(a) Determine the normal production, presuming if there had not been abnormal gain in the process. (c) Determine the cost per unit of normal production by dividing the result of step No. 2 by result of step No. 1. 100 units 50% complete with regard to material, labour and overhead. Material can be introduced in the beginning, in the middle or at the end of the process.
The average method tends to narrow the wide fluctuations in prices. The equivalent units for the period will be 7,200 units, i.e., 6,000 + 40% of 3,000. If the costs incurred during the period is Rs. 14,400, the cost per equivalent unit will be Rs. 2, i.e., Rs. (14,400/7,200). In process industries there must be some partially finished units i.e., work-in-progress (opening and closing) in each process at the end of an accounting period. The cost of such unfinished units is lower than a finished unit.
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(7) Production for – In process costing, products are standardised and production is carried on for stocks. In so many industries when the goods are in manufacturing process there can be loss in weight of the input of material due to evaporation, moisture like chemicals, spirit, alcohol, essence etc. There can be weight loss also in the material because of working as furniture making from wood, or boring and drilling on iron bars etc. The scrap sometime is sold at a nominal value in the market or may not having any value. Divide the total costs by equivalent units to get the cost per equivalent unit. FIFO is used when the value of opening WIP is a lump sum figure and the degree of completion is not given.
Manufacturing overhead will be estimated, just as in the job costing method, but will need to be recorded as incurred. The clearing account will be used to accumulate the actual costs, and a reconciliation will be done at the end of each period. In other words, the products are made to bear a proportion of the joint cost on the basis of their ability to absorb the same. Market value means weighted market value i.e., units produced X price of a unit of joint product.
What is the difference between process costing and job-order costing?
In the process costing system, costs are accumulated, period by period not per job or batch by batch. Cost of each unit is calculated at the end of the period (commonly one month or after one week as the case may be). Cost per unit (average) is obtained by dividing the total cost applicable to a production department during a particular period by the total number of units produced during that period. Job order costing tracks prime costs to assign direct material and direct labor to individual products (jobs).
- All direct expenses and indirect expenses relating to the product are debited to the process account concerned.
- The share of the overheads of each process is shown in the debit of the concerned process account.
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- But not all readily identifiable material is a direct material cost.
- If the costs incurred during the period is Rs. 14,400, the cost per equivalent unit will be Rs. 2, i.e., Rs. (14,400/7,200).
A separate account is opened for each process to which all costs incurred thereon are charged. The total number of units produced during a given period is calculated and by dividing the total cost of a process by the total number of units produced, the cost per unit shall be obtained. Process costing is a method of costing used to ascertain the costs of each process or operation or stage of manufacture.
Convert the physical units as obtained in (1) into equivalent units of production for each cost element, i.e., material, labour and overheads. The account is debited with the cost of materials, labour and overheads relating to the process and the value of byproducts and scrap is credited. The balance of this account, representing the cost of a process, is passed on to the next process and so on until the final product is completed. For this reason, the amount standing at the credit of abnormal gain account will not be transferred to profit and loss account as it is. Amount of scrap value relating to five units will be debited to abnormal gain account and the balance thus arrived at will be transferred to profit and loss account for the year. This adjustment is always carried out when there is abnormal gain and units lost fetch some scrap value.
Process Costing – Meaning of Operation Costing
Scrap value of normal loss account is credited to process account and scrap value of units representing abnormal loss is credited to abnormal loss account. Normal loss is inseparably linked with manufacturing operations of the process. In this method, the total process costs (up to the point of split off) are divided by the total weight or units produced to get average cost per unit of production. The process losses are borne by the joint products in the ratio of their output weight units.
Sometimes, after inspection, the product needs to be reworked and additional pieces are added. Because the frames have already been through each department, the additional work is typically minor and often entails simply adding an additional fastener to keep the back of the frame intact. Other times, all the frame needs is additional glue for a corner piece. These general rules for S&A expenses, however, have their exceptions. For example, some items that are classified as overhead, such as plant insurance, are period costs but are classified as overhead and are attached to the items produced as product costs. Cost Calculation – In process costing costs are calculated on the basis of period after the completion of the process.
Process costing Process cost accounting
Process costing refers to a type of costing procedure commonly adopted by factories. In process costing, there is continuous or mass production and ongoing costs, which are accumulated regularly. How does a company differentiate between direct and indirect material? Many direct material costs, as the wood in the frame, are easy to identify as direct costs because the material is identifiable in the final product. But not all readily identifiable material is a direct material cost.
Choosing Between Process Costing and Job Order Costing
It also means converting the uncompleted units into equivalent of completed units. When there is abnormal gain, value of units representing abnormal gain should be debited to process costing suitable for process account. For valuation purpose, abnormal gain is treated at par with good units. Normal production in process A should have been 90 units, if there had not been abnormal gain of 5 units. For the purpose of valuation, 5 units should be valued at the rate, at which 90 units would have been valued.
Examples of the industries where this type of production occurs include oil refining, food production, and chemical processing. For example, how would you determine the precise cost required to create one gallon of aviation fuel, when thousands of gallons of the same fuel are gushing out of a refinery every hour? The cost accounting methodology used for this scenario is process costing.
Hence none of the opening WIP will find a place in the closing WIP. This is shown separately in the statement of equivalent production units. Hence, when there are inventories of WIP, unit cost cannot be obtained by simply dividing the total cost by the number of units processed. Units in WIP must be converted to a base which can be equated with completed production. In a manufacturing unit generally it is not possible to complete the work on all the units on which work has been started. The opening stock is shown on the debit side of the account prepared for the process concerned while the closing stock is shown on its credit side.