LECTURE 8 – PROCESS COSTING
PROCESS COSTING SYSTEMS
Study is limited to:
Weighted Average Process costing, with no spoilage
Flow of Production in Process Costing
When goods reach the end of Assembly they will be transferred out of Assembly and “transferred in” to Finishing.
When goods reach the end of Finishing, they will move to the FG storeroom/warehouse
In this unit we do not consider accounting for spoiled units, therefore we will not consider the situation where goods
are reworked. This means that in all the problems we cover, once goods have passed a point in the process they do
not pass that point again.
As products move through the processes, DM, DL and OH costs are incurred. Because the costs should be viewed as
being “attached” to the product, wherever the product is sitting in the manufacturing process, the costs are sitting at
that point as well.
As goods move into the next process, costs “attached” or “already incurred” on those goods move into the next
process. When the goods have passed through all manufacturing processes and are completed, all costs incurred in all
processes are attached to the goods.
In manufacturing processes which mass-produce a single product continuously, process costing (or “average
costing”) is typically found.
Product costs are obtained by allocating total costs to masses of like units that proceed in continuous fashion through
a series of uniform production steps.
o Lecture Example: Ready-Roll produces only one line of skateboards therefore all units are identical
Characteristics of Process Costing
We do not keep a separate job cost sheet for each job or batch of jobs. Instead, a Cost of Production Report
(process cost sheet) is prepared for each of the firm’s processes
o Journal entries are identical to job costing, except that firms with more than one process will have more
than one WIP account.
In process costing systems, all manufacturing costs (DM, DL and OH) are averaged across units produced.
o To facilitate the averaging of costs, we calculate a unit cost for all the costs added in different ways in a
MANFACTURING COSTS IN PROCESS COSTING SYSTEMS
There are still only three manufacturing costs: DM, DL and OH.
However, there are a number of additional cost classifications which are important for process costing.
o The DM, DL and OH of the previous process are called “transferred in” (T/I) costs in the current process.
o DL and OH tend to be added together and treated as one item “conversion costs” (C/C) for most problems.
How Costs Are Added
Recording costs in process costing is affected by “how costs are added”. There are only two ways of adding costs:
o At a particular (unique) point in the process.
Direct materials are usually added in this way.
For Ready-Roll Skateboards, DM wheels is added at the start of the process, and DM
lacquer is added at the end of the process. All skateboards either have all the wheels
(100%), or none of the wheels (0%), and all the lacquer (100%) or none of the lacquer (0%).
o Uniformly (evenly) throughout the process.
This means that if costs are added uniformly, any unit completed in the process has 100% of the
cost; if the unit is 2/3 way through the process (as is the case for Ready-Roll) it has 2/3 of the cost,
and so on. DL and OH are usually added uniformly. This is why they tend to be added together and
called “conversion costs” in process costing systems. Therefore units typically will have a percent
of the conversion costs depending on what stage in the process they have reached.
Your questions will always indicate the cost behaviour patterns of costs in a process. Lecture Example
A separate unit cost is calculated for, and therefore a column is required for, each of the following costs:
o Transferred-in costs. This column is for the costs added in the Assembly process and transferred into the
Finishing Dept with the partly-completed boards. A transferred-in column is always required in any process
other than the first process.
o Direct material “wheels” - added at the beginning of the process
o Direct material “lacquer” - added at the end of the process.
o Conversion costs (C/C) (which equals DL + OH, but in this process DL is zero) - added uniformly
throughout the process.
WORK LECTURE EXAMPLE PAGE 3 HERE
The Cost of Production Report (Process Cost Sheet) has three distinct sections:
o Section 1 - calculates equivalent units, which are then used in
o Section 2 - to calculate unit costs, which are applied to the production data from Section 1 to
o Section 3 – allocate costs to production, i.e. costs will be allocated to:
All goods completed in the process (which will go to FG if there is no more processing required, or
to the next WIP account if further processing is required), and
Work in process (costs incurred to date on goods not yet completed in the process)
Calculation of Equivalent Units (EU)
This is a really important concept in process costing. It is required only in manufacturing processes which have work in
Work in process - Certain types of production processes will never have WIP. Where WIP does occur, it is possible
that incomplete units could be at any number of points on the conveyor belt.
o For this unit we will simplify the world, and assume that any incomplete units (closing WIP) are all at the
same stage of the process, e.g. all at 2/3 stage or ¾ stage etc.
o Closing WIP at the end of one period becomes opening WIP for the next period’s Cost of Production Report.
“Equivalent units” is the term used when we express ALL PRODUCTION (both complete and incomplete units) in
terms of the number of completed (whole) units that have had a particular cost added.
How equivalent units are calculated - To complete the first section of the Cost of Production Report we need to
determine exactly “how many units” have had each of the costs added.
o For the lecture example, how many whole units have had:
Transferred in costs
Direct material (wheels)
Direct material (lacquer)
For the Finishing Process of Ready-Roll Skateboards the equivalent units will be calculated as follows:
All units in process 2 must be complete in process 1. Therefore the number of equivalent units of transferred in
costs is all the units in process 2, i.e. 25,000 (19,000 completed + 6,000 still in process, OR 15,000 opening WIP +
10,000 transferred in)
Because wheels are added at the beginning of the process, all boards in process 2 have the wheels added, whether
they are finished or not i.e. 25,000 (19,000 completed + 6,000 still in process)
Only those units that are at the 100% stage have had the lacquer added, i.e. 19,000 equivalent units. The closing
WIP has not yet reached the stage where lacquer is added, therefore NONE of those 6,000 units have had lacquer
The number of equivalent units that have had conversion costs added are 23,000. 19,000 have had 100% of CC, and
6,000 have had 2/3 of CC, which is “equivalent to” 4,000 whole units.
We operationalise this cumbersome series of calculations in section 1 of the Cost of Production Report. Steps in Preparing the Cost of Production Report
(1) Complete the flow column, section 1. Note that units “ACCOUNTED FOR” must always equal units “TO
(2) Calculate equivalent units, section 1, for units completed and goods still in process at the end of the period
(3) Enter all costs in section 2. Enter opening WIP on first line, then current costs. Total all costs across and down.
(4) Calculate all unit costs by dividing total costs in section 2 by relevant equivalent units in section 1. When done,
add all unit costs across ($15+$9+$2+$8) to obtain the “total” unit cost ($34). Note that the $34 cannot be obtained
from the total column, but only by totalling the individual average costs.
(5) Go to “completed” and “WIP at end” in section 1. Match up the equivalent units with the unit costs from section 2 to
complete section 3. When done, check that the total of goods completed + WIP equals the amount from the total
column in section 2 (i.e. $792,000).