As a result, our selling price will be much higher or under the market, it will impact to our profit. Process costing is not required a complicated accounting or IT system to collect data and calculate it. When we obtain enough information, only a simple spreadsheet is enough to complete the work. The company does not need to invest in an expensive accounting system just for product costing. Finally, the Packaging department, the place where shoes are matched by size and put into a retail box. The cost of direct labor in this department during March has only USD 30,000 and they complete the work for 12,000 pairs of shoes.
Some of the dressed chickens are directly transferred to packaging department and then to finished goods department. Some part of the dressed chickens are transferred to the grinding department and then to the packaging department and finally to the finished goods department. In their petroleum refining operations, crude oil is processed initially in one processing department and then the refined output is further processed by different processes simultaneously to get different end products. For the purpose of dealing with the stocks of finished goods, a separate Process Stock Account is prepared with each process. The output of each process is first transferred to its Process Stock Account and from there to the next process account. CIMA defines this term as – “notional whole units representing completed work.
Important Features of Process Industries
In mass producing industries where like units pass through different stages of production, the adoption of process costing necessitates cost accumulation by these stages. Like units move from one process to another till the stage of completion. Output of the earlier process becomes the input of the later process. When a product is manufactured through various processes, the output of each process is transferred to the subsequent process and that of the last process is transferred to the finished stock. Process costing is the only reasonable approach to determining product costs in many industries.
In some industries, two or more products of equal importance and value are produced, simultaneously in a process. Motor spirit, kerosene oil, fuel oil, lubricating oil, wax, tar and asphalt are the examples of joint products produced from crude petroleum. Where several dissimilar products are produced in the same process, a close study of production and costs of each variety of products is essential.
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Joint costs are apportioned in the ratio of net realisable values. As the goods are transferred at profit so for the amount of profit included in stock needs the creation of reserve for unrealised profit. The purpose is to show the value of closing stock at cost price in place of inflated price. The reason being business is earning profits from itself.
As a process costing example, ABC International produces purple widgets, which require processing through multiple production departments. The first department in the process is the casting department, where the widgets are initially created. During the month of March, the casting department incurs $50,000 of direct material costs and $120,000 of conversion costs (comprised of direct labor and factory overhead). The widgets then move to the trimming department for further work, and these per-unit costs will be carried along with the widgets into that department, where additional costs will be added. Often, process costing makes sense if the individual costs or values of each unit are not significant. For example, it would not be cost effective for a restaurant to make each cup of iced tea separately or to track the direct material and direct labor used to make each eight-ounce glass of iced tea served to a customer.
(4) Controlling aspect – Since each job is separate and distinct, greater supervision and control is required by management. (viii) Transfer of product by adding profit to the next process. (iv) When there is a problem given regarding valuation of opening stock and closing stock. The percentage of the market value of each product to the total of the market values is found out.
In sequential processing system, products flow in sequence from one processing department to another processing department. The costs are transferred from one process account to another as the product is transferred. (vi) When total cost of the process is divided by the units produced in that process it results into per unit cost of that process. (d) Rate arrived at by step No. 3 should be applied for valuation of both unit representing abnormal loss and output of the process. In a case like this losses up to 5% of input will be categorised as normal loss of the process. The cost of normal loss in process is absorbed as additional cost by good production in the process.
- The balance of this account, i.e., abnormal gain is transferred to costing profit and loss account.
- “Equivalent production” is a technique by which work done on unfinished units is expressed in terms of “completed units” only.
- Expenses can be allocated to different processes on rational basis and accurate cost, thus, can be ascertained.
- By past experience and data available relating to industry, a rate of normal loss is always mentioned with specification of production techniques.
Under process costing, there is a finished product at each stage. This becomes the raw material of the subsequent stage until the final stage of completion. This follows the expense recognition principle because the cost of the product is expensed when revenue from the sale is recognized. Units representing abnormal gain are valued like normal output of the process.
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But it results into weight loss of the quantity in output. This loss increases the cost of production of the product produced in the process. If the scrap is sold then the sale value of scrap is also shown on the credit of process account which results into decreasing the cost of production.
Therefore,the cost of normal loss should be borne by good production during the process. For scrap value relating to normal loss is credited to the process account so that only the actual cost of normal loss is shared by good production in the process. When work done in process includes work done on unfinished units also, it is advisable to prepare a statement of equivalent production. This statement shows element wise details of work done in terms of completed units only. “Equivalent production” is a technique by which work done on unfinished units is expressed in terms of “completed units” only. This idea to find out units, which would have been completed, if the work done on unfinished units had been done for finished units only.
Process Costing – Reasons for Introducing the Concept of Profit from one Process to Another (With Formula)
Production Order – In process costing work is performed for stock purpose on the continuous basis. Process cost account keeping is very simple when there is no process loss. All materials, wages and overheads are debited to the process and the accumulated costs are transferred to the subsequent process. The products are the simultaneous outcome of the joint process and from the same raw materials.
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This becomes necessary since each order of an individual customer is different from process costing suitable for that of the other. Being different, each order requires different amounts of material, labour and overhead. Process costing is not the same as specific order costing. Consequently, costs need not be collected and charged to a specific order. Process costing is useful or found to be most suitable for industries engaged in continuous manufacture of products in bulk in which the units of products are uniform and cannot be differentiated.
McNutt was perplexed as to why his bakery was not more profitable year after year. The accountant was stealing the money while making the stolen checks appear to be paying for material costs or operating costs. According to Texas Monthly, “Once Sandy was sure that nobody had noticed the first fraudulent check, he tried it again.
Moreover, raw material needs to pass through multiple stages of production before turning into finished goods. And it is very complicated to assign the overhead cost individual unit. Since there are eight slices per pizza, the leftover pizza would be considered two full equivalent units of pizzas.
