Description of process costing in accounting

5. Process costing example

On January 1, 20X4, a small Coke plant’s bottling facility starts the period with 500 units which are 100% complete for materials and 20% complete for conversion costs. The facility begins production of 4,000 units and sends 3,500 filled bottles to the packaging facility during January. On January 31, 1,000 bottles (i.e., 500 + 4,000 – 3,500) remain in ending WIP inventory, and they are 100% complete for materials and 50% complete for conversion costs. The costs in beginning WIP inventory and those incurred during January are as follows:

Beginning WIP inventory costs




     Conversion Costs (overhead and labor)



Costs added in January




     Conversion Costs (overhead and labor)


Our first step is to track our units. We had 500 in WIP at the beginning of January and started 4,000, so we need to keep track of 4,500 units. According to the example, ending WIP inventory is 1,000 units and 3,500 units are completed. We’ll come back to those numbers later, so put them on the back burner for now.

Next, we need to determine EUP (i.e., equivalent units of production) for January. Weighted-average process costing ignores the amount of work done on beginning WIP inventory and assumes that every unit finished in the period was also started in the period (even if that is not necessarily true).


Number of Units

EUP - Materials

EUP - Conversion

Completed Bottles




Ending WIP Bottles


1,000 (1,000 x 100%)

500 (1,000 x 50%)





According to the table, the bottling facility had 4,500 EUP for materials and 4,000 EUP for conversion costs. Note that we have equivalent units of production for materials and conversion and in our case, the numbers of such units happen to be different.  Now that we have EUP values, we’ll add cost information (refer to the beginning of this case for cost information).

Materials Cost = $110 (beginning WIP) + $1,040 (January costs) = $1,150

Conversion Cost = $58 (beginning WIP) + $2,379 (January costs) = $2,437


Cost per Material EUP = $1,150 (materials cost) ÷ 4,500 (materials EUP) = $0.26*

Cost per Conversion EUP = $2,437 (conversion costs) ÷ 4,000 (conversion EUP) = $0.61*

(*) Costs per unit are rounded.

We now have all the information we need to separate costs between the bottles sent to the packaging facility and the bottles remaining in ending WIP inventory. In addition, we can easily determine the cost of each bottle sent to the packaging facility this period. The amounts in January’s ending WIP inventory become February’s beginning WIP inventory.



Ending WIP

Number of Units




Materials Cost

$910 (3,500 x $0.26)

$260 (1,000 x $0.26 x 100%)

Conversion Cost

$2,135 (3,500 x $0.61)

$305 (1,000 x $0.61 x 50%)


Total Cost



Cost per bottle sent to packaging = $0.87 ($0.26 + $0.61, or $3,045 ÷ 3,500)

For the completed bottles, note that the material and conversion costs are calculated using the cost per unit without prorating them (because all bottles are 100% completed).  On the other hand, for the bottles in the ending inventory, the material cost is determined at 100% because all material had been added to such bottles while the conversion cost is set at 50% because not all conversion costs have been applied by the end of January.

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