1. Management Accounting 28th February 2011
Process Costing
Management Accounting 28th February 2011

2. Process Costing
Is used mainly when a company makes one item continuously
Unlike Job Order Costing where each JOB is costed on a separate JOB CARD
Both systems have the same basic purpose, to assign the costs of production to the COST OBJECT(S)
Please read and understand Pg 153 differences between Job and Process Costing and ask any questions you may have

3. Cost Flows Raw Materials (RM) Work In Progress (WIP)
Finished Goods (FG)

4. Raw Materials
Raw Materials or Inventory are the objects which go into making the COST OBJECT before any conversion process has taken place
In our example of a Chair the Raw Materials would be the stock of Wood, Nails and Glue before it is requisitioned for a job
Or the example on Page 153 is of Potatoes before they are transformed into Potato Chips

5. Work In Progress
Work in Progress is the materials as they are being transformed into the final product
In our example of a chair this is the Nails, Wood and Glue as they are being put together
Or in the example on Pg 153 it refers to the Potatoes as they are Cut, Cooked and Packaged

6. Finished Goods
Finished Goods are the completed product which has not yet been sold
In Our Example this would be the completed chair
In the example on Pg 153 it is the packaged Potato Chips

7. What Happens during each of these stages?
Raw Materials are our Direct Materials before any Direct Labour has been applied
Work in Progress are the Direct Material as the Direct Labour is being applied
Finished Goods are the completed products
RM, WIP and FG are one way of understanding how costs accumulate during the Production Process

8. Direct Material and Direct Labour
Production Process
Finished Goods
All Costs assigned
Total Costs include all Direct Materials, Labour and Allocated Overheads
Work In Progress
Direct Material and Direct Labour
Goods not complete so Overheads not allocated fully, only according to Conversion %
Raw Materials
Direct Materials
No Direct Labour

9. Cost Accumulation
Costs accumulate as the Production Process moves forward
Costs can therefore be calculated depending on what stage they are in the Production Process
This has the advantage of more accurately assigning costs and controlling wastage

10. System Design
Process Costing Systems are designed along exactly the same lines as Job Costing as materials, labour and overheads are allocated depending on the % of the conversion process completed
Therefore if Work in Progress has to be written off at some stage of production we have a more accurate record of the costs of wastage
This is particularly useful in systems of continuous production (Think of Plastic Bottles)

11. How we measure costs in a Process Costing System
Step One – Determine Equivalent Units
Step Two – Compute Costs
Step Three - Apply Costs

12. 2 Methods for Determining EQUIVILENT UNITS
FIFO (First In First Out)
Weighted Average Method
For simplicities sake we will be using the Weighted Average Method

13. Weighted Average Method – Step One
You will be looking at a defined period of time, in this example one week
Find Beginning Work in Progress (WIP) for the period
Find Units Started into production during the period
Find Units Completed in the period
Find ending (WIP)

14. March 2011 Pressing Department % Complete Beginning WIP
Units Started into Production
Units Completed
Ending WIP
Units
Materials
Conversion
300
6000
5000
600

15. Step Two
Find the % of Materials which have been utilised for each of these classifications
Assume that Units Completed have a utilisation rate for Materials of 100% (ALL THE MATERIALS FOR THIS PROCESS HAVE BEEN USED)

16. March 2011 Pressing Department % Complete Beginning WIP
Units Started into Production
Units Completed
Ending WIP
Units
Materials
Conversion
300
6000
5000
600
55%
n/a
100%
40%

17. Step Three
Find the Conversion Rate (this is how far the units have moved through the production process)
Assume that the Conversion Rate for Units Completed is always 100% (These units have used all the direct materials/Labour and Overheads that they are going to at this point of the process)

18. March 2011 Pressing Department % Complete Beginning WIP
Units Started into Production
Units Completed
Ending WIP
Units
Materials
Conversion
400
6000
5000
600
55%
n/a
100%
40%
35%
50%

19. Step 4 – Determining the Equivalent Units
Find units completed
Weight the Ending WIP according to the % utilisation of Materials and Conversion
Do not worry about beginning WIP as this forms a part of the Units completed in the period

20. Equivalent Units Units Completed = 5000 Ending WIP
Materials 600 x 40% (0.4) =240
Conversion 600 x 50% (0.5) = 300 OR
Pressing March 2011
Materials
Conversion
Units Transferred
5000
Ending WIP
- Materials (600 x 0.4)
240
- Conversion (600 x 0.5)
300
Equivalent Units of Production
5240
5300

21. The Next Step – Compute and Apply Costs
Costs are computed and applied for Starting WIP, Units Completed in the Period and Ending WIP and Weighted according to EQUVILENT UNITS
You will generally be given costs

22. Starting WIP Starting WIP Units In Process 400
Stage Completion (Materials)
55%
Stage Completion (Conversion)
35%
Costs in the Beginning Inventory $
- Materials Cost
8000
- Conversions Costs
4000
Total Costs
12000

23. Units Started In Production WIP
6000
Units Completed
5000
Costs Added During Process $
- Materials Cost
100,000
- Conversions Costs
Total Costs
200,000

24. Ending WIP Starting WIP Units In Process 600
Stage Completion (Materials)
40%
Stage Completion (Conversion)
50%

25. Cost Per Equivalent Unit
Cost of beginning WIP Inventory + Cost Added during the period
Equivalent Units of Production

26. Equivalent Costs Materials Conversion Cost of Beginning WIP Inventory
8000
4000
Cost Added During the Period
100,000
Total Cost
108000
104000
Equivalent Units of Production
5240
5300
Cost Per Equivalent Unit
20.61
19.62

27. Applying the Costs
The Equivalent Cost Per Unit is used to value WIP that is moving through the processes
We must ensure that we know the Ending WIP value as well as its % use of conversion and materials as this is what the next Process costing in the following period will be based upon

28. Back to the Example
Find the proportion of units left in the process by both Material and conversion percentage
Multiply these by the respective costs

29. Cost of WIP and Finished Goods
Material
Conversion
Total
Ending WIP
240
300
Cost Per Equivilent Unit
20.61
19.62
Cost of Ending WIP
4946.4
5886
Units Completed
5000
Cost Of Finished Goods
103050
98100
201150

30. Seminar Problem
A Process Costing for the following information

31. Production Information for the Period Cost Information For the Period
Milling Dept
Units
Materials
Conversion
Begining WIP
200
30%
40%
Units Started in Period
1000
Units Completed
900
100%
Ending WIP
300
35%
Cost Information For the Period $
- Materials
500
- Conversion
350
Total Begining WIP
850
2500
1750
Total Finished Goods
4250

32. Step One – Find Equivalent Units of Production
Refer to Page 159

33. Equivilent Units Of Production
Materials
Conversion
Units Transfered (FG)
1000
Ending WIP
105
120
Totals
1105
1120

34. Step Two – Cost Per Equivalent Unit
Refer to page 160

35. Cost of Begining WIP
500
350
Costs Added In the Period
2500
1750
Total Costs
3000
2100
Equivilent Units
1105
1120
Cost per Equivilent Unit ($)
2.71
1.88

36. Apply costs
Refer to Page 161

37. Apply Costs
Materials
Conversion
Total
Ending WIP
105
120
Cost Per Equivilent Unit
2.71
1.88
Cost of Ending WIP
285.07
225.00
510.07
Finished Goods
Units Completed
1000
Cost per Equivilent Unit
Cost of Units Transfered Out
2710
1880
4590

38. Apply Costs
Materials
Conversion
Total
Ending WIP
105
120
Cost Per Equivilent Unit
2.71
1.88
Cost of Ending WIP
285.07
225.00
510.07
Finished Goods
Units Completed
1000
Cost per Equivilent Unit
Cost of Units Transfered Out
2710
1880
4590
Reconciliation
Cost of Begining WIP
850
Cost of Finished Goods
4250
Total Costs to Account for
5100