Process Costing Manac Ppt

PROCESS COSTING

DR. ALOK DIXIT INDIAN INSTITUTE OF MANAGEMENT LUCKNOW

COSTING SYSTEMS USED TO DETERMINE PRODUCT COSTS

Costing Systems Process Costing

Job-order
Costing

Mass production of identical or similar products (at process-level). For example, Sugar, food, chemical industry. Many units of a single, homogeneous product flow evenly through continuous production process(s). One unit of product is indistinguishable (at process-level) from any other unit of product. Each unit average cost. of product is assigned the same

SOME EXAMPLES OF BUSINESSES USING PROCESS COSTING

Process Costing

Extraction In a process cost system,

Process costing accumulates costs by process or department and then assigns them to a large number of nearly identical products. Drilling/

SOME EXAMPLES

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Costs are tracked through a series of connected manufacturing processes or departments; Used for large volume production of uniform products. Example:

Chemicals Oil refining Textiles Paints Paper Flour Rubber Steel Food processing Supply to Customer

http://www.bajajhindustan.com/sugarp rocess.html

Illustration 3-2

FLOW OF COST IN PROCESS COSTING SYSTEM

Process Costing
Materials Inventory Work in Process, Mixing Dept

Manufacturing Wages

Work in Process, Molding Dept

Finished Goods

Manufacturing Overhead

Work in Process, Packaging Dept

Cost of Goods Sold

IMPORTANT ASPECTS OF PROCESS COSTING
 Flow

of Costs through various processes; of Normal Loss and Abnormal

 Treatment

Loss/ Gain;

 Concept

of Equivalent Units; of Joint Costs; of By-Products;

 Allocation  Treatment

FLOW OF COSTS THROUGH VARIOUS PROCESSES
• •

Product may be produced in single process. OR In case it utilizes more than one process, output of one process become input for the subsequent process.

Example

PROCESS ACCOUNTS

TREATMENT LOSS/ GAIN

OF

NORMAL LOSS

AND

ABNORMAL

Product X is complete after it passes through three distinct processes. The following information is available for operations;

SOLUTION

Costing P & L a/c

CONCEPT OF EQUIVALENT UNITS

EQUIVALENT UNITS
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In process industries, manufacturing is continuous (in general); Cost for the period gets accumulated along processes; Average cost per unit is arrived at: Total Cost Accum ulated in a Period at Process - level No. of Units Produced

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Number of units produced could be complete or incomplete on the closing date/ end of the period; Therefore, average cost is determined using the concept of equivalent units; Equivalent units are ‘incomplete units in terms of complete units’. It’s a way of converting ‘incomplete units’ in ‘complete units’ for determining cost on the date when these units are actually incomplete.

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EQUIVALENT UNITS
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Equivalent Units are defined as ‘notional whole units’ representing incomplete work, used to apportion cost between WIP and completed output. (CIMA, UK) EquivalentUnits  Physical Units * Degree of Work Completed During the Period

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Work Completed is expressed as a proportion (%) of ‘total work required to complete one physical unit’. Degree of completion may vary across the inputs needed to manufacture the units, e.g., the units may be 100% complete in terms material, but only 70% complete in terms of Labour and just 50% in terms of overheads. For more precision, the equivalent units are determined for all the three constituents of costs, viz;  Material  Labour  Overheads

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EQUIVALENT UNITS: AN EXAMPLE

EXAMPLE

EXAMPLE: R P LTD

SOLUTION
Statement of Calculating Equivalent Units Material Labour Particulars Total Overheads Equivalent  % of  Equivalent  % of  Equivalent  % of  Completion Units Completion Units Completion Units

Units Produced Closing WIP Normal Loss Abnormal Loss
Total Equivalent Units

9500 350 100 50 10000

100% 100% 100%

9500 350 50 9900

100%...