ALL THE BEST1 Process Costing This is on the other side of the continuum from Job Costing

ALL THE BEST2 Process Costing Typical features of process costing are.  The output is homogeneous.  Production is continuous.  The production precedes sales.  It is feasible to segment the manufacturing operations into clearly identifiable processes.  It assumes sequential flow of costs from one process to another.

ALL THE BEST3 Process Costing v/s Job Costing  Process Costing is generally used for a mass of identical product or service.  The Costs are accumulated in a period. The total costs in a period are divided over the number of units to get an average unit cost.  Job costing is used when the cost object is an individual (or a lot/batch) unit of a distinct product or service  Costs can be accumulated by each individual product or service

ALL THE BEST4 Process Costing v/s Job Costing  Job costing is done against a specific order being produced.  Costs are calculated when a job is over.  There are usually no transfers of costs from one job to another.  Costs are compiled for each process over time.  Costs are calculated at the end of a cost period like an accounting year.  Transfer of costs from one process to another is made as the product moves from one process to the other.

ALL THE BEST5 Process Costing v/s Job Costing  There is more paper work.  There is little or no inventory.  It is less amenable to mechanization & automation.  It has lesser paper work.  There is regular and significant inventory.  It is more amenable to mechanization & automation.

ALL THE BEST6 Process Costing IndustryProcessJob Food96%4% Textiles91%8% Primary Metals 92%25% Chemicals75%25% Oil refining 100%25% Furniture38%63% Machinery43%65% Electronics55%58%

ALL THE BEST7 Process Costing  Service Sector eg.  Compute the costs to process Fixed Deposit Receipt Applications in a Bank.  Compute the costs to serve Customers in a Call Centre.  Merchandizing Sector eg.  Compute the costs to serve Coke in McDonalds.

ALL THE BEST8 Process Costing Raw material Process 1 Process 1Process 2 Process 2Process 3 Process 3Finished Goods

ALL THE BEST9 Process Costing Raw Material (Inputs) Add Conversion Costs Finished Goods of Process 1 Finished Goods of Process 1= Raw Material of Process 2 Add Conversion Costs Finished Goods of Process 2 Finished Goods of Process 2= Raw Material of Process 3 Add Conversion Costs Finished Goods (Output)

ALL THE BEST10 Process Costing  Materials: The raw material is taken at the cost value for each process.  Wages: The wages on each process are traced clearly and allocated to that process.  Direct expenses: The direct expenses of each process are traced clearly and allocated to that process.  Indirect expenses: They are allocated to each process at predetermined rates.

ALL THE BEST11 Process Costing A product passes through process A & process B. In June 1500 units are made. There was no WIP neither at the beginning nor at the end of the month. The cost structure is as below: Direct CostsProcess A Process B Material Labor Expenses The Indirect Expenses worth are apportioned on the basis of Direct Labor Costs.

ALL THE BEST12 Process Costing Process A Direct Material Transfer to Process B Direct Labor Direct Expenses Indirect Expenses Process B Transfer from Process A Transfer to Finished Goods Direct Material Direct Labor Direct Expenses Indirect Expenses 40000

ALL THE BEST13 Process Costing  Cost per Unit of Process A = /1500 = =  Cost per Unit of Process B = /1500 = =  Direct Material Cost per Unit = ( ) / 1500 = 110  Direct Labor Cost per Unit = ( ) / 1500=150  Direct Expenses Cost per Unit = ( ) / 1500 = 22  Indirect Expense Cost per Unit = (60000) / 1500 = 40  Total Costs = 322

ALL THE BEST14 Process Costing When there is Work In Progress Inventory at the end of the period, they are converted into equivalent completed units. E.g. 100 units of WiP which is 40% complete is considered as equivalent to 40 completed units. Procedure: 1. Summarize the flow of units of output. 2. Compute Output in terms o9f equivalent units. 3. Compute equivalent unit costs. 4.Summarize total costs to account for. 5. Assign total costs to completed units and to units ending in WiP.

ALL THE BEST15 Process Costing In Feb.’01, the Assembly had the following data. Beginning WiP (Feb 1,’01) = 0 units Started in Feb.’01= 400 units Completed & Transferred= 175 units Closing WiP Inventory= 225 units. Total Costs incurred for Feb.’01 Direct Material= Conversion Costs= Total Assembly Costs= The Supervisor estimates that the WiP is about 60% complete.

ALL THE BEST16 Process Costing Flow of Production Step 1 Step 2 Physical Units Direct Material Conversion Costs Beginning WiP 0 Started in Feb.’01 to account 400 Completed & Transferred Ending WiP 225 Material 100% of Conversion 60% of Work Done in Feb.’

ALL THE BEST17 Process Costing  Note that the WiP is for Full 100% of 400 units for Direct Material as the entire material is committed at the initial stage itself. So the equivalent units of WiP of 225 units for Direct Material is 225 units.  The Conversion Costs in the 225 of 60% assembled units is equivalent to 135 units of 100% complete.

ALL THE BEST18 Total Production Costs Direct Material Conversion Costs Step 3 Costs incurred in Feb.’ Equivalent Units of Work Done Step 4 Costs per equivalent Unit 8060 Step 5 Assignment of Costs Complete 175 units x x 60 WiP (225 Units) Direct Material x 80 Conversion Costs x 60 Total Costs 50600

ALL THE BEST19 Process Costing In Mar.’01, the Assembly had the following data. Beginning WiP (Mar 1,’01) = 225 units (100% of Materials & 60% of Conversion Costs) Started in Mar.’01= 275 units Completed & Transferred= 400 units Closing WiP Inventory= 100 units. 100% of Materials & 50% of Conversion Costs) Total Costs for Mar.’01 WiP (Beginning) = Material Conversion Cost 8100 Direct Material Added in Mar.01= Conversion Costs added in Mar= Total Costs to account for= 62280

ALL THE BEST20 Flow of Production Step 1 (Physical Units) Step 2 (Equivalent Units) Direct Material Conversion Costs Beginning WiP 225 Started in Current Period 275 To Account For 500 Completed & Transferred WiP Ending 100 (100% x 100) & (50% x 100) Accounted For 500 Work done till date Weighted Average Cost Method

ALL THE BEST21 Total Production Costs Direct Materials Conversi on Costs Step 3 WiP Beginning Costs Added in Mar Costs incurred till date Equivalent Units of Work Done Costs per equivalent unit Step 4 Total Cost to Account For Weighted Average Cost Method

ALL THE BEST22 Step 5 Assignment of Costs Completed & transferred out 400 Units x x WiP Ending (100 Units) Direct Material x Conversion Costs x Total WiP Costs Total Costs Accounted For Weighted Average Cost Method

ALL THE BEST23 First in First Out Method Flow of Production Step 1 (Physical Units) Step 2 (Equivalent Units) Direct Material Conversion Costs Beginning WiP 225 Started in Current Period 275 To Account For 500 Completed & Transferred From Beginning WiP x(100%-100%) & 225x(100%-60%) 090 Started & Completed WiP Ending x 100% & 100 x 50% Accounted for work done in current period

ALL THE BEST24 Total Production Costs Direct Materials Conversi on Costs Step 3 WiP Beginning Costs Added in Mar Equivalent Units of Work Done in Current Period Cost per equivalent unit of work done 7252 Step 4 Total Cost to Account For First in First Out Method

ALL THE BEST25 Step 5 Assignment of Costs Completed & transferred out 400 Units WiP Beginning (225 Units) Direct Material 0 0 x 72 Conversion Costs x 52 Total From Beginning WiP Costs Started & Completed in Mar.’01 (175 Units) x x 52 Total Costs of Units Completed & Transferred WiP ending (100 Units) Direct Material x 72 Conversion Costs x 52 Total WiP ending 9800 Total Costs Accounted For First in First Out Method

ALL THE BEST26 Comparison of WAC v/s FIFO Methods WACFIFODifference Cost of Units completed & transferred out Work in process,ending Total costs accounted for

ALL THE BEST27 Comparison of WAC v/s FIFO Methods  The WAC method shows lower cost of goods sold which implies higher profits in a declining cost scenario & vice versa in an increasing cost scenario. The direct material cost in the beginning WIP was 80 & conversion cost was 60 as compared to 72 & 52 respectively in the current period. Thus, WAC method smoothes out the cost per equivalent unit by assuming that more of the lower cost units are completed & transferred out & some higher cost units are placed in ending WiP.  This can be material when  the direct material costs & conversion costs vary significantly between periods  The physical inventory level of WiP is large vis-a-vis the total no. of units transferred out

ALL THE BEST28  FIFO method does not merge the costs between the periods & so helps period to period comparison of costs.  WAC method is simpler in computation & is more representative of the avg. unit cost as compared to FIFO. Comparison of WAC v/s FIFO Methods