During production in a process costing environment, products flow in a first-in, first-out (FIFO) fashion through several processes, departments, or work cells.

As they do, the process costing system accumulates their costs and passes them on to the next process, department, or work cell. At the end of every accounting period, the system generates a report that assigns the costs that have accumulated during the period to the units that have transferred out of the process, department, or work cell and to the units that are still work in process. The process cost report may assign costs by using the FIFO costing method, in which the costs assigned to the first products processed are the first costs transferred out when those products flow to the next process, department, or work cell, or the average costing method, which assigns an average cost to all products made during an accounting period.

The Work in Process Inventory accounts are the focal point of a process costing system. Each production process, department, or work cell has its own Work in Process Inventory account. All costs charged to that process, department, or work cell flow into its Work in Process Inventory account. A process cost report prepared at the end of every accounting period assigns the costs that have accumulated during the period to the units that have flowed out of the process, department, or work cell (the cost of goods transferred out) and to the units that are still in process (the cost of ending inventory).