To ascertain the cost of each joint/by-product, common costs are apportioned among the joint-by-products on some equitable basis. Use of standard costing system is very effective in process costing. Scrap value exampleMr Bean can no longer afford to give his staff 5% of the bars. He decides to offer the bars to his staff at a discount. As a result of this, there is another abnormal gain of 10kg, so 3,810 units are transferred to Process 2. Process Costing will allocate same overhead cost to all product, which will result in less accurate and it will impact to product cost and selling price as well.
The single largest problem with the process costing concept is the use of an estimated percentage of completion of work-in-process at the end of a reporting period. This percentage is a key part of the calculation to assign costs to work-in-process inventory, and so can be used to shift costs into or out of the current period to modify reported levels of profitability. Second, Sewing department where all parts of the shoes are attached. In March 202X, this department has incurred a cost of direct labor USD 50,000, overhead cost USD 30,000. As a result, they have completed 8,000 pairs of shoes and pass the next stage.
The value of abnormal gain is shown on the debit side of process account and credit side of the abnormal gain account. Since abnormal gain occurs as a result of actual loss being less than normal, the scrap realisation shown against normal loss gets reduced by the scrap value of abnormal gain. process costing suitable for (i) Opportunity or replacement cost method – This method is followed where by-products are utilised by the factory itself as input material for some other process. The opportunity cost or replacement cost which otherwise would have been incurred if the by-products were to be purchased from outside suppliers is taken as the basis for costing by-products. The process account is credited with the value of by-products so ascertained.
So provision is to be created to value the stock at cost price when the concept of inter-process profit is introduced. (ix) If the product of one process is transferred to another process by adding profit then the goods transferred in the credit by adding profit in that and the profit is shown in the debit of the process account. The output of each process in semi-finished condition should become the raw materials for the subsequent process.
Process Costing – 4 Main Elements of Production Cost
- (i) To calculate the cost of production of each process and each unit in the different processes.
- The objective of this method is to value the closing WIP at current costs.
- The whole concept of process costing system is based on average costs.
- According to the requirement, some portion of the output is processed further.
- The sales value is deducted either from the production costs or cost of sales.
- This introduces subjective element in scientific cost determination.
Used to apportion costs between work in process and completed output”. In addition to the above, process costing is often employed in companies that use a form of process costing in their assembly operations. Examples are – Tata Motors (cars and trucks), Sony (T.V. and Video monitors) Compaq (personal computers), Nokia (mobile phones), etc. Total cost of the finished final product comprises of all costs incurred in all the processes. The finished product of one process is the raw material for the next process and this procedure continues until the final product arrives.
Process Costing – Reasons for Introducing the Concept of Profit from one Process to Another (With Formula)
This type of continuous process manufacture is used by rubber manufacturers, oil refineries and chemical producers. The cost of normal wastages is added to the good units produced. Apart from this, there occur abnormal wastages and abnormal gains.
By-products may require further processing after being separated from the main products. The point at which they are separated from the main product is called the ‘split off point.’ Till the split-off point all expenses incurred are considered to be joint expenses. In so many organisations the management may decide to transfer the product of one process to the next process not at the cost of production but at the market price or by adding profit in the cost. The profit may be agreed percentage either on cost price or on transfer price.
If overhead rates are predetermined, unit costs can be computed very promptly even at weekly or monthly. Management can review each cost of the assembly line and make any change if necessary. Assembly lines can be combined or separated based on actual production and resource management.
Static Main Menu
To convert the work in progress or partly completed (manufactured) units into fully complete units (assumption only) is known as Equivalent Production. In parallel processing system, after a certain point, two or more products go through two or more separate sets of processes simultaneously. (v) The output of the previous process is transferred to the next process, and the final product is then transferred to Finished Stock account. (i) A separate account for each process is opened and each process is considered as a separate department or cost centre to calculate cost of each process. Overheads can be factory overheads, office overheads and selling and distribution overheads.
Calculate the process costing in each department.
Examples of products manufactured using the job order costing method include tax returns or audits conducted by a public accounting firm, custom furniture, or, in a comprehensive example, semitrucks. At the Peterbilt factory in Denton, Texas, the company can build over 100,000 unique versions of their semitrucks without making the same truck twice. At the Peterbilt factory in Denton, Texas, the company can build over \(100,000\) unique versions of their semitrucks without making the same truck twice.
During month, this department has finished 10,000 pairs of shoes and passes them to next stage. While both systems produce a cost of goods sold for a given period, Process Costing focuses on the product’s progression through various stages of production. Job-order costing focuses on a specific product or service produced for a given customer. Process costs are expensed as incurred; job-order costs are capitalized. Process costs represent a higher level of accuracy than job-order costing, but they are also more complex and time consuming to develop.
Different Forms of Process Accounts
Cost Control – Being each process is standardised and stable and can be predetermined so control is easier. (1) Cost Calculation – Cost is determined for every process. (5) Completion of task – Completion of job is necessary for calculating of cost of a job, order. In both the systems, flow of cost is basically the same. The production of goods must be continuous and on large scale. This can be done by preparing a statement of cost for each element.
A company may state that 10% of input will be normal loss of process A. Suppose, input in process A is 100 units, normal loss of process A should be 10 units and normal production of process A should be 90 units. This difficulty will always be experienced, when work done is represented both by finished and unfinished units. To avoid this difficulty, work done on unfinished units is expressed in terms of equivalent completed units, 100 units, which are half finished with regard to material, labour and overhead. In the course of manufacturing operations, the work done in one department is transferred to several departments, after which further production results in several products.
Rock City Percussion makes \(8,000\) hickory sticks per day, four days each week. It is difficult to tell the first drumstick made on Monday from the \(32,000\)th one made on Thursday, so a computer matches the sticks in pairs based on the tone produced. If production is not homogeneous, as in the case of foundries making castings of different sizes and shapes, the average cost may give an incorrect picture of cost. Output of one process, becomes input for the next process till it reaches to finished product.
Materials, labor, and factory overhead costs are added in each department. The sum of the departmental work in process costs is the total cost of the batch that is transferred to Finished Goods. Under process costing, the procedure used to manufacture a product is divided into well-defined processes. A separate account is opened for each process to which all incurred costs are charged. When a company mass produces parts but allows customization on the final product, both systems are used; this is common in auto manufacturing.