Features of process costing

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					Chapter 5

            Process costing
Features of process costing

 Used in repetitive product environments
 Mass-production of one product, or a small
  range of almost identical products
 Involves two main steps
     estimate the costs of the production process
     calculate an average cost per unit by dividing
      the cost of the process by the number of units
Identical products, no work in
process inventories
 Use of simple averaging techniques to
  determine product costs
 Used under just-in-time (JIT) inventory
 Used where levels of work in process
  inventories and costs are stable from one
  period to the next
 A work in process inventory account is still
  used to provide information for control
 Identical products, work in
 process inventories
 Need to value partially completed goods at
  the end of the accounting period
 Production costs will include
     units started in the previous period (beginning
      work in process) and completed in the current
     units started and completed during the period
     units that are incomplete at the end of the period
      (ending work in process)
Effects of ending work in process
 Equivalent units
     production inputs that have been applied to
      physical units during production
     used to value work in process at end of a period
 Physical units
     all units currently in production, whether
      complete or partially complete
The four steps of process costing

 Step 1 - analyse the physical flow of units
 Step 2 - calculate the equivalent units
 Step 3 - calculate the unit costs (ie. cost per
  equivalent unit for direct material and
 Step 4 - analyse the total costs (to determine
  work in process and transferred/finished
Two cost flow assumptions

 Weighted average method
     cost of opening WIP inventory and current
      production costs are averaged to determine the
      cost of completed production and closing WIP
     FIFO (first in, first out) method
     assumes that the oldest inventory is completed
      before new production commences
Comparison of WAC and FIFO

 Weighted average - the cost of closing WIP
  is a weighted average of some of the costs
  incurred prior to the prior month and all of
  the costs incurred during the current month
 FIFO - the cost of closing WIP is based on
  costs incurred during the current month
Different products, repetitive
 Batch manufacturing processes
     different material inputs
     different combinations of specific production
 A hybrid costing system - has features of
  two or more costing systems, eg. job costing
  and process costing

Different products, repetitive
 Operation costing system
     used in a batch manufacturing environment to
      assign direct material costs to individual
      batches (as in job costing), and conversion costs
      to departments (as in process costing)
 Conversion costs are applied to products
  using a predetermined application rate
Other issues in process costing

 Standard costs are often used
     standard costs - budgeted costs which are based
      on estimates of the cost of direct material,
      direct labour and overhead that should be used
      to produce one unit of product
     better basis for cost control than actual costs
Other issues in process costing

 Responsibility accounting
     costs are accumulated by processes or
      operations performed by separate departments
     department managers can be held responsible
      for departmental costs and output produced
 Use of predetermined overhead and
  conversion costs
     smooth out the fluctuations in actual costs and
      cost driver volumes
Other issues in process costing

 Cost drivers for process or operation costing
 Determining the percentage of completion
 Process and operation costing in service
     where there are routine repetitive or similar
      services, such as cheque processing in banks
Exhibit 5.1
Exhibit 5.3