Process costing is used in situations where homogeneous products or services are produced on a continuous basis. Costs flow through the manufacturing accounts in basically the same way in both job-order and process costing systems. A process costing system differs from a job-order system primarily in that costs are accumulated by department (rather than by job) and the department production report replaces the job cost sheet.

To compute unit costs in a department, the department's output in terms of equivalent units must be determined. In the weighted-average method, the equivalent units for a period are the sum of the units transferred out of the department during the period and the equivalent units in ending work in process inventory at the end of the period.

The activity in a department is summarized on a production report, which has three separate (though highly interrelated) parts. The first part is a quantity schedule, which includes a computation of equivalent units and shows the flow of units through a department during a period. The second part consists of a computation of costs per equivalent unit for materials, labor, and overhead as well as in total for the period. The third part consists of a cost reconciliation, which summarizes all cost flows through a department for a period.

Learning Objectives

Record the flow of materials, labor, and overhead through a process costing system.

Compute the equivalent units of production using the weighted-average method.

Compute the cost per equivalent unit using the weighted-average method.

Assign costs to units using the weighted-average method.

(Appendix 4A) Compute the equivalent units of production using the FIFO method.

(Appendix 4A) Compute the cost per equivalent unit using the FIFO method.

(Appendix 4A) Assign costs to units using the FIFO method.

(Appendix 4B) Allocate service department costs to operating departments using the direct method.

(Appendix 4B) Allocate service department costs to operating departments using the step-down method.