Methods Used for Process Costing

Methods Used for offset appealingA put to run short toll manner is use for Indus misrepresentation producing chemical, petroleum, textile, and flour, pharmaceutical, shoos and coal. This type of be is also used by firms manufacturing such(prenominal) things methods is the assembly type industry which manufactures such things as type writers, automobiles. Airplanes and house hold electric appliances. Fin every last(predicate)y original service industries, such sagas, water, and heat, equal their products by using shape be methods. In fact affect representing procedure ar often termed continuous or mass production approach historying procedure.http//www.principlesof history.com/ART/c20art/steel form.JPGWhat is form Costing?Process costing is a type of costing system that is used for uniform, or homogeneous, products. Process costing averages the be over wholly social units to come to the per unit cost. This is in contrast to other types of costing systems, such a s military control- companionship costing that is used for products that argon in distinguish batches. Un manage job-order costing, mold costing is tracked using a work-in- serve up account for each incision, preferably than make subsidiary ledgersProcess CostingIn accounting, process costing is a method of assigning production be to units of fruit. In process costing systems, production cost atomic number 18 not tinctured to individual units of return. be atomic number 18 designate first to production divisions and then to units of output as they move through the departments. The process costing method is typic tout ensembley used for processes that produce large quantities of homogeneous products.The process costing method is in contrast to other costing methods, such as product costing, job costing, or operation costing systems. Using the process costing method is optimal under certain conditions. If the output products argon homogeneous, that is, the units of out put are relatively indistinguishable from one another, it may be beneficial to use process costing. If the output products are of low value, message each individual unit of output is not worth much, it may be beneficial to use process costing. And if it is difficult or infeasible to trace production be sharpenly to individual units of output, it may be beneficial to use the process costing method.Examples of operations that are likely to use the process costing method as opposed to another costing method include a cola bottling plant, a breakfast cereal maker, a smart set that makes computer chips, and company that produces lumber, and a company that produces bricks. For example, for the company that bottlefuls cola, it would not be feasible or worthwhile to separate and record the cost of each bottle of cola in the bottling process. on that pointfore, the company would assign be to the bottling process as a whole for a period of time, and then divide that overall process co st by the derive of bottles produced during that period of time to assign production be to each bottle of cola.Process Costing Methods5 flavours for Process CostingAnalyze inventory flowConvert in-process inventory to analogous unitsCompute all applicable costCalculate the cost per unit of immaculate and in-process inventoryAllocate be to units of finished and in-process inventoryFirst, analyze the cost-flow manikin of the relevant inventory account to determine how much inventory was in that location at the beginning of the period, how much was get movinged during the period, how much as completed during the period, and how much is left as work-in-process at the end of the period.Second, convert the work-in-process terminate inventory into a number of equivalent weight units produced. This means if there are 1,000 units of inventory in work-in-process, and these units are all 50% complete, then you consider this as the equivalent of 500 units produced (500 = .50 x 1,000). Third, compute the make sense groom and indirect cost incurred by the production process that need to be assigned to the units completed and the units chill out in process. This includes the be associated with the beginning inventory and the cost incurred during the relevant period.Fourth, calculate the amount of cost to be assigned to the completed units of output and the equivalent of completed units of output still in the last inventory. For example, if 2,000 units were completed, and 1,000 units were left half-finished, then you would divide the applicable costs by 2,500 units.Fifth, allocate the relevant costs to the units of product that were completed and to the units of product that breathe in the work-in-process account.SourceHilton, Ronald W., Michael W. Maher, Frank H. Selto. Cost Management Strategies for Business Decision, Mcgraw-Hill Irwin, New York, NY, 2008.Process Costing ProceduresProcess costing systems follow specific procedures, and while shoot procedures may vary by company or by industry, they lead by and large follow these stepsWhile other types of costing start with a sales order, a sales order is not needed for process costing as it is a continuous processThe work-in-process accounts are divided by department and are named as such for example Work-in-process section NameThe first department in the process makes the first entry into the work-in-process account, generally for the direct raw materialsAs the products move from department to department, entries are made to each work-in-process department accountDirect labor costs are save by periodActual overhead costs are recorded no contra-account is needed because there is no over- or under-applied overhead due to the actual cost being appliedIndirect costs are applied to the overhead account in actual amounts conventionalism spoilage is recorded as a cost to the work-in-process account abnormal spoilage is removed from the work-in-process account and applied to a separate a ccount so it hatful be addressed by management.When Is Process Costing Appropriate?Process costing is appropriate when products are homogeneous (or analogous). Where job-order and other types of costing seek to find the cost per unit for batches of differentiated products, process costing seeks to find the average cost of all units over a period of time. in that respectfore, process costing is only appropriate when all units are the same. For example, a manufacturing company that produces only one homogeneous product may elect to use process costing.Characteristics and process of costing.The characteristics of process costing areA cost of production report is used to collect, summarize, and compute extreme and unit cost. performance is accumulated and reported by departments.Costs are posted to departmental work in process accounts.Production in process at the end of a period is restated in terms of completed units.Total costs charged to a department are divided by tally comput ed production of the department in order to determine a unit cost for a specific period.Costs of completed units of a department are transferred to the bordering processing department in order to arrive at the total costs of the finished products during a period. At the same time, costs are assigned to units still in process.Characteristics and procedure.Accumulate material, labor, and factory over head costs by departments.Determine a unit cost for each department.Transfer costs from one department.Assign coast to the inventory of work still in process.If accurate unit and inventory costs are to be established by process costing procedure, costs of a period must be identified with units produced in the same period.Features/Characteristics of Process CostingProcess Costing Method is applicable where the output results from a sequence of continuous or clamant operations or processes and products are identical and cannot be segregated.Process Costing enables the ascertainment of cos t of the product at each process or stage of manufacture.The following features may be identified with process costingThe output consists of products which are homogenous.Production is carried on in different stages (each of which is called a process) having a continuous flow.Production takes place continuously except in cases where the plant and machinery are shut down for maintenance etc. Output is uniform and all units are identical during each process. It would not be possible to trace the identity of any particular lot of output to any lot of input.The input will depart through two or more processes before it takes the shape of the output. The output of each process becomes the input for the next process until the final product is obtained, with the brave process giving the final product.The output of a process (except the last) may also be saleable in which case the process may engender some profit.The input of a process (except the first) may be capable of being acquired f rom the outside sources.The output of a process is transferred to the next process generally at cost to the process. It may also be transferred at market price to enable checking efficiency of operations in comparison to the market conditions.Normal and abnormal losses may arise in the processesThere are a number of industries in which process costing can be applied.Elements/Components of CostProcess, cost, accounting, recording, direct, indirect, costsFor the purpose of cost accounting, the process industry is divided into separate departments with each department representing a specific process. The Direct Material and Direct motor/ push Costs are collected for each department separately and the overheads which are collected over all the departments/processes are apportion over the various departments/processes on some rational hind end.The following are the main elements/components of costs involved in the manufacturing process where process costing method is adopted.Direct M aterialsThere are two types of materials that we come across in process costing.Primary MaterialMaterials which are introduced in the initial process and passed on to the next process as a part of output after completion of processing.Secondary MaterialMaterials which are introduced in the first or subsequent processes in attachment to the main material introduced in the initial process. This gets mixed up with the main material and is passed on to the subsequent processes as a part of the output.Direct Labor/LaborThe direct labour/labor cost is generally incurred in every process. Identification of direct labour cost is also relatively belatedly in process costing industryDirect ExpensesExpenses in addition to Direct Material and Labor which can be directly attributable to a particular process. These are costs relevant to specific processes.Production OverheadsThe overhead expenses are generally expended over all the processes involved in production. These are to be apportioned o ver the various processes in an amicable manner.Methodology of Recording/Accounting CostsFinancial Accounting Methodology is adopted for recording costs involved.Process AccountsA nominal account for each process is used to record all the costs relevant to a process.Each process account isDebited withThe Primary Direct Material CostSecondary Direct Material CostDirect Labor CostDirect Expenses andProduction Overheads allocated and/or apportioned to the process.Credited withThe value of output transferred to the subsequent process or finished stocks.Numbers, Alphabets or any word or phrase representing the process are used as suffixes/prefixes in the names (Process I a/c, Process A a/c, Refining Process A a/c, etc.,.) to distinctly identify the processes accounts.Process Stock AccountsStocks relevant to a process are well-kept in a separate stock account.Stock accounts for input may be maintained where all the input acquired/received for a process during a period is not used up.Stock accounts for output may be maintained where all the output produced/completed in a process during a period is not disposed off either by transfer to the next process or by sale.Where the output relevant to a process is sold apart from being transferred to the next process, it generates revenue. These revenues relevant to a process, are generally recorded using the process account or the stock account.FEATURES of Process CostingThe product of one process becomes the INPUT OR RAW MATERIAL of the next processThere is a CONTINUOUS FLOW OF IDENTICAL OUTPUTIt is DIFFICULT TO IDENTIFY A COST social unit because each cost unit is part of a processIt is difficult to cost a cost unit hence we can only find the AVERAGE COST PER UNIT over period of timeCOST CENTRES are set up and costs are collected by the cost centersIt is possible that JOINT PRODUCTS may be produced in the processesWASTE may arise during processing eg due to evaporation, etcEach process or department performs a particular o peration(s). A certain stage of production is completed in each process. Each process is carried out by a certain department. A person is usually responsible for a process.An account called a PROCESS ACCOUNT is maintained for each process. This process account captures/records the followingAll costs-materials, labor and overheadsScrapOutput chess opening work-in-processClosing work-in-processTransfers from previous processLosses or gainsReasons for useCompanies need to allocate total product costs to units of product for the following reasonsA conducts 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.Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against relate to sales revenue.Mana gers need to maintain cost control over the manufacturing process. Process costing provides managers with feedback that can be used to compare like 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 sawhorse 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.g. chemicals) might need to be given a value, process costing allows for this. 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.ComparisonsSimilarities between job order and process costing includeBoth systems have the same basic purpose-to calculate unit costBoth systems use the same manufacturing accountsThe flow of costs through the manufacturing accounts is basically theSame.However, there are some important remnants between job order and processing costing as described below.Job redact CostingProcess CostingEach job is differentAll products are identicalCosts are accumulated by jobCosts are accumulated by departmentCosts are captured on a job cost planerCosts are accumulated on a department production reportUnit costs are computed by jobUnit costs are computed by department line of business the production flow and the cost flows of companies which use process costing in Exhibits 4-2, 4-3, and 4-4. Note that as units are part completed in one department they proceed onto another department for further processing. This will require a journal entry such asWork in Process Department BWork in Process Department AWhen the products are completed they are transferred from the final processing department to Finished Goods. Study the model journal entries on Pages 149-150.A complication arising in process costing is that not all units may be completed at the balance sheet date. To calculate unit costs, it will be necessary to compute equivalent units of production. Equivalent units can be defined as the product of the number of partially completed units times the percentage completion of these units. If there are 300 of partially completed units at year-end which are 40% complete, then there are 120 equivalent units. If say 5000 units were completed during the period, the managerial accountant would add 5000 and 120 to arrive at 5120 equivalent units completed during the period. Then total department costs for the period (direct material, direct labor, and overhead) would be divided by the 5120 equivalent units to arrive at cost per unit. Equivalent units can be computed in two different ways, the weighted average method and the first in first out method. We only cover the weighted average method in this course and th erefore trend Appendix 4A.Companies using process costing prepare departmental production reports. Exhibit 4-9, Page 158, is a production report for Double Diamond Skis moldable and Milling Department. Note that the production report consists of three parts as followsA quantity schedule which shows the flow of units through the department and a count of equivalent unitsA computation of costs per equivalent unitA reconciliation of all cost flows into and out of the departmentAlso note in Exhibit 4-9 that the equivalent unit totals are different for material costs and for conversion costs. This frequently happens as all material is input at the start of the production process but the direct labor and overhead costs are incurred sometime later.7. Mention of sources used1. Process Costing Systems What is it and when is it used?A process-costing system is a costing system in which the cost of a product or service is obtained by assigning costs to masses of like or similar units. Unit costs are then computed on an average basis. Process-costing systems are used in industries that produce like or similar units which are often mass produced. In these industries, products are manufactured in a very similar way. The companies usually use the same amount of direct materials, direct manufacturing labor costs and manufacturing overhead costs. Industries that use process costing systems are for example chemical processing, oil refining, pharmaceuticals, plastics, brick and tile manufacturing, semiconductor chips, beverages and breakfast cereals.The difference between job costing and process costing is the extent of averaging used to compute unit costs of product and services. The cost object in job costing is a job that constitutes a distinctly identifiable product or service. The quantity of manufacturing resources is different in any job. It would be incorrect to cost each job at the same average manufacturing cost. So, when like or similar units are mass produced, pro cess costing averages manufacturing costs over all units produced.The costs of a product are important for inventory calculations, pricing decisions and product profitability analysis. Its also important for measuring how well the management is do and if costs are reduced effectively.Illustrating process costingThe best way to show how process costing works, is by exampleGlobal exoneration, Inc, manufactures thousands of components for missiles and military equipment. superstar of these is called DG-19. The product-costing system for DG-19 has a single direct-cost strategy (direct materials) and a single indirect-cost category (conversion costs). Each unit passes through two departments the conference Department and the Testing Department. all(prenominal) effort is made to make sure that all DG-19 products are identical. Direct materials are added at the beginning of the process in gather. Additional direct materials are added at the end of processing in the Testing Department . reincarnation costs are added evenly during both processes. They include manufacturing labor, indirect materials, energy, plant depreciation and so on. After leaving the Testing Department, the DG-19 component is transferred to Finished Goods.2. Three cases2.1 Case 1 Process Costing with no beginning or close work in process inventoryDuring January, the first month of the period, Global Defense starts with the manufacturing process. All units will start and end in this period. Altogether, Global Defense will manufacture cd units of DG-19 during this period.Direct materials in this period$ 32.000Conversion costs in this period$ 24.000_______Total Assembly costs in January$ 56.000Global Defense records direct materials and conversion costs in the Assembly Department as these costs are incurred. By averaging, the assembly cost per unit would be $ 56.000 / 400 units = $ cxlDirect materials costs by unit ($32.000 / 400)$ 80Conversion costs per unit ($ 24.000 / 400)$ 60_____Assemb ly Department cost per unit$ 140Each unit is identical in this case, so we assume that all units receive the same amount of direct materials and conversion costs. The unit costs can be averaged by dividing total costs in a given accounting period by total units manufactured. This approach is for example used by banks to compute the unit costs of 100.000 similar customer deposits made in a month. It is usually used by organizations with mass production of standard units and no incomplete units after the period.2.2 Case 2 Process costing with no beginning but an ending work in Process InventoryThere is no beginning inventory in February, because all 400 units produced in January had been fully completed. Due to customer delays in placing orders, it was only possible to produce clxxv units in February.The 225 partially assembled units as of February 28 were fully processed with respect to direct materials, because all direct materials in the Assembly Department are added at the begin ning of the assembly process. Conversion costs are added evenly during the assembly process. Based on the work completed relative to the total work compulsory to be done, an Assembly Department supervisor estimates that the partially assembled units were, on average, 60 % complete as to conversion costs.Total costs for FebruaryDirect materials costs in February$ 32.000Conversion costs February$ 18.600_______Total Assembly Departments costs$ 50.600Problem How should Global Defense calculate the cost of fully assembled units and the cost of the partially assembled units still in process?The following four steps help us to find the answerStep 1Summarize the flow of carnal unit of outputStep 2Compute output in terms of equivalent unitsStep 3Compute equivalent unit costsStep 4Summarize total costs to account for and assign these cost to units completed and to units in ending work in processStep 1 tracks the physical unit of output. It shows, where they come from and how many units are there to account for, and where they go and how they are accounted for.Step 2 measures the output in equivalent units, not in physical units, because not all units had been completed. The 400 units are complete in terms of equivalent units of direct materials, because all direct materials are added in the Assembly Department at the initial stage of the process. So you count all 400 units in equivalent direct costs.The 175 fully assembled units are altogether processed with respect to conversion costs. The partially assembled units in ending process are 60 % complete (on average). Therefore, the conversion costs in 225 partially assembled units is equivalent to conversion costs in 135 (60% of 225) fully assembled units. So, 310 equivalent units of conversion costs are assembled and transferred out and 135 equivalent units are in ending work in process inventory.In step 3, equivalent unit costs are computed by dividing direct materials and conversion costs added during February by the related quantity of equivalent units of work done in FebruaryDirect costsConversion costsCosts added during February$ 32.000$ 18.600Divide by equivalent units work done in February/ 400/ 300_________________Cost per equivalent unit of work done in February$ 80$ 60In Step 4, total costs to account for are summarized and assigned to units completed and transferred out and to units still in process at the end of February. Since the beginning balance of the work in process is zero, total costs to account for consist of the costs added during February direct materials $ 32.000 and conversion costs $ 18.600.Direct material costs are 225 times $80 (=$18.000) + Conversion costs 135 times $60 (=$8.100). Total costs are therefore $18.000 + $8.100 = $26.100.2.3 Case 3 Process costing with both beginning and ending work in process inventoryIn march, Global Defense has 225 partially assembled units in the Assembly Department. During march, Global Defense placed another 275 units into pro duction.Step 1 traces the physical units of production. In march, 400 units are completed and transferred out, 100units are in ending inventory.Step 2 computes the output in terms of equivalent units 275 equivalent units of direct materials and 315 equivalent units of conversion costs.Step 3 computes equivalent unit costs. Direct materials $ 80 conversion materials $ 60Step 4 summarizes total costs to account for and assigns these costs to units completed and to units in ending work in progress.The costs that get assigned to each of these categories depend, as in all inventory accounting, on the specific assumptions regarding the flow of costs. Next are described to alternative methods, the weighted-average method and the first-in, first-out method.3. Weighted-average methodThe weighted-average process-costing method assigns the average equivalent unit cost of all work done to date (regardless of when it was done) to equivalent units completed and transferred out, and to equivalent units in ending inventory. The weighted-average cost is simply the average of various equivalent unit costs entering the work in process account.4. First-In, First-out MethodThe First-in, first-out (FIFO) process-costing method assigns the cost of the earliest equivalent units available (starting with the equivalent units in beginning work-in-process inventory. This method assumes that the earliest equivalent units in work in process Assembly account are completed first.5. Transferred-in costs in process costingTransferred-in costs (or previous department costs) are costs incurred in a previous department that are carried forward as part of the products cost as it moves to a subsequent department. That means, costs move with the units when they are transferred to a new department. So, computations of Testing costs must include transferred-in costs, additional direct materials costs and conversion costs added in Testing.The four -step procedure is used to account for the costs of a subsequent department that has transferred-in costs. Units are fully completed as to transferred-in costs because these costs are just carried forward from the previous process. Direct materials costs have a zero degree of completion in both beginning and ending work-in-process inventories, because in Testing, direct materials are introduced at the end of the process. That completes steps 1 and 2.5.1 Transferred-in Costs and the weigthed-average methodIn step 3, the equivalent unit costs are computed. In step 4, the total costs to account for are summarized, that is the total debits to Work in Process under the weighted-average method. After that, these costs are assigned to units completed and to units in ending work-in-process inventory. Beginning work in process and work done in the authoritative period are totaled and unite together for purposes of computing weighted-average costs.A company may split the Work in Process account into Work in Process Testing, Transferred-in Cos ts, Work in Process Testing, Direct Materials and Work in Process Testing, Conversion costs. The journal entries would contain this detail, though the underlying reasoning and techniques would be unaffected.5.2 Transferred-in Costs and the FIFO-MethodThe costs transferred-in from the Assembly Department are different when the weighted-average rather than the FIFO method is used in step 3.In step 4, the total costs to account for are summarized, consisting of the beginning inventory plus costs added during the current period, under the FIFO-method. These costs differ from the total debits to Work on Process under the weighted-average method, because of the different costs of completed units transferred-in from the Assembly Department under the weighted-average and FIFO methods.When assigning costs, the FIFO method keeps the beginning inventory separate and distinct from the work done during the current period.Each department in interdepartmental transfers is regarded as being separ ate and distinct for accounting purposes. All costs transferred in during a given accounting period are carried at one unit cost figure, regardless of whether previous departments used the weighted-average or the FIFO method.6. Common Mistakes with Transferred-in CostsHere are some common pitfalls to avoid when accounting for transferred-in costsRemember to include transferred-in costs from previous departments in your calculations. Such costs should be treated as if they were another kind of direct material added at the beginning of the process. In other words, when successive departments are involved, 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 materials costs.In calculating costs to be transferred on a FIFO basis, do not overlook the costs assigned at the beginning of the period to units that were in process but are now included in the units transferred.Unit cos ts may fluctuate between periods. Therefore, transferred units may contain batches accumulated at different unit costs.Units may be measured in different terms in different departments. Consider each department separately. Unit costs could be based on kilograms in the first department and liters in the second , so as units are received by the second department, their measure