Many Process-Costing systems have two or more departments or processes in the production cycle. As units move from one department to another, related costs are transferred monthly through journal entries. Transferred-in costs are also known as previous-department costs, which can be explained as costs which were incurred in previous departments and to be carried forward as the product’s cost when it is moved to subsequent processes in the production cycle.
Conversion costs are added equally during the testing department’s process and in the end of the process in testing, units receive additional direct materials, including crating and other packing materials to prepare units for shipment. As units are completed in testing, they are immediately transferred to Finished Goods. Computation of testing department costs consists of transferred-in costs, as well as direct materials and conversion costs that are added in testing.
These costs are treated as separate costs like direct material addition at the beginning of the process. Hence, these costs are always 100% complete as of the beginning of the process in the new department. In case of successive departments the transferred units from one department become all or a part of the direct materials of the next department; however, they are called transferred-in costs, not direct material costs.
Transferred-in costs, the costs assigned in the previous period to units that were in process at the beginning of the current period but are now included in the units transferred are to be cautiously included. In case when unit costs fluctuate between periods then transferred units may contain batches accumulated at different unit costs. The units may be measured in different denominations in different departments therefore while calculating these costs consider each department separately.