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Process Costing

Process costing is a cost accounting method used to allocate production costs to products made through continuous processes, by accumulating costs in departments and calculating cost per equivalent unit based on units started, completed, and in work in process inventory. It is useful for industries like chemicals, food, and automobiles that produce large volumes of standardized products, helping to determine accurate unit costs and monitor costs throughout production.

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Khing Dragon Manlangit
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10 views

Process Costing

Process costing is a cost accounting method used to allocate production costs to products made through continuous processes, by accumulating costs in departments and calculating cost per equivalent unit based on units started, completed, and in work in process inventory. It is useful for industries like chemicals, food, and automobiles that produce large volumes of standardized products, helping to determine accurate unit costs and monitor costs throughout production.

Uploaded by

Khing Dragon Manlangit
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Process Costing

Presented by:
Arce D. Apol
Process Costing

 Processcosting is a cost accounting method


used by companies to allocate production
costs to their products or services. It's
particularly useful in industries where large
quantities of identical or similar products
are produced through continuous
processes.
Example:
Custom Homes
Movies Example:
Services Cornflakes
Beverages
Paints
The Production Process
Components of Process Costing

Direct Material – The raw materials used


in production.
Direct Labor – The cost of labor directly
involved in production.
Overhead costs – Indirect costs like rent,
utilities, and equipment maintenance.
Cost Accumulation
 Costs in process costing are accumulated by department or process.
 These departments or processes are often referred to as cost centers.
 Costs are tracked for each cost center, including direct materials, direct labor
and overhead costs.

Calculating Costs
 In process costing it is the process that is costed (unlike the job costing where
each job is costed separately). The method uses is to take the total cost of
the process and average it over units of production.
 Cost per unit = Total costs/Equivalent units
Significance of Process Costing:

 Efficiency:
Ideal for mass production
environments, leading to cost efficiencies.
 CostControl: Helps in monitoring and
controlling costs throughout production.
 DecisionMaking: Provides insights for
informed managerial decisions.
Process Costing steps:

1. Identify Cost Centers: Identify distinct production stages


or processes.
2. Accumulate Costs: Gather direct and indirect costs for each
process.
3. Calculate Equivalent Units: Determine the equivalent units
of production at each stage.
4. Assign Costs: Allocate accumulated costs to equivalent
units to calculate the cost per unit.
Sample Problem: Computation of
Process Costing
 Scenario: ABC Manufacturing Company
 ABC Manufacturing Company produces widgets in two departments: Department A and
Department B. The following data is available for the month of July:
 Department A:
 Beginning work in process inventory: 1,000 units, 40% complete
 Started and completed 6,000 units
 Ending work in process inventory: 2,000 units, 60% complete
 Total costs incurred: $50,000
 Department B:
 Beginning work in process inventory: 2,500 units, 30% complete
 Started and completed 7,000 units
 Ending work in process inventory: 3,000 units, 50% complete
 Total costs incurred: $65,000
 Calculate the cost per equivalent unit for each department and the total cost of production for
July.
Solutions:
Let's calculate the cost per equivalent unit for both Department A and Department B:
Now that we have calculated the cost per equivalent
unit for each department, let's calculate the total cost
of production for July:

 Total Cost of Production for July:


 Total Cost for Department A + Total Cost for
Department B = ($50,000 + $65,000) = $115,000
 So, the total cost of production for July is $115,000.

 In summary, the cost per equivalent unit for both


Department A and Department B is $10 per unit, and
the total cost of production for July is $115,000.
References:

 Horngren, C. T., Datar, S. M., & Rajan, M. V. (2018). "Cost Accounting: A


Managerial Emphasis." Pearson.
 Hilton, R. W., & Maher, M. W. (2018). "Cost Management: Strategies for
Business Decisions." McGraw-Hill Education.
 Drury, C. M. (2018). "Management and Cost Accounting." Cengage Learning.
 Wild, J. J., Shaw, K. W., & Chiappetta, B. (2018). "Managerial Accounting."
McGraw-Hill Education.
Q & A:

 Q1: What industries commonly use process costing, and


why?

 A1: Process costing is commonly used in industries like


chemical manufacturing, food processing, and automobile
manufacturing, where standardized, homogeneous
products are produced in large quantities. It is used
because it helps in accurately determining the cost per unit
for such continuous production processes.
Q & A:

 Q2:How does process costing differ from job order


costing in terms of cost tracking?

 A2:Process costing accumulates costs by


department or process, while job order costing
tracks costs on a per-job basis. In process costing,
costs are averaged over all units produced in a
department during a specific period.
Q & A:

 Q3: Why is calculating the cost per equivalent unit


important in process costing, and how is it calculated?

 A3: Calculating the cost per equivalent unit is


important because it helps determine the cost of units
in process inventory, considering the percentage of
completion. It is calculated by dividing the total costs
for a department by the equivalent units of production.

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