Process costing

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Cost process is an accounting methodology that tracks and accumulates direct costs, and allocates indirect costs from the manufacturing process. Fees are set for the product, usually in large quantities, which may include one full month of production. Finally, costs should be allocated to each product unit. This sets the average cost for each unit, and is the opposite extreme of the Job cost that tries to measure the individual production costs of each unit. The costing process is usually an important part. This is a method of setting costs for production units in companies that produce large quantities of homogeneous products.

The cost process is a type of operating cost used to ensure the cost of a product in every process or stage of manufacture. CIMA defines the cost process as "The applicable cost method in which the goods or services result from a series of continuous or recurring operations or processes.The average cost of units produced during the period". The cost process is suitable for industries that produce homogeneous products and where production is a sustainable flow. A process may be referred to as a sub-unit of an organization specifically specified for cost collection purposes.

Video Process costing

Importance of costing process

Costing is an important process involving many companies to track where their money is spent in production and distribution processes. Understanding these costs is the first step in getting them under control. It is imperative that the company chooses the right kind of costing system for the type and industry of their products. One type of costing system used in a particular industry is the cost process that varies from other cost types (such as the cost of work) in some way. In the process of costing unit costs more like the average, the cost-process system requires less bookkeeping than the job-order costing system. Thus, some companies often prefer to use a cost-processing system.

Maps Process costing

When is the cost process applied?

The cost process is appropriate for a company that generates a continuous mass such as a unit through a series of operations or processes. Also, when one order does not affect the production process and standardization of processes and products exist. However, if there is a significant difference between the costs of various products, the process cost system will not provide adequate product cost information. Costs are generally used in industries such as petroleum, coal mining, chemicals, textiles, paper, plastics, glass, food, banks, couriers, cement, and soaps.

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Reasons for use

Unit of the Compaq product within a certain period of time.

• Products are produced in large quantities, but the product can be sold in small quantities, sometimes one by one (car, bread), one or two dozen at a time (eggs, cakes), etc.
• The cost of the product must be transferred from the Finished Goods to the Cost of Goods Sold because the sale is made. This requires correct and accurate product cost per unit calculation, in order to have an appropriate match between the cost of the product and the associated sales revenue.
• Managers need to maintain cost control over manufacturing processes. The costing process provides feedback managers that can be used to compare similar product costs from one month to the next, keeping costs in line with the projected manufacturing budget.
• A cost change of a fraction of a cent can represent a major dollar change in overall profitability, when selling millions of units of products per month. Managers must carefully monitor each unit's cost every day through the production process, while at the same time dealing with materials and output in large quantities.
• The material through the process (eg chemicals) may need to be rated, the cost of the process allows for this. By determining how much material costs processed parts that have been spent such as labor or overhead "equivalent units" relative to the value of completed processes can be calculated.

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Process costing procedure

There are four basic steps in accounting for Process costs:

• Summarize the physical output unit flow.
• Calculate the output in terms of equivalent units.
• Summarizes the total cost to calculate and Calculates the equivalent unit cost.
• Set the total cost for completed units and to units in the final work in process inventory.

The journal entry for the cost process is the same as the entry for the job-order fee with one exception. Entries for transferring fees from one work-in-process account to another are:

Debit department supplies-second-department-process (Left)

First-in-process (Right) working-line credit

e.g. (1) Micro Labs Company produces house paint in two processing departments: Mixing Department which mixes paint colors and Finishing Department that puts paint in the container and label it. The following information is related to the company's operations for the following October:

A) Raw materials issued for use in production: Mixing Department, $ 551,000, and Finishing department, $ 629,000. B) Direct labor cost incurred: Mixing department $ 230,000, and Finishing department $ 270,000. C) Factory overhead cost applied: Mixing department $ 665,000, and Finishing department, $ 405,000. D) The cost of mixed paint that is transferred from the Mixing department to the Finishing department is $ 1,850,000. E) Paints that have been prepared for delivery are transferred from the Finishing department to the finished Goods. The cost of paint transferred is $ 3.2 million.

Required: Prepare a journal entry to record items A) to E) above.

Solution (1):

 -Work in Process - Mix 551.000  -Working in Process - Finishing 629,000  -Raw Material 1.180.000  -Working in Process - Mixing 230,000  -Working in Process - Finishing 270,000  - 500,000 Wages and Salaries  -Working in Process - Mixing 665,000  -Working in Process - Finishing 405,000  Overhead Manufacturing 1.070.000  -Working in Process - Finishing 1,850,000  -Working in Process - Mixing 1.85 million  - finished goods 3,200,000  -Working in Process - Finishing 3,200,000  

e.g. (2) Larney Corporation uses the costing process. A number of transactions that occurred in June are listed below. As follows:

A) Raw materials valued at $ 38,200 were withdrawn from the warehouse for use in the Mixing Department. B) Direct labor costs incurred $ 36,500, in the Mixing Department. C) A production overhead of $ 42,100 is applied to the Mixing Department. D) Units with a recorded cost of $ 112,400 are completed in the Mixing Department and transferred to the Drying Department for further processing. E) Units with a carrying cost of $ 143,800 are completed in the Drying Department, the last step in the production process, and transferred to the finished goods warehouse. F) Finished goods at a carrying cost of $ 138,500

Required: Prepare journal entries to record items A) through F).

Solution (2):

 -work in the process-mixing department $ 38,200  - raw material $ 38,200  - work in process $ 36,500  -gift/salary paid $ 36,500  - work in a $ 42,100 department mixing process  -makes a $ 42,100 overhead fee  - work in the process drying department. $ 112,400  - work in the mixing department $ 112,400  - Finished goods $ 143,800  -worked in the process drying department $ 143,800  -the item costs $ 138,500  - Finished goods $ 138,500  

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Operating cost in batch making

Batch costing is a modification of the cost of the job. When production is repetitive and consists of a number of definite articles, batch is used. In batch costs, the most important issue is determining the optimal size of the batch that follows the fact that the production of two cost elements:

• Prepare the costs that are generally set per batch.
• Bringing costs that veteterminate batch quantities requires consideration of several factors:
• set up cost per batch.
• production costs such as (direct material costs direct direct wage costs) per unit.
• storage cost.
• the interest rate on the capital invested in the product and the level of demand for the product.

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References

• Jae K. Shim, Joel G. Siegel (2009,2000,1992). Modern Cost Management and Cost Ed 3 . Barron's Education Series, Inc. ISBN: 978-0-7641-4103-4.
• Bhabatosh Banerjee. Costing And Practice Theory 12Th Ed . Ã,

Source of the article : Wikipedia