ACCT20001 Chap.5 Process Costing and Equivalent Units
Process Costing and Equivalent Units
Where output is a population of interchangeable units, keeping a separate record for each one would cost more than it could ever be worth, so each unit's cost comes from averaging the period's spending across the whole population. The subject reduces the contrast to a single idea: what separates the two systems is simply how much averaging each of them does.
Process environments are often automated with little labour content, so labour is usually not traced separately at all and is folded in with overhead as conversion cost, leaving two cost categories rather than three. Averaging works only if the units being averaged over are comparable, and at period end some are half finished.
The subject solves this with equivalent units, meaning how much of an input has already gone into the units still on the floor, computed separately for materials and for conversion because the same closing stock is usually complete for one and not for the other. Five steps then run in a fixed order, and the last two must agree, which is the only internal check the method offers.
Australian practice values stock on one of two bases, weighted average or first in first out; this subject requires the weighted average calculation and an understanding of how the other differs.
What this chapter covers
- 01
Job costing against process costing, and why averaging is the difference
- 02
Why direct labour disappears into conversion cost
- 03
Transferred-in costs, and why they are always complete in the receiving department
- 04
Equivalent units, defined and computed
- 05
Two completion percentages for one set of physical units
- 06
The five steps, in the order that makes them check themselves
- 07
Working a period with no opening work in progress
- 08
The weighted average method, and what it blends
- 09
The first in first out method, and what it keeps separate
- 10
Why cost per equivalent unit is a period figure and not a standing rate
Convert closing stock into equivalent units in two columns
- 1Units completed enter both columns at their full physical count, because completed output is complete for every input: 9,000 and 9,000.
- 1Closing stock for materials is 2,000 at 100 per cent, which is 2,000 equivalent units, because the material went in at the start of the process.
- 1Closing stock for conversion is 2,000 at 35 per cent, which is 700 equivalent units.
- 1Total equivalent units are therefore 11,000 for materials and 9,700 for conversion.
Key terms
- Process costing
- A system in which the cost object is a mass of identical or similar units and unit cost is obtained by averaging the period's process cost over output.
- Conversion cost
- All manufacturing cost other than direct materials, used as a single category where labour is too small or too automated to trace separately.
- Equivalent units
- A measure of how much of an input has already gone into the units on the floor, found by multiplying physical units by the percentage of that input applied.
- Weighted average method
- A method that blends opening work in progress cost with current period cost and averages over all work done to date.
- First in first out method
- A method that keeps opening work in progress cost separate and assigns it to the first units completed, pricing the remainder at current cost.
- Transferred-in cost
- The accumulated cost carried into a later department by units arriving from an earlier process, always complete in the receiving department.
- Units to account for
- Opening work in progress plus units started, a total that must equal units completed plus closing work in progress.
- Cost per equivalent unit
- The cost of an input for the period divided by the equivalent units of that input, computed afresh each period.
Process Costing and Equivalent Units FAQ
How do I know whether a question wants process costing or job costing?
Read what the output is. Distinct units, batches or engagements made to a customer specification point to job costing; masses of identical units where every customer receives the same product point to process costing. The other reliable signal is the data itself: a question that gives completion percentages and units started is a process question, because those quantities have no meaning in a job system.
Is process costing simply less accurate?
Not inherently. It is more averaged, and averaging only discards information when the units being averaged over genuinely differ. Where output really is homogeneous, a process average is as accurate as a job record and dramatically cheaper to produce, so the question turns on how similar the output is rather than on the arithmetic of the method.
What is the fastest way to check a process costing answer?
Add the cost assigned to completed units to the cost assigned to closing work in progress and compare the total with the cost you had to account for in step four. They must be equal. If they are not, the fault is nearly always a completion percentage applied to the wrong column rather than a slip in the division, so recheck the equivalent-unit table before recomputing any rate.
What changes once there is opening work in progress?
The period then contains work done in two different periods at two different costs, so a rule is needed to say which cost attaches to which output. The weighted average method pours the opening cost into the same pool as current spending and draws one average out; first in first out keeps them apart and finishes the opening units on their own account.
This subject requires the weighted average calculation and an understanding of how the other differs.
Exam move
Work this chapter with a pen and a fixed layout. Draw the two-column equivalent-unit table the same way every time, materials on the left and conversion on the right, and fill the completed row before you touch the closing stock row. Then practise reading the sentence that fixes the materials column, because questions bury it in a line about when material is added and never mention it again.
Always finish with the step five reconciliation and treat a mismatch as information rather than annoyance: it tells you a percentage went into the wrong column. Finally, be able to describe the two inventory methods in two sentences each, since the subject asks you to calculate one and explain the difference between both.
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