Presenter:
Rex Jhon A. Suello
Master in Business Administration
BA504 – Management Accounting
Dr. Christopher Plamenco
Process Costing System
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Oftentimes, the production of manufactured products is easily divisible into
specific jobs, and job order costing system is appropriate.
However, job order costing system does not work well when the production
cycle involves a continuous flow of raw materials through various processing
departments, and the finished output is characterized as homogenous units,
each displaying the same basic characteristics.
Wood pulp is processed into giant rolls of paper, refineries process crude oil
into gasoline, iron ore is processed into steel, sand is processed into glass, and
so forth.
The physical nature of these processes makes it hard to identify and associate
specific units of direct labor and direct material with the final output.
Process Costing System
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Process Costing System is a methodology used in cost accounting to allocate
the total cost of production to homogenous units produced via a continuous
process that usually involves multiple steps or departments.
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Process Costing System
Materials
Assembly Dept.
Work-in-process
Department Process 1
xxx
Labor
xxx
xxx
Overhead
Cost of
completed
units in
Dept. 1
transfer to
Dept 2
Paints Dept.
Work-in-process
Department Process 2
x
Plus
additional
applicable
M, L, OH
Cost of
completed
units in
Dept. 2
transfer to
Dept 3
Packaging Dept.
Work-in-process
Department Process 3
x
Plus
additional
applicable
M, L, OH
Cost of
completed
units in
Dept. 3
transfer to
FGI
Finished goods inventory
x
When sold,
debit to
COGS
Step 1
Analyze the cost-flow model by determining the inventory levels on:
1. Beginning balance of work-in-process inventory for a specific department (which
were not completed in the previous period).
2. Units started during the period in the department.
3. How much of the beginning WIP units and units started during the period were
completed in the same period.
4. Units not yet finished (WIP, ending which will be brought to the next period as WIP,
beginning).
Step 2
Determine the number of equivalent units produced in the process called EQUIVALENT
UNITS OF PRODUCTION (EUP).
For example, if the ending work-in-process inventory in a specific department is 1,000 units
and all materials were added at the beginning of the process and labor and overhead
applied to units is 60% complete as to conversion, the EUP will be:
Materials
Labor and Overhead
1,000 units x 100% = 1,000 units
1,000 units x 60% = 600 units
Step 3
Calculate all of the applicable direct costs and indirect costs that was incurred in the
production process so that these cost will be assigned later to the equivalent units as
to completed units and in-process units.
Relevant costs in this scenario includes all costs associated with beginning inventories
and current period costs added to continue the production process.
Step 4
Calculate the cost per equivalent unit of production (Cost per EUP).
Cost per EUP = Applicable costs in the production process / EUP
Step 5
When cost per EUP is available, allocate all relevant costs to all products completed
and all products still in process.
KEY TAKEAWAY
The cost flows in a process costing system are similar to the
cost flows in a job costing system. The primary difference
between the two costing methods is that a process costing
system assigns product costs—direct materials, direct labor,
and manufacturing overhead—to each production
department (or process) rather than to each job. Each
production department has its own work-in-process
inventory account when using process costing.
References
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https://saylordotorg.github.io/text_managerial-accounting/s08-02-product-costflows-in-a-proces.html
https://www.youtube.com/watch?v=Gf_ou5bqsGE
https://www.youtube.com/watch?v=pjG1yZBFazY