Process Costing-Definitions And Features(Part1)

November 17th, 2007 Comments off
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Process Costing
CIMA’s definition:

  • The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are average over the units produced during the period, being initially charged to the operation or process.Hence, process costing:
  • Determines the cost per unit of product in an environment where IDENTICAL product is produced for all customers;
  • Examples: Automobile assembly line-all cars coming out are identical; electronic assembly line where all products is identical; biscuit manufacturing though has more than one product line, each line is a separate, continuous process producing identical products; food production,etc
  • In these production processes, it is NOT POSSIBLE to readily identify specific quantities of input with each unit of output.

 

 

FEATURES of Process Costing
  • The product of one process becomes the INPUT OR RAW MATERIAL of the next process;
  • There is a CONTINUOUS FLOW OF IDENTICAL OUTPUT;
  • It is DIFFICULT TO IDENTIFY A COST UNIT because each cost unit is part of a process;
  • It is difficult to cost a cost unit hence we can only find the AVERAGE COST PER UNIT overperiod of time;
  • COST CENTRES are set up and costs are collected by the cost centres;
  • In process costing when manufacturing the main product(s), BY-PRODUCTS may emerge. However, these by-products need to be further processed to be marketable;
  • It is possible that JOINT PRODUCTS may be produced in the processes;
  • WASTE may arise during processing eg due to evaporation, etc
  • Each process or department performs a particular operation(s). A certain stage of production is completed in each process. Each process is carried out by a certain department. A person is usually responsible for a process.
  • An account called a PROCESS ACCOUNT is maintained for each process.This process account captures/records the following:

            ·All costs-materials, labor and overheads;

         ·Scrap;

         ·Output;

         ·Opening work-in-process;

         ·Closng work-in-process;

         ·Transfers from previous process and

            ·Losses or gains

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Financial Accounting

 
 

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