Process Costing

This is on the other side of the continuum from

Job Costing

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 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.

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 Process Costing v/s
Job Costing
 Job costing is used when the cost
 Process object
Costing is is
generally
an individual (or a lot/batch) used
unit of a for a
distinct product or servicemass of identical
product or service.
 Costs can be accumulated  Theby each
Costs are
individual product or service
accumulated in a
period. The total costs
in a period are divided
over the number of
units to get an
average unit cost.
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 Process Costing v/s
Job Costing
 Costs are compiled
Job costing for each
is done process a
against over time.
specific
 Costs are calculated at the end of a cost period like an
order being produced.
accounting year.
 Costs
Transfer are calculated
of costs when toa another
from one process job is isover.
made
 as the product
There moves from
are usually noone process to
transfers ofthe other.
costs
from one job to another.

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 Process Costing v/s
Job Costing
 ItThere
has lesser
is morepaper
paperwork.
work.
 There is regular
little or no
andinventory.
significant inventory.
 It is more
less amenable
amenabletotomechanization
mechanization&&
automation.

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 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%

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 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.

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

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

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 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.

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 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.

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 Process Costing
Process A
Direct Material 90000 Transfer to 200000
Direct Labor 75000 Process B
Direct Expenses 15000
Indirect Expenses 20000
Process B
Transfer from Process A 200000 Transfer to 483000
Direct Material 75000 Finished
Goods
Direct Labor 150000
Direct Expenses 18000
Indirect Expenses 40000

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 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 = (90000+75000) / 1500 = 110

 Direct Labor Cost per Unit = (75000+150000) / 1500=150
 Direct Expenses Cost per Unit = (15000+18000) / 1500 = 22
 Indirect Expense Cost per Unit = (60000) / 1500 = 40
 Total Costs = 322

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 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.

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 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.

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 Process Costing
Flow of Production Step 1 Step 2
Physical Direct Conversion
Units Material Costs
Beginning WiP 0
Started in Feb.’01 to 400
account
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
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 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.

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

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 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

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 Weighted Average Cost Method

Flow of Production Step 1 Step 2 (Equivalent Units)

(Physical Direct Conversion
Units) Material Costs

Beginning WiP 225

Started in Current Period 275
To Account For 500
Completed & Transferred 400 400 400
WiP Ending 100
(100% x 100) & (50% x 100) 100 50
Accounted For 500
Work done till date 500 450

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 Weighted Average Cost Method

Total Direct Conversi

Production Materials on Costs
Costs
Step 3 WiP Beginning 26100 18000 8100
Costs Added in Mar 36180 19800 16380
Costs incurred till date 37800 24480
Equivalent Units of Work Done 500 450
Costs per equivalent unit 75.60 54.40
Step 4 Total Cost to 62280
Account For

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 Weighted Average Cost Method

Step 5 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

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 First in First Out Method
Flow of Production Step 1 Step 2 (Equivalent Units)
(Physical Units) Direct Conversion
Material 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%) 0 90
Started & Completed 175 175 175
WiP Ending 100
100 x 100% & 100 x 50% 100 50
Accounted for work done 500 275 315
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 First in First Out Method

Total Direct Conversi

Production Materials on Costs
Costs
Step 3 WiP Beginning 26100
Costs Added in Mar 36180 19800 16380
Equivalent Units of Work Done in Current 275 315
Period
Cost per equivalent unit of work done 72 52
Step 4 Total Cost to 62280
Account For

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 First in First Out Method
Step 5 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

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 Comparison of WAC v/s FIFO Methods

WAC FIFO Difference

Cost of Units 52000 52480 + 480
completed &
transferred out
Work in 10280 9800 - 480
process,ending

Total costs 62280 62280

accounted for

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 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

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 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.

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