Question

Process costing serves two related purposes. First, it measures the cost of goods manufactured on both a total and per-unit basis. This information is used in valuing inventories and in recording the cost of goods sold. But process costing also provides management with information about the per-unit cost of performing each step in the production process. This information is useful in evaluating the efficiency of production departments and often draws attention to potential cost savings.

Milton Manufacturing uses a process costing system. Products are processed successively by Department × and Department Y and are then transferred to the finished goods warehouse. Shown below is cost information for Department Y during the month of May:

The assignment for this unit will consist of two parts, in a word document of 1-2 pages, addressing the following questions.

1. Briefly explain the operation of process costing, including the way the unit costs of finished goods are determined.
2. Discuss how managers will use the information obtained from process costin

Answer 1

Answer-1:

Process Costing is a method of costing used in industries where the material has to pass through two or more processes for being converted into a final product. It is defined as "a method of Cost Accounting whereby costs are charged to processes or operations and averaged over units produced". A separate account for each process is opened and all expenditure pertaining to a process is charged to that process account. Such type of costing method is useful in the manufacturing of products like steel, paper, medicines, soaps, chemicals, rubber, vegetable oil, paints, varnish etc. where the production process is continuous and the output of one process becomes the input of the following process till completion.

The Cost of each process comprises the cost of: (i) Materials (iii) Direct expenses, and Employee Cost (Labour) (ii) (iv) Overheads of production. Materials - Materials and supplies which are required for each process are drawn against Material Requisitions Notes from the stores. Each process for which the materials are used, are debited with the cost of materials consumed on the basis of the information received from the Cost Accounting department. The finished product of first process generally become the raw materials of second process; under such a situation the account of second process is debited with the cost of transfer from the first process and also with the cost of any additional material used in process. Employee Cost (Labour) - Each process account should be debited with the labour cost or wages paid to labour for carrying out the processing activities. Sometimes the wages paid are apportioned over the different processes after selecting appropriate basis.

Direct expenses - Each process account should be debited with direct expenses like depreciation, repairs, maintenance, insurance etc. associated with it. Production Overheads- Expenses like rent, power expenses, lighting bills, gas and water bills etc. are known as production overheads. These expenses cannot be allocated to a process. The suitable way out to recover them is to apportion them over different processes by using suitable basis. Usually, these expenses are estimated in advance and the processes debited with these expenses on a pre- determined basis.

Answer-2:

(i) Manager can identify inefficiencies within the supply chain by getting the report of each cost center containing data of acquisition of supplies, employees salaries. This help manager to minimize cost also.

(ii) Process costing help manager to keep track and report of inventory supply thus aiding in inventory control.

(iii) Through the implementation of a process costing system, a company will ensure that every department, regardless of function, operates in a uniform manner. This will allow members of the manufacturing supply chain to be in sync with one another.

(iv) It is possible for manager to determine process costs periodically at short intervals.

(v) With the standardization of products, managers track performance, productivity, and costs over time.

(vi) Process costing allows manager for greater flexibility when making changes in the production process.

(vii) Process costing data also help manager in calculating equivalent units, thus helping in reporting correct WIP in company's balance sheet.