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Process costing is an appropriate cost accumulation system when products are manufactured through a mass production or a continuous process. Costs are averaged over the units produced during the period, being initially charged to the operation or process. Process costs are accumulated by department, or cost centre.
Process costing is an appropriate cost accumulation system when products are manufactured through a mass production or a continuous process. Costs are averaged over the units produced during the period, being initially charged to the operation or process. Process costs are accumulated by department, or cost centre.
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Process costing is an appropriate cost accumulation system when products are manufactured through a mass production or a continuous process. Costs are averaged over the units produced during the period, being initially charged to the operation or process. Process costs are accumulated by department, or cost centre.
Copyright:
Attribution Non-Commercial (BY-NC)
Verfügbare Formate
Als PDF, TXT herunterladen oder online auf Scribd lesen
Hong Kong Institute of Continuing Higher Education |||
HKICHE www.hkiche.com Cost Accounting
41
Chapter 6 : PROCESS COSTING
INTRODUCTION Process costing is an appropriate cost accumulation system when products are manufactured through a mass production or a continuous process. Costs are accumulated by department o cost centre.
Definition of Process Costing Process costing has been defined as "the costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period, being initially charged to the operation or process.
Objectives The process costing system aims to determine how manufacturing costs will be allocated to units completed, or to units started but not completed. Those are work in process units. It is also to compute total unit costs for income determination.
Characteristics of Process Costing (a) Process costs are accumulated by department, or cost centre. (b) Each department has its own work-in-process inventory account. The costs are debited when costs are incurred, and are then credited when units are complete, or transferred to next departments process account after the current process. (c) As units and costs leave each department, the units and costs are accumulated and carried over to the next department. When units and costs leave the last department, they can be used to determine the unit cost of the finished goods. (d) Unit costs are determined by respective department, or cost centre. (e) Departmental costs of production reports are used to aggregate, analyse and calculate the total costs and the unit costs.
Terminology y Opening work in process (WIP) Some uncompleted units of production are brought forward from the previous period by the beginning of the period. These units may contain materials, labour and overhead costs at different percentages of completion.
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y Closing WIP Some units may still be unfinished at the end of the current period. They are the closing WIPs and the degree of completion should be notified, for example 80% complete as to labour.
y Completed units They refer to the units completed during the period. Some of these are the units that were started and completed in the period while some are the opening WIP units that have been completed.
y Equivalent units Some parts of the costs incurred in a period relate to the completed product and others relate to the uncompleted work in process.
Example 1 : Equivalent Units and Different Degree of Completion
Suppose that ABC Ltd. Is a manufacturer of processed goods, and the costs of process B in October 2004 were as follows:
Opening stock nil Material input from process A 8,000 units
Costs of input: Material from process A $12,000 Added materials in process B 2,160 Conversion costs 3,440
Output is transferred into the next process, process C
Closing work in process amounted to 1,600 units, complete as to : Process A material 100% Added materials 50% Conversion costs 30%
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Required : Prepare the account for process B for October 2004.
Solution :
(a) Statement of Equivalent Units (of production in the period)
Total Process A Materials Added materials Conversion costs Input Output Units Units % Units % Units % 8,000 Completed 6,400 6,400 100% 6,400 100% 6,400 100% Production
Input Cost Equivalent production in units Cost per unit Process A material $12,000 8,000 $1.50 Added materials 2,160 7,200 0.30 Conversion costs 3,440 6,880 0.50 _______ _____ $17,600 $2.30 ====== ====
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( c) Statement of Evaluation (of Finished Work and Closing Stocks)
Production Cost element Number of Cost per Total Cost equivalent equivalent unit unit
Completed production 6,400 2.30 14,720
Closing stock: Process A material 1,600 1.50 2,400 Added material 800 0.30 240 Conversion costs 480 0.50 240 2,880 17,760 =====
Apportionment of WIP Inventory y To apportion costs to the work in process inventory it is necessary to decide:
(a) how many units of finished product will be obtained when that the work is complete: (b) What percentage of the materials and conversion costs have so far been incurred. The multiplication of (a) by (b) will give equivalent units. These equivalent units are added to the number of units actually completed to give a total figure of units over which the costs incurred will be apportioned.
Example Costs incurred in the period $72,000 Units in the process 12,000 Degree of completion 60% (* all performed in the period)
Required: (a) the equivalent units (b) the cost per unit
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Process Costs with Closing WIP Besides the costs of completed units, the costs of uncompleted units in closing WIP are worked out considering the equivalent units or the degree of completion.
Example 1 Completed Units and WIP
Total costs incurred in period $84,000 Finished units produced 6,000
Closing units at the end of period: 6,000 that are assessed to be 40% complete, that is 2,400 equivalent units. There is no opening WIP.
Solution Total production is 6,000 completed units plus 2,400 equivalent units, that is 8,400 equivalent units. The average cost per equivalent unit is $84,000/8,400 = $10 per unit.
Therefore, (a) the cost attributable to finished production is 6,000 x $10 = $60,000 (b) the cost attributable to the work in process will be 2,400 x $10 = $24,000
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REVIEW QUESTIONS
1. Total costs incurred in period $66,000 Material input $18,000 Total $84,000 ====== Finished units produced are 6,000 and units in process at the end of the period are 6,000. There is no opening WIP.
In relation to these 6,000 units of WIP, the whole amount of material necessary for their completion has already been injected into the process (materials are 100% complete), but only half the necessary work has been done (labour and associated costs are 50% complete)