Provides a clear and simple explanation of Process Costing, as covered in learning unit 8 of the 2024 curriculum. This is based on the textbook "Principles of Management Accounting - Third Edition."
- Process costing is used to determine the cost of a large number of identical
product units produced in a continuous process. Each unit uses the same
amount of variable and fixed costs. Unlike job costing systems, that can trace
and allocate costs to each job, with process costing systems you do not trace
and allocate costs to individual product units. Costs incurred during a particular
costing period are accumulated and allocated to ALL units produced during that
period. The price of each unit produced during the costing period is then
calculated as follow:
Units cost = total cost / total number of units
- CIMA definition: costs are averaged over the units produced during the period
resulting from continuous or repetitive operations of process.
- The types of costs remain the same as others such as, DM, DL, other direct costs
and indirect overhead costs. Materials are used in the beginning and possibly
additional materials are added later in the process. The direct labour cost and
the direct and indirect overhead costs are usually combined as conversion
costs.
- Labour and machinery may not work in unison but may be applied at diJerent
stages of the process.
- A batch of products may be subjected first to manual processing and then
progress through a mechanized processing stage. In this case, the two types of
cost are allocated separately – labour costs as one category and variable and
fixed costs relating to the use of equipment as the second category.
, Process costing
- The flow of costs in a simple process costing system is illustrated below:
Manufacturing
Direct materials Direct labour
overheads
Conversion costs
Batch of identical units of product
Calculations in a process costing system:
The objective of a process costing system is to calculate the unit cost of the products
produced during the period.
The calculation of the unit cost is supported by three statements:
- Statement of equivalent production – this is used to calculate the number of
units produced during the period.
- Unit cost statement – this calculated the average cost of producing one unit
during the period.
- Production cost statement – This reconciles the costs allocated to units during
the period with the cost of production during the period.
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