See Also:
Standard Costing System
Activity Based Costing vs Traditional Costing
Absorption vs Variable Costing
Average Cost
Cost Driver
Process Costing Definition
In accounting, process
costing is a method of assigning production costs to units of output. In process costing systems,
production costs are not traced to individual units of output. Costs are assigned first to production departments. Then assign the costs to units of output as they move through the
departments. The process costing method is typically used for processes that produce large quantities of homogeneous products.
The process costing
method is in contrast to other costing methods, such as product costing, job costing, or operation costing
systems. Using the process costing method is optimal under certain conditions. Homogeneous indicates that the units of output are relatively indistinguishable from one another. If the output products are homogeneous, then it may be beneficial to use
process costing. Low value indicates that each individual unit of output is not worth much. If the output products are of low value, then it may be beneficial to use process costing. If it’s difficult or infeasible to trace production costs directly to individual units of output, then it may be beneficial to use the process
costing method.
Examples of Operations To Use Process Costing
Examples of operations likely to use the process costing method over another costing method include the following:
- Cola bottling plant
- Company that produces bricks
- Breakfast cereal maker
- Company that makes computer chips
- Company that produces lumber
For example, for the company that bottles cola, it would not be feasible or worthwhile to separate and record the cost of each bottle of cola in the bottling process. Therefore, the company would assign costs to the bottling process as a whole for a period of time. Then they would divide that overall process cost by the number of bottles produced during that period of time to assign production costs to each bottle of cola.
[button link=”//strategiccfo.com/scfo-lab-sl?utm_source=wiki&utm_medium=button%20cta” bg_color=”#eb6500″]Learn About The SCFO Lab[/button]
Process Costing Method
There are five steps in the process costing method. First, analyze the cost-flow model of the relevant inventory account to determine how much inventory was there at the beginning of the period, how
much was started during the period, how much as completed during the period, and how much is left as work-in-process at the end of the period.
Second, convert the work-in-process ending inventory into a number of equivalent
units produced. This means if there are 1,000 units of inventory in work-in-process, and these units are all 50% complete, then you consider this as the equivalent of 500 units produced (500 = .50 x 1,000).
Third, compute the total direct and indirect costs incurred by the
production process that need to be assigned to the units completed and the units still in process. This includes the costs associated with the beginning inventory and the costs incurred during the relevant period.
Fourth,
calculate the amount of cost assigned to the completed units of output and the equivalent of completed units of output still in the ending inventory. For example, if a company completed 2,000 units, and left 1,000 units half-finished, then divide the applicable costs by 2,500 units.
Fifth, allocate the relevant
costs to the units of product completed and to the units of product remaining in the work-in-process account.
5 Steps for Process Costing
Follow the 5 steps for process costing.
1. Analyze
inventory flow
2. Convert in-process inventory to equivalent units
3. Compute all applicable costs
4. Calculate the cost per unit of finished and in-process
inventory
5. Allocate costs to units of finished and in-process inventory
Cost Accounting, 14e, Global Edition (Horngren/Datar/Rajan)
Chapter 17 Process Costing
Objective 17.1
1) Costing systems that are used for the costing of like or similar units of products in mass production
are called:
A) inventory-costing systems
B) job-costing systems
C) process-costing systems
D) weighted-average costing systems
Answer: C
Diff: 1
Terms: process-costing system
Objective: 1
AACSB: Reflective thinking
2) Which of the following manufactured products would NOT use process costing?
A) 747 jet aircraft
B) 46-inch television sets
C) Construction of a commercial office building
D) Both A and C are correct.
Answer: D
Diff: 2
Terms: process-costing system
Objective: 1
AACSB: Reflective thinking
3) Process costing should be used to assign costs to products when the:
A) units produced are similar
B) units produced are dissimilar
C) calculation of unit costs requires the averaging of unit costs over all units produced
D) Either A or C are correct.
Answer: D
Diff: 2
Terms: process-costing system
Objective: 1
AACSB: Reflective thinking
4) Which one of the following statements is true?
A) In a job-costing system, individual jobs use different quantities of production resources.
B) In a process-costing system each unit uses approximately the same amount of resources.
C) An averaging process is used to calculate unit costs in a job-costing system.
D) Both A and B are correct.
Answer: D
Diff: 2
Terms: process-costing system
Objective: 1
AACSB: Reflective thinking
1
Copyright © 2012 Pearson Education