1. as per 2019/2020
# UPE Permanent
Lecturers
Academic Staff
PROCESS COSTING
Part 1
Nureni Wijayati
Session 6
Chapter 18
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as per 2019/2020
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Academic Staff
Learning Objectives
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1. Identify the situations in which process-costing systems
are appropriate
2. Understand the basic concepts of process-costing and
compute average unit costs
3. Describe the five steps in process-costing and calculate
equivalent units
4. Use the weighted-average method and first-in, first-out
(FIFO) method of process costing
5. Apply process-costing methods to situations with
transferred-in costs

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Academic Staff
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Academic Staff
Process Costing
• Process costing is a system where the unit cost of a product
or service is obtained by assigning total costs to many
identical or similar units of output.
• Unit costs are calculated by dividing total costs incurred by
the number of units of output from the production process.
• Each unit receives the same or similar amounts of direct
materials costs, direct manufacturing labor costs, and
indirect manufacturing costs (manufacturing overhead).

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# UPA Permanent
Lecturers
Academic Staff
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Academic Staff
Process-Costing Cost Categories
• Process-costing systems separate costs into cost categories
according to when costs are introduced into the process.
1. Direct materials are usually added at the beginning of the
production process, or at the start of work in a subsequent
department down the assembly line.
2. Conversion costs are generally added equally along the
production process.

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# UPA Permanent
Lecturers
Academic Staff
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Academic Staff
FIVE-STEP PROCESS-COSTING ALLOCATION
1. Summarize the flow of physical units of output.
2. Compute output in terms of equivalent units.
3. Summarize total costs to account for.
4. Compute cost per equivalent unit.
5. Assign total costs to units completed and to units in
ending work-in-process.

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EQUIVALENT UNITS
A derived amount of output units that:
Takes the quantity of each input in units completed and in
unfinished units of work in process and
Converts the quantity of input into the amount of
completed output units that could be produced with that
quantity of input.
Are calculated separately for each input. (direct materials and
conversion cost).
When calculating equivalent units in step 2, focus on
quantities and disregard dollar amounts until after the
equivalent units are computed.

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Weighted-Average Process-Costing Method
• Process costing can be accomplished using 1) the weighted-
average method or 2) the FIFO method.
1) Weighted-average method
• Calculates cost per equivalent unit of all work done to date
(regardless of the accounting period in which it was done).
• Assigns this cost to equivalent units completed and
transferred out of the process, and to equivalent units in
ending work-in-process inventory.

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Weighted-Average Process-Costing Method
• The Weighted-average cost is the total of all costs entering
the work-in-process account divided by the total equivalent
units of work done to date.
• The beginning balance of the work-in-process account
(work done in a prior period) is blended in with current
period costs.

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M2020 manufactures bottled turmeric beverages. The information for June is as follows:
Illustration 1 – weighted-average
Beginning work in process 10,000 units
Units started 20,000 units
Units completed 25,000 units
Costs:
Beginning work-in-process direct materials ₤6,000
Beginning work-in-process conversion ₤2,600
Direct materials added during month ₤30,000
Direct manufacturing labor during month ₤12,000
Factory overhead ₤5,000
Beginning work in process was half converted as to labor and overhead. Direct
materials are added at the beginning of the process. All conversion costs are incurred
evenly throughout the process. Ending work in process was 60% complete.
Required:
Prepare a production cost worksheet using the weighted-average method.

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Physical
Units
EU EU
Flow of production
Direct
Materials Conversion
Work- in process, beginning 10,000
Started during period 20,000
To account for 30,000
Units completed 25,000 25,000 25,000
Work- in process, ending 5,000 5,000 3,000
Accounted for 30,000 30,000 28,000
PRODUCTION COST WORKSHEET
STEP 1: Summarize the flow of physical units of output
STEP 2: Compute output in terms of equivalent units

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Costs Totals
Direct
Materials
Conversion
Costs
Work in process, beginning ₤ 8,600 ₤ 6,000 ₤ 2,600
Costs added during period 47,000 30,000 17,000
Total costs to account for ₤55,600 ₤36,000 ₤19,600
Divided by equivalent units 30,000 28,000
Equivalent unit costs ₤ 1.90 ₤ 1.20 ₤ 0.70
STEP 3: Summarize total costs to account for
STEP 4: Compute cost per equivalent unit

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Assignment of costs
Costs transferred out (25,000 × ₤1.90) ₤47,500
Work in process, ending
Direct materials (5,000 × ₤1.20) 6,000
Conversion (5,000 × ₤0.70 × 0.60) 2,100
Costs accounted for ₤55,600
STEP 5: Assign total costs to units completed and to
units in ending work-in-process.

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Pet Products Company uses an automated process to manufacture its pet
replica products. For September, the company had the following activities:
Beginning work in process inventory
4,500 items, 1/4 complete with
regards to conversion costs
Units placed in production 15,000 units
Units completed 17,500 units
Ending work in process inventory
2,000 items, 3/4 complete with
regards to conversion costs
Cost of beginning work in process $5,250
Direct material costs, current $16,500
Conversion costs, current $23,945
Direct materials are placed into production at the beginning of the process and
conversion costs are incurred evenly throughout the process.
Required:
Prepare a production cost worksheet using the FIFO method.
Illustration 2 – FIFO

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Physical
Units
EU EU
Flow of production
Direct
Materials Conversion
Work in process, beginning 4,500
Started during period 15,000
To account for 19,500
Units completed
Work in process, beginning 4,500 3,375
Started and completed 13,000 13,000 13,000
Work in process, ending 2,000 2,000 1,500
19,500 15,000 17,875
PRODUCTION COST WORKSHEET
STEP 1: Summarize the flow of physical units of output
STEP 2: Compute output in terms of equivalent units

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Costs Totals
Direct
Materials
Conversion
Costs
Work in process, beginning $5,250
Costs added during period 40,445 $16,500 $23,945
Total costs to account for $45,695 $16,500 $23,945
Divided by equivalent units 15,000 17,875
Equivalent unit costs $2.44 $1.10 $1.34
STEP 3: Summarize total costs to account for
STEP 4: Compute cost per equivalent unit

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Assignment of costs
Work in process, beginning 5,250.00
Completion of beginning (3,375 × $1.34) 4,522.50
Total beginning inventory 9,772.50
Started and Completed (13,000 × $2.44) 31,720.00
Total costs transferred out $41,492.50
Work in process, ending
Direct materials (2,000 × $1.10) $2,200.00
Conversion (2,000 × $1.34 × 0.75) 2,010.00 4,210.00
Costs accounted for $45,702.50
STEP 5: Assign total costs to units completed and to
units in ending work-in-process.

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Transferred-in Costs
• Are costs incurred in previous departments that are
carried forward as the product’s cost when it moves to a
subsequent process in the production cycle.
• Are also called previous department costs.
• Journal entries are made to mirror the progress in
production from department to department.
• Transferred-in costs are treated as if they are a separate
type of direct material added at the beginning of the
process.

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Illustration 3 – weighted-average

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HOMEWORK
EXERCISE 18-30
PROBLEM 18-35

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THANK YOU
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