POMA Chapter 4: Process
Costing
The Flow of Materials, Labor, and Overhead Costs
Cost accumulation is simpler in a process costing system than in a job-order costing
system. In a process costing system, instead of having to assign costs to hundreds of
different jobs, costs are assigned to only a few processing departments.
Exhibit 4–3 shows a T-account model of materials, labor, and overhead cost flows in
a process costing system. Several key points should be noted from this exhibit. First,
note
that a separate Work in Process account is maintained for each processing department.
Finally, note that materials, labor, and overhead costs can be added in any processing
department—not just the first. Costs in Department B’s Work in Process account consist
POMA Chapter 4: Process Costing 1
of the materials, labor, and overhead costs incurred in Department B plus the costs
assigned to the units transferred in from Department A (called transferred-in costs)
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Because it would be an overstatement to count these partially
completed units as equivalent to fully completed units when counting the department’s
output, these partially completed units are translated into an equivalent number of fully
completed units. In process costing, this translation is done using the following formula:
to explain the weighted-average method of process costing in four steps:
Step 1: Compute the equivalent units of production.
Step 2: Compute the cost per equivalent unit.
Step 3: Assign costs to units.
Step 4: Prepare a cost reconciliation report.
The equivalent units in beginning work in process inventory plus the equivalent units
for the work done during the period equals the units transferred out plus the equivalent
units in ending work in process inventory.
When the FIFO method is used to prepare a production report, costs to the next
department are accounted for in two separate blocks.
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When the weighted-average method of process costing is used, a department's
equivalent units are computed by: adding the units transferred out to the equivalent
units in ending inventory.
Equivalent units for a process costing system using the FIFO method would be equal to:
units started and completed during the period plus equivalent units in the ending work in
process inventory plus work needed to complete units in the beginning work in process
inventory.
Step 1:
The equivalent units of production is the name we use for the denominator in unit cost
calculations. Each processing department calculates the equivalent units of production
for each of its manufacturing cost categories. In the weighted-average method, the
equivalent units of production for a department is the number of completed units
transferred to the next department (or to finished goods) plus the equivalent units in the
department’s ending work in process inventory. This def
When using weighted average, the completion percentage in the beginning are ignored
Under the weighted average method, these two completion percentages pertaining to
the ending work in process inventory (40% for materials and 25% for conversion) will be
included in the
computation of equivalent units of production
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Step 2: Compute the Cost per Equivalent Unit
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Step 3: Assign Costs to Units
In step 3 we use the costs per equivalent unit to value the equivalent units in ending
inventory and the completed units that are transferred to the next department.
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Step 4: Prepare a Cost Reconciliation Report
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As mentioned above, operation costing is a hybrid system that employs aspects of
both job-order and process costing. Products are typically processed in batches when
operation costing is used, with each batch charged for its own specific materials. In this
sense, operation costing is similar to job-order costing. However, labor and overhead
costs
are accumulated by operation or by department, and these costs are assigned to units
as in
process costing. If shoes are being produced, each shoe is charged the same per unit
conversion cost, regardless of the style involved, but it is charged with its specific
materials
cost. Thus, the company is able to distinguish between styles in terms of materials, but
it
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is able to employ the simplicity of a process costing system for labor and overhead
costs.
Appendix 4A: FIFO Method
Step 1: Compute the Equivalent Units of Production –
FIFO Method – Part 1
The computation of equivalent units of production under the FIFO method differs from
the computation under the weighted-average method in two ways.
First, the “units transferred out” is divided into two parts. One part consists of the units
from the beginning inventory that were completed and transferred out, and the other
part consists of the units that were both started and completed during the current
period.
Second, full consideration is given to the amount of work expended during the current
period on units in the beginning work in process inventory as well as on units in the
ending work in process inventory.
Thus, under the FIFO method, both beginning and ending work in process inventories
are converted to equivalent units.
For the beginning inventory, the equivalent units represent the work done to complete
the units;
for the ending inventory, the equivalent units represent the work done to bring the units
to a stage of partial completion at the end of the period (the same as with the weighted-
average method
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Step 2: Compute the Cost per Equivalent Unit
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Step 3: Assign Costs to Units
see slides
The costs per equivalent unit are used to value (1) the equivalent units needed to
complete beginning work in process inventory, (2) the equivalent units in ending work in
process inventory, and (3) the units that were started and completed during the period
A complete accounting of the costs assigned to the units in ending work in process
inventory and the units transferred out appears below. It is more complicated than
the weighted-average method. This is because the cost of the units transferred out
consists of three separate components: (1) the cost in beginning work in process
inventory;
(2) the cost to complete the units in beginning work in process inventory; and (3) the
cost
of units started and completed during the period. Notice that the cost in beginning work
in process inventory ($15,175) is excluded in the numerator of the FIFO method’s
computation of the cost per equivalent unit. However, it is included in the numerator of
the
weighted-average method’s computation of the cost per equivalent unit. This is a major
difference between the FIFO and weighted-average methods.
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Step 4: Prepare a Cost Reconciliation Report
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