Case 1: Process Costing With Zero Beginning or Ending Work-in-Process Inventory

Learning Objective 2 Understand the basic concepts of process costing and compute average unit costs

divide total costs by total units in a given accounting period

On January 1, 2020, there was no beginning inventory of SG-40 units in the assembly department. During the month of January, Pacific Electronics started, completely assembled, and transferred 400 units to the testing department.

Data for the assembly department for January 2020 follow:

Physical Units for January 2020
Work in process, beginning inventory (January 1)	0 units
Started during January	400 units
Completed and transferred out during January	400 units
Work in process, ending inventory (January 31)	0 units

Physical units refer to the number of output units, whether complete or incomplete. In January 2020, all 400 physical units started were completed.

A table shows total costs for January 2020 for Pacific Electronics

The table depicts total costs for January 2020 for Pacific Electronics. The details of the table are as follows:

1. Direct materials costs added during January: 32,000 dollars

2. Conversion costs added during January: 24,000 dollars

3. Total assembly department costs added during January: 56,000 dollars

Pacific Electronics records direct materials costs and conversion costs in the assembly department as these costs are incurred. The cost per unit equals total costs incurred in a given accounting period divided by total units produced in that period. So, the assembly department cost of SG-40 is $$ 56,000 \div 400 units = $140$ per unit:

A table shows the assembly department cost of SG-40

The table depicts the assembly department cost of SG-40. The details of the table are as follows:

1. Direct materials cost per unit, 32,000 dollars divided by 400 units: 80 dollars

2. Conversion costs per unit, 24,000 dollars divided by 400 units: 60 dollars

3. Assembly department cost per unit: 140 dollars

Case 1 applies whenever a company produces a homogeneous product or service but has no incomplete units when each accounting period ends. This is a common situation in service-sector organizations. For example, banks adopt this process-costing approach to compute the unit cost of processing 100,000 customer deposits made in a month because each deposit is processed in the same way regardless of the amount of the deposit.