Process Costing

Process 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. 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 -1 Identify the situations in which process-costing systems is more suitable.

Process Cost System Direct materials Work in Process Account Work in Process Account DEPT. A DEPT. B Factory Overhead Direct Labour Factory Overhead Direct Labour to Finished Goods PCS is used when masses of similar units are produced Eg: 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 -2 Calculate equivalent units and understand how to use them.

Process Cost Direct Materials Conversion Costs Raw material directly traceable to the process. Labour and overhead directly traceable to the process.

Direct Materials (DM) 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

Objective -3 Describe the five steps in 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 Manufacturer Scrap Metal Materials Melting Department Casting Department

Molten metal transferred from Melting Casting Department Melting Department Physical Flows for a Process Manufacturer To finished goods

Physical Units (Step 1) Physical units Flow of Production Work in process, beginning 0 Started during current period 35,000 To account for 35,000 Completed and transferred out during current period 30,000 Work in process, ending (100%/20%) 5,000 Accounted for 35,000 Degree of Completion in this Department. DM 100% & CC 20%

Compute Equivalent Units (Step 2) Equivalent units Direct Conversion Flow of Production Materials Costs Completed and transferred out 30,000 30,000 Work 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 Rs62,000 Equivalent units 35,000 31,000 Cost per equivalent unit Rs2.4014 Rs2.00 Total production costs are Rs146,050.

Summarize and Assign Total Costs (Steps 4 and 5) Step 4: Total costs to account for: Rs146,050 Step 5: Assign total costs: Completed and transferred out 30,000 × Rs4.4014 Rs 132,043 Work in process, ending (5,000 units) Direct materials 5,000 × Rs2.4014 12,007 Conversion costs 1,000 × Rs2.00 2,000 Total Rs146,050

Objective -4 Prepare journal entries for process-costing systems.

Journal Entries Example Assume that ABC Ltd. has two processing departments – Melting and Casting. ABC Ltd., purchases direct materials as needed. What is the journal entry for materials? Work in Process, Melting 84,050 Accounts 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 62,000 Various accounts 62,000 To record Melting Department conversion costs What is the journal entry to transfer completed goods from Melting to Casting?

Journal Entries Example Work in Process, Casting 132,043 Work in Process, Melting 132,043 To record cost of goods completed and transferred from Melting to Casting during the period

Flow of Costs Example Accounts Payable 84,050 Various Accounts 62,000 WIP Melting 84,050 132,043 62,000 14,007 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% material 60% conversion costs 1,000 Units started in process 35,000 36,000 Units transferred out: 31,000 Units in ending inventory: 100% material 5,000 20% conversion costs 36,000

Compute Equivalent Units (Step 2) Materials Conversion Completed and transferred 31,000 31,000 Ending inventory 5,000 1,000 Equivalent units 36,000 32,000 100% 20%

Compute Equivalent Unit Costs (Step 3) Materials Conversion Beginning inventory Rs 2,350 Rs 5,200 Current costs 84,050 62,000 Total Rs86,400 Rs67,200 Equivalent units 36,000 32,000 Cost per unit Rs2.40 Rs2.10

Summarize and Assign Total Costs (Steps 4 and 5) Work in process beginning inventory: Materials Rs 2,350 Conversion 5,200 Total beginning inventory Rs 7,550 Current costs in Melting Department: Materials Rs84,050 Conversion 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 12,000 Conversion 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 units transferred 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,Melting Beg. Inv. 7,550 Transferred Materials 84,050 to Finishing Conversion 62,000 139,500 Balance 14,100

The First-in, First-out (Fifo) Method

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 Equivalent Units (Steps 1 and 2) Materials Conversion Completed and transferred: From beginning inventory 0 400 Started and completed 30,000 30,000 Ending inventory 5,000 1,000 35,000 31,400 Quantity schedule (Step 1) is the same as the weighted-average method.

Compute Equivalent Units (Step 2) Materials Conversion Completed and transferred: 31,000 31,000 Ending inventory 5,000 (100%) 1,000 (20%) 36,000 32,000 Beginning inventory 1,000 (100%) 600 (60%) Equivalent units 35,000 31,400

Compute Equivalent Unit Costs (Step 3) Materials Conversion Current costs Rs84,050 Rs62,000 Equivalent units 35,000 31,400 Cost per unit Rs2.40 Rs1.975

Summarize and Assign Total Costs (Steps 4 and 5) Work in process beginning inventory: Rs7,550 Current costs: Material 84,050 Conversion 62,000 Total Rs153,600 Same as using weighted-average

Summarize and Assign Total Costs (Steps 4 and 5) Costs transferred out: From beginning inventory: Rs7,550 Conversion costs added: 400 × Rs1.975= Rs790 Rs8,340 From current production: 30,000 × Rs4.375 131,250 Total Rs139,590

Summarize and Assign Total Costs (Steps 4 and 5) Work in process ending inventory: Materials: 5,000 × Rs2.40=Rs12,000 Conversion: 1000 × Rs1.975 = 1,975 Total Rs13,975

Summarize and Assign Total Costs (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, Melting Beg. Inv. 7,550 Transferred Materials 84,050 to Finishing Conversion 62,000 139,625 Balance 13,975

Comparison of Weighted-Average and FIFO Methods Weighted Average FIFO Difference Costs of units completed and transferred out Rs139,500 Rs139,625 +Rs125 Work in process, ending 14,100 13,975 –Rs 125 Total costs accounted for Rs153,600 Rs153,600 0

Beginning & Ending WIP Weighted 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. FIFO Costs 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 is the most commonly used method. Weighted Average vs. FIFO

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 Just-in-Time Processing (JIT)

Upholstery Dept. Assembly Dept. Cutting Dept. Wood Traditional Production Line Drilling Dept. Sanding Dept. Staining Dept. Varnishing Dept.

Just-in-Time Production Line Wood Cutting drilling and sanding Staining and varnishing Upholstery and assembly Work Center One Work Center Two Work Center Three

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. Flexible Manufacturing System (FMS)

FMS Production Line Wood Cutting drilling and sanding Staining and varnishing Upholstery and assembly Work Center One Work Center Two

I get the feeling I’m in over my head! END

Process Costing

More Related Content

What's hot (20)

Similar to Process Costing (20)

Recently uploaded (20)

Process Costing