49,200
Cost incurred during April 142,000
62,200
186,600
390,800
Total cost
$160,000
$70,000
$210,000 $440,000
Units
Units completed
60,000
60,000
60,000
Equivalent units, ending
20,000
10,000
10,000
WIP
Total units
80,000
70,000
70,000

ENDING WORK IN PROCESS

Ending Balance in Work in Process, Mixing
Material (20,000 equiv. units at $2)
$40,000
Labor (10,000 equiv. units at $1)
10,000
Overhead
(10,000
$3)
A production
costequiv.
reportunits
is an at
end-of-the
month
30,000
report for a process costing system that
Total
provides a reconciliation of units and a
$80,000
reconciliation of costs as well as the details of
the cost per equivalent unit calculatios.

Production Cost Report

Mixing Department
April 2006
Unit Reconciliation
Units in Beg. WIP (100% material, 80% conversion
costs)
10,000
Units started during April
70,000
Units to account for
80,000
Units completed and transferred to packaging
60,000
Units in ending WIP (100% material, 50%
conversion costs)
20,000
Units accounted for
80,000
Cost Per Equivalent Unit Calculation

Units
Units completed
60,000
60,000
60,000
Equivalent units, ending
20,000
10,000
10,000
WIP
Total
80,000
70,000
70,000
Cost per equivalent unit
$2 $1
$1
$6
Cost Reconciliation
Total cost to account for
$440,000
Cost of completed units transferred to Packaging
$360,000
(60,000 X $6)
Cost of ending WIP

PROCESS COSTING AND

INCREMENTAL ANALYSIS

Cost per unit is typically the average of fixed

and variable costs. Thus, it does not measure
the change in cost associated from producing
an additional unit.
200,000 Units
Per
Equivalent Unit
Direct material cost
$100,000
$0.50
Direct labor cost
200,000
1.00
Manufacturing overhead cost
300,000
1.50
Total
$600,000
$3.00

 Now, suppose the company is considering

decreasing its price to $2.90 for 2006 and
expects that demand for its product will
increase 75,000 units to 275,000.
New revenue ($2.90 X 275,000)
$797,500
Old revenue ($3.25 X 200,000)
650,000
Change in revenue
$147,500
New Cost
Material: variable ($0.50 X 275,000)
$137,500
Labor: variable ($1.00 X 275,000)
275,000
Overhead: fixed
300,000
$712,500

Discuss the concept of an equivalent unit.

Units in Work in Process are not equal to fully
completed units. Therefore, in calculating the
average cost per unit it is necessary to
express these partially completed units in
terms of equivalent whole units.
Calculate the cost per equivalent unit. Process
costing is essentially a system off averaging.
The average unit cost is referred to as the
cost per equivalent unit. It equals the sum of
beginning Work in Process costs and current
period costs divided by the sum of units
completed and equivalent units in ending
Work in Process.