In average cost method, the cost of opening WIP is added to material, labour and overhead costs incurred during the period. The cost per unit is obtained by dividing these costs by equivalent production. When prices are rising, (i.e., during inflation), FIFO indicates a lower cost of units finished and a higher inventory value as current costs are applied to closing inventory.
The cost of different processes as well as finished product can be computed conveniently at short intervals, say, daily or weekly. Per unit cost – In contract cost the total cost of each contract is calculated. (iii) When there is sale of half manufacturing product during the production process.
- Output of Previous Process, Input of Next Process – The finished product of one process becomes the raw material for the next process.
- If actual output is 90 units, then 5 units is considered as abnormal gain.
- In a case like this losses up to 5% of input will be categorised as normal loss of the process.
- Each of these processing departments will be a work-in-process center.
- For example, in a job order cost system, each job is unique, which allows management to establish individual prices for individual projects.
Abnormal loss cannot be treated like overhead of the process to be shared by good units. Units’ representing abnormal loss are valued like good units produced and the value of units representing abnormal loss is debited to a separate account which is known as abnormal loss account. In process costing, the emphasis is on accumulation of costs for a process during a given period of time and the number of units produced in the process during that period. To determine the unit cost of output of each process, the total production cost of the process is divided by the total quantity of the process costing suitable for output of the process during a given period. Process costs are generally calculated at the end of the period, on completion of manufacture. It represents a type of costing procedure for mass production industries producing standard products.
1: Compare and Contrast Job Order Costing and Process Costing
Only Rs.10, i.e., scrap value of 5 units will be realised. The whole concept of process costing system is based on average costs. If there is an error in cost determination in one process, it will affect the cost estimation in subsequent processes as well as the cost of work in process and finished products.
Each department, or process, will have its own work in process inventory account, but there will only be one finished goods inventory account. The stage of completion may be different for different cost elements, e.g., materials may be 100% complete but labour and overheads may be 40% complete. Thus, equivalent units are to be calculated separately for each cost element.
Thus, element wise breakdown of cost into material, labour and overheads is absolutely necessary. All direct expenses and indirect expenses relating to the product are debited to the process account concerned. If one process completes the manufacture, the units produced are transferred to finished stock. If finished product of one process is required by the next process as raw material, the units produced are transferred to the next process account. (vii) In process costing system the units produced in each process are also recorded and hence there is a separate column for units introduced and units produced in every process.
Process costing also tracks prime costs to assign direct material and direct labor to each production department (batch). Manufacturing overhead is another cost of production, and it is applied to products (job order) or departments (process) based on an appropriate activity base. The value of opening WIP is added to the costs incurred during the current accounting period, and the total cost is divided by the total equivalent units to get the average cost of equivalent units.
Process Costing – 4 Main Elements of Production Cost
The balance of this account, i.e., abnormal gain is transferred to costing profit and loss account. In this method, all important factors such as volume, selling price, technical side, marketing process etc. affecting costs are ascertained by means of an extensive survey. Points values or percentages are given to individual products according to their relative importance and costs are apportioned on the basis of total points.
Process costing is optimal when the costs cannot be traced directly to the job. For example, it would be impossible for David and William to trace the exact amount of eggs in each chocolate chip cookie. It is also impossible to trace the exact amount of hickory in a drumstick. Even two sticks made sequentially may have different weights because the wood varies in density. These types of manufacturing are optimal for the process cost system. The diagram above shows the cost flows in a process cost system that processes the products in a specified sequential order.
Process Costing – Determination of Unit Cost
The total number of units produced during a given period is calculated. By dividing the total cost of a process by the total number of units produced, the cost per unit can be obtained. A process costing system accumulates the costs of a production process and assigns them to the products that the business outputs.
For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. The valuation of work-in-progress on the basis of degree of completion is merely a guess work. Separate Entity – In contract costing every contract is a separate entity. Cost Control – Being every job is separate and each job has special characteristics and the job is not standardised so cost control is difficult.
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Since it is based on historical costs, it has all the weaknesses of historical costing. Expenses can be allocated to different processes on rational basis and accurate cost, thus, can be ascertained. Transfer – In the contract costing every contract is separate and independent from each job or contract. (2) Cost unit – Each Job or batch of product is the cost unit for which cost is ascertained. (1) Cost Calculation – Cost is determined for every job or batch or product.
For this reason, units representing abnormal loss are treated at par with good units for the purpose of valuation. (vii) The process costing of each process provides the base for the valuation of opening stock and closing stock of each next process. As the cost of production of the previous process is considered the cost per unit of opening as well as closing stock of the next process. There can be abnormal gain also when the actual production is more than the expected production.
