Process costing
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PROCESS COSTING. CONCEPT. Process Costing Used by manufacturers who mass produce large quantities of identical units in a continuous flow. Process costing involves averaging costs for a particular period in order to obtain departmental unit costs.

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PROCESS COSTING

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PROCESS COSTING


CONCEPT

Process Costing

Used by manufacturers who mass produce large quantities of identical units in a continuous flow.

Process costing involves averaging costs for a particular period in order to obtain departmental unit costs.


Job Order and Process Cost Systems Compared

Job Cost

Sheets

Dept. A and Dept. B

Dept. B

Job Order Cost System

Direct materials

Direct labor

Finished goods

Factory overhead

Process Cost System

Direct

materials

Finished goods

Dept. A

Direct

labor

Factory

overhead

Direct

labor

Factory

overhead


CHARACTORISTICS OF PROCESS COSTING

  • The cost of production report is used to collect , summarize and compute total and unit costs.

  • Total costs charged to the department is divided by total computed production of the department in order to determine a unit cost for a specific period.

  • Costs of completed units of a department are transferred to the next processing department in order to arrive at the total costs of the finished products during a period.


THE PROCEDURES OF PROCESS COSTING

  • Accumulate materials , labor and factory overheads costs by departments

  • Determine a unit cost for each department

  • Transfer costs from one department to the next and to finished goods

  • Assign costs to the inventory of work still in process .


PRODUCT FLOW

  • Three product flow formats associated with process costing

  • Sequential product flow

  • Parallel product flow

  • Selective product flow


SEQUENTIAL PRODUCT FLOW

  • In a sequential product flow, each item manufactured goes through the same set of operations .e.g

  • Materials are placed into production in the Blending department and labor and FOH are added. When the work is finished in the Blending department , it moves to the Testing department. The same procedure is applied again and after the completion of work , it moves to the Terminal department. After this department the product is completed and becomes the part of the finished goods.


PARALLEL PRODUCT FLOW

  • In a parallel product flow, certain portions of the work are done simultaneously and then brought together in a final process or processes for completion and transfer to the finished goods.


SELECTIVE PRODUCT FLOW

  • The product moves to different departments within the plant, depending upon the desired final product. E.g meat processing


MATERIAL COSTS

An entry to record direct materials used in a period is as follows:


LABOR COSTS

  • Summary labor charges are made to departments through an entry which distributes the direct material payroll:


FACTORY OVERHEAD COSTS

  • Predetermined overhead rates for producing departments should be used if:

  • Production is not stable

  • Factory overhead , especially fixed overhead , is a significant cost.

  • The use of predetermined rates is highly recommended for improving cost control and facilitating cost analysis


ACTUAL FACTORY OVERHEAD


APPLIED FACTORY OVERHEAD


COST OF PRODUCTION REPORT

  • A departmental cost of production report shows all costs chargeable to a department.

  • It is the most conveniant vehicle for presenting and disposing of costs accumulated during the month.


COST OF PRODUCTION REPORT

  • A cost of production report shows:

  • Total and unit costs tranferred to it from a preceding department

  • Materials, labor, and factory overheads added by the department

  • Unit costs added by the department.

  • Total and unit costs accumulated to the end of the operations in the department

  • The cost of work in process inventories

  • Cost tranferred to the succeeding department or to a finished goods store room


COST OF PRODUCTION REPORT

  • Information in the cost of production report is adjusted for equivalent production.

  • To condense the illustrated cost of production report , only total materials , labor and factory overhead charged to the departments are considered.


The Clonex Corporation

Blending Department

Cost of Production Report

For the month of January , 2010

Quantity Scehdule

Units started in process50,000

Units tranferred to the next department45,000

Units still in process(all materials-1/2 labor and factory overhead)4,000

Units lost in process 1,00050,000

Cost charged to the department

Cost added by department: Total Cost Unit cost

Materials24,500 0.50

Labor29,140 0.62

Factory Overhead28,2000.60

Total cost to be accounted for81,8401.72

Cost accounted for as follows

Tranferred to the next department (45,000*1.72)77,400

Work in process-ending inventory:

Materials (4,000*0.50)2,000

Labor (4,000*1/2*0.62)1,240

Factory overhead (4,000*1/2*0.60)1,2004,440

Total cost to be accounted for81,840


The Clonex Corporation

Testing Department

Cost of Production Report

For the month of January , 2009

  • Quantity Scehdule

  • Units recieved from the preceding department45,000

  • Units tranferred to the next department40,000

  • Units still in process(1/3 labor and factory overhead)3,000

  • Units lost in process2,00045,000

  • Cost charged to the department

  • Cosr from the preceding department:Total Cost Unit cost

  • Tranferred in during the month (45,000 units)77,4001.72

  • Cosrt added by the department:

  • Labor37,3100.91

  • Factory Overhead32,8000.80

  • Total cost added70,1101.71

  • Adjustment for lost units0.08

  • 147,4103.51

  • Cost accounted for as follows

  • Tranferred to the next department (40,000*3.51)140,400

  • Work in process-ending inventory:

  • Adjusted cost from preceding department(3,000*(1.72+0.08)5,400

  • Labor (3,000*1/3*0.91)910

  • Factory overhead (3,000*1/3*0.80)8007,110

  • Total cost to be accounted for147,510


ADJUSTMENT FOR LOST UNITS

  • Method 1:

  • 77,400 = 1.80-1.72=0.08 per unit

  • 43,000

  • Method 2:

  • 2,000 units*1.72= 3,440

  • 3,440/43,000=0.08 per unit

  • The greater the number of units lost , the greater will be the unit costs.


  • The Clonex Corporation

  • Testing Department

  • Cost of Production Report

  • For the month of January , 2009

  • Quantity Schedule

  • Units received from the preceding department45,000

  • Units transferred to the next department40,000

  • Units still in process(1/3 labor and factory overhead)3,000

  • Units lost in process2,00045,000

  • Cost charged to the department

  • Cost from the preceding department:Total Cost Unit cost

  • Transferred in during the month (45000 units)77,400 1.72

  • Cost added by the department:

  • Labor37,3100.87

  • Factory Overhead32,8000.76

  • Total cost added70,1101.63

  • 147,5103.35

  • Cost accounted for as follows

  • Transferred to the next department (40,000*(3.35+0.1675) 140,720

  • Work in process-ending inventory:

  • cost from preceding department(3,000*1.72)5,160

  • Labor (3,000*1/3*0.67)870

  • Factory overhead (3,000*1/3*0.76)7606,790

  • Total cost to be accounted for 147,510


TERMINAL DEPARTMENT

  • Entry:

  • Work in process-Terminal Department xx

  • Work in process-Testing Department xx


UNIT COSTS

  • Labor:

  • $37,310/43,000=$0.87 per unit

  • Factory overhead:

  • $32,800/43,000=$0.76 per unit

  • Lost unit cost:

  • 3.35*2000 units=$6,700;

  • $6,700/40,000= $0.1675 per unit

  • Total cost to be transferred: 3.35+0.1675=$3.5175


  • The Clonex Corporation

  • Terminal Department

  • Cost of Production Report

  • For the month of January , 2009

  • Quantity Schedule

  • Units received from the preceding department40,000

  • Units transferred to finished goods storeroom35,000

  • Units still in process(1/4 labor and factory overhead)4,000

  • Units lost in process1,00040,000

  • Cost charged to the department

  • Cost from the preceding department:Total Cost Unit cost

  • Transferred in during the month (40,000 units)140,4003.51

  • Cost added by the department:

  • Labor32,4000.90

  • Factory Overhead19,8000.55

  • Total cost added52,2001.45

  • Adjustment for lost units0.09

  • 192,8005.05

  • Cost accounted for as follows

  • Transferred to the next department (35,000*5.05) 176,750

  • Work in process-ending inventory:

  • Adjusted cost from preceding department(4,000*(3.51+0.09)14,400

  • Labor (4,000*1/4*0.90)900

  • Factory overhead (4,000*1/4*0.55)55015,850

  • Total cost to be accounted for 192,800


LOST UNITS

  • Method 1:

  • $140,400/39,000= $3.60

  • 3.60-3.51= $0.09 per unit

  • Method 2:

  • 1000 units * $3.51= $3,510

  • $3,510/39,000= $0.09 per unit


  • An entry to transfer finished units to the finished goods store room:

  • Finished goodsxxx

  • Work in process-Terminal Departmentxxx


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