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Six steps must be taken when deriving and assigning product cost under a process costing system:
1. Compute the total number of physical units to account for.
2. Compute the physical units accounted for by tracing the physical flow of units.
3. Determine the number of equivalent units of production, either on the weighted average or FIFO basis, for each cost component. The cost components include transferred-in (if multidepartmental), direct material, direct labor, and overhead. In cases of multiple materials having different degrees of completion, each material is considered a separate cost component. If overhead is applied on a direct labor basis or is incurred at the same rate as direct labor, labor and overhead can be combined as one cost component and referred to as “conversion.”
4. Determine the total cost to account for, which is the sum of beginning inventory costs and all production costs incurred for the current period.
5. Compute the cost per equivalent unit of production for each cost component.
6. Assign the costs to the units transferred and the units in ending work in process inventory. The method of cost assignment depends on whether weighted average or FIFO costing is used. The total of the costs assigned to units transferred and to units in ending work in process inventory must equal the total cost to account for.
