Process costingProcess costing• Process costing is a type of costingProcess costing is a type of costingsystem that is used for uniform orsystem that is used for uniform orhomogeneous product.Process costhomogeneous product.Process costaverage the cost over all unit to come toaverage the cost over all unit to come tothe per unit cost.the per unit cost.
Features of process costingFeatures of process costing• Process costing is a type of operationProcess costing is a type of operationcosting which is used to ascertain the costcosting which is used to ascertain the costof the product at each process or stage ofof the product at each process or stage ofmanufacturing.manufacturing.• It is a method of allocating manufacturingIt is a method of allocating manufacturingcost to product to determine an averagecost to product to determine an averageper unit cost.per unit cost.• It traces and accumulate direct cost andIt traces and accumulate direct cost andallocate indirect cost through aallocate indirect cost through amanufacturing process.manufacturing process.
Illustrating Process CostingIllustrating Process CostingDirect Materials, Direct LaborIndirect Manufacturing CostsDepartmentADepartmentBFinished Goods Cost of Goods Sold
Example of process costingExample of process costing• SugarSugar• TextileTextile• CementCement• FlourFlour• SoapSoap• IceIce• RubberRubber
Case studyCase studyPaxy sind chocolates worksPaxy sind chocolates works hashasstarted out his business in 1978.it is astarted out his business in 1978.it is apartnership based manufacturingpartnership based manufacturingconcern.They produced different range ofconcern.They produced different range ofconfectionery products but mainly theyconfectionery products but mainly theyprovide chocolate slabs.provide chocolate slabs.
Five Steps in Process CostingFive Steps in Process CostingStep 1: Summarize the flow of physical units ofoutput.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: Assign total costs to units completed and tounits in ending work in process inventory.
Physical Units (Step 1)Physical Units (Step 1)Physical unitsFlow of ProductionWork in process, beginning 0Started during current period 35,000To account for 35,000Completed and transferred outduring current period 30,000Work in process, ending (100%/20%) 5,000Accounted for 35,000
Compute Equivalent UnitsCompute Equivalent Units(Step 2)(Step 2)Equivalent unitsDirect ConversionFlow of Production Materials CostsCompleted andtransferred out 30,000 30,000Work in process,ending 5,000 (100%) 1,000 (20%)Current period work 35,000 31,000
Compute Equivalent Unit CostsCompute Equivalent Unit Costs(Step 3)(Step 3)Direct ConversionMaterials Costs$84,050 $62,000Equivalent units 35,000 31,000Cost per equivalent unit $2.4014 $2.00Total production costs are $146,050.
Summarize and Assign TotalSummarize and Assign TotalCosts (Steps 4 and 5)Costs (Steps 4 and 5)Step 4: Total costs to account for: $146,050Step 5: Assign total costs:Completed and transferred out30,000 × $4.4014 $132,043Work in process, ending (5,000 units)Direct materials 5,000 × $2.4014 12,007Conversion costs 1,000 × $2.00 2,000Total $146,050
conclusionconclusionAt the end we can conclude that processAt the end we can conclude that processcosting is used for large quantity ofcosting is used for large quantity ofidentical and similar products are massidentical and similar products are massproduced.produced.