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| Corporate practice bd |
What is Process costing ?
In Process costing there are some process cost
are accumulated and calculating
production cost per unit in every stage also transfer finished goods inventory to the next process. In other words, the value of every product produced is assumed to be the identical because the cost of each other product.
Under this idea, costs are
accumulated over a hard and fast period of your time, summarized, then allocated to any or all of the units
produced during that period of
your time on a uniform basis.
When products are instead being manufactured on a personal basis, job costing is employed to accumulate costs and assign the prices to products. When a
production process contains some mass manufacturing and a few customized elements, then
a hybrid costing system is
employed.
Types of Process Costing
In process costing there are
three ways to calculate costs like,
01.Weighted average costs:
Under this method of calculating cost. Companies add all costs for the present period and divide by the whole number of units completed and transferred out, plus the equivalent units of work-in-progress at the top of the amount.
02. First in, first out (FIFO):
The first in first out is the more complicated process costing approach, FIFO is employed to get more precise product costing, especially in situations where costs change significantly from one period to the following. FIFO assumes that the primary units in (i.e., add progress at the start of the present period) are the primary to be completed. When calculating costs for the present period, it excludes costs.
03.Standard costs:
This
method uses an estimated standard cost for every process stage rather than actual costs. Companies typically use this method
when it’s too difficult or time-consuming to gather current information about the costs. It can even be beneficial for
businesses that make a large range of things and find it challenging
to attribute precise costs to
every of the products. The estimated totals are compared to actual
totals after a production run is finished, and also the difference is added to a variance account.
Importance of Process Costing
Process costing is especially important within the oil, chemical, lumber, textile and food processing industries. Getting a handle on production costs enables these companies to line the correct prices for his or her products and determine whether costs are tracking in line with projections. they will use process costing to research the prices of every step of the assembly and distribution process and use the knowledge to spot areas where they'll reduce costs.
Let,s start with Practical Example
Practical Example. (01) (Try yourself)
The
wimax company LTD. uses process costing in accounting for its
production department ,which uses two materials ,Material A added
beginning of the process ,inspection is at 90% stage Material is then
added to the good units .Normal spoilage units amount to 5% of good out
put.the company records contain the following information for January.
Started during the period= 10,000 units
Material A = Tk.13,370
Material B = Tk.4,500
Direct labor =Tk.37,580
Factory overhead = Tk.46,975 Transfer to finished goods =7000 units
Ending inventory 95% complete, and include all materials (B) =2000 units
Requirement:
01.Prepare a quantity schedule
02. 01.Prepare an equivalent of production schedule and finally
01.Prepare a cost of production report
Practical Example. (02) (Try yourself)
The ABC Company LTD. Uses process costing in accounting for its two production department.
The following information pertains to Department 02 for November.Normal spoilage is 5% of good out . Inspection and identified spoilage is take place at 90% stages of completion.Materials are added after inspection.
In department -02 received 14,000 units from department -01 at a cost Tk.1,40,000.Department -02 cost were Tk.12,000 for materiel and Tk.892,50 for conversion cost.
A total of 8,000 units were complete and transfer to the finished goods.At the end of the month,5,000 units were still in process, estimated to be 60% complete as to conversion cost.
Requirement:
01.Prepare a quantity schedule
02. 01.Prepare an equivalent of production schedule and finally
01.Prepare a cost of production report for the Department -02