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Managerial Accounting – Process Cossting
Up to date on March 17, 2010 hafeezrm moreContact Author Major functions of any product costing system are: (1) accumulating manufacturing costs and (ii) assigning these prices to the products being manufactured.Product prices are need for planning, price-management, resolution making and reporting to each internal and exterior customers like regulatory businesses or analysis associations.
Of the various strategies, one is course of costing. It ascertains the price of a product at every process or stage of manufacture. It assigns price equally to homogeneous models inside a particular time interval.
Course of costing is the subject material of this hub.
Process COSTING – a formal definition
CIMA defines course of costing as “The costing method applicable where goods or services outcome from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced throughout the interval”.
By saying repetitive operations or processes, CIMA has precluded Jobs that are distinctive and one-time effort.
When is process costing acceptable?
Course of costing is appropriate the place production process is repetitive, merchandise are homogeneous or an identical, manufacturing stream is steady and manufacturing time is relative short.
Industries utilizing process costing are oil refineries, paint making plant, soap manufacturing, foods and drinks, paper, petroleum, chemicals, textiles and electronics.
Differences and Similarities with Job Order Costing
JOB ORDER COSTING Course of COSTING
Variations
Strategies Cost by Job Price by course of
Nature Unique product Standard or idential product
Prices Completely different costs for distinction jobs Same unit value for all
Quantity Small Large
Interlinking None with other jobs Definite Hyperlinks
Key Documents Cost Sheet Departmental Report
SIMILARITIES
Sources Same fiancial and operational information
Goal Cost allocation
Circulation Identical circulate of production
Use of Course of Cost Information
Measure prices of production of mass-produced merchandise
Assign costs to inventory and value of goods sold for working out profitability and taxes.
Keep a watch on operations and prices
Used in budget or future prices for determination making
Determine potential areas for course of improvements
Analyze the prices and advantages of high quality improvements
Price Flow
As in job-costing, supplies are withdrawn from stores utilizing a material requisition form. The materials are processed including labor and overhead. Since there quite a lot of processes, the models would remain partially accomplished until the ultimate course of. In the next processes extra materials could also be added along with labor and overheads. For example, Coca-Cola Firm might have three processes or departments: (i) Formulation Department, (ii) Bottling Division and (iii) Distribution Division. To stare with, raw supplies (flavors, sugar, water and carbon dioxide) are poured into tanks. Subsequently, bottles and caps are added within the Bottling Division and at last wood crates are launched in Distribution Department.
Remedy of labor prices and overheads is identical as in job-costing except these costs are allotted to departments and not to particular person jobs. Also, predetermined overheads fee are used.
On completion of a process, the items are moved to next department for additional processing. It goes on till the product is accomplished. The prices of accomplished models would be transferred to Finished Goods Inventory Account. Finally, when goods are offered, the relevant prices are transferred to Value of goods bought for computation of gross revenue.
Equivalent Unit of Manufacturing
It is not mandatory that every one semi-completed units are totally treated and passed to subsequent division. Actually, some are left behind as work-in-means of that individual department. For instance, in confectionery, the processes are mixing, shaping, baking and packing. Assume that 1,000 of raw cakes have been despatched to baking division. As a consequence of shortage of working solely 600 cakes had been backed and the remainder remained as acquired.
Let us say that baking cost was 25% of complete value of a baked cake (not together with packing). If total value of Rs.126,000 was incurred until now, the unit cost can be computed as follows:
Equal Units = 600 + (400 x seventy five%) = 600+300= 900 equal items
Unit cost = 126,000 divided by 900 models = 140 per cake.
Totally different Manufacturing Processes
Quite a few processes are used within the industrial plants. The method could also be sequential the place work-in-course of moves in one route and all units are treated equally. It could possibly be parallel the place two or more strains work at the identical time and finally their output is assembled in a single full unit. Finally, in selective course of, some items are treated specially after which moved to the main line.
As extra processes are involved, the calculation grow to be more cumbersome. It should be remembered that accounting is a service and should be tailor made to fulfill demand of the user. In no case, actual production movement or process stream is modified. In stead, adjustments are made in cost accounting system to match the requirements.
Summary
Course of costing is appropriate for industries engaged in mass production of near equivalent merchandise. Both process costing and job costing have the identical purpose i.e. to accumulate costs and assign them to merchandise. Product prices are needed for planning and control moreover reporting to regulatory authorities.
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sendingAccounting agency 7 years in the past
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sajeesh chandran 6 years in the past
