Process costing is a method of costing used mainly in manufacturing where In a manufacturing process the number of units of output may not necessarily. Why are equivalent units of production used in process costing? 3. How are equivalent units of production determined using the weighted average and FIFO . compare and contrast job, batch, contract and process costing; In this chapter, you will learn about another costing method: process costing. Process cost-.
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Process costing is a cost accumulation method where continous production of job costing whereas in process costing cost is accumulated for a process which. Process Costing: Objectives, Process Cost Accounting Procedure, Basic Steps for Solution of Problems in Process Costing, Normal Loss, Abnormal Loss. After studying this chapter you should able to understand. • the meaning of Process Costing and its importance. • the distinction between job costing and process.
Conversion cost The cost incurred in converting raw materials into finished products. Conversion cost is made up of direct labour and manufacturing overhead. Cost reconciliation The part of a production report that shows what costs a department has to account for during a period and how those costs are accounted for.
Weighted-average method A method of process costing that blends together units and costs from both the current and prior periods. FIFO method A method of accounting for cost flows in a process costing system in which equivalent units and unit costs relate only to work done during the current period.
Points of Note: Under the FIFO method, units transferred out are divided into two groups: Exxon Corporation uses a process costing system to account for the manufacture of a select fuel product. The following information is available for the Mixing Department for month of May Beginning Work in Process 7, 5, 4, Started into Production 14, Total units into production 21, Completed and Transferred: Completed and Transferred: Dachuna Inc.
The following data concern the operations of the company's mixing department for the month of April Prepare a production report for the mixing department for the month of April Question 2: Anchor Inc.
The following data concern the operations of the company's blending department for the month of June Prepare a production report for the blending department for the month of June Question 3: For each of the following independent cases, determine the information requested.
Beginning inventory amounted to units. This period 2, units were started and completed. At the end of the period, the 1, units in inventory were 30 percent complete. Using FIFO costing, the equivalent production for the period was 2, units.
What was the percentage of completion of the beginning inventory? During the period, 4, equivalent units were required to complete the beginning inventory, and 6, units were started and completed.
The ending inventory represented 1, equivalent units of work this period. FIFO costing is used. What was the total conversion costs incurred this period? In the beginning inventory, 1, units were 40 percent complete with respect to materials.
Process Costing PDF(2)
During the period, 8, units were transferred out. Ending inventory consisted of 1, units that were 70 percent complete with respect to materials. How many units were started and completed during the period? Assume FIFO costing. At the start of the period, 8, units were in the work in process inventory and 6, units were in the ending inventory.
During the period, 19, units were transferred out to the next department. Materials and conversion costs are added evenly throughout the production process.
How many units were started this period? Since production is a continuous activity, there may be some incomplete production at the end of an accounting period. Incomplete units mean those units on which percentage of completion with regular to all elements of cost i. Such incomplete production units are known as Work-in-Progress.
Such Work-in-Progress is valued in terms of equivalent or effective production units. This represents the production of a process in terms of complete units. In other words, it means converting the incomplete production into its equivalent of complete units. The term equivalent unit means a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress, when the aggregate work content of the incomplete units is deemed to be equivalent to that of the substituted quantity.
The principle applies when operation costs are apportioned between work in progress and completed units. In short the following from steps an involved. Step 1 — prepare statement of Equivalent production Step 2 — Prepare statement of cost per Equivalent unit Step 3 — Prepare of Evaluation Step 4 — Prepare process account The problem on equivalent production may be divided into four groups.
Only closing work-in-progress without process losses: In this case, the existence of process loss is ignored.
Closing work-in-progress is converted into equivalent units on the basis of estimates on degree of completion of materials, labour and production overhead. When there is closing work-in-progress with process loss or gain. If there are process losses the treatment is same as already discussed in this chapter. In case of normal loss nothing should be added to equivalent production.
If abnormal loss is there, it should be considered as good units completed during the period. If units scrapped normal loss have any reliable value, the amount should be deducted from the cost of materials in the cost statement before dividing by equivalent production units. Abnormal gain will be deducted to obtain equivalent production. Situation III: Where there is opening and closing work-in progress without process losses.
Since the production is a continuous activity there is possibility of opening as well as closing work-inprogress. Let us discuss the methods of valuation of work-in-progress one by one. The FIFO method of costing is based on the assumption of that the opening work-in-progress units are the first to be completed.
Equivalent production of opening work-in-progress can be calculated as follows: This method is useful when price fluctuate from period to period. The closing valuation of work-inprogress in the old period is added to the cost of new period and an average rate obtained.
In this method no distinction is made between completed units from opening inventory and completed units from new production. All units finished during the current accounting period are treated as if they were started and finished during that period. In LIFO method the assumption is that the units entering into the process is the last one first to be completed. The cost of opening work-in-progress is charged to the closing work-in-progress and thus the closing work-in progress appears cost of opening work-in-progress.
The completed units are at their current cost.
Step 1. Summarize the flow of physical units of output.
Step 2. Compute output in terms of equivalent units. Step 3. Compute equivalent-unit costs. Step 4. Summarize total costs to account for. Step 5. Such individual products costs may be taken as only approximation and hence not reliable.
Products are manufactured in large quantities, but products may be sold in small quantities, sometimes one at a time automobiles, loaves of bread , a dozen or two at a time eggs, cookies , etc. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue. Managers need to maintain cost control over the manufacturing process.
Process costing provides managers with feedback that can be used to compare similar product costs from one month to the next, keeping costs in line with projected manufacturing budgets. A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when selling millions of units of product a month.
Managers must carefully watch per unit costs on a daily basis through the production process, while at the same time dealing with materials and output in huge quantities. Materials part way through a process e. By determining what cost the part processed material has incurred such as labor or overhead an "equivalent unit" relative to the value of a finished process can be calculated.
Process cost procedures There are four basic steps in accounting for Process cost: Summarize the flow of physical units of output. Compute output in terms of equivalent units. Summarize total costs to account for and Compute equivalent unit costs. Assign total costs to units completed and to units in ending work in process inventory.
Operation cost in batch manufacturing Batch costing is a modification of job costing. When production is repetitive nature and consists of a definite number of articles, batch is used. In batch costing, the most important problem is to determine the optimum size of the batch that follows the fact that production of two elements of costs: Set up costs which are generally fixed per batch.
Carrying costs which vadetermination of batch quantity requires considerations of some factors: setting up costs per batch. Process Costing Overview Process costing is used in situations where job costing cannot be used; that is, for the mass production of similar products, where the costs associated with individual units of output cannot 7 be differentiated from each other.
In other words, the cost of each product produced is assumed to be the same as the cost of every other product. Examples of the industries where this type of production occurs include oil refining, food production, and chemical processing. For example, how would you determine the precise cost required to create one gallon of aviation fuel, when thousands of gallons of the same fuel are gushing out of a refinery every hour?
The cost accounting methodology used for this scenario is process costing. Process costing is the only reasonable approach to determining product costs in many industries. It uses most of the same journal entries found in a job costing environment, so there is no need to restructure the chart of accounts to any significant degree.
This makes it easy to switch over to a job costing system from a process costing one if the need arises, or to adopt a hybrid approach that uses portions of both systems. Cost Flow in Process Costing The typical manner in which costs flow in process costing is that direct material costs are added at the beginning of the process, while all other costs both direct labor and overhead are gradually added over the course of the production process.
For example, in a food processing operation, the direct material such as a cow is added at the beginning of the operation, and then various rendering operations gradually convert the direct material into finished products such as steaks.
Conversion Costs: Conversion costs are those costs required to convert raw materials into finished goods that are ready for sale. Examples of costs that may be considered conversion costs are: Direct labor and related benefits Equipment depreciation Equipment maintenance Factory rent Factory supplies Machining Inspection Production utilities Production supervision Small tools charged to expense If a business incurs unusual conversion costs for a specific production run such as reworking parts due to incorrect tolerances on the first pass , it may make sense to exclude these extra costs from the conversion cost calculation, on the grounds that the cost is not representative of day-today cost levels.
Absorption Costing: Absorption costing, which is also known as full absorption costing or full costing, is a method for accumulating fixed and variable costs associated with the production process and apportioning them to individual products.
Thus, a product must absorb a broad range of costs. The key costs assigned to products are: Direct materials. Those materials that are included in a finished product. Direct labor. The factory labor costs required to construct a product. Fixed manufacturing overhead. The costs to operate a manufacturing facility, which vary with production volume.
Examples are supplies and electricity for production equipment. Variable manufacturing overhead. The costs to operate a manufacturing facility, which do not vary with production volume. Examples are rent and insurance. Because many costs are absorbed into inventory, they are not recognized as expenses in the month when an entity pays for them. Instead, they remain in inventory as an asset until such time as the inventory is sold; at that point, they are charged to cost of goods sold.
Generally Accepted Accounting Principles require that an entity use absorption costing to record the value of inventory in its financial statements. Direct costing does not require the allocation of overhead to a product, and so may be more useful than absorption costing for incremental pricing decisions. This version assumes that all costs, whether from a preceding period or the current one, are lumped together and assigned to produced units.
It is the simplest version to calculate. Standard costs. This version is based on standard costs. Its calculation is similar to weighted average costing, but standard costs are assigned to production units, rather than actual costs; after total costs are accumulated based on standard costs, these totals are compared to actual accumulated costs, and the difference is charged to a variance account.
First-in first-out costing FIFO. FIFO is a more complex calculation that creates layers of costs, one for any units of production that were started in the previous production period but not completed, and another layer for any production that is started in the current period. There is no last in, first out LIFO costing method used in process costing, since the underlying assumption of process costing is that the first unit produced is, in fact, the first unit used, which is the FIFO concept.
Why have three different cost calculation methods for process costing, and why use one version instead of another? The different calculations are required for different cost accounting needs. The weighted average method is used in situations where there is no standard costing system, or where the fluctuations in costs from period to period are so slight that the management team has no need for the slight improvement in costing accuracy that can be obtained with the FIFO costing method.
Alternatively, process costing that is based on standard costs is required for costing systems that use standard costs. It is also useful in situations where companies manufacture such a broad mix of products that they have difficulty accurately assigning actual costs to each type of product; under the other process costing methodologies, which both use actual costs, there is a strong chance that costs for different products will become mixed 11 together.
Finally, FIFO costing is used when there are ongoing and significant changes in product costs from period to period to such an extent that the management team needs to know the new costing levels so that it can re-price products appropriately, determine if there are internal costing problems requiring resolution, or perhaps to change manager performance-based compensation.
In general, the simplest costing approach is the weighted average method, with FIFO costing being the most difficult.Upcoming SlideShare.
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Cost obtained at each process is only historical cost and are not very useful for effective control. Google Scholar Skinner, R. Using the data and solutions from Examples 1, 2 and 3, compute the ending balance in work-in-process inventory for the Mixing department and the cost of gallons transferred to the Finishing department during October. This video will provide a demonstration of cost assignment under the FIFO method.
The following data concern the operations of the company's mixing department for the month of April
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