 Process costing is one of the two widely used cost accumulation procedures that are used when

products are manufactured under conditions of continuous processing or under mass production
methods.
 Process costing is a method for assigning product costs to units of product when all units of product
are virtually the same.
 Products are completed in a short time, and costs for a single period can be averaged over the number
of units produced. These conditions exist in industries that produce such products as plastics, textiles,
petroleum, steel, sugar, drugs, etc.
 With process costing, costs are not traced to unit of product. Instead, all production costs (unit-level
and otherwise) are assigned or allocated based on total production costs and total units produced.
 Job costing and process costing differ in the way costs are assigned, and they differ because of
differences in product characteristics. With job costing, many costs are traceable to jobs or can be
assigned to specific jobs using cost-driver rates.
 For products in a process costing environment, all costs must be assigned using a cost-driver
approach. They key difference is that the only cost-driver is the actual number of units produced.
In general, process costing is used;
 In homogeneous products
 In continuous processing
 In mass production techniques
 Process costing is most commonly used in industries that produce essentially homogeneous (e.g.
uniform) products on a continuous basis.
 Firms producing distinct and unique products use job order costing where as firms producing
similar or identical units use process-costing system.
 Process costing system accumulate costs by department for a period of time, just as a job
order costing system accumulate costs by job, and the total cost then will be assigned to the
units produced during that period.
3.4.1 Characteristic/Features of Process Costing
1) Production is continuous, in a series of stages called processes.
2) Each process is deemed as a cost centre and costs are accumulated for each process separately
along with output finished and in progress.
3) Products and processes are standardized.
4) The output of one process becomes the raw material to the next process, usually till the final
product is completed.
5) The cost of the previous process is transferred to the next process along with the output.
Sometimes, the transfer may be at a transfer price inclusive of profit.
6) There may be process losses of the input. They may be normal or abnormal or both.
7) Completed and semi finished outputs have to be expressed in common terms for cost
determination.
8) Since production is of identical units, the total cost of a process is divided with the units of output
to obtain average cost per unit.
9) Two or more products may be produced unavoidably in the same process. They may be of equal
importance or of disproportionate values.
10) It is not possible or necessary to trace or identify specific lots of material inputs with products or
output.

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Advantages of Process Costing:
1) Cost of each process and that of the finished product can be computed at short intervals, weekly or
daily.
2) Cost control and control over production are more effective because of uniform output and usage of
predetermined costs as budgeted or standard costs.
3) Cost ascertainment is simple and less expensive.
4) Average cost per unit can easily be obtained.
5) Indirect expenses can be apportioned and allocated more accurately and reliable data can be obtained.
6) Valuation of inventories is easier and accurate.
7) Quotations become easier due to standardized processes.
Disadvantages:
1) Costs obtained at the end of processes are historical costs and their utility for cost control and
managerial decision-making is not significant.
2) Inefficiencies in processes can be concealed.
3) Later processes may be adversely affected due to the inefficiency of earlier processes.
4) Evaluating the efficiency of individual workers or supervisors is difficult.
5) Apportionment of joint costs to common products may lead to irrational pricing decisions.
3.5 Illustrating Process Costing
3.5.1 Three cases in process costing
Case 1: Process costing with zero beginning and zero ending work-in-process inventories that is all units
are started and fully completed by the end of the accounting period.
Haron Chemical Company makes different chemicals and uses process costing system to account for its
operation. One of its products, namely product A is produced in two processing departments: the Mixing
Department and the Bottling Department. Product A is marketed in one-liter bottles.
Part I: Mixing Department
In the mixing department, various ingredients are added at the start of the process and costs are
accumulated in two pools, one for direct material and another for the conversion costs. Direct material is
added at the beginning of the process and conversion costs are applied evenly throughout the process.
Data for the first month of operation (September of the mixing department is given below:
Physical Units, Costs and Stages of Completion
Beginning work in process 0 units
Started during the month 1,000 units
Completed during he month 1,000 units
Direct material costs Br. 80,000
Conversion costs Br. 40,000
Ending work in process 0 units
Total cost of production for the month is computed as follows:
Direct Material costs -------------------- 80,000
Conversion costs -------------------------- 40,000
Total cost ----------------------------------- 120,000
Unit cost
Direct material --------------------------- 80 (80,000/1000)
Conversion cost ------------------------- 40 (40,000/1000)
Total --------------------------------------- 120 (120,000/1000)
Case 2: Process Costing with zero beginning but some ending work in process inventory

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Data for the second month of operation (October) of the Mixing Department is given below:
Physical Units, Costs and Stages of Completion
Beginning work in process 0 units
Started during the month 2,000 units
Completed during the month 800 units
Ending work in process (60% completed as to conversion cost) 1200 units
Direct material costs Br.160,000
Conversion costs Br. 91,200
How should the Co. Calculate the cost of fully assembled units in and the cost of partially assembled units
still in process at the end of September?
Steps:
Step 1: summarize the flow of physical units of output (quantity schedule)
This schedule shows the physical flow of units into and out of departments. The total units to account for
most equal to the total units accounted for.
Step 2: Compute output in terms of Equivalent Units (EUs) Schedule:
Equivalent units are the number of units for which periodic manufacturing cost is incurred. Equivalent
units equal the total units completed plus incomplete unit restated in terms of completed units.
Step 3: Compute Equivalent unit costs
This is computed by dividing costs incurred by the related equivalent units.
Step 4: Summarize total Cost to Account for Schedule:
This schedule shows which costs are charged to or accumulated by the department. Unit costs broken
down by the cost elements are also presented in this section.
Step 5: Assign total costs to unit are completed and to units in ending work in process
This schedule shows the distribution of accumulated costs to units completed & transferred and to units
still in process. The total cost to account for must equal to the total cost accounted for.
Usually process costing system is illustrated under three cases. These cases are:

Physical units & Equivalent units (Step 1 & 2)

Step – 1 Step – 2 equivalent units

Flow of production Physical units Direct Material Conversion costs
Beginning work in process 0 - -
Started during the month 2,000 units - -
Total units to account for 2,000 units - -
Completed during the month 800 800 800
Work in process ending 1,200 1,200 720
Total units accounted for 2,000 - -
Work done current period 2,000 1,520

Production cost report Total production cost Direct material cost Conversion cost
Costs added this period 251,200 Br. 160,000 Br. 91,200
Equivalent units 2,000 1,520

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Equivalent unit cost (step -3) 80 60
Total cost to account for (st -4) 251,200 - -
Assignment of cost (step 5) - - -
Competed & transferred out 112,000 800*80 800*60
W/P ending: Direct material 96,000 1,200*80 -
Conversion cost 43,200 - 720*60
Total W/P ending 139,200 - -
Total cost accounted for 251,200 - -

Journal entries
 W/P mixing department -------160,000
Materials control ----------------- 160,000
 W/P mixing department ------- 91,200
Various accounts -----------------------91,200
Case 3: Process costing with some beginning and some ending work in process inventory.
Data for the third month of operation (November) of the mixing department is given below:
Beginning work in process 1,200 units
Started during the month 1,000 units
Completed during the month 1,600 units
Ending work in process (50% completed as to conversion costs) 600 units
Direct material costs Br.69,000
Conversion costs Br.70,800

3.5.2 Weighted-Average process costing method

 This method calculates the equivalent unit cost of the work done to date (regardless of the period in
which it was done) and assigns this cost to equivalent units completed and transferred out of the
process and to equivalent units in ending work in process inventory.
 The weighted average cost is the total of all costs entering in the work in process account (regardless
of whether it is from the beginning work in process or from work started during the period) divided
by total equivalent units of work done to date.
Using the weighted average method, the cost of partially and fully computed units can be computed
as follows:
Step – 1 Step – 2 Equivalent units
Flow of production Physical units Direct material Conversion costs
Beginning work in process 1,200 - -
Started during the month 1,000 - -
Total units to account for 2,200 - -
Completed during the month 1,600 1,600 1,600
Work in process ending 600 600 300
Total units accounted for 2,200 - -
Work done to date - 2,200 1,900

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Production cost report Total production cost Direct material cost Conversion cost
Beginning W/P Br. 139,200 Br. 96,000 Br. 43,200
Current period cost 139,800 69,000 70,800
Cost incurred to date - 165,000 114,000
Equivalent units - 2,200 1,900
Equivalent unit cost ( step – 3) - 75 60
Total cost to account for (st-4) 279,000 - -
Assignment of cost - - -
Competed & transferred out 216,000 1600*75 1600*60
W/P ending: direct material 45,000 600*75 -
Conversion 18,000 - 300*60
Total W/P ending 63,0000 - -
TC accounted for 279,000

Journal entries
 W/p mixing department -------- 69,000
A/P --------------------------------------- 69,000
 W/P mixing department -------- 70,800
Various accounts --------------------- 70,800
 W/P mixing department ----------------- 216,000
W/P bottling department ---------------------- 216,000

3.5.3 First-in, First-out Method

 The FIFO process costing method assigns the cost of the previous periods equivalent units in
beginning work-in process inventory to the first units completed and transferred out of the process,
and assigns the cost of equivalent units worked on during the current period first to complete
beginning inventory, then to start and complete new units in ending work in process inventory.
 This method assumes that the earliest equivalent units in the work in process account are completed
first.
 A distinct feature of the FIFO process-costing method is that work done on beginning inventory
before the current period is kept separate from work done in the current period.
 Costs incurred in the current period ad units produced in the current period are used to calculate costs
per equivalent unit of work done in the current period.
 In contrast equivalent unit and cost per equivalent unit calculations in the weighted average method
mere the units and costs in beginning inventory with units and costs of work done in the current
period.
Using the FIFO method, the cost of partially and fully computed unit can be computed as follows:
Step – 1 Step – 2 Equivalent units
Flow of production Physical units Direct material Conversion costs
Beginning work in process 1,200 - -
Started during the month 1,000 - -
Total units to account for 2,200 - -
Completed during the month
From beginning 1,200 0 480

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 Started and completed 400 400 400
Work in process ending 600 600 300
Total units accounted for 2,200 - -
Work done only current period 1,000 1180

Production cost report Total production cost Direct material cost Conversion cost
Beginning W/P Br. 139,200 Br. 96,000 Br. 43,200*
Current period cost 139,800 69,000 70,800*
Work done only current period 1,000 1180
Equivalent unit cost (step – 3) - 69 60
Total cost to account for (st-4) 279,000 - -
Assignment of cost (step -5)
Completed:
From the beginning WIP
Cost in the beginning WIP 139,200
Cost to complete these units : - - -
Direct materials 0 0*69
Conversion costs 28,800 - 480*60
Total cost from beginning 168,000 -
Started and completed 51,600 400*69 400*60
Total completed & transferred out 219,600 - -
W/P ending: direct material 41,400 600*69
Conversion cost 18,000 - 300*60
Total W/P ending 59,400 - -
Total cost account for 279,000 - -

Journal entries
 W/P mixing department --------------69,000
A/P --------------------------------------------- 69,000
 W/P mixing department -------------- 70,800
Various accounts --------------------------- 70,800
 W/P bottling department ------------ 219,600
W/P mixing department ---------------- 219,600

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