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What Is Process Costing Accounting Essay

Paper Type: Free Essay Subject: Accounting
Wordcount: 3324 words Published: 1st Jan 2015

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A process costing technique is worn in favor of Indus deception producing substance, oil, fabric, and flour, pharmaceutical, shoos and petroleum. This kind of estimate is too old through firms developed such clothes methods be the gathering sort manufacturing which manufactures such equipment given that kind writers, automobiles. Airplanes and home embrace emotional appliances. Lastly certain service industries, such sagas, stream, and warmth, cost their goods via with development estimate methods. During information procedure figure course of act are time and again termed” nonstop or collection production cost bookkeeping process.

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What Is Process Costing?

Process costing be a kind of estimate scheme so as to is worn for consistent, or all the same, products. Process costing averages the expenditure in excess of every units to approach in the direction of the each unit cost. This is within distinction to additional type of estimate systems, such as job-order costing to is used for goods to be in differentiate batch. Nothing like job-order costing, process costing is track using a work-in-process report for all section, somewhat than from end to end supplementary ledgers

Process Costing

In office, process costing is a technique of transfer manufacture costs to units of production. During process costing systems, production costs be not traced to being units of production. Costs are assigning primary to production departments and after that in the direction of units of output because they shift through the departments. The procedure costing method is classically used intended for process that produces great quantities of all the same goods.

The process costing technique is within difference to extra costing methods, such as produce costing, job costing, or operation estimate systems. Using the procedure estimate technique is best below sure environment. If the production goods be all the same, that be, the unit of productivity are fairly identical as of one more, and it may be useful to use process costing. But the productivity products are of short cost, sense every entity unit of production is not value much; it can be obliging to utilize process costing. And rider it is hard before infeasible to draw production costs in a straight line to person units of production, it can be useful to utilize the process costing technique.

Examples of operations to be possible to utilize the procedure figure system as opposite to one more costing method comprise a cola bottling place, a lunch puffed rice creator, a corporation that make processor chips, and group that produces clump, and a corporation that produces bricks. For instance, intended for the corporation to bottles cola; it would not be possible otherwise valuable to divide and evidence the cost of all bottles of cola in the bottling procedure. Consequently, the corporation would allot costs to the bottling development since a total meant for a stage of moment, and next segregate that generally development cost by the digit of bottles shaped throughout that time of time to allocate making costs to all pot of cola.

Process Costing system

5 Steps used for Process Costing

1. Examine inventory flow

2. Translate in-process inventory to equivalent units

3. Calculate every valid cost

4. Compute the cost for every unit of complete and in-process inventory

5. Assign costs to units of ended and in-process inventory

First, examine the cost-flow copy of the applicable account account to settle on how a great deal inventory be at hand at the opening of the stage, how a good deal was in progress for the period of the period, how a great deal as finished during the stage, and how a lot is missing as work-in-process at the ending of the period.

Second, exchange the work-in-process finish account keen on a digit of corresponding units fashioned. These incomes if there are 1,000 units of inventory in work-in-process, and these units are all 50% absolute, and then you judge this as the equivalent of 500 units shaped (500 = .50 x 1,000).

Third, calculate the whole direct and indirect costs incurred through the making procedure that calls for to be assigned to the units concluded and the units at rest in process. This includes the costs related with the launch inventory and the costs incurred during the related period.

Fourth, figure the amount of cost to be assigning to the over units of construction and the equal of completed units of production at rest in the finish inventory. For instance, if 2,000 units were finished, and 1,000 units were missing half-finished, after that you would separate the valid costs through 2,500 units.

Fifth, apportion the applicable costs to the units of manufactured goods that were finished and to the units of item for consumption that stay in the work-in-process explanation.


Hilton, Ronald W., Michael W. Maher, Frank H. Skelton. “Cost Management Strategies for Business Decision”, McGraw-Hill Irwin, New York, NY, 2008.

Process Costing Procedures

Process costing systems go after exact events, as well as precise events can differ through corporation otherwise by manufacturing, they determinations normally chase these steps:

At the same time as additional types of figure begin by means of a sales order, a sales classify be not wanted used for procedure estimate as it is a constant method

The work-in-process financial records are separated by division and are named because such – for illustration: Work-in-process – division Name

The original branch in the development makes the initial entrance keen on the work-in-process report, usually for the through unprocessed resources

As the goods go from section to branch, entries are completed to every work-in-process division explanation

Direct labor costs be recorded through phase

Actual overhead costs be recorded; no contra-account is wanted since here is rejection more than- or under-applied transparency payable to the real cost organism practical

Indirect costs be realistic to the clearness account in specific amounts

Normal spoilage is recorded since a time to the work-in-process report; uneven spoilage is distant as of the work-in-process explanation and practical to a part explanation consequently it is able to be deal with board.

When Is Process costing suitable?

Process costing is appropriate as goods be all the same (or the same). Anywhere job-order and additional types of estimate search for to locate the cost for each unit for batches of differentiated goods, sequence estimate seeks to locate the normal cost of every units more than a stage of time. Then, progression approximation is just relevant when every one unit is the equal. For example, a developed corporation that produces only one uniform creation capacity choose to use development estimate.

Characteristics and process of costing.

The characteristics of procedure costing are:

A cost of manufacture in order is hand-me-down to collect, calculation up, and build complete and component indict.

Manufacture is accumulating and report by departments.

Costs are post to departmental work in growth accounts.

Structure in procedure at the finish of a period is restated in circumstances of over units.

Total expenses exciting to a part are alienated by whole computed manufacture of the section in order to decide a unit cost for a exact period.

Costs of finished units of a section are transferred to the subsequently dispensation section in order to turn up at the whole costs of the ended products throughout a period. At the similar time, costs are assigned to units motionless in procedure.

Uniqueness and procedure.

Build up substance, labor, and factory over head costs by departments.

Conclude a component cost for every department.

Move costs from one department.

Allocate coast to the explanation of labor motionless in process.

If correct unit and list costs be to live recognized by procedure costing method, costs of a period have to be recognized with units shaped in the similar phase.

Elements/Components of Cost

Process Costing way is appropriate anywhere the production results from a sequence of unremitting or cyclical operation or process and crop are indistinguishable and cannot be segregated.

Process Costing enables the ascertainments of price of the produce at all method or point of invent.

The yield consists of goods which are homogenous.

Manufacture is accepted on in dissimilar stages having a nonstop flow.

Fabrication takes place constantly except for in belongings somewhere the set and technology are lock up for preservation and so on. Output is identical and every unit are matching during each process. It would not be probable to outline the characteristics of any exacting lot of yield to any lot of effort.

The contribution will go by from side to side two or more processes earlier than it takes the figure of the production. The productions of every procedure become the effort for the after that process until the last product is obtain, with the previous procedure charitable the last product.

The production of a process may also be profitable in which box the course may make some income.

The input of a procedure may be competent of organism acquire from the outer surface sources.

The output of a procedure is transfer to the next course usually at cost to the course. It can also be transferred at marketplace price to allow examination competence of operation in assessment to the variety store situation.

Standard and uncharacteristic fatalities may occur in the process

There are a number of industries in which procedure costing is able to be functional

Elements/Components of Cost

The subsequent are the major elements/components of costs mixed up in the developed process everywhere method costing method is adopted.

Direct Materials

Present be two types of equipment that we approach crossways in process costing.

Primary Material

Materials which are introduce in the first course and approved on to the after that development as a fraction of productivity after close of meting out.

Secondary Material

Materials which are introduced in the first or ensuing processes in addition to the main material introduced in the opening process. This gets miscellaneous up with the major matter and is approved on to the following processes as a part of the productivity.

Direct Labor/

The direct labor cost is usually incurred in each process. Classification of direct labor cost is as fine comparatively easy in process estimate industry

Direct Expenses

Expenses in adding to Direct Material and Labor which can be in a straight line attributable to a exacting procedure. These are costs pertinent to exact processes.

Production Overheads

The overhead operating cost is in general finished over all the process involved in construction. These are to be apportioning over the different processes in an agreeable method

Methodology of Recording Accounting Costs

Financial Accounting method is adopted for tape costs concerned.

Process Accounts

A nominal account for all process is use to verification all the expenditure applicable to a process.

every procedure report is

Debited with

The Primary Direct Material Cost

Secondary Direct Material Cost

Direct Labor Cost

Direct Expenses and

Production Overheads billed and/otherwise apportioned to the procedure.

Credited with

The worth of production transfer to the following procedure or over stocks.

Information, Alphabets or any word or expression on behalf of the process are second-hand as suffixes/prefixes in the names (“Process I a/c”, “Process A a/c”, “purification Process A a/c”… etc…) to clearly recognize the processes accounts.

Process Stock Accounts

Stocks applicable to a procedure are maintained in a break up supply account.

Stock accounts for contribution can be maintained someplace every one the effort acquire/established for a procedure through a period is not second-hand up and doing

Stock accounts for production may be maintain where all the output produced/finished in a course throughout a age is not likely off also by move to the after that course or by sale.

Where the productivity applicable to a process is sold not together from organism transfer to the next process, it generates revenue. These revenues relevant to a process are normally record by means of the procedure explanation or the store explanation.

Feature of Process Costing

The product of one process becomes the contribution otherwise unprocessed objects of the next process;

There is a permanent stream of the same production;

It is complicated en route for make out a price tag item because each cost unit is part of a process;

It is difficult to cost a cost unit hence we can only find the typical rate for each item over period of time;

price centre are set happy and costs are composed by the cost centers;

It is possible that combined goods may be produced in the processes;

misuse may arise during dispensation e.g. due to vanishing, etc

. A person is usually liable for a process.

An account called a method version is maintained for each process.

All costs-materials, labor and overheads;



opportunity work-in-process

finishing work-in-process

transfer from preceding process

Losses or gains


Similarity among job order and process estimate take in:

Both systems have the similar fundamental reason-to work out unit cost

Together systems use the similar developed financial records

The flow of costs from side to side the developed financial records is on the whole the same.

the other hand, there are a few significant differences between job order and processing costing as describe under.

Job Order Costing

Process Costing

every job be special

every one products be matching

Costs be accumulate through job

Costs be accumulated through section

Costs be captured on a job cost slip

Costs are accumulated on top of a subdivision making report

Unit costs be compute via job

Unit costs be computed by means of department

. These resolves require a journal access such the same as

Work in Process – Department B

Work in Process – Department A

When the products are finished they are transfer as of the final meting out sector to completed supplies.

Companies using process costing arrange departmental production reports. The production report consists of three parts as follows:

    1.  A quantity schedule which shows the current of units from end to end the branch and a

        subtraction of comparable units

   2.  A calculation of expenses per correspondent unit

   3.  A understanding of all cost flows into and elsewhere of the department


Process Costing Systems – What is it and when is it used?

Weighted-average method

First-In, First-out Method

Common Mistakes with Transferred-in Cost


Process Costing Systems – What is it and when is it used?

A process-costing scheme is a estimate organization in which the cost of a creation or repair is obtained by transmission costs to a lot of like or comparable units. Unit costs are then computed on an average basis. Process-costing systems are second-hand in industries that create approximating otherwise parallel units which are repeatedly crowd produced. In these industries, products are pretend in a awfully parallel system The companies habitually use the equivalent sum of direct materials, direct industrialized labor costs and industrialized overhead costs. Industries that use process costing systems are for example: substance dispensation, oil cleansing, pharmaceuticals, plastics, element and tile developed semiconductor chips, beverages and banquet cereals.

The disparity flanked by job estimate and course costing is the degree of averaging second-hand to work out unit costs of produce and armed forces. The cost article in job estimate is a job that constitutes a noticeably individual produce or service


Weighted-average method

The weighted-average process-costing procedure assigns the regular corresponding unit cost of every job done to date (regardless of when it was done) to alike units complete and transferred out, and to equivalent units in finish inventory. The weighted-average cost is purely the usual of different the same unit costs ingoing the occupation in process account.


First-In, First-out Method

The First-in, first-out (FIFO) process-costing technique assigns the cost of the first equal unit’s accessible (preliminary with the equal units in beginning work-in-process inventory. This method assumes that the earliest equivalent units in work in development – school assembly account are done first.

Common Mistakes with Transferred-in Costs

Here are a few frequent pitfalls to stay away from when secretarial for transferred-in costs:

Keep in mind to comprise transferred-in costs on or after preceding departments in your calculations. Such costs be supposed to be treated because if they were an extra type of direct material additional at the start of the process. In other language when consecutive department are involved, transferred units from one division develop into all or a part of the through materials of the next division; though, they are called transferred-in costs, not shortest materials costs.

In scheming costs to be transferred on a FIFO foundation, do not fail to see the costs assign at the commencement of the era to units so as to be in process other than are at the present built-in in the units transferred.

Unit costs may vary flanked by periods. Consequently, transfer units could hold batches accumulate at dissimilar unit costs.

Example of an area where Process Costing is applied

A general example of an industry anywhere practice costing may be applied is “Sugar Manufacturing Industry”.


The processes in this production are

Cane Shredding

The cane is busted into little pieces to allow easier group through the milling machine.


The torn cane is approved from side to side rollers which squash them to extract cane juice.

Heating and adding lime

The extracted juice is then heated to make it a concentrate and lime is added to the heated juice.


Muddy substance is removed from the concentrate through this process


Water is removed as of the juice by vanishing.

Crystallization and Separation

Sugar crystals are developed on or after the waterless juice think in this method.


Molasses are alienated as of sugar with Centrifugals in this method.


Sugar is obtained by freshening the wet raw darling obtains in the revolving method.


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