AFC2131 Cost Information for Decision Making Presentation

Process Costing and Operation Costing

Cheung Yim Fai

Kwok Hoi Yuen

What is Process Costing?
• Process: a series of activities that are linked together to perform a specific objective • Process Costing is…
– Costing system – Traces all production costs  Process

• Process Costing Job Costing

Job vs Process vs Operation

Job versus Process Costing

Features of process costing
• Homogeneity • Continuous flow • Input and Output of process costing • Normal and Abnormal losses

Example of Process Costing
• Sugar Manufacturing Industry

Example of Process Costing
• • • • • • • • Cane Shredding Milling Heating and Adding lime Clarification Evaporation Crystallisation and Separation Spinning Drying

Reasons for using process costing
• A company may manufacture thousands or millions of units of product in a given period of time. • Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. • A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when selling millions of units of product a month. • Materials part way through a process (e.g. chemicals) might need to be given a value, process costing allows for this.

Manufacturing versus Service
• Is process and operating costing applicable to service businesses?

What is Hybrid Costing?
Process Hybrid Job

• Hybrid: a mix • Hybrid Costing
– Mix of >1 costing systems – E.g. Process + Job

What is Operation Costing?
• Operation Costing
– Subset of hybrid costing

Hybrid Operation … …

– Direct material  batches – Conversion cost  process

Use of Operation Costing
• Manufacturing firms:
– Very little: pure job production environment or pure process production environment – Most: Mix of both

• Use in
– Clothes – Textiles – Shoes

• Conversion input: same demand • Direct material: different demand

Why should use Operation Costing
• Manufacturing firm:
– Some individual input but repetitive processes – Product: some unique but some common features

• Enable management to dispense correctly • Advantages of both Process and Job Costing

Example of Operation Costing
   

Processor
Mobile AMD Sempron™ technology 3500+

Processor
AMD Athlon™ 64 X2 Dual-Core Mobile technology TK-53

Memory
512MB (1X512) Memory 533MHz DDR2  SDRAM

Memory
1GB (2x512MB) 533MHz dual-channel DDR2  SDRAM Shared with Graphics

Harddrive
120GB 5400RPM SATA Hard Drive

Harddrive
120GB 5400RPM SATA Hard Drive

Monitor
14.1” Widescreen WXGA (1280x800) TFT  Display

Monitor
15.4" Widescreen WXGA (1280x800) TFT  Display

Graphic Card
ATI Radeon® Xpress 1150 HyperMemory™  (integrated)

Graphic Card
ATI Radeon® Xpress 1150 HyperMemory™  (integrated)

Optical Device
8X max DVD+/-RW Drive with DVD+R double  layer write capability

Optical Device
8X max DVD+/-RW Drive with DVD+R double  layer write capability

A
Anti-Virus
Norton Internet Security Trial

B

Anti-Virus
Norton Internet Security Trial

Service
1-Year Limited Next Business Day On-site  Service

Service
1-Year Limited Next Business Day On-site  Service

Example of Operation Costing
Direct Materials Hard Drive
A B

14.1” Monitor
A

Conversion costs 15.4” Monitor
B

Finished Goods
A B

Technology Use in Process Costing
• Process vs Job
– Less data collection – More calculations

• ERP (Enterprise Resource Planning)
– Integrates all of major business processes – consistent data across all functional departments – Marketing and Sales, Field Service, Production, Inventory Control, Procurement, Distribution, Human Resources, Finance, and Accounting.

Technology Use in Process Costing
• Before: Manufacturing Industries • Now: Whole Organisation • Software Modules
– – – – – – – Manufacturing Supply Chain Management Financials Projects Human Resources Customer Relationship Management Data Warehouse

Technology Use in Process Costing
• Disadvantages
– Increase the cost of training – High cost to install – Limitation of potential employees – Systems can be difficult to use

Technology Use in Process Costing
• Advantages:
– Better security – Software can talk to each other

• Not only the improvement in Process Costing • But also the Improvement of the organisation as a whole

Conclusion
• The use of process costing is becoming less prevalent as most manufacturing industries produce products with dissimilar materials. • In practice, most businesses nowadays adopt the hybrid costing system which involves both job and process costing systems. • Besides process and operation costing, other costing systems are now becoming more popular because the manufacturing procedures are becoming more complex. • Manufacturing industries should adopt costing systems which is suitable according to their own needs • Choosing a suitable costing system is complicated but critical to all businesses.

Thank you

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