Process costing is a method of accounting that simply allocates indirect cost by considering direct costs in a manufacturing process.In other words, this method gives production costs to output units of a manufacturing process. But the costs are assigned to the production department and then to the output units. It is applied to products, which are manufactured in large amount and are similar or homogeneous in nature.
The method is not like other costing methods like product costing, job costing or even operating costing and should be applied carefully only in certain circumstances. For example, if the products are heterogeneous, then process accounting should not be applied as it will not be beneficial.
Also, if the products are of high value, then process costing should not be applied. Again, if finding the production of each unit is hard, process costing is a good option. In Process Costing Homework Answers, these factors should be considered and cautiously applied.
The steps of process costing:
Process costing homework answers should also include the method of process costing, step-by-step. The method can be explained on following steps:
- Determining the inventory â€“
Firstly, determine the amount of inventory at the very beginning by using the cost-flow model of the pertinent system. The starting scenario, current scenario and amount of work-in-process at the end should be considered.
- Conversion of in-process inventory to the number of equivalent units produces â€“
An example of this is, suppose there are 2000 units of work-in-process of inventory, and this is 40% completion, then this will be considered as 1000 units of production (800 = 0.40 x 2000)
- Calculate all cost â€“
Calculate all direct and indirect costs of the process of production. Cost at the start of the inventory and during the period of production should be calculated.
- Calculate the cost of each unit of in-process and finished inventory â€“
As an example, if 5,000 units have been completed, and 2,000 units were unfinished, then the cost is divided into 7, 500 units.
- Assign the required cost to completed product units and in-progress units.
An example calculation of process costing:
Process costing homework answers must include a real-life example with proper calculations, which could be as follows:
Suppose a pen manufacturing company produces pen in two processing departments: the designing department that designs the pen and the labeling department that labels the pens after produced. Now follow the following information about this company of a certain month:
- Raw materials used by designing department were $50,000, and for the labeling, department were $20,000.
- Direct labor costs of the designing department were $30,000, and for the labeling, department were $10,000.
- Manufacturing overhead costs were $20,000 for the designing and $ 15,000 for the labeling department.
- Cost of transfer from designing to labeling department were $ 40,000
- Pens prepared as finished products were also transferred to the finishing department. The Cost of that transfer were $9000.
The process costing will be tabulated in the form of journal entry as follows:
- Work of designing – $50,000
- Work of labeling – $20,000
Total Raw Material cost -$70,000
- Work of designing – $30,000
- Work of labeling – $10,000
Total Labor cost (in terms of salaries) – $40,000
- Work of designing – $20,000
- Work of labeling – $15,000
Total overhead cost – $ 35,000
- Work of designing –
- Work of labeling – $40,000
Total Cost of transfer from designing to labeling – $ 40,000
Finished products – $9,000
Total cost of finished goods – $9,000
Why and where to use process costing:
Another important aspect that must be mentioned in process costing homework answers are the reasons process costing should be used. This step is very crucial as process costing is not for all kinds of businesses. The following scenarios must be remembered while doing process costing.
- In a certain time, the production of the company is in large units.
- Products are sold in small quantities. For example, in the scenario mentioned above although a huge number of pens can be manufactured but can be sold in one piece or smaller quantities.
- The product cost should be transferred from finished products to cost of goods when sales are done.
- The management should have a control over the cost of the manufacturing process. This process provides a feedback that can be used over and over to have this control over the cost.
- The management should have a watch over per unit cost per day simultaneously with the materials and outputs.
- All materials going through a process must be given a value to get included into process costing.
A process like costing is an important accounting step to keep track of money spent by a company during the manufacturing and production processes. Hence, understanding each of them properly is very important for a business.But the most important thing is to understand which one to apply and when.This is especially true in cases of process costing because this cannot be applied to every scenario.
Hence, before even attempting process costing homework answers, you should learn these minute differences. Also, remember that process costing is less bookkeeping and more of a conceptual work so know what and how you are doing. Know the right applications before attempting the problem. An ideal Process Costing Homework answers, therefore, should have all these areas covered as it is being discussed in this article.