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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 Processor
Mobile AMD Sempron™ technology 3500+ AMD Athlon™ 64 X2 Dual-Core Mobile
technology TK-53

Memory
Memory 1GB (2x512MB) 533MHz dual-channel DDR2 
512MB (1X512) Memory 533MHz DDR2  SDRAM Shared with Graphics
SDRAM

Harddrive
Harddrive
120GB 5400RPM SATA Hard Drive
120GB 5400RPM SATA Hard Drive

Monitor Monitor
14.1” Widescreen WXGA (1280x800) TFT  15.4" Widescreen WXGA (1280x800) TFT 
Display Display

Graphic Card Graphic Card


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

Optical Device Optical Device


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

A B
Anti-Virus Anti-Virus
Norton Internet Security Trial Norton Internet Security Trial

Service Service
1-Year Limited Next Business Day On-site  1-Year Limited Next Business Day On-site 
Service Service
Example of Operation Costing
Direct Materials Hard Drive
A B

14.1” Monitor Conversion costs

A
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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