5-Process costing PDF

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MANAGEMENT ACCOUNTING|PROCESS COSTING|JAVIER RAMOS NICOLÁS 1. Similarities between job-order and process costing  Job-order and process costing are similar in that they both deal with assigning materials, labor, and overhead to products as a way to calculate the unit product cost.  Both systems use Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory.  The flow of costs is similar, but not exactly the same, in the two systems. 2. Differences between job-order and process costing  Process costing is best suited for the production of a single product that is continuously produced for a long period of time. Job-order costing is best suited when jobs are produced as discrete projects. For example, building a house.  Process costing accumulates costs by department, while job-order costing accumulates costs by individual jobs.  Process costing uses a fundamental document called a department production report, while job-order costing uses the job cost sheet.  In process costing unit cost is computed by department, while in job-order systems unit cost is computed by job. 3. Processing departments A processing department is any unit in an organization where materials, labor, or overhead are added to the product. The activities performed in a processing department are performed uniformly on all units of production. Furthermore, the output of a processing department must be homogeneous. Products in a process costing environment typically flow in a sequence from one department to another. 4. Comparing job-order and process costing The flow of costs through the manufacturing accounts is basically the same for process and job-order costing.

MANAGEMENT ACCOUNTING|PROCESS COSTING|JAVIER RAMOS NICOLÁS There is a key fundamental difference between process and job-order costing systems. Job-order costing systems trace and apply manufacturing costs to jobs. One Work in Process account is often used to accumulate costs for all jobs. The individual job cost sheets serve as a subsidiary ledger. In a process costing systems, costs are traced to departments that process the goods. In some companies there may be several processing departments that goods must pass through to become finished goods. A separate Work in Process account is maintained for each processing department. Material, labor, and overhead costs transferred from one department’s Work in Process account to another department’s Work in Process account are called transferred-in costs. 5. Process cost flows: Direct materials can be requisitioned for use in both Department A and Department B. Direct labor is transferred from the Salaries and Wages Payable account into the work in process account of Departments A and B depending upon where the individual employee worked. Manufacturing overhead is applied to each processing department based on a predetermined rate for each department Once we sell finished goods, we debit Cost of Goods Sold and credit Finished Goods Inventory. 6. Equivalent units Two half completed products are equivalent to one complete product.

So, 10,000 units 70% complete are equivalent to 7,000 complete units.

MANAGEMENT ACCOUNTING|PROCESS COSTING|JAVIER RAMOS NICOLÁS 7. Treatment of direct labour In today’s economy, direct labor costs are becoming small when compared to materials and overhead costs. Automation is one of the causes for this shift. As a consequence of the change in volume of direct labor costs, many companies combine labor and overhead costs and refer to the total as conversion costs. That is, these are the costs incurred to convert the direct materials into a finished good. 8. Allocate and apportion Allocate means assign whole item of cost to single cost unit Apportion means spread cost over two or more cost units 9. Operating departments Operating departments carry out the central purpose of the organization. i.e. the surgery department at a hospital, the production departments of Mitsubishi. 10. Service departments Service departments do not directly engage in operating activities. They provide services or assistance to the operating departments. i.e. Cafeteria, HRM, Accounting 11. Interdepartmental services The overhead costs of operating departments frequently include allocations of costs from service departments. Costs of the service department become overhead costs to the operating department.

Cos Costt ite item m

Allo Allocati cati cation on tto o co cost st ccentr entr entres es

Rent of building

Floor area of each cost centre

Lighting

Floor area of each cost centre

Power for machines

Nº of machines in each cost centre

Production supervisor’s salary

Nº of employees in each cost centre

Canteen costs

Nº of employees in each cost centre

Depreciation and insurance

Value of machinery in each cost centre

Maintenance department

Nº of machines in each cost centre

MANAGEMENT ACCOUNTING|PROCESS COSTING|JAVIER RAMOS NICOLÁS

Employees restaurant and coffee bar Stores department

Nº of employees in each cost centre Total value of stores requisitions from each cost centre

Finished goods quality inspection

Value of goods produced by each cost centre

Safety inspectors

Nº of employees in each cost centre

12. European Models 12.1.

German model

12.2.

French model

12.3.

Spanish model...