ACCT20001 Lecture Notes - Lecture 5: Tennis Ball, Execution Unit, Job Shop
16 May 2018
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Process Costing
Process Costing
•A system where costs incurred by identical units of output over period X are
-lumped together then,
-assigned to the units produced during period X via averaging (i.e. total cost/units produced)
-to obtain the cost per unit of output
•Total costs divided by number of units
Job vs process costing
•Process costing uses averaging to calculate unit costs
•Job costing cannot use averaging because individual jobs use different quantities of
manufacturing resources
•Note: Job costing involves accumulation of the costs of each job separately to obtain the cost of
each job (which can be a product or a service)
•Opposite ends of a spectrum:
Processes that are suitable for ‘process costing’ include those with:
•Well defined or specified inputs
•Standardised procedures or steps
•Well defined or standardised outputs
Process costing: some terminology (tennis ball manufacturing)
•Finished goods
-container of 4 tennis balls
•Work in process
-partly completed tennis balls
•Raw materials
-standard inputs - rubber, felt etc.
•Actual physical units
-identifiable units of output - a container of tennis balls
•Equivalent units
-units of output expressed to a common denominator
-e.g. 1000 partly finished to 50% tennis balls = 500 equivalent units
•Production costs/ conversion costs
-direct labour + manufacturing overheads
•Manufacturing overhead
-depreciation of equipment, supervisors
•Weighted average costs
-(Begin WIP + current period costs) / equivalent units
•Standard inputs
-Raw materials
•What is the impact on the cost per item as we produce more of them?
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Two Measures of Work in Progress
1. Physical Units (u)
•Real units
•Quantity is not altered by material inputs or conversion
•When we say ‘units’ we usually mean ‘physical units’
•E.g. if more work is done on 100 units that are currently in WIP, the physical unity quantity is
still 100 units (even though they are now ‘finished’)
2. Equivalent Units (EU)
•For costing purposes
•Increases with addition of material inputs and conversion costs
•Identical to physical units only when completed/transferred out
•E.g. 100 WIP physical units which are 50% complete = 50 E.U.
•E.g. 100 physical units which are now complete = 100 E.U.
Example of a process
Note: Conversion costs are all manufacturing costs OTHER than direct material costs (e.g. direct
manufacturing labour, indirect manufacturing labour, indirect materials, other manufacturing
overheads)
Uses/Application of Process Costing
1. Inventory valuation
•placing value on raw materials
•work in progress
•finished goods for inclusion in financial statements
2. Determining the cost of units for pricing/benchmarking
3. Internal decision making
•Process improvements
•Cost management/reduction opportunities
Process costing - the finer points
•Costs will only need to be classified as EITHER direct materials OR conversion costs when
assigning costs to cost objects/products
•This is because all conversion costs are assumed to be added uniformly through time
-Therefore there is no need to split conversion costs into direct labour and indirect
manufacturing costs
•Although not explicitly shown, an allocation base is required to allocate indirect costs to cost
objects under process costing
•However in the below example the allocation of indirect cost calculation (i.e. allocation rate x
allocation base quantity) has been done and inputted into the conversion costs numbers
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Document Summary
Process costing: a system where costs incurred by identical units of output over period x are. Assigned to the units produced during period x via averaging (i. e. total cost/units produced) To obtain the cost per unit of output: total costs divided by number of units. Processes that are suitable for process costing" include those with: well de ned or speci ed inputs, standardised procedures or steps, well de ned or standardised outputs. Process costing: some terminology (tennis ball manufacturing: finished goods. Container of 4 tennis balls: work in process. Partly completed tennis balls: raw materials. Standard inputs - rubber, felt etc: actual physical units. Identi able units of output - a container of tennis balls: equivalent units. Units of output expressed to a common denominator. E. g. 1000 partly nished to 50% tennis balls = 500 equivalent units: production costs/ conversion costs. Direct labour + manufacturing overheads: manufacturing overhead. Depreciation of equipment, supervisors: weighted average costs.
