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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
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
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
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.
EQUIVALENT UNITS
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
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
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%...
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
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
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
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.
EQUIVALENT UNITS
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
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
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%...
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