allocation base

standard unit that provides the system for the way overhead costs of a product or service are divided

completed unit

segment of work that is finished 100% in the related processing department; not the same as finished goods that are ready to sell

conversion cost

expense necessary to transform raw material to a finished product, generally equal to direct labor cost plus manufacturing overhead

cost of production report

processing department's explanation of how much was manufactured and spent during a specific reporting period

direct labor

hours spent producing a product or providing a service that can easily be traced to the product or service

direct materials

raw goods that can be traced directly to, or easily identified with, a specific product

equivalent units calculation

method of figuring out the inventory value of partially finished units

equivalent units of production

estimate of the amount of work done on items that are only partially completed at the close of an accounting period

first in, first out (FIFO) inventory method

inventory method based on the assumption that units purchased first are to be sold first

general ledger

record of the transactions of a company's complete financial accounts, such as expenses, income, money generated, and more

generally accepted accounting principles (GAAP)

rules and standards adopted by the Securities and Exchange Commission that companies must follow when reporting financial information

operation costing

hybrid method of expense tracking that uses some aspects of job order costing and some from process costing


operating costs or expenses, such as rent, electricity, and taxes

predetermined overhead rate

estimated ratio established before an accounting period begins; used to allocate costs involved in producing goods or services. The accountant calculates it by dividing the estimated manufacturing overhead costs for the accounting period by the allocation base.

process costing

method used when large quantities of similar products are manufactured and expenses are applied to a series of actions instead of an individual product

processing department

area of operation that moves material or data through a series of actions that bring the company closer to a stated goal

raw materials

items a manufacturer uses as the basic parts to create a product

unit cost

expense identified with one unit of the company's product or service

weighted average method

method whereby the carrying value of a unit of inventory is based on the weighted average cost of inventory purchases

work in process (WIP) inventory

means of keeping track of products that have started through production but are not yet complete