3 1: Introduction to Process Costing Business LibreTexts

process costing examples

The organizational chart also shows the departments that report to the production department, illustrating the production arrangement. The material storage unit stores the types of wood used (hickory, maple, and birch), the tips (nylon and felt), and packaging materials. Figure 4.1 shows how product costs flow through accounts for job
costing and process costing systems. Table 4.1 outlines the
similarities and differences between these two costing systems. Review these illustrations carefully before moving on to the next
section. Equivalent units of production for conversion costs uses the percentages of conversion costs completed in May that are given to mathematically convert partial units to whole units for costing purposes.

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. First, they start from the Designing and Cutting department where shoes are designed to fit with the trending market, and process costing examples fabric will be cut to fit with each design. In March 200X, the Design and Cutting department incur the cost of direct material USD 100,000, direct labor cost of USD 150,000 and USD 80,000 of overhead cost. During month, this department has finished 10,000 pairs of shoes and passes them to next stage.

What is a Process Costing System?

Process costing is another method of keeping track of the costs of manufactured items. Once products are completed, their overall costs are marked up and sold at a profit to customers. Process costing is used when large quantities of identical items are manufactured in a continuous flow on a first-in, first-out basis. Examples of products that would use process costing are Cheerios brand cereal, iPhones, or Toyota Camrys.

  • This necessitates the employment of a separate Work in Process account for each major manufacturing activity.
  • The job costing is useful for the businesses like accounting & law firms, medical services, the film-making industry, and the construction industry, etc.
  • Then, when the products are eventually sold, the cost is shifted to the cost of goods sold account on the income statement.
  • Process costing system considers work in progress — things that have entered but have not completed the production process — at the beginning and end of each period to precisely estimate the cost of creating each unit.
  • Abnormal gain example

    There is a heat wave and staff have eaten less chocolate.

  • Overall, when it is difficult or not economically feasible to track the costs of a product individually, process costing is typically the best cost system to use.

This becomes the raw material of the subsequent stage until the final stage of completion. Goals of process costing are to determine a manufacturing department’s cost of finished goods during a month and the cost of work in process at the end of that month. Prior to the new year, a company computes the estimates of the annual overhead per department divided by the estimated driver for that department. A driver is the measure that increases the cost of overhead and is commonly direct labor hours, direct labor cost, or machine hours.

Advantages of process costing

Examine the graphic below that compares job and process costing, noting in particular the difference in how costs are shifted out of work in process. Process costing entails handing off accumulated costs from one department to the next. The homogeneous products produced in the chemical, oil, timber, textile, or food processing sectors cannot be identified from one another because such identical items usually pass through several stages during the course of production. Hence, a process costing system is used to allocate costs to an individual unit after a process of mass production. Process Costing is the cost accounting method in which production overhead is equally allocated to each product due to their similarity and mass production. Moreover, raw material needs to pass through multiple stages of production before turning into finished goods.

The process costing system follows certain stages that are discussed below. This problem is handled through the concept of equivalent units of production. The process costing procedure is explained in more detail in the next example.

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