Process costing is a management accounting function. Business owners use this function to accurately calculate as well as to apply the business costs for producing specific types of goods. Process costing provides costing system for homogenous goods , which usually have little differentiation from one item to the next item. Paper, petroleum, chemical, textile and food processing industries generally use process costing. Weighted average method is the most commonly used process costing system. This method includes few basic steps when costing products.
In most of the industries, products are mass produced, relatively homogeneous and processed in a similar manner. Process costing is a costing system used to assign costs equally to homogeneous units within a particular time period.
Process Costing has five basic steps :
Step 1: Analyze the flow of physical units.
Step 2: Calculate equivalent unit costs.
Step 3: Determine total cost to account for.
Step 4: Calculate unit cost
Step 5: Assign total costs to units completed and to units in ending work in process inventory.
Process costing relies on a very distinct flow of units through the company’s production system. Homogenous goods flow through several various production processes. Each process has a specific amount of costs linked with producing products. Costs may include direct materials, production labor and manufacturing overhead. These items represent the direct costs related to specific production of goods. Manufacturers have different types of processes they use when producing goods. In the wine industry...
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Flow of production Direct Materials Conversion
Completed & transferred out 30,000 30,000
Work-in-process,ending 5,000(100%) 1,000(20%)
Current period work 35,000 31,000
Compute Equivalent units costs : (Step 3)
Total production costs are Rs 146,050.
Direct Materials Conversion
Rs 84,050 Rs 62,000
Equivalent units 35,000 31,000
Cost per equivalent unit Rs 2.4014 Rs 2.00
Summarize and Assign Total Costs : (Step 4 and Step 5)
Total Costs to account for : Rs 146,050
Assign Total Costs :
Completed and Transferred out
30,000 x Rs4.4014 Rs 132,043
Direct materials 5,000 x Rs 2.4014 12,007
Conversion Costs 1,000 x Rs 2.00 2,000
Total Rs 146,050
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