Process Costing

1
Process Costing

• Accumulate costs by departments and allocate
  costs to products based on broad, average costs
• Process costing systems are usually simpler and
  less expensive than job-order costing systems
• Equivalent Units
• Basic unit of measurement to convert work on
  "units started in previous period" and "units not
  completed" to equivalent whole units
• 100 units 40 complete 40 units 100 complete
• Five Steps in Process Costing
• 1. Track the flow of physical units
• 2. Determine number of equivalent whole units
  
• 3. Summarize relevant costs
• 4. Determine cost per equivalent unit
• 5. Allocate costs to units completed and to
  units in ending work in process

2
Job-Order versus Process Costing
Job-Order Costing
Job 100
Direct materials Direct labour Factory overhead
Finished Goods Inventory
Cost of Goods Sold
Job 101
Job 102
Process Costing
Process A
Direct materials Direct labour Factory overhead
Finished Goods Inventory
Cost of Goods Sold
Process B
Process C
3
Process Costing Terminology

• Direct materials
• Materials applied to the production process at
  specific points in time
• Conversion costs
• Labour and overhead costs which are assumed to be
  applied uniformly throughout the production
  process
• Transferred-In costs
• Value of materials and conversion costs carried
  forward to subsequent departments

Direct Material
Direct Material
Transferred-In Costs
Forming Department
Finishing Department
To Finished Goods Inventory
Conversion Costs
Conversion Costs
4
Backflush Costing

• As companies achieve JIT inventory control and
  Total Quality Management, less costs are carried
  in inventory
• Less attention is given to systems which
  sequentially track the flow of product costs from
  material inventory to work in process and
  finished goods
• Use backflush costing when
• Levels of inventory are minimal
• Production process / technology is relatively
  stable
• Standard costs are clear
• When finished goods inventory is minimal, it is
  possible to eliminate this account and transfer
  costs directly to cost of goods sold

Cost of Goods Sold
Finished Goods Inventory
Materials
Conversion Costs
5
Operation Costing

• Operation Costing is a hybrid costing system
  combining aspects of job-order and process
  costing
• Products are usually produced in batches
• While many of the products share common
  characteristics each batch has its own unique
  features
• Wool Blazers Polyester Blazers
• Direct materials 2,500 3,100
• Conversion costs
• Cutting cloth 600 1,200
• Checking edges 300
• Sewing body 500 1,000
• Checking seams 600
• Machine sewing 800
• Hand sewing 700
• Total costs 5,200 6,100