# Process Costing

#### faaiz

##### Par 100 posts (V.I.P)
Process Costing
________________________________________
Process costing is used in those situations when it is impossible to clearly differentiate the cost of individual units of production. For example, it is a prime candidate for use in an oil refinery, where it is impossible to track the cost of an individual gallon of diesel fuel.
The most common method for calculating process costs on a per-unit basis is to accumulate all production-related costs during the accounting period and calculate a weighted average per-unit cost based on these totals and the amount of production that was completed during the period, or which is currently still in process. An example of this calculation is shown below:
Units Summary Direct Material Units Conversion Factor Conversion Cost Units
Completed units 1,000 1,000
Ending units in process 350 60% 210
Unit totals 1,350 1,210
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Calculation Direct Materials Conversion Costs Totals
Beginning work-in-process \$20,000 \$15,000 \$35,000
Current period costs \$28,000 \$21,500 \$49,500
Total costs \$48,000 \$36,500 \$84,500
Unit totals (see above) 1,350 1,210
Cost per unit \$35.556 \$30.165
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Allocation Direct Materials Conversion Costs Totals
Cost of completed units \$35,556 \$30,165 \$65,721
Cost of ending WIP units \$12,444 \$6,335 \$18,779
Totals \$48,000 \$36,500 \$84,500
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
In the exhibit, there are three blocks of calculations, each one segregated by a horizontal line. The top block contains a conversion calculation, which converts the amount of completed and work-in-process units into units to which materials and other costs can be allocated. The first column of numbers contains the calculation for the allocation of direct materials costs, while the final column of numbers calculates the allocation of all other production costs. For the purposes of this calculation, we assume that there are two types of costs – direct materials, which are typically added at the beginning of the production process, and all other costs, which can be added at a multitude of other points during the manufacturing sequence.
Since materials costs are assumed to occur at the earliest stage of production, the calculation of equivalent units for direct material cost allocation is quite easy – just use the number of finished goods completed (1,000) and the number of units in work-in-process inventory (350). However, for the purposes of allocating all other production costs, we must reduce the amount of work-in-process inventory by an estimate of their aggregate level of completion, which in the example is 60%. This results in total converted units of production of 1,210.
In the middle block of calculations, we accumulate the total cost of production and divide it by the equivalent number of units of production to determine the cost per unit. This calculation includes the costs that had been carried over in the work-in-process inventory from the preceding accounting reporting period, totaling \$35,000. We add to this the current cost of production, which is \$49,500, to yield a total cost of \$84,500 that must be allocated to units of production. When divided by the slightly different units of production being used for direct material costs and all other production costs, we arrive at a direct material cost per unit of \$35.556, and all other costs per unit of \$30.165.
The lowermost block of calculations requires us to multiple the cost per unit (as determined in the middle block) by the total number of units (as determined in the top block). The calculation is identified with arrows. The result is \$48,000 in direct material costs, of which \$35,556 are charged to completed units and the remainder to work-in-process units. Total other production costs are \$36,500, of which \$30,165 are charged to completed units and the remainder to work-in-process. As a cross-check, we can see that the total allocated is \$84,500, which matches the total amount of funds that were to be allocated, as noted on the far right side of the middle block.
This method is a simple one that requires very little data collection. However, some companies like to make the task even easier by avoiding the collection and interpretation of actual costs at the end of each accounting period. Instead, they prefer to use standard unit costs for their calculations, which allows them to calculate total costs more frequently and with no related data collection costs. This type of calculation is shown below.
Units Summary Direct Material Units Conversion Factor Conversion Cost Units
Completed units 1,000 1,000
Ending units in process 350 60% 210
Unit totals 1,350 1,210
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Calculation Direct Materials Conversion Costs
Standard unit cost \$32.000 \$31.500
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Allocation Direct Materials Conversion Costs Totals
Standard cost of completed units \$32,000 \$31,500 \$63,500
Standard cost of ending WIP units \$11,200 \$6,615 \$17,815
Standard cost totals \$43,200 \$38,115 \$81,315
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Period Variance
Beginning standard WIP cost \$20,000 \$15,000 \$35,000
Current period actual costs \$28,000 \$21,500 \$49,500
Total period costs \$48,000 \$36,500 \$84,500
Standard cost totals \$43,200 \$38,115 \$81,315
Cost variance \$4,800 \$(1,615) \$3,185
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
In the exhibit, the first block of calculations does not change – we still assume that a conversion factor must be applied to the ending work-in-process inventory for the purposes of assigning other production costs than direct materials. The difference arises in the second block, where we only use a standard cost per unit, rather than a summarization of actual costs. This cost is then carried forward into the third block of calculations, where we see that a total of \$81,315 has been allocated to the ending finished goods and work-in-process inventory. However, this ending figure varies from the \$84,500 that resulted from the preceding actual costing calculation. The difference of \$3,185 was caused by a slight variance between the pre-set standard cost and the actual cost. The presence of this variance causes us to add a fourth block of calculations at the bottom of the exhibit, in which we compare the actual costs incurred during the period to the standard costs, which shows that more costs than expected were incurred in the direct materials column, while fewer costs were incurred under the other production costs column.
The main issue for the cost accountant is what to do with this variance. If negligible, it can be charged off to the cost of goods sold. If it is so large that expensing the difference will result in an appreciable impact on reported earnings, then a more accurate approach is to apportion the variance among the cost of goods sold, work-in-process inventory, and finished goods inventory.
The data collection and calculations required for a process costing system are substantially simpler than what is required for a job costing system, and so is a favorite approach for those who wish to pare their data collection costs or who produce such large volumes of similar products that there is no point in attempting to track the costs of individual products.

#### rohini_gupta1412

##### Par 100 posts (V.I.P)
oh u r great! i do believe i need ur help to catch in this subject.
ur fundas r very clear.
its great dat u share wid us.
thanx.

#### siasia_b1

##### Par 100 posts (V.I.P)
thanks man i found it useful for my accounting.

##### New member
Process Costing
________________________________________
Process costing is used in those situations when it is impossible to clearly differentiate the cost of individual units of production. For example, it is a prime candidate for use in an oil refinery, where it is impossible to track the cost of an individual gallon of diesel fuel.
The most common method for calculating process costs on a per-unit basis is to accumulate all production-related costs during the accounting period and calculate a weighted average per-unit cost based on these totals and the amount of production that was completed during the period, or which is currently still in process. An example of this calculation is shown below:
Units Summary Direct Material Units Conversion Factor Conversion Cost Units
Completed units 1,000 1,000
Ending units in process 350 60% 210
Unit totals 1,350 1,210
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Calculation Direct Materials Conversion Costs Totals
Beginning work-in-process \$20,000 \$15,000 \$35,000
Current period costs \$28,000 \$21,500 \$49,500
Total costs \$48,000 \$36,500 \$84,500
Unit totals (see above) 1,350 1,210
Cost per unit \$35.556 \$30.165
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Allocation Direct Materials Conversion Costs Totals
Cost of completed units \$35,556 \$30,165 \$65,721
Cost of ending WIP units \$12,444 \$6,335 \$18,779
Totals \$48,000 \$36,500 \$84,500
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
In the exhibit, there are three blocks of calculations, each one segregated by a horizontal line. The top block contains a conversion calculation, which converts the amount of completed and work-in-process units into units to which materials and other costs can be allocated. The first column of numbers contains the calculation for the allocation of direct materials costs, while the final column of numbers calculates the allocation of all other production costs. For the purposes of this calculation, we assume that there are two types of costs – direct materials, which are typically added at the beginning of the production process, and all other costs, which can be added at a multitude of other points during the manufacturing sequence.
Since materials costs are assumed to occur at the earliest stage of production, the calculation of equivalent units for direct material cost allocation is quite easy – just use the number of finished goods completed (1,000) and the number of units in work-in-process inventory (350). However, for the purposes of allocating all other production costs, we must reduce the amount of work-in-process inventory by an estimate of their aggregate level of completion, which in the example is 60%. This results in total converted units of production of 1,210.
In the middle block of calculations, we accumulate the total cost of production and divide it by the equivalent number of units of production to determine the cost per unit. This calculation includes the costs that had been carried over in the work-in-process inventory from the preceding accounting reporting period, totaling \$35,000. We add to this the current cost of production, which is \$49,500, to yield a total cost of \$84,500 that must be allocated to units of production. When divided by the slightly different units of production being used for direct material costs and all other production costs, we arrive at a direct material cost per unit of \$35.556, and all other costs per unit of \$30.165.
The lowermost block of calculations requires us to multiple the cost per unit (as determined in the middle block) by the total number of units (as determined in the top block). The calculation is identified with arrows. The result is \$48,000 in direct material costs, of which \$35,556 are charged to completed units and the remainder to work-in-process units. Total other production costs are \$36,500, of which \$30,165 are charged to completed units and the remainder to work-in-process. As a cross-check, we can see that the total allocated is \$84,500, which matches the total amount of funds that were to be allocated, as noted on the far right side of the middle block.
This method is a simple one that requires very little data collection. However, some companies like to make the task even easier by avoiding the collection and interpretation of actual costs at the end of each accounting period. Instead, they prefer to use standard unit costs for their calculations, which allows them to calculate total costs more frequently and with no related data collection costs. This type of calculation is shown below.
Units Summary Direct Material Units Conversion Factor Conversion Cost Units
Completed units 1,000 1,000
Ending units in process 350 60% 210
Unit totals 1,350 1,210
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Calculation Direct Materials Conversion Costs
Standard unit cost \$32.000 \$31.500
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Allocation Direct Materials Conversion Costs Totals
Standard cost of completed units \$32,000 \$31,500 \$63,500
Standard cost of ending WIP units \$11,200 \$6,615 \$17,815
Standard cost totals \$43,200 \$38,115 \$81,315
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Period Variance
Beginning standard WIP cost \$20,000 \$15,000 \$35,000
Current period actual costs \$28,000 \$21,500 \$49,500
Total period costs \$48,000 \$36,500 \$84,500
Standard cost totals \$43,200 \$38,115 \$81,315
Cost variance \$4,800 \$(1,615) \$3,185
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
In the exhibit, the first block of calculations does not change – we still assume that a conversion factor must be applied to the ending work-in-process inventory for the purposes of assigning other production costs than direct materials. The difference arises in the second block, where we only use a standard cost per unit, rather than a summarization of actual costs. This cost is then carried forward into the third block of calculations, where we see that a total of \$81,315 has been allocated to the ending finished goods and work-in-process inventory. However, this ending figure varies from the \$84,500 that resulted from the preceding actual costing calculation. The difference of \$3,185 was caused by a slight variance between the pre-set standard cost and the actual cost. The presence of this variance causes us to add a fourth block of calculations at the bottom of the exhibit, in which we compare the actual costs incurred during the period to the standard costs, which shows that more costs than expected were incurred in the direct materials column, while fewer costs were incurred under the other production costs column.
The main issue for the cost accountant is what to do with this variance. If negligible, it can be charged off to the cost of goods sold. If it is so large that expensing the difference will result in an appreciable impact on reported earnings, then a more accurate approach is to apportion the variance among the cost of goods sold, work-in-process inventory, and finished goods inventory.
The data collection and calculations required for a process costing system are substantially simpler than what is required for a job costing system, and so is a favorite approach for those who wish to pare their data collection costs or who produce such large volumes of similar products that there is no point in attempting to track the costs of individual products.

Thanks Dude...
good material...
keep posting...

##### New member
thanks man its really good nad beneficial

#### chenthil03mcc

##### New member
help me to get project on process costing

#### jainsonu

##### New member
the information was really useful and it helped me a lot in understanding process costing.thanx:SugarwareZ-224:

Thanks

#### jitendra05

##### Banned
Process Costing
________________________________________
Process costing is used in those situations when it is impossible to clearly differentiate the cost of individual units of production. For example, it is a prime candidate for use in an oil refinery, where it is impossible to track the cost of an individual gallon of diesel fuel.
The most common method for calculating process costs on a per-unit basis is to accumulate all production-related costs during the accounting period and calculate a weighted average per-unit cost based on these totals and the amount of production that was completed during the period, or which is currently still in process. An example of this calculation is shown below:
Units Summary Direct Material Units Conversion Factor Conversion Cost Units
Completed units 1,000 1,000
Ending units in process 350 60% 210
Unit totals 1,350 1,210
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Calculation Direct Materials Conversion Costs Totals
Beginning work-in-process \$20,000 \$15,000 \$35,000
Current period costs \$28,000 \$21,500 \$49,500
Total costs \$48,000 \$36,500 \$84,500
Unit totals (see above) 1,350 1,210
Cost per unit \$35.556 \$30.165
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Allocation Direct Materials Conversion Costs Totals
Cost of completed units \$35,556 \$30,165 \$65,721
Cost of ending WIP units \$12,444 \$6,335 \$18,779
Totals \$48,000 \$36,500 \$84,500
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
In the exhibit, there are three blocks of calculations, each one segregated by a horizontal line. The top block contains a conversion calculation, which converts the amount of completed and work-in-process units into units to which materials and other costs can be allocated. The first column of numbers contains the calculation for the allocation of direct materials costs, while the final column of numbers calculates the allocation of all other production costs. For the purposes of this calculation, we assume that there are two types of costs – direct materials, which are typically added at the beginning of the production process, and all other costs, which can be added at a multitude of other points during the manufacturing sequence.
Since materials costs are assumed to occur at the earliest stage of production, the calculation of equivalent units for direct material cost allocation is quite easy – just use the number of finished goods completed (1,000) and the number of units in work-in-process inventory (350). However, for the purposes of allocating all other production costs, we must reduce the amount of work-in-process inventory by an estimate of their aggregate level of completion, which in the example is 60%. This results in total converted units of production of 1,210.
In the middle block of calculations, we accumulate the total cost of production and divide it by the equivalent number of units of production to determine the cost per unit. This calculation includes the costs that had been carried over in the work-in-process inventory from the preceding accounting reporting period, totaling \$35,000. We add to this the current cost of production, which is \$49,500, to yield a total cost of \$84,500 that must be allocated to units of production. When divided by the slightly different units of production being used for direct material costs and all other production costs, we arrive at a direct material cost per unit of \$35.556, and all other costs per unit of \$30.165.
The lowermost block of calculations requires us to multiple the cost per unit (as determined in the middle block) by the total number of units (as determined in the top block). The calculation is identified with arrows. The result is \$48,000 in direct material costs, of which \$35,556 are charged to completed units and the remainder to work-in-process units. Total other production costs are \$36,500, of which \$30,165 are charged to completed units and the remainder to work-in-process. As a cross-check, we can see that the total allocated is \$84,500, which matches the total amount of funds that were to be allocated, as noted on the far right side of the middle block.
This method is a simple one that requires very little data collection. However, some companies like to make the task even easier by avoiding the collection and interpretation of actual costs at the end of each accounting period. Instead, they prefer to use standard unit costs for their calculations, which allows them to calculate total costs more frequently and with no related data collection costs. This type of calculation is shown below.
Units Summary Direct Material Units Conversion Factor Conversion Cost Units
Completed units 1,000 1,000
Ending units in process 350 60% 210
Unit totals 1,350 1,210
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Calculation Direct Materials Conversion Costs
Standard unit cost \$32.000 \$31.500
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Unit Cost Allocation Direct Materials Conversion Costs Totals
Standard cost of completed units \$32,000 \$31,500 \$63,500
Standard cost of ending WIP units \$11,200 \$6,615 \$17,815
Standard cost totals \$43,200 \$38,115 \$81,315
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Period Variance
Beginning standard WIP cost \$20,000 \$15,000 \$35,000
Current period actual costs \$28,000 \$21,500 \$49,500
Total period costs \$48,000 \$36,500 \$84,500
Standard cost totals \$43,200 \$38,115 \$81,315
Cost variance \$4,800 \$(1,615) \$3,185
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
In the exhibit, the first block of calculations does not change – we still assume that a conversion factor must be applied to the ending work-in-process inventory for the purposes of assigning other production costs than direct materials. The difference arises in the second block, where we only use a standard cost per unit, rather than a summarization of actual costs. This cost is then carried forward into the third block of calculations, where we see that a total of \$81,315 has been allocated to the ending finished goods and work-in-process inventory. However, this ending figure varies from the \$84,500 that resulted from the preceding actual costing calculation. The difference of \$3,185 was caused by a slight variance between the pre-set standard cost and the actual cost. The presence of this variance causes us to add a fourth block of calculations at the bottom of the exhibit, in which we compare the actual costs incurred during the period to the standard costs, which shows that more costs than expected were incurred in the direct materials column, while fewer costs were incurred under the other production costs column.
The main issue for the cost accountant is what to do with this variance. If negligible, it can be charged off to the cost of goods sold. If it is so large that expensing the difference will result in an appreciable impact on reported earnings, then a more accurate approach is to apportion the variance among the cost of goods sold, work-in-process inventory, and finished goods inventory.
The data collection and calculations required for a process costing system are substantially simpler than what is required for a job costing system, and so is a favorite approach for those who wish to pare their data collection costs or who produce such large volumes of similar products that there is no point in attempting to track the costs of individual products.

Hey faaiz, thanks for sharing such a nice article on process accounting. Well, process costing is an accounting technique that records and collects direct costs and allocates indirect costs of a production process. I am also uploading a document for the better explanation of process costing.

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