Process Costing

This is on the other side of the continuum from Job Costing

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Process Costing
Typical features of process costing are. The output is homogeneous. Production is continuous. The production precedes sales. It is feasible to segment the manufacturing operations into clearly identifiable processes. It assumes sequential flow of costs from one process to another.
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Process Costing v/s Job Costing

Job costing is used
when the cost object is an individual (or a lot/batch) unit of a distinct product or service Costs can be accumulated by each individual product or service

Process Costing is
generally used for a mass of identical product or service. The Costs are accumulated in a period. The total costs in a period are divided over the number of units to get an average unit cost.
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Process Costing v/s Job Costing

Job costing is done
against a specific order being produced. Costs are calculated when a job is over. There are usually no transfers of costs from one job to another.
Costs are compiled for
each process over time. Costs are calculated at the end of a cost period like an accounting year. Transfer of costs from one process to another is made as the product moves from one process to the other.

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Process Costing v/s Job Costing

There is more paper
work. There is little or no inventory. It is less amenable to mechanization & automation.

It has lesser paper

work. There is regular and significant inventory. It is more amenable to mechanization & automation.

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Process Costing
Industry Food Textiles Primary Metals Chemicals Oil refining Furniture Machinery Electronics Process 96% 91% 92% 75% 100% 38% 43% 55%
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Job 4% 8% 25% 25% 25% 63% 65% 58%

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Process Costing
Service Sector eg.
Compute the costs to process 100000 Fixed Deposit Receipt Applications in a Bank. Compute the costs to serve Customers in a Call Centre.

Merchandizing Sector eg.

Compute the costs to serve Coke in McDonalds.
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Process Costing
Raw material Process 1 Process 2 Process 3 Process 1 Process 2 Process 3 Finished Goods

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Process Costing
Raw Material (Inputs) Add Conversion Costs Finished Goods of Add Process 1= Raw Conversion Material of Process 2 Costs Finished Goods of Add Process 2= Raw Conversion Material of Process 3 Costs
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Finished Goods of Process 1 Finished Goods of Process 2 Finished Goods (Output)

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Process Costing
Materials: The raw material is taken at the cost
value for each process. Wages: The wages on each process are traced clearly and allocated to that process. Direct expenses: The direct expenses of each process are traced clearly and allocated to that process. Indirect expenses: They are allocated to each process at predetermined rates.
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Process Costing
A product passes through process A & process B. In June 1500 units are made. There was no WIP neither at the beginning nor at the end of the month. The cost structure is as below: Direct Costs Process A Process B Material 90000 75000 Labor 75000 150000 Expenses 15000 18000 The Indirect Expenses worth 60000 are apportioned on the basis of Direct Labor Costs.
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Process Costing
Process A Direct Material Direct Labor Direct Expenses Indirect Expenses 90000 75000 15000 20000 Process B Transfer to Process B 200000

Transfer from Process A

Direct Material Direct Labor Direct Expenses

200000
75000 150000 18000

Transfer to Finished Goods

483000

Indirect Expenses

40000
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Process Costing
Cost per Unit of Process A = 200000/1500
= 133.33

Cost per Unit of Process B = 483000/1500

= 322.00

Direct Material Cost per Unit = Direct Labor Cost per Unit = Direct Expenses Cost per Unit = Indirect Expense Cost per Unit = Total Costs

(90000+75000) / 1500 = 110 (75000+150000) / 1500=150 (15000+18000) / 1500 = 22 (60000) / 1500 = 40 = 322

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Process Costing
When there is Work In Progress Inventory at the end of the period, they are converted into equivalent completed units. E.g. 100 units of WiP which is 40% complete is considered as equivalent to 40 completed units. Procedure: 1. Summarize the flow of units of output. 2. Compute Output in terms o9f equivalent units. 3. Compute equivalent unit costs. 4.Summarize total costs to account for. 5. Assign total costs to completed units and to units ending in WiP.
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Process Costing
In Feb.01 , the Assembly had the following data. Beginning WiP (Feb 1,01) = 0 units Started in Feb.01 = 400 units Completed & Transferred = 175 units Closing WiP Inventory = 225 units. Total Costs incurred for Feb.01 Direct Material = 32000 Conversion Costs = 18600 Total Assembly Costs = 50600 The Supervisor estimates that the WiP is about 60% complete.
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Process Costing
Flow of Production Step 1 Physical Units Step 2 Direct Material Conversion Costs

Beginning WiP
Started in Feb.01 to account Completed & Transferred Ending WiP Material 100% of 225 Conversion 60% of 225 Work Done in Feb.01

0
400 175 225 225 135 400
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175

175

310
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Process Costing
Note that the WiP is for Full 100% of 400
units for Direct Material as the entire material is committed at the initial stage itself. So the equivalent units of WiP of 225 units for Direct Material is 225 units. The Conversion Costs in the 225 of 60% assembled units is equivalent to 135 units of 100% complete.
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Total Production Costs Step 3 Costs incurred in Feb.01 50600

Direct Material 32000

Conversion Costs 18600

Equivalent Units of Work Done

Step 4 Step 5 Costs per equivalent Unit Assignment of Costs 24500

400
80

310
60

Complete 175 units WiP (225 Units) Direct Material Conversion Costs Total Costs

175 x 80

175 x 60

18000 8100 50600

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225 x 80 135 x 60

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Process Costing
In Mar.01 , the Assembly had the following data. Beginning WiP (Mar 1,01) = 225 units (100% of Materials & 60% of Conversion Costs) Started in Mar.01 = 275 units Completed & Transferred = 400 units Closing WiP Inventory = 100 units. 100% of Materials & 50% of Conversion Costs) Total Costs for Mar.01 WiP (Beginning) = 26100 Material 18000 Conversion Cost 8100 Direct Material Added in Mar.01 = 19800 Conversion Costs added in Mar = 16380 Total Costs to account for = 62280
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Weighted Average Cost Method

Flow of Production Step 1 (Physical Units) 225 Step 2 (Equivalent Units) Direct Material Conversion Costs

Beginning WiP

Started in Current Period

To Account For Completed & Transferred WiP Ending (100% x 100) & (50% x 100) Accounted For Work done till date

275
500 400 100 100 500 500 450 50 400 400

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Weighted Average Cost Method

Total Production Costs Step 3 WiP Beginning 26100 36180 Costs Added in Mar Costs incurred till date Equivalent Units of Work Done Costs per equivalent unit Step 4 Total Cost to Account For 62280 Direct Materials 18000 19800 37800 500 75.60 Conversi on Costs 8100 16380 24480 450 54.40

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Weighted Average Cost Method

Step 5 Completed & transferred out 400 Units Assignment of Costs 52000 400 x 75.60 400 x 54.40

WiP Ending (100 Units)

Direct Material Conversion Costs Total WiP Costs Total Costs Accounted For 7560 2720 10280 62280 100 x 75.60 50 x 54.40

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First in First Out Method

Flow of Production Step 1 (Physical Units)
225 275 500

Step 2 (Equivalent Units)

Direct Material Conversion Costs

Beginning WiP Started in Current Period To Account For Completed & Transferred From Beginning WiP

225 0 175 100 500

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225x(100%-100%) & 225x(100%-60%) Started & Completed WiP Ending 100 x 100% & 100 x 50% Accounted for work done in current period 175 100

90 175 50 315
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275

First in First Out Method

Total Production Costs Step 3 WiP Beginning 26100 36180 Costs Added in Mar

Direct Materials

Conversi on Costs

19800 275 72

16380 315 52

Equivalent Units of Work Done in Current Period Cost per equivalent unit of work done

Step 4

Total Cost to Account For

62280

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First in First Out Method

Step 5
Completed & transferred out 400 Units WiP Beginning (225 Units) 26100

Assignment of Costs

Direct Material
Conversion Costs Total From Beginning WiP Costs Started & Completed in Mar.01 (175 Units)

0
4680 30780 21700

0 x 72
90 x 52

175 x 72 175 x 52

Total Costs of Units Completed & Transferred

WiP ending (100 Units) Direct Material Conversion Costs Total WiP ending Total Costs Accounted For
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52480
7200 2600 9800 62280
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100 x 72 50 x 52

Comparison of WAC v/s FIFO Methods WAC 52000 FIFO 52480 Difference + 480

Cost of Units completed & transferred out Work in process,ending

10280

9800

- 480

Total costs accounted for

62280

62280

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Comparison of WAC v/s FIFO Methods

The WAC method shows lower cost of goods sold which implies
higher profits in a declining cost scenario & vice versa in an increasing cost scenario. The direct material cost in the beginning WIP was 80 & conversion cost was 60 as compared to 72 & 52 respectively in the current period. Thus, WAC method smoothes out the cost per equivalent unit by assuming that more of the lower cost units are completed & transferred out & some higher cost units are placed in ending WiP. This can be material when
the direct material costs & conversion costs vary significantly between periods The physical inventory level of WiP is large vis-a-vis the total no. of units transferred out

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Comparison of WAC v/s FIFO Methods

FIFO method does not merge the costs between the periods & so
helps period to period comparison of costs. WAC method is simpler in computation & is more representative of the avg. unit cost as compared to FIFO.

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