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!