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Process Costing:
Process costing is an accounting methodology that traces and accumulates direct costs, and
allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a
large batch, which might include an entire month's production. Eventually, costs have to be
allocated to individual units of product. It assigns average costs to each unit, and is the opposite
extreme of Job costing which attempts to measure individual costs of production of each unit.
Process costing is usually a significant chapter. it is a method of assigning costs to units of
production in companies producing large quantities of homogeneous products.
Process costing is a type of operation costing which is used to ascertain
the cost of a product at each process or stage of manufacture. CIMA defines process costing as
"The costing method applicable where goods or services result from a sequence of continuous or
repetitive operations or processes. Costs are averaged over the units produced during the period".
Process costing is suitable for industries producing homogeneous products and where production
is a continuous flow. A process can be referred to as the sub-unit of an organization specifically
defined for cost collection purpose.

Importance of Process Costing:

Costing is an important process that many companies engage in to keep track of
where their money is being spent in the production and distribution processes. Understanding
these costs is the first step in being able to control them. It is very important that a company
chooses the appropriate type of costing system for their product type and industry. One type of
costing system that is used in certain industries is process costing that varies from other types of
costing (such as job costing) in some ways. In process costing unit costs are more like averages,
the process-costing system requires less bookkeeping than does a job-order costing system. Thus,
some companies often prefer to use the process-costing system.

Advantages of process costing:

1. Costs are be computed periodically at the end of a particular period
2. It is simple and involves less clerical work that job costing
3. It is easy to allocate the expenses to processes in order to have accurate costs.
4. Use of standard costing systems in very effective in process costing situations.
5. Process costing helps in preparation of tender, quotations
6. Since cost data is available for each process, operation and department, good managerial
control is possible

1. Cost obtained at each process is only historical cost and are not very useful for effective
2. Process costing is based on average cost method, which is not that suitable for performance
analysis, evaluation and managerial control.
3. Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost
4. The computation of average cost is more difficult in those cases where more than one type of
products is manufactured and a division of the cost element is necessary.
5. Where different products arise in the same process and common costs are prorated to various
costs units. Such individual products costs may be taken as only approximation and hence not


Process costing method is used for industries producing chemicals, petroleum, textiles, steel,
rubber, cement, flour, pharmaceuticals, shoes, plastics, sugar, and coal. Process costing system is
also used by firms manufacturing items such as rivets, screws, bolts, and small electrical parts. A
third type of industry using process costing system is the assembly type industry which
manufactures such things as typewriters, automobiles, airplanes, and household electric
appliances (washing machines, refrigerators, toasters, irons, radios, television sets, etc.). Finally
certain service industries, such as gas, water, and heat, cost their products by using
process costing system. Thus, process costing is used when products are manufactured under
conditions of continuous processing or under mass production methods. In fact, process costing
procedures are often termed "continuous or mass production cost accounting procedures".

The characteristics of process costing system are as follows:1. A cost of production report is used to collect, summarize and compute total and unit
2. Production is accumulated and reported by departments.
3. Costs are posted to departmental work in process accounts.
4. Production in process at the end of a period is restated in terms of completed units.
5. Total cost charged to a department is divided by total computed production of the
department in order to determine a unit cost for a specific period.

6. Costs of completed units of a department are transferred to the next processing

department in order to arrive at the total costs of the finished products during a period. At
the same time, costs are assigned to units still in process.


A company called Premier Plastics mass-produces plastic products and small appliances
designed by a famous Scandinavian architect One manufacturing facility is dedicated to the
production of a premier line of CD/DVD storage units. The plant has two production
departments: the molding department and the assembly department.
In the molding department, plastic liquid is prepared and poured into molds. Plastic
mix ingredients are added at the beginning of the process. Conversion costs include direct
labor, facility and equipment depreciation, janitorial wages, electricity, building insurance,
supervisor salaries, and many other overhead costs. Although the conversion costs are
incurred throughout the molding process, they are not incurred evenly. For example, the
machines are periodically shut down for cleaning and maintenance. More labor is required
to monitor certain parts of the process, such as when plastic mix ingredients are added.
Never the less, we simplify the accounting by assuming that conversion costs are incurred
evenly throughout the process. When the molding process is complete, the outer shells are
transferred to the assembly department.
In the assembly department, machines remove any rough edges and then smooth
the outer and inner surfaces. Next, a metal inner framework f o r holding CDs and DVDs is
inserted. Thus, direct materials are added partway through this process. Finally, details are
painted on each unit. Because the cost for paint and trim for each storage unit is small, those
costs are considered indirect and included in conversion costs. The completed units are
transferred to finished goods inventory. As orders are processed, the units are transferred to the
shipping department for packing and delivery
In process costing, separate WIP accounts are maintained f o r each
production d e p a r t me n t . Pools of product costs are accumulated in WIP and are then
allocated to the individual units. In a traditional system two cost pools are used for costs

incurred within a department: direct material and conversion costs. As units are completed
in the first department, their costs are transferred to WIP for the second department. The
costs for transferred-in units are pooled separately from other costs in the second
department. Then additional direct material (if any) and conversion costs are added. At the
end of production in the second department, the three categories of cost (transferred-in
costs, direct materials, and conversion costs) are assigned to units and the costs are
transferred out. This process continues for each department until the products are transferred
into finished goods.
The general l e d g e r accounts and inventory cost flows for the two production departments
at Premier Plastics .

First, direct materials move from raw material inventory to the

molding d e p a r t m e n t . Conversion costs are accumulated in the WIP account for each
department. The costs for the completed units in the molding department are transferred to
the assembly department WIP account.

In the assembly department, additional direct

material and c o n v e r s i o n costs are ad de d . When assembly work i s completed, costs

are transferred from the assembly department WIP to finished goods inventory
There are two methods of process costing FIFO method and weighted average method.
From the information about June production and costs. During June, 12,000 units were started,
including 3,000 units in ending WIP that were 500/o complete and 9,000 units that were
transferred out. Direct material cost was $33,600 and conversion costs were $74,925. Beginning
work in process consisted of 1,000 units. She obtains the weighted average costs from May's
accounting records and calculates the values that would have been used for FIFO. The costs for
beginning WIP are as follows:

Direct Materials 1000 equivalent units

Conversion costs 400 equivalent units
Total beginning WIP


Weighted Average

Comparison of Weighted Average and FIFO

From the information that the weighted average method requires fewer computations. However,
she thinks the extra work for FIFO is not a problem because she plans to use a spreadsheet to
create future reports. From a management perspective, she thinks that FIFO is probably a better
method because it provides more precise information about any changes in per-unit cost
between periods. During June, the difference in per-unit cost between weighted average and
FIFO was small ($9.5806 versus $9.55). However, she believes it is large enough that managers
will prefer the more current data provided by FIFO. When Nancy discusses the two methods
with the managers, they agree that the FIFO method provides them with the best information for
monitoring monthly costs.
After finishing the cost reports, Nancy compares the equivalent cost per unit in the assembly
department using weighted average and FIFO. The weighted average equivalent unit cost is
$21.434 and the FIFO cost is $21.389.It noticed that the cost per equivalent unit in assembly is
similar under both methods, which means that costs during June were similar to May's costs. She
asks the managers whether costs in the assembly department fluctuate much from month to
month. The managers tell her that a long-term contract with suppliers guarantees prices for at
least a one-year period, and labor contracts are negotiated annually, so the costs do not fluctuate
much from month to month. In addition, volumes do not fluctuate a great deal.
Because costs in the department rarely fluctuate and volumes are reasonably stable, the costs
added will be similar under both methods, so either method would be appropriate. However,
because The preceding information demonstrated traditional process costing methods for
assigning product costs to mass-produced goods. In recent years several developments have
affected the manufacturing environment and costing practices. Organizations have concentrated
on reducing the amount of inventory in their systems and also on increasing their abilities to
customize mass produced goods. In addition, managers have sought better ways to monitor
costs and motivate higher levels of performance. The costing systems used by organizations vary,

depending on the information needs of the managers, the production processes used, and the
nature of the organization's products or services.
In the preceding information , we performed process costing computations under the
following assumptions:
Direct materials added at the beginning of the process
Conversion costs incurred evenly throughout the process
Conversion costs accumulated in a single cost pool
No costs transferred in from another department
Fluctuations between beginning WIP and current period cost per unit

Direct Materials Added During the Process

For manufactured products, the cost of direct materials is often a large proportion of the total cost
per unit. If the point when direct materials are added is correctly identified, accuracy is
increased in the equivalent unit calculations and cost for WIP inventories. In many processes,
direct materials are added at the beginning and WIP is always l 00% complete with respect to
direct materials. However, direct materials are sometimes added later during the process. Direct
materials may also be added at more than one point during the process. Alternatively, direct
materials are not added in some processes. In Exhibit 6.2, the T-accounts show these variations
in adding direct material in a water bottling process.

No uniform Conversion Costs and Multiple

Cost Pools Accountants also analyze

production processes to determine how


costs are incurred. We often assume that conversion costs are incurred evenly throughout the
process in each department. However, conversion costs might be incurred

unevenly. In

addition, for some processes it might be easier to match costs to the work performed if
conversion costs are separated into two or more cost pools.

Costs Transferred from Another Department

There are many processes are organized around multiple departments. Process costing for each
department is performed separately, but costs for work done in one department are transferred to
the next department as units are transferred. Completed units and costs are transferred from
department to department until the last production department transfers completed units to
finished goods inventory. After the first department, the number of units started consists of units
transferred in from the preceding department. In addition, the total costs to account for includes a
new cost category for costs transferred in.


From this assignment I have understood concept of process costing. It is basically a method of
costing used to find out the cost of the product in each process .According ICMA London It is
the form of Operation Costing where standardized goods are produced.
Its Importance is also understood by me. As coin two sides i.e. heads and tails Such that
Process costing has also two sides i.e. advantages and disadvantages. The Biggest advantage is
that it is easy to allocate the expenses to processes in order to have accurate costs. And
disadvantage is that Cost obtained at each process is only historical cost and are not very useful
for effective control. By taking the example of Premier Plastics the process costing system is
more clear and learned that which method should be used for more efficient costing.





Process costing system of premier plastics



Leaning Outcomes