Average cost (or weighted average) method A method of computing equivalent units where the number of equivalent units for each cost element equals the number of units transferred out plus the number of equivalent units of that cost element in the ending inventory.

Conversion costs Costs of converting raw materials into the final product. Direct labor plus overhead.

Equivalent units A method of expressing a given number of partially completed units as a smaller number of fully completed units; for example, bringing 1,000 units to a 75 per cent level of completion is the equivalent of bringing 750 units to a 100 per cent level of completion.

First-in, first-out (FIFO) method A method of determining unit cost. This method computes equivalent units by adding equivalent units of work needed to complete the units in beginning inventory, work done on units started and completed during the period, and work done on partially completed units in ending inventory.

Job cost system (job costing) A manufacturing cost system that accumulates costs incurred to produce a product according to individual jobs.

Process cost system (process costing) A manufacturing cost system that accumulates costs incurred to produce a product according to the processes or departments a product goes through on its way to completion.

Production cost report A report that shows both the flow of units and the flow of costs through a processing center. It also shows how accountants divide these costs between the cost of units completed and transferred out and the cost of units still in the processing center’s ending inventory.

Transferred-in costs Costs associated with physical units that were accumulated in previous processing centers.