Flow of Costs Process Costing Accounting for Managers

A foreman/supervisor is responsible for the efficient functioning of his department. In selective processing system, products go through some but not each processing departments. According to the requirement, some portion of the output is processed further.

Selling and Administrative Expenses

In the above situation, process A will be credited with Rs.20 being the scrap value for 10 units (normal loss). It should be noted from cost data given above that actual loss in the process will not process costing suitable for be 10 units. It will be 5 units, i.e., input of 100 units—output of 95 units. Therefore, Rs.20 credited to process account will not be realised in full.

So the costs in Process 2 will include everything happening in that process, plus the costs that are attached to the partially completed product transferred in from Process 1. Each of these processing departments will be a work-in-process center. So a job costing system may have only one work-in-process, while a process costing system will have several. In the Ultimate Planner example, there will be three WIP accounts. The main aim of both the systems are to assign material, labour and overhead cost to products and to provide a mechanism for computing cost per unit and control of cost.

Credit is given to the process account for sale value less the cost after split off point. Costs incurred to finish this opening WIP are added to the opening WIP cost to arrive at the total cost of completed units of opening WIP at which it is transferred to the subsequent process. So equivalent unit may represent the production of a process in terms of completed unit.

Regardless of the costing system used, manufacturing costs consist of direct material, direct labor, and manufacturing overhead. Figure 5.2 shows a partial organizational chart for Rock City Percussion, a drumstick manufacturer. In this example, two groups—administrative and manufacturing—report directly to the chief financial officer (CFO). Each group has a vice president responsible for several departments.

The Unethical Bakery Accountant1,2

Completing fresh units introduced, i.e., fresh units which were introduced and completed during the process. (i) To calculate the cost of production of each process and each unit in the different processes. Output of Previous Process, Input of Next Process – The finished product of one process becomes the raw material for the next process. Process industries may also have problems of joint/by-products.

Can process costing be applied to service industries?

Performance – In contract costing work is performed generally outside the factory or at the work site. Cost of process can be obtained even if product is incomplete. (4) Controlling aspect – Since production is continuous and products are standardized so comparatively lesser control is required.

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Units which have been introduced in the process and completed during the same period have their own unit cost. This cost may not be the same as the completed unit cost of units of opening WIP. The closing stock is 5,000 units on which 70% work is complete. A separate account is prepared for each process on the basis of double entry book keeping with quantity column alongside the amount (total cost) column.

Although it goes through many assembly lines as it incurs costs such as direct material, direct labor, and overhead, we can just sum up all costs and divide them by the total output of each process line. For the total product cost, we will sum all costs from all processes. Normal production is represented by input minus normal loss relating the performance. For this reason value of units representing abnormal gain is debited to process account and credited to abnormal gain account.

When the units are completed, they are transferred to finished goods inventory and become costs of goods sold when the product is sold. A processing department is a unit where work is performed on a product and where materials, labor or overhead are added to the product. In the case of our planner, we first add the raw materials, then we add labor to process the raw materials, next conclude with additional labor to package the finished product to prepare it for shipment. Each business will have different processing departments, depending on the product they are making. (e) Adjustment for scrap value in case of abnormal gain. When there is abnormal gain, the process and units representing normal loss fetch some scrap value.

1. But it results into weight loss of the quantity in output.
2. In fact, any loss exceeding normal allowance is considered as abnormal loss in process costing.
3. It should be noted from cost data given above that actual loss in the process will not be 10 units.
4. If actual production of process A happen to be 95 units, will 5 units represent abnormal gain in process A?
5. This can be done by preparing a statement of cost for each element.

Process Costing – Loss in Weight and Sale of Scrap

The concept of “equivalent production” is used for assigning cost of process to both finished units and unfinished units. First, they start from the Designing and Cutting department where shoes are designed to fit with the trending market, and fabric will be cut to fit with each design. In March 200X, the Design and Cutting department incur the cost of direct material USD 100,000, direct labor cost of USD 150,000 and USD 80,000 of overhead cost.

The share of the overheads of each process is shown in the debit of the concerned process account. (b) Separate products are produced, but the second product uses some of the first product in its manufacturing operations. In a fertiliser plant, acid phosphate is produced in one department. Some of this is sold and the rest is used in manufacturing fertiliser. (v) To calculate the profit or loss of each process as the product may be sold after completing any of the process on the raw material. (ii) To calculate the cost of production of joint products and by-products separately.