Process costing tracks costs through multiple production stages. In a bakery, for example, costs are calculated separately for mixing, baking, and decorating departments. This method determines costs per equivalent unit and allocates them to completed products and work-in-process.

Equivalent units measure partially completed work in terms of finished units. By calculating costs for materials and conversion separately, managers can accurately value inventory and determine product costs. This approach ensures proper cost allocation and reconciliation across production stages.

Equivalent Units and Total Cost of Production in a Subsequent Processing Stage

Cost per equivalent unit calculation

• Determine total costs for materials and conversion costs separately
  • Materials costs encompass cost of raw materials added in current processing stage (flour, sugar)
  • Conversion costs include direct labor and manufacturing overhead incurred in current processing stage (wages, utilities)
• Calculate equivalent units for materials and conversion costs separately
  • Equivalent units for materials = Units completed and transferred out + (Units in ending WIP inventory × Percentage of completion for materials)
    • Measures the material input used to produce units completed and partially completed
  • Equivalent units for conversion = Units completed and transferred out + (Units in ending WIP inventory × Percentage of completion for conversion)
    • Measures the labor and overhead input used to produce units completed and partially completed
• Compute cost per equivalent unit for materials and conversion costs
  • Cost per equivalent unit for materials = $\frac{Total:materials:costs}{Equivalent:units:for:materials}$
  • Cost per equivalent unit for conversion = $\frac{Total:conversion:costs}{Equivalent:units:for:conversion}$
  • Determines the average cost per unit for materials and conversion in the current processing stage (baking department)
• The weighted average method is commonly used to calculate equivalent units and costs

Cost allocation for inventory transfers

• Calculate cost of units completed and transferred out
  • Cost of units transferred out = (Equivalent units for materials × Cost per equivalent unit for materials) + (Equivalent units for conversion × Cost per equivalent unit for conversion)
  • Assigns costs to units that have completed processing and moved to the next stage or finished goods (decorated cakes)
• Compute cost of units remaining in ending work-in-process inventory
  • Cost of ending WIP inventory = (Ending WIP units × Percentage of completion for materials × Cost per equivalent unit for materials) + (Ending WIP units × Percentage of completion for conversion × Cost per equivalent unit for conversion)
  • Assigns costs to partially completed units still in the current processing stage at the end of the period (cakes in the oven)
• Transferred-out costs represent the accumulated costs of units moving to the next stage

Total cost reconciliation in processing

• Total costs to be accounted for include:
  1. Cost of units transferred in from previous processing stage (mixing department)
  2. Materials costs added in current processing stage (chocolate chips)
  3. Conversion costs incurred in current processing stage (oven fuel)
• Total costs accounted for include:
  1. Cost of units completed and transferred out to next processing stage or finished goods inventory (packaged cookies)
  2. Cost of units remaining in ending work-in-process inventory (cookie dough)
• Ensure total costs accounted for equal total costs to be accounted for
  • If discrepancy exists, investigate reason and make necessary adjustments
  • Confirms all costs are properly allocated and the cost flow is balanced (no missing or double-counted costs)

Department Costing and Production Reporting

• Cost accumulation occurs within each processing department
• A production report summarizes the cost flow and unit flow for each department
• Department costing involves tracking costs separately for each production stage
• Cost reconciliation ensures all costs are accounted for accurately in the production process