Processing Costing

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February 2013

ACCT 102 Managerial Accounting

Oil Refinery: A Typical Example
for the use of Process Costing

Objectives
☯To understand what is process costing
☯To understand the physical flow and basic
entries in a process costing system
☯To be able to calculate the production cost
able
in a process costing system by using
the
the Weighted Average method

1

Comparison of Job-Order Costing
and Process Costing
JobJob-order costing

The oil refining process starts with a fractional distillation column.

Typical Application of Process Costing
Process
Costing

Process costing

Job-Order
Job-order
Costing

Costs
Costs accumulated by
the job.
job.

Costs
Costs accumulated by
department or process.
process.

Work
Work in process has a
jobjob-cost sheet for each
job.
job.

Work
Work in process has a
production report for
each batch of products.
products.

Chocolate Making (e.g. Hershey’s)

Many unique, high cost
hi
jobs.
jobs.

A few identical, low cost
id
products.
products.

Oil Refinery
Refinery

Units
Units continuously
produced for inventory
in automated process.

Paint manufacturer

Jobs
Jobs built to customer
order.

Typical process cost applications:
http://www.hersheys.com/ads-and-videos/how-we-make-chocolate.aspx?video=raw-ingredients http://www.youtube.com/watch?v=rdTpA0luD2U

http://www.youtube.com/watch?v=jvYgXJgoLJ0&feature=related

http://painting.about.com/od/artsupplies/youtube/paint_factory.htm

Paper mill
3

Cheng Nam Sang

2

http://www.youtube.com/watch?v=7SdJtYkAzTw

4

1

February 2013

ACCT 102 Managerial Accounting

Job-order and Process Costing
Applications:

Types of Processes
Sequential:
Process 1

Process 2

Process 3

Process 2

Process 4

Finished
Product X

Process 3

Parallel:

1.
2.
3.
4.
5.
6.

Finished
Goods

Process 5

Finished
Product Y

Process 1

Process 1

Process 2

Qn: Find out the brief background of these companies
Qn: Find out the brief background of these companies
and
and justify the reason for the most likely choice
between job-order and process costing systems
jobused by them.

Process 3
Process 5

Evian (www.evian.com)
(www.evian.com
Paramount Pictures (www.paramount.com)
Nestle S.A. (www.nestle.com)
(www.nestle.com
SAP (www.sap.com)
(www.sap.com
Toyota Motor (www.toyota.com)
(www.toyota.com
Zurich Financial Services Group (www.zurich.com)
(www.zurich.com

Finished
Goods

Process 4
5

6

Process Costing:
Note for Calculation

Manufacturing
Overhead
Direct
Labor

Direct
Material

Direct-labor costs
costs
are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)

Dollar Amount

Dollar Amount

Direct
Material

Process Costing:
Note for Calculation
Conversion

Direct-labor costs
are usually small
usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)

Type of Product Cost
Type of Product Cost
7

Cheng Nam Sang

So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.

8

2

February 2013

ACCT 102 Managerial Accounting

Differences Between Job-Order
and Process Costing

Differences Between Job-Order
and Process Costing

The work-in-process
account consists of
account consists of
individual jobs in a
job-order cost system.

Direct Material

Jobs

Direct Labor

ManufacturingO
verhead

Direct Material

Finished
Goods

Direct Labor
& Overhead
(Conversion)

Cost of
Goods
Sold

The work-in-process
account consists of
account consists of
individual products in a
process cost system.

Products

When direct labor is a relatively small amount
compared to material and overhead, it is often
combined with overhead.

Finished
Goods

Cost of
Goods
Sold

9

10

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