Process Costing: Five Steps, Methods, and Allocation of Overhead Costs in Manufacturing, Study notes of Cost Accounting

Download Process Costing: Five Steps, Methods, and Allocation of Overhead Costs in Manufacturing and more Study notes Cost Accounting in PDF only on Docsity! Process Costing is highly automated and direct labor small in proportion to costs Five Steps of Process Costing: 1) Calculate number of units completed and number of units not completed 2) Calculate End Units 3) Add up total cost for materials 4) Calculate cost per end unit for materials and conversion 5) Assign total costs based on steps 2 and 4 -Spoiled units are treated as 100% complete Activity – Any discrete task undertaken to make or deliver good or service Cost Driver – Some characteristic of activity that causes costs to be incurred Direct Method – Cost of services between services departments are ignored and all costs allocated directly to production departments Joint Products – 2 or more products that are products simultaneously Process – Series of activities linked to perform specific objective Transferred-In Cost – Cost transferred from prior process to subsequent process Process Costing Flow: Direct Materials/Direct Labor/Applied Overhead Mixing -> Tableting -> Bottling/Finished Goods Production Report – Summarizes manufacturing activity that takes place in process department Basic Features of Process-Costing System: 1) Homogenous Units 2) Each Unit in each process receives similar manufacturing costs 3) Manufacturing costs accumulated by process for given period of time 4) There is work in process account for each process (not each job) 5) Cash Flows and journal Entries generally similar to job-order costing 6) Departmental production report key for tracking activity and costs 7) Compute unit costs by dividing departmental costs by outputs Types of process costing organizations with no WIP Inventories: 1) Service Organizations 2) Just In Time Manufacturing Firms Equivalent Units of Output – Complete units could have been produced given total amount of productive effort Physical Flow Schedule – Provides analysis of physical flow units FIFO Costing Method – Equivalent units and manufacturing costs in beginning WIP are excluded from current-period unit cost calculation Weighted Average Costing Method – Picks up beginning inventory costs and the accompanying output and treats as if they belong to current period Batch Production Processes – Produce batches of different products identical in many ways Operation Costing – Blend of job-order and process-costing procedures applied to batches of homogenous products Work Orders – Used to collect production costs of each batch 3 Methods of Allocation: 1) Physical Unit 2) Weighted Average 3) Sales Value at Split-off -Physical Unit assumes that costs to produce one product is same as other -Problems 1) Different grades of product may cost more to make 2) High conversion costs. Might leave imprecise allocation