Process Costing

1
Process Costing

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

2
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.

3
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.

4
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.

5
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.

6
Process Costing
Industry Process Job
Food 96 4
Textiles 91 8
Primary Metals 92 25
Chemicals 75 25
Oil refining 100 25
Furniture 38 63
Machinery 43 65
Electronics 55 58
7
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.

8
Process Costing

• Raw material Process 1
• Process 1 Process 2
• Process 2 Process 3
• Process 3 Finished Goods

9
Process Costing
Raw Material (Inputs) Add Conversion Costs Finished Goods of Process 1
Finished Goods of Process 1 Raw Material of Process 2 Add Conversion Costs Finished Goods of Process 2
Finished Goods of Process 2 Raw Material of Process 3 Add Conversion Costs Finished Goods (Output)
10
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.

11
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.

12
Process Costing
Process A Process A Process A Process A
Direct Material 90000 Transfer to Process B 200000
Direct Labor 75000 Transfer to Process B 200000
Direct Expenses 15000 Transfer to Process B 200000
Indirect Expenses 20000 Transfer to Process B 200000
Process B Process B Process B Process B
Transfer from Process A 200000 Transfer to Finished Goods 483000
Direct Material 75000 Transfer to Finished Goods
Direct Labor 150000 Transfer to Finished Goods
Direct Expenses 18000 Transfer to Finished Goods
Indirect Expenses 40000 Transfer to Finished Goods
13
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 (9000075000) /
  1500 110
• Direct Labor Cost per Unit (75000150000) /
  1500150
• Direct Expenses Cost per Unit (1500018000) /
  1500 22
• Indirect Expense Cost per Unit (60000) / 1500
  40
• Total Costs 322

14
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.

15
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.

16
Process Costing
Flow of Production Step 1 Step 2 Step 2
Flow of Production Physical Units Direct Material Conversion Costs
Beginning WiP 0
Started in Feb.01 to account 400
Completed Transferred 175 175 175
Ending WiP 225
Material 100 of 225 225
Conversion 60 of 225 135
Work Done in Feb.01 400 310
17
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.

18
Total Production Costs Direct Material Conversion Costs
Step 3 Costs incurred in Feb.01 50600 32000 18600
Equivalent Units of Work Done 400 310
Step 4 Costs per equivalent Unit Costs per equivalent Unit 80 60
Step 5 Assignment of Costs Assignment of Costs Assignment of Costs Assignment of Costs
Complete 175 units Complete 175 units 24500 175 x 80 175 x 60
WiP (225 Units) WiP (225 Units)
Direct Material Direct Material 18000 225 x 80
Conversion Costs Conversion Costs 8100 135 x 60
Total Costs Total Costs 50600
19
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

20
Weighted Average Cost Method
Flow of Production Flow of Production Step 1 (Physical Units) Step 2 (Equivalent Units) Step 2 (Equivalent Units)
Flow of Production Flow of Production Step 1 (Physical Units) Direct Material Conversion Costs
Beginning WiP Beginning WiP 225
Started in Current Period Started in Current Period 275
To Account For To Account For 500
Completed Transferred Completed Transferred 400 400 400
WiP Ending WiP Ending 100
(100 x 100) (50 x 100) (100 x 100) (50 x 100) (100 x 100) (50 x 100) 100 50
Accounted For 500 500
Work done till date Work done till date Work done till date 500 450
21
Weighted Average Cost Method
Total Production Costs Direct Materials Conversion Costs
Step 3 WiP Beginning 26100 18000 8100
Costs Added in Mar Costs Added in Mar 36180 19800 16380
Costs incurred till date Costs incurred till date 37800 24480
Equivalent Units of Work Done Equivalent Units of Work Done Equivalent Units of Work Done 500 450
Costs per equivalent unit Costs per equivalent unit Costs per equivalent unit 75.60 54.40
Step 4 Total Cost to Account For 62280
22
Weighted Average Cost Method
Step 5 Assignment of Costs Assignment of Costs Assignment of Costs
Completed transferred out 400 Units 52000 400 x 75.60 400 x 54.40
WiP Ending (100 Units)
Direct Material 7560 100 x 75.60
Conversion Costs 2720 50 x 54.40
Total WiP Costs 10280
Total Costs Accounted For 62280
23
First in First Out Method
Flow of Production Step 1 (Physical Units) Step 2 (Equivalent Units) Step 2 (Equivalent Units)
Flow of Production Step 1 (Physical Units) Direct Material Conversion Costs
Beginning WiP 225
Started in Current Period 275
To Account For 500
Completed Transferred
From Beginning WiP 225
225x(100-100) 225x(100-60) 225x(100-100) 225x(100-60) 0 90
Started Completed 175 175 175
WiP Ending 100
100 x 100 100 x 50 100 x 100 100 x 50 100 50
Accounted for work done in current period 500 275 315
24
First in First Out Method
Total Production Costs Direct Materials Conversion Costs
Step 3 WiP Beginning 26100
Costs Added in Mar Costs Added in Mar 36180 19800 16380
Equivalent Units of Work Done in Current Period Equivalent Units of Work Done in Current Period Equivalent Units of Work Done in Current Period 275 315
Cost per equivalent unit of work done Cost per equivalent unit of work done Cost per equivalent unit of work done 72 52
Step 4 Total Cost to Account For 62280
25
First in First Out Method
Step 5 Assignment of Costs Assignment of Costs Assignment of Costs
Completed transferred out 400 Units
WiP Beginning (225 Units) 26100
Direct Material 0 0 x 72
Conversion Costs 4680 90 x 52
Total From Beginning WiP Costs 30780
Started Completed in Mar.01 (175 Units) 21700 175 x 72 175 x 52
Total Costs of Units Completed Transferred 52480
WiP ending (100 Units)
Direct Material 7200 100 x 72
Conversion Costs 2600 50 x 52
Total WiP ending 9800
Total Costs Accounted For 62280
26
Comparison of WAC v/s FIFO Methods
WAC FIFO Difference
Cost of Units completed transferred out 52000 52480 480
Work in process,ending 10280 9800 - 480
Total costs accounted for 62280 62280
27
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

28
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.