Process Costing
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Transcript of Process Costing
Process CostingProcess Costing
Suhas Ambade
Laxmikant Parate Prashant Banait
Sachin Karale Sambhaji Gaikwad
Satish Gadhari Abhay Raut
Process Costing is a costing system that assigns costs equally to homogeneous units within a particular time
period.
Process Costing is a costing system that assigns costs equally to homogeneous units within a particular time
period.
This is an appropriate system to use when:
•Units do not differ from each other.
•Unit cycle time is relatively short.
•The production process is continuous.
This is an appropriate system to use when:
•Units do not differ from each other.
•Unit cycle time is relatively short.
•The production process is continuous.
PROCESS COSTING
Objective -1Objective -1Objective -1Objective -1
Identify the situations in which
process-costing systems
is more suitable.
Process Cost System
DirectDirect materialsmaterials
Work in Process Work in Process AccountAccount
Work in Process Work in Process AccountAccount
DEPT. A DEPT. B
Factory Factory OverheadOverhead
Direct Direct LabourLabour
Factory Factory OverheadOverhead
Direct Direct LabourLabour
to Finished to Finished GoodsGoods
to Finished to Finished GoodsGoods
PCS is used when masses of similar units are producedPCS is used when masses of similar units are produced
Eg: Automobile, food Textile & oil refineries, etcEg: Automobile, food Textile & oil refineries, etc
Process Costing can also be used by service organization with homogeneous services and repetitive process such as Bank, Courier, Post, etc
Objective -2Objective -2Objective -2Objective -2
Calculate equivalent units andunderstand how to use them.
Process CostProcess Cost
Direct MaterialsDirect Materials Conversion CostsConversion Costs
Raw material directly traceable to the
process.
Raw material directly traceable to the
process.
Labour and overhead directly traceable to the
process.
Labour and overhead directly traceable to the
process.
Direct Materials (DM)
Direct Materials (DM)
Conversion Costs (CC)
Conversion Costs (CC)
+
Determine total Direct Material costs Compute DM Cost per Unit Determine total Conversion Costs Compute CC Cost per Unit DM+CC=Total Cost per Unit COGS = Total Cost per Unit × Units Sold Ending Inventory = Total Cost Per Unit
× Units Not Sold
Determine total Direct Material costs Compute DM Cost per Unit Determine total Conversion Costs Compute CC Cost per Unit DM+CC=Total Cost per Unit COGS = Total Cost per Unit × Units Sold Ending Inventory = Total Cost Per Unit
× Units Not Sold
Objective -3Objective -3Objective -3Objective -3
Describe the five stepsin process costing.
Step 1: Analyze flow of physical units.
Step 2: Calculate equivalent unit costs.
Step 3: Determine Total Cost to Account for.
Step 4: Calculate unit Cost.
Step 5: Assign total costs to units completed and to units in ending work in process inventory.
Physical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process Manufacturer
Scrap Metal
Materials
MeltingMeltingDepartmentDepartment
CastingCastingDepartmentDepartment
Molten metal
transferred from
Melting
To finished goods
CastingCastingDepartmentDepartment
MeltingMeltingDepartmentDepartment
Physical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process Manufacturer
Physical Units (Step 1) Physical units
Flow of ProductionWork in process, beginning 0Started during current period 35,000To account for 35,000Completed and transferred out during current period 30,000Work in process, ending (100%/20%) 5,000Accounted for 35,000
Degree of Completion in this Department. DM 100% & CC 20%
Compute Equivalent Units(Step 2)
Equivalent unitsDirect Conversion
Flow of Production Materials CostsCompleted and transferred out 30,000 30,000Work in process, ending 5,000 (100%) 1,000 (20%)Current period work 35,000 31,000
Compute Equivalent Unit Costs
(Step 3)
Direct Conversion Materials Costs
Rs 84,050 Rs62,000Equivalent units 35,000 31,000Cost per equivalent unit Rs2.4014 Rs2.00
Total production costs are Rs146,050.
Summarize and Assign TotalCosts (Steps 4 and 5)
Step 4: Total costs to account for: Rs146,050
Step 5: Assign total costs:
Completed and transferred out30,000 × Rs4.4014 Rs 132,043
Work in process, ending (5,000 units)Direct materials 5,000 × Rs2.4014 12,007Conversion costs 1,000 × Rs2.00 2,000Total Rs146,050
Objective -4Objective -4Objective -4Objective -4
Prepare journal entries forprocess-costing systems.
Journal Entries Example
Assume that ABC Ltd. has two processingdepartments – Melting and Casting.
ABC Ltd., purchases direct materials as needed.
What is the journal entry for materials?
Work in Process, Melting 84,050Accounts Payable 84,050
To record direct materials purchased and used
Journal Entries Example
What is the journal entry for conversion costs?
Work in Process, Melting 62,000Various accounts 62,000
To record Melting Department conversion costs
What is the journal entry to transfer completedgoods from Melting to Casting?
Journal Entries Example
Work in Process, Casting 132,043Work in Process, Melting 132,043
To record cost of goods completed and transferredfrom Melting to Casting during the period
Flow of Costs Example
Accounts Payable 84,050
Various Accounts 62,000
WIP Melting84,050 132,04362,00014,007
WIP Casting 132,043
Weighted Average Process Costing Method Calculate the equivalent unit cost of all the work done to date Assign this cost to equivalent unit completed and transferred out of the process and to equivalent unit in ending
work in the process inventory. The weighted Avg Cost is the total of all cost entering the work in process account divided by total equivalent units
Physical Units (Step 1)
Work in process, beginning:100% material60% conversion costs 1,000Units started in process 35,000 36,000Units transferred out: 31,000Units in ending inventory:100% material 5,00020% conversion costs 36,000
Compute Equivalent Units (Step 2)
Materials ConversionCompleted and transferred 31,000 31,000Ending inventory 5,000 1,000Equivalent units 36,000 32,000
100% 20%
Compute EquivalentUnit Costs (Step 3)
Materials ConversionBeginning inventory Rs 2,350 Rs 5,200Current costs 84,050 62,000Total Rs86,400 Rs67,200Equivalent units 36,000 32,000Cost per unit Rs2.40 Rs2.10
Summarize and Assign TotalCosts (Steps 4 and 5)
Work in process beginning inventory:Materials Rs 2,350Conversion 5,200Total beginning inventory Rs 7,550
Current costs in Melting Department:Materials Rs84,050Conversion Rs62,000
Costs to account for Rs153,600
Summarize and Assign Total Costs (Steps 4 and 5)
Costs transferred out:31,000 × (Rs2.40 + Rs2.10) =Rs139,500
Costs in ending inventory:Materials 5,000 × Rs2.40 12,000Conversion 1,000 × Rs2.10 2,100
Total costs accounted for: Rs153,600
Summarize and Assign Total Costs (Steps 4 and 5)
This step distributes the department’s costs to unitstransferred out: 31,000 units × Rs4.50 = Rs139,500
And to units in ending work in process inventory:Rs12,000 + Rs2,100 = Rs14,100
Weighted-Average
Work in Process Inventory,MeltingBeg. Inv. 7,550 TransferredMaterials 84,050 to FinishingConversion 62,000 139,500Balance 14,100
FIFO Process Costing Method Assign the cost of the previous accounting period equivalent unit in beginning WIP Inventory to the first unit completed
and transferred out of process. Assign the cost of equivalent unit work on during the current period first to complete beginning inventory, next to start
and complete new unit, and finally to unit in ending WIP inventory. The work done on beginning inventory before the current period is kept separate from work done in the current period.
Compute EquivalentUnits (Steps 1 and 2)
Materials ConversionCompleted and transferred:From beginning inventory 0 400Started and completed 30,000 30,000Ending inventory 5,000 1,000
35,000 31,400
Quantity schedule (Step 1) is the same asthe weighted-average method.
Compute EquivalentUnits (Step 2)
Materials ConversionCompletedand transferred: 31,000 31,000Ending inventory 5,000 (100%) 1,000 (20%)
36,000 32,000Beginning inventory 1,000 (100%) 600 (60%)Equivalent units 35,000 31,400
Compute EquivalentUnit Costs (Step 3)
Materials ConversionCurrent costs Rs84,050 Rs62,000Equivalent units 35,000 31,400Cost per unit Rs2.40 Rs1.975
Summarize and Assign TotalCosts (Steps 4 and 5)
Work in process beginning inventory: Rs7,550
Current costs:Material 84,050Conversion 62,000Total Rs153,600
Same as using weighted-average
Summarize and Assign TotalCosts (Steps 4 and 5)
Costs transferred out:
From beginning inventory: Rs7,550Conversion costs added:400 × Rs1.975= Rs790 Rs8,340
From current production:30,000 × Rs4.375 131,250
Total Rs139,590
Summarize and Assign TotalCosts (Steps 4 and 5)
Work in process ending inventory:
Materials: 5,000 × Rs2.40=Rs12,000
Conversion:1000 × Rs1.975 = 1,975Total Rs13,975
Summarize and Assign TotalCosts (Steps 4 and 5)
Costs transferred out Rs139,590
Cost in ending inventory Rs13,975
Rs153,565
An alternative approach:
Costs to account for Rs153,600
Cost in ending inventory Rs13,975
Costs transferred out Rs139,625
+=
–=
FIFO
Work in Process Inventory, MeltingBeg. Inv. 7,550 TransferredMaterials 84,050 to FinishingConversion 62,000 139,625Balance 13,975
Comparison of Weighted-Average and FIFO Methods
Weighted Average FIFO Difference
Costs of units completed and transferred out Rs139,500 Rs139,625 +Rs125Work in process, ending 14,100 13,975 –Rs125Total costs accounted for Rs153,600 Rs153,600 0
Beginning & Ending WIP
Weighted Average vs. FIFOWeighted Average vs. FIFO
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
FIFOCosts are accounted for by layer. Cost per EU for this period is computed separately from the Cost per EU
for last period.
FIFOCosts are accounted for by layer. Cost per EU for this period is computed separately from the Cost per EU
for last period.
Beginning & Ending WIP
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
Weighted-Average is the most
commonly used
method.
Weighted-Average is the most
commonly used
method.
Weighted Average vs. FIFOWeighted Average vs. FIFO
Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)
JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality.
JIT organizes work cells that perform several manufacturing steps. Workers are cross-trained to perform more than one task. This
provides flexibility and worker pride and involvement in the final product.
Because products have limited movement between departments, the nonvalue-added cost of transporting products and parts is reduced.
Minimize the inventory, this saves cost that arise from holding inventory, including the risk of damage, theft, loss
Upholstery Upholstery Dept.Dept.
Assembly Assembly Dept.Dept.
Cutting Cutting Dept.Dept.
Traditional Production LineTraditional Production Line
DrillinDrilling Dept.g Dept.
Sanding Sanding Dept.Dept.
Staining Staining Dept.Dept.
Varnishing Varnishing Dept.Dept.
Just-in-Time Production LineJust-in-Time Production Line
Work Center OneWork Center OneCutting drilling
and sanding
Work Center TwoWork Center TwoStaining and varnishing
Work Center ThreeWork Center ThreeUpholstery and
assembly
Flexible Manufacturing System (FMS)Flexible Manufacturing System (FMS)Flexible Manufacturing System (FMS)Flexible Manufacturing System (FMS)
It is also like JIT that helps manufacturing firms reduce inventory level.
A FMS is an automated Production system that produces one or more items using ROBOTS, Computer control material handling system.
It also reduces down time and setup time. The result is a smooth flow of production with little or no WIP
inventory.
Work Center OneWork Center One
FMS Production LineFMS Production Line
Cutting drilling and sanding
Staining and varnishing
Work Center TwoWork Center TwoUpholstery and
assembly
I get the feeling I’m in
over my head!