Process Costing In Management Accounting

July 22, 2021

Process Costing

The total cost is $150,000, and with 150,000 units produced, its cost-per-unit is $1. Two of the primary methods of determining the cost of each product are process costing and job costing. Job costing, in contrast, tracks all direct and indirect costs for each item or project. This is more commonly used by companies that offer custom products or services and price each one individually. The next step is to calculate cost per unit for both direct materials and conversion costs for each stage of the process.

Process Costing

By-products may require further processing after being separated from the main products. The point at which they are separated from the main product is called the ‘split off point.’ Till the split-off point all expenses incurred are considered to be joint expenses. The reason being business is earning profits from itself. So provision is to be created to value the stock at cost price when the concept of inter-process profit is introduced. In so many organisations the management may decide to transfer the product of one process to the next process not at the cost of production but at the market price or by adding profit in the cost. The profit may be agreed percentage either on cost price or on transfer price.

Finished Goods

All those expenses which are specially incurred for a process like corks, bottles, bags or primary packing material is the direct expenses incurred for that product or process. Separate products are produced, but the second product uses some of the first product in its manufacturing operations. In a fertiliser plant, acid phosphate is produced in one department. Some of this is sold and the rest is used in manufacturing fertiliser. Simultaneous Production – Different products, with or without by-product, are simultaneously produced in one or more processes. Process industries may also have problems of joint/by-products.

The account is debited with the cost of materials, labour and overheads relating to the process and the value of byproducts and scrap is credited. The balance of this account, representing the cost of a process, is passed on to the next process and so on until the final product is completed. The opening stock is shown on the debit side of the account prepared for the process concerned while the closing stock is shown on its credit side. For this reason, the amount standing at the credit of abnormal gain account will not be transferred to profit and loss account as it is. Amount of scrap value relating to five units will be debited to abnormal gain account and the balance thus arrived at will be transferred to profit and loss account for the year.

Process Costing

Management accountants may also leave out production costs and create under-costed products. Under-costed products usually result in lower business profits because goods are actually more expensive than actually reported. When no complexity of process costing is involved, process cost determination is a very simple exercise. It is not possible to trace the items of prime cost of a particular order, as its identity is lost in continuous production. The cost per unit can be ascertained at the end of any manufacturing process by dividing the total cost of a process by the number of units produced in that process.

3 Determining Equivalent Units

Summarize total costs to account for and Compute equivalent unit costs. For certain types of manufacturers, Process Costing is the most practical and efficient accounting method for determining product costs. Still, this method has both advantages and disadvantages.

It is a subset of operation costing typically applicable to manufacturing entities mass-producing a homogeneous product. Industries producing a standardized product wherein raw materials pass through multiple processes to obtain the final output are prime employers of the process costing technique. We focus on the weighted average approach here and leave the discussion of the FIFO method to more advanced cost accounting textbooks. Figure 4.1 “A Comparison of Cost Flows for Job Costing and Process Costing” shows how product costs flow through accounts for job costing and process costing systems. Table 4.1 “A Comparison of Process Costing and Job Costing” outlines the similarities and differences between these two costing systems.

Process Costing With Process Loss

From this account, the total amount is distributed to various process accounts on the basis of a manufacturing overhead summary sheet. The total cost of each process is divided by the total production by the process for arriving at the unit cost of the article processed. Products that have multiple extraneous features can benefit from process costing.

  • If the abnormal loss units have realisable value, then that value is credited to abnormal loss account.
  • Scrap value of normal loss account is credited to process account and scrap value of units representing abnormal loss is credited to abnormal loss account.
  • A process costing system accumulates the costs of a production process and assigns them to the products that the business outputs.
  • The fabric is cut into the correct shape, then each mask is sewn, and then the masks are packaged for shipment.
  • Product costs are allocated to the departments or processes each item passes through over a set period, instead of tracing costs to individual items produced.

Second, they divide the accumulated costs by the number of units produced in that process or department. Process costing is methodology used to allocate the total costs of production to homogenous units produced via a continuous process that usually involves multiple steps or departments. This method of process costing focuses on assigning costs to units in the order that they are produced.

These 9,000 units will end up in one of two places, either completed and transferred out or not completed and therefore in ending WIP inventory. The previous schedule shows that 4,000 units were completed and transferred out , and 5,000 units remain in ending WIP inventory. In the first stage of production, Coca-Cola mixes direct materials—water, refined sugar, and secret ingredients—to make the liquid for its beverages. The second stage includes filling cleaned and sanitized bottles before placing a cap on each bottle. In the third stage, filled bottles are inspected, labeled, and packaged.

Timesheet Integrations

Raw materials move through the production cycle in a continuous flow, ending with the production of identical packages of paper. Conversion costs are $100,000, or $.67 per package, comprising $70,000 in direct labor and $30,000 for overhead, including maintenance expenses, insurance costs and electricity.

Process Costing

A separate account is opened for each process to which all costs incurred thereon are charged. The total number of units produced during a given period is calculated and by dividing the total cost of a process by the total number of units produced, the cost per unit shall be obtained. In process costing, the emphasis is on accumulation of costs for a process during a given period of time and the number of units produced in the process during that period. To determine the unit cost of output of each process, the total production cost of the process is divided by the total quantity of the output of the process during a given period. Process costs are generally calculated at the end of the period, on completion of manufacture.

All units completed and transferred out during March are sold by March 31. Direct labor costs totaling $3,500 were incurred in the Molding department, to be paid the next month. The total costs to be accounted for match the total costs accounted for. ATotal costs to be accounted for must equal total costs accounted for . Figure 4.6 “Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department” presents the cost per equivalent unit calculation for Desk Products’ Assembly department. 1,000 units were completed and transferred out to the Finishing department ; thus 1,000 units were started and completed during May.

The general factory labor costs are indirect labor costs that are added to factory overhead. Unlike the accounting for payroll under the job order cost system, the employee does not have to be physically involved in making a product to be assigned to a specific function. The accounting for the labor costs for June includes the following journal entries, shown in the following table. Divide the total costs by equivalent units to get the cost per equivalent unit.

If the product of one process is transferred to another process by adding profit then the goods transferred in the credit by adding profit in that and the profit is shown in the debit of the process account. The output of each process in semi-finished condition should become the raw materials for the subsequent process. Determine the cost per unit of normal production by dividing the result of step No. 2 by result of step No. 1. Determine the total accumulated cost relating to the process, i.e., cost transferred + cost introduced in the process – scrap value of normal loss. CIMA defines this term as – “notional whole units representing com­pleted work.

Accounting Vs Bookkeeping

The accumulated cost at this point of completion is what we transfer to the WIP account. The most notable difference between job and Process costing is the WIP calculation. In Job Costing, we estimate the percentage of completion for each partially finished job. On the other hand, in Process Costing, we cost the processes up to the current production stage. We can use several methods to calculate the total incurred costs and produced units during the period. We can either use one of these approaches or a combination between them.

The underlying of ABC costing are cost drivers used to determine the basis of cost absorption. For example, the rent of a factory may be absorbed basis the area occupied by each machine. Calculate the costs assigned to ending WIP inventory for the Painting department for direct materials, direct labor, overhead, and in total. Which types of companies use a process costing system to account for product costs?

A total of 10,000 units of product remain in the Assembly department at the end of the year. Direct materials are 80 percent complete and direct labor is 40 percent complete. Calculate the equivalent units in the Assembly department for direct materials and direct labor. Recall that Desk Products, Inc., has two departments—Assembly and Finishing. Although this chapter focuses on the Assembly department, the Finishing department would also use the four steps to determine product costs for completed units transferred out and ending WIP inventory. Table 4.2 “Production Information for Desk Products’ Assembly Department” presents information for the Assembly department at Desk Products for the month of May.

Because of this, labor and material costs are considered direct costs. The first step to calculating product cost per gallon is to determine what process each expense relates to.

Soap Production Company’s Mixing department shows the following information for the 1,000 units of product remaining in work in process at the end of the period. Products with a cost of $9,100 are completed and transferred from the Packaging department to the finished goods warehouse. A system of assigning costs used by companies that produce unique products or jobs.

By products possess a lesser value when compared to main products. Calculate the cost per unit of Equivalent output according to each element of cost.

Review this information carefully as it will be used to illustrate the four key steps. Job costing, also known as job order costing, and process costing are cost accounting systems designed to help businesses keep track of all the costs they have to pay to produce a product or deliver a service. The type of costing method you use depends on the type of business you’re running. For example, 200 units 50% complete will be equal to 100 equivalent units. Equivalent production is obtained by multiplying the actual number of units in process by their stage of completion in terms of cost. Suppose, 6,000 units are completed and transferred to the subsequent process, and 3,000 units remain incomplete (at the stage of 40% completion) at the end of the period. Abnormal loss cannot be treated like overhead of the process to be shared by good units.

The following information pertains to the Finishing department for the month of June. Using a simple example to explain this concept, assume 30 students attend school and each takes half a full load of classes. However, this is the equivalent of 15 full-time students, or 15 FTES. Products with a cost of $8,300 are sold to customers. The Coca-Cola Company is one of the world’s largest producers of nonalcoholic beverages.

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