Process costing –
Use when products are mass produced and very similar or identical in nature. – in a continuous flow environment.

Common products that are mass produced are foods and drinks, drugs, chemicals, paints, oil and gas products

Separate work in process accounts are used for each department or manufacturing process.

Total costs are determined at the end of the period for each department or manufacturing process.

Inventory is valued using the average cost of the “equivalent units”

A production cost report is used to show the value of ending work in process and finished goods for the period.

Equivalent Units –

The number of whole units you would have if all units processed during the period were complete

The number of whole units that could have been produced from the material and resources added this period

Manufacturing/Product Costs –
Direct materials, direct labor, and manufacturing overhead
Conversion = labor + O/H Product

Costs are accumulated during the period and an average cost per equivalent unit is calculated for the three types of product cost. The average cost per equivalent unit is used to value inventory.

                  Average Cost per Equivalent Unit =          total product costs $ 
                                                                                       equivalent units 

1st – Complete the quantity column – the top and bottom part

You will be given the quantity of units in beginning inventory and units started this period. Place those quantity amounts in the top part of the schedule. This is what went into production this period.

“Transferred in” means units started when the goods are started in another department and come to this department next.

What went in during the period has to come out at the end of the period. It comes out as beginning inventory that was finished, started and completed, or ending inventory still in process. The total of these 3 must equal what went in during the period. (1) = (1).

Put the total units in the bottom part of the schedule on the total line. The bottom beginning inventory amount is the same as the top beginning inventory amount. Ending inventory is normally given, if it is put the amount in and plug to find the started and completed amount (whatever it takes to get the numbers to add to the total).

At times the ending quantity is not given and units transferred/completed is given. Units transferred/completed is the total of beginning inventory and started and completed; it is all goods finished this period. This will be the sum of the first two lines on the bottom part. When you know this you can plug to find the ending inventory.

2nd – Calculate the equivalent units that have been produced during the period.
There are two common methods used: weighted average and FIFO.

Weighted Average:

Beginning inventory = 100% of amount in the total column for all

This method assumes all work on units was done this period Started/Completed = 100% of amount in the total column for all Ending inventory = the % complete times the amount in the total column. You may have a different % given for each type of product cost.

FIFO:

Beginning inventory = the % done this period only times the amount in the total column for each product type.

The % done this period will be 1 less the % complete at the beginning of the period

This method gives credit only for work done this period
Started/Completed = 100% of amount in the total column for all
Ending inventory = the % complete times the amount in the total column.
You may have a different % given for each type of product cost.

Important: The only difference in Weighted Average and FIFO is the equivalent unit
quantities for beginning inventory (started/completed and ending inventory equivalent units will be the same for both methods.

Calculate total production costs

Weighted Average cost: Use total costs, beginning + current period

         FIFO cost:         Only use costs added this period.
                                    You did not include work from last period in the equivalent
                                    units and you can not include the dollars either.

Calculate cost per equivalent unit:

         Average Cost per Equivalent Unit =                Product costs $ 
                                                                               Equivalent units 
     

Compute average cost for each column in the equivalent units schedule

Reconcile Weighted Average Method to FIFO Method: 

         Weighted Average Equivalent Units 
         -Beginning Inventory E.U. -work not done this period
         = FIFO Equivalent Units

The difference is the work that was done last period is not counted in FIFO.

Cost Reconciliation Report: (Value work in process and finished goods)

         The value of inventory is always: equivalent unit quantity x cost per unit
                  WIP and FG have three components: Material, labor, O/H 
                  (or two components: material and conversion (labor + O/H combined) 
       
         1st - Value WIP – done the same for W.A. and FIFO 

                  Use the quantity of equivalent units from the ending inventory row

                           # equivalent units x $ per eq. unit = total cost for that product cost type

                           Do this for material and conversion and add them together to get total
                              value of WIP. (WIP is units in ending inventory)

         2nd – Value finished goods: done differently for W.A. and FIFO

                  Weighted Average: 

                  Add BI + SC eq. units together to get total eq. units. These were all        
                     done at 100%. All units received all costs.

                  Total E.U x total $ per eq. unit (material + conversion) = FG value

                  FIFO: 

                  Finished goods is valued using a three step process:
                     1) Add in beginning inventory $, this is given
                     2) Take the equivalent units from the beginning inventory row x the cost per unit = BI this period cost 
                     3) Take the equivalent units from the started/completed row x the cost per unit = S/C period cost:  
                          Add all three together to get the total cost of finished goods.