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Process Costing

Process Costing. Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources. Process costing does not assign costs to each unit of output because each unit is identical .Instead, average unit costs are computed.

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Process Costing

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  1. Process Costing Job costing assigns costs to each individual unit of outputbecause each unit consumes different quantities ofresources. Process costing does not assign costs to each unit ofoutput because each unit is identical .Instead, average unitcosts are computed

  2. A comparison of job and process costing

  3. A comparison of job and process costing

  4. An illustration of an operational process system

  5. Comparison using WIP Accounts 1.

  6. Basic features of a process-costing system • Homogeneous units pass through a series of similar processes. • Each unit in each process receives a similar dose of manufacturing costs. • Manufacturing costs are accumulated by a process for a given period of time. • There is a work-in-process account for each process.

  7. Basic features of a process-costing system • Manufacturing cost flows and the associated journal entries are generally similar to job- order costing. • The departmental production report is the key document for tracking manufacturing activity and costs. • Unit costs are computed by dividing the departmental costs of the period by the output of the period.

  8. Process Costing With No Beginningor Ending Work-in-Process Inventories • Services that are homogeneous and repetitively produced can use the process-costing approach. Examples: check processing in a bank, changing oil, dental cleaning, surgical procedures • JIT manufacturing firms minimize inventories and strive to reduce work-in-process inventories to insignificant levels.

  9. Five Steps of Process Costing

  10. Case 1: Process Costing with Zero Beginning and Zero ending WIP Inventory

  11. Case 2: Process Costing with Zero Beginning but Some Ending WIP Inventory

  12. Equivalent Units Concept • Equivalent units of production are the complete units that could have been produced given the total amount of manufacturing effort expended during the period • Number of physical units x % of completion

  13. Case 3:Process Costing with Some Beginning and Some Ending WIP

  14. Two approaches for dealing with beginning WIP inventory costs • Weighted Average Method • Combines beginning inventory cost with current period cost to compute unit costs • FIFO • Separates units in beginning inventory from those produced during the period

  15. Case 3: Using Weighted Average

  16. Case 3: First In First Out

  17. Transferred-In Costs • Also known as previous department costs • Costs incurred in previous department/process that are carried forward as the product’s cost when it moves to a subsequent process in the production cycle • Treated as if they are a separate type of direct material added at the beginning of the process

  18. Case 4: Process Costing With Transferred- In Costs

  19. Case 4: Process Costing With Transferred- In Costs

  20. Case 4: Process Costing With Transferred- In Costs

  21. Normal and abnormal losses • Normal losses cannot be avoided –Cost is absorbed by good production. • Abnormal losses are avoidable –Cost is recorded separately and treated as a period cost. Example Input = 1 200 litres at a cost of RM1 200 Normal loss =1/6 of input Actual output = 900 litres CPU = RM1 200/Expected output (1 000 litres) = 1.20 Cost of completed production = RM1 080 (900 ×RM1.20) Cost of abnormal loss = RM120 (100 × RM1.20)

  22. 5.3b

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