Business Glossary

method that aggregates manufacturing costs by departments or by production processes. Total manufacturing costs are accumulated by major categories-direct materials, direct labor, and factory overhead applied. Unit cost is determined by dividing the total costs charged to a cost center by the output of that cost center. Process costing is appropriate for companies that produce a continuous mass of like units through a series of operations or processes-generally used in such industries as petroleum, chemicals, oil refinery, textiles, and food processing. A cost of production report is a cost sheet used for process costing that summarizes the total cost charged to a department and the allocation between the ending work-in-process inventory and the units completed and transferred to the next department or finished goods inventory. The output of a processing department during a given period is measured in terms of equivalent units of production which is the expression of the physical units of output in terms of doses or amount of work applied thereto. In computing the unit cost for a processing center, when a beginning inventory of work-in-process exists, two specific assumptions about the flow of cost are used-weighted average and FIFO. Under weighted average, the costs in the beginning inventory are averaged with the current period's costs to determine one average unit cost for all units passing through the cost center in a given month. Under FIFO, costs in the beginning inventory are not mingled with the current period's costs but transferred out as a separate batch of goods at a different unit cost than units started and completed during the period.