MMMANAC CMM224

---Process Costing

Wang Guangyu
Jun 02, 2023
Contents:
1 What is Process Costing?

2 Types of Process Costing

3 Steps of Process Costing?

4 Example of Process Costing

5 Features & Conclusion

1 What is Process Costing?

Process costing is a method wherein the products go through two or more processes. The costs are
assigned/charged to individual processes or operations, averaged over the number of units produced
during the said period.
A product may be manufactured through one process or more than one process. If two or more
processes are involved in manufacturing one finished product, the question arises, “which process
has consumed the expense?” The answer lies within process costing. It helps identify the specific cost
assigned to each process. It enables the management to further decision making.

Process costing is suitable for industries where the product is continuous and the end products are
identical. Also, the entire process of production is standardized. In such industries, the production
cycle is standardized & even the quantum of the normal loss of inputs & outputs is quantified earlier.
In case of abnormal expense, it is a charge to the profit & loss account directly and not to any
individual process. It is used commonly in manufacturing units like paper, steel, soaps, medicines,
vegetable oils, paints, rubber, chemical, etc. use this method widely.
2 Types of Process Costing

#1 – Weighted Average Method of Process Costing

Here the actual cost is divided by the weighted average of products produced.
This calculation is simple as compared to any other method. A weighted average
of units means the summation of the product of the rate and quantity of each
item.
#2 – Standard Cost
Here the actual cost of units is not considered; instead, it follows a standard
costing method. Standard cost assumes the cost of certain materials as per
management estimate. Any difference in standard & actual costs is recorded
separately under the variance account
#3 – First-In-First-Out
This method assigns the expense of first inputs to the processes in the order of
production. However, it does not precisely identify which a lot of raw material is
taken for production and its procurement rate.
 3 Steps of Process Costing?
Process Costing
Step#1 – Record of Inventory Record of
This step involves the identification of inventory at the end of each Inventory

process. The organization can identify such inventory by physically

counting the units or through software inbuilt into the manufacturing
Conversion of
process. In addition, the costs of inventory under each process are also Allocation of
Work in Process
Costs
identified at this change. Inventory
Step #2 – Conversion of Work in Process Inventory
Apply the percentage of completion to the units which are under any
process & not yet completed the production. Say 80,000 units of soaps Process
are under process & these are 60% completed. Then the equivalent
completed units are 80,000*60% i.e. 48,000 units. Calculation of
Calculation of
Per-Unit Cost of
Step #3 – Calculation of Inventory Costs Inventory
Inventory Costs
Here, the organisation calculates the direct cost and indirect costs in the
production phase. These costs are accumulated from the first process to
the last process. The said is then bifurcated into an inventory of
complete products & inventory of products that are under process.
Step #4 – Calculation of Per-Unit Cost of Inventory
We calculate this by dividing the total cost by equivalent completed units Step #5 – Allocation of Costs
in the production phase. The cost per unit calculated here reflects the The per-unit costs are then split according to the
cost of only completed units. The basis of equivalent units can be the number of units completed & units that are under
weighted average, standard cost, or first-in-first-out inventory method. process.
4 Example of Process Costing

The entity has provided the following information & wants to calculate the cost involved in
each manufacturing step.
Also, it intends to calculate the value of closing inventory.
4 Example of Process Costing

Solution:
5 Features & Conclusion

Features
① Each plant is divided into several processes/centers. Each such division is a stage of
production or process. Thus, we first clearly identify the cost centers.
② Direct & indirect costs are assigned and accumulated to each process in the factory.
③ The output of one process may become input for another process.
④ The finished products are identical & cannot be easily distinguished unless batch coding
is done.
⑤ The production process is continuous for all days in the year except for regular breakdown
hours required to maintain the machinery.
⑥ The total cost of production is divided among each process on a suitable basis.
⑦ The company is required to keep records for each production process, such as units or
costs introduced in each process and passed on to the next stage of production.
⑧ The production may result in joint products or by-products.
5 Features & Conclusion

Conclusion
Process cost allows an organisation to assigns the cost to
different steps in the production phase. It helps management
in decision making. The organisation can use this method to
identify the relevant costs
(i.e., direct and indirect costs) for each process, and no
abnormal expenses are charged to any process.
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