Question

Describe the four (4) steps in Process Costing and what is a Process Cost Summary.

Answer 1

The four basic steps in process costing:

(1) The flow of physical units of output should be summed up - Determine how much inventory was there in the beginning of the production cycle, how many units were started during the cycle, how many units were completed during the cycle, and how many units were left as work-in-progress at the end of the production cycle.

(2) Compute Work-In-Process Inventory and total output in terms of equivalent units - The work-in-process ending inventory should be converted into a number of equivalent units produced, so it's easier to allocate the costs that incurred, e.g. if they are 500 units in work-in-process, 50% complete that means the equivalent units are 250.

(3) Sum up all the costs to account for and compute cost for each equivalent unit - Add up all the direct and indirect costs that incurred during the production cycle that need to be allocated to the equivalent units produced during that production cycle. The costs should include the costs of the opening/beginning inventory and the costs incurred during that production cycle. The total cost should be divided by the equivalent units produced to get the cost of each equivalent unit produced.

(4) Total cost should be allocated to units completed and units in work in process at the end - Total costs should be assigned to the units completed to determine the cost of the units which are completed 100% and also to the work-in-process in the end so when the work-in-process is carried to the next production cycle we know the costs to be accounted for.

Process Cost Summary:

A Process Cost Summary is a production report that has the details, of the costs incurred by the department, the number of units produced, and costs allocated to the units produced and work-in-process inventory at the end. Basically it is a report that summarizes all of the costs and production of a process.