Explain the process costing income statement and provide a hypothetical example of process costing income

statement in a manufacturing enterprise. Explain how unit product cost is evaluated in this format. Provide
in-text citations and explain your example in detail

According to Wild and Shaw (2019), process operation involves large volume of similar products in a
continuous flow of a sequential process, also process operation is highly standardized. And process
income statement is the financial statement that describe how much money company spend and earned
during the process operation at a specific period.

Example

Process income statement

Assumption:

1. Units during this period

2. Assume direct material 100% conversion and direct labor 50% conversion

Cost per Equivalent units:

Direct Material

According to Wild and Shaw (2019), EUP is calculated as

“Equivalent units of production (EUP) Number of whole units = completed and transferred out* Number
of equivalent units + in ending work in process” and Cost per EUP = total cost / EUP.

Cost Per EUP for direct material = direct materials cost at the beginning of process and cost incurred this
period / total units = ($100,000 + $40,000) / (60,000 + 15,000 * 100%) = $1.87

Conversion:

Cost Per EUP for conversion = ($50,000 + $15,000 + $20,000) / (60,000 + 15,000 * 50%) = $1.26

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 When calculating total units for conversion, as we assume 50% direct labor conversion, total units = units
completed and transferred out + ending WIP * conversion rate = 60, 000 + 15,000 * 50% = 75,000 units.

Explain the variable costing income statement and provide a hypothetical example of variable costing
income statement in a manufacturing enterprise. Provide in-text citations and explain your example in
detail.

Variable costing means “where direct materials, direct labor, and variable overhead costs are included in
product costs. This method is useful for many managerial decisions, but it cannot be used for external
financial reporting” (Wild & Shawn, 2018, p. 764). Compare to absorption costing, the main difference is
that variable costing assigns fixed overhead cost to period expense whereas absorption costing include
fixed overhead cost to cost of goods sold.
Assumption

Sales is 10,000 units in this period

Income Statement – variable costing

Explanation: with variable costing, we assigned fixed manufacturing overhead ($500,000) to period cost
and set fixed manufacturing overhead to 0 for cost of goods manufactured.

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 Wild, J. J., & Shaw, K. W. (2019). Financial and managerial accounting: Information for decisions.

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