B Com Exam > B Com Videos > Cost Management > Process Costing - Methods of Cost Determination, Cost Management
Process Costing - Methods of Cost Determination, Cost Management Video Lecture | Cost Management - B Com
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FAQs on Process Costing - Methods of Cost Determination, Cost Management Video Lecture - Cost Management - B Com
| 1. What is process costing? |  |
Ans. Process costing is a method used to determine the cost of producing a product or service in a continuous production environment. It is commonly used in industries such as manufacturing, chemicals, and food processing, where products go through multiple stages of production.
| 2. What are the methods of cost determination in process costing? | |
Ans. In process costing, there are two main methods of cost determination: weighted average method and first-in, first-out (FIFO) method. The weighted average method calculates the average cost of all units produced during a specific period, while the FIFO method assigns the cost of the oldest units in production to the units completed and transferred out first.
| 3. How does process costing help in cost management? | |
Ans. Process costing provides valuable information for cost management by allowing companies to accurately track and allocate costs to different stages of production. This helps management identify inefficiencies, control costs, and make informed decisions regarding pricing, production levels, and resource allocation.
| 4. What are the advantages of using process costing? | |
Ans. Some advantages of using process costing include:
- Simplified cost allocation: Process costing provides a systematic and straightforward method of allocating costs to different production stages, making it easier to track and manage expenses.
- Cost control: By identifying cost variances at each stage of production, companies can implement cost control measures to optimize efficiency and reduce waste.
- Pricing decisions: Process costing helps determine the cost per unit produced, enabling companies to make informed pricing decisions based on actual costs incurred.
- Performance evaluation: Process costing allows for the comparison of actual costs with budgeted or standard costs, facilitating performance evaluation and the identification of areas for improvement.
| 5. How can process costing be applied in the service industry? | |
Ans. Although process costing is commonly associated with manufacturing industries, it can also be applied in the service industry. For example, in a restaurant, process costing can be used to determine the cost of producing each dish by allocating direct and indirect costs to the different stages of food preparation. This information can then be used to analyze profitability, set menu prices, and identify areas for cost reduction.
Text Transcript from Video
in this video we're going to discuss
process costing which stands out in
contrast to what we talked about before
which is job order costing and the key
difference between these two is that
with process costing we have we're
dealing with a homogeneous product right
so we're dealing with something like oil
right five quarts of oil over here is
indistinguishable from five quarts of
oil over here if we're just talking
about standard oil now a job order
costing we've actually got some
heterogeneous products and so we end up
with a job cost ticket right so we'll
have like somebody says okay I want to
chairs a table I want these different
things and that's in the job cost sheet
so we say like okay this is job 511 at
511 a and then we will go ahead and put
the the materials cost we put the direct
labor the overhead all these things
would be charged to a job but in process
costing because all the other jobs so to
speak it's basically the same product
it's all just oil right so we don't
really need like a different job ticket
for each thing so what we do is we just
allocate the costs or do the cost flows
through departments right so instead of
having what we have under the job order
costing well we might have hundreds of
jobs right we might have a thousands of
these job cost sheets and that's
basically how our costs are flowing
right they're flowing through these jobs
instead we're flowing out all our costs
are just going through the department's
for example like processing the oil
packaging add for sale those types of
things so so it's actually a little bit
easier dealing with process costing as
opposed to job order costing because
this all the costs just get dumped and
come right through these departments
instead of a bunch of individualized
jobs so let's take a look in an example
of how process costing with the look for
a firm so let's say in our example that
you make cookies this is a cookie
factory
so you
reduce cookies and let's just say
there's probably a lot more to cookies
than I'll ever know but let's just say
that we've got three departments right
so in our cooking odd we've got the
preparation that's like getting the
dough and getting the dough ready to go
into the oven then actually baking the
dough baking the cookie dough and baking
the cookies and then we've got packaging
because after we make the cookie we have
to actually put it in packages to get it
ready for sale so we've got we've got
these three departments here all right
so these are our departments and so what
we're going to do is let's just draw a
little old value chain here excuse me
just kind of an idea of how how value is
being created so we're taking raw
materials that's our that's what we
start with right this dough and we
basically we bring it in
to the prep Department right we start
prepping the cookie dough and of course
we're adding in labor and stuff and
professions say stuff and manufacturing
overhead these types of things are
coming in at this point in the process
right and then once we've done kind of
the preparation that first that first
stage now we move on to the baking bake
the cookies just put bake and then we
package these now what when things are
when our product is going through here
it's really in process right so we'll
call it work in process right that's
work in process inventory which we've
talked about before and then ultimately
it goes to finish goods then I've run
out of space here so I'll say after
things are transferred out of finished
goods ultimately it's when we sell them
and they go to cost of goods sold which
I'll just abbreviate cogs so what we
really want to focus on mainly is is the
difference with process costing is we're
going to have a whip account here with
these three we're going to have this
this whip account we're going to have a
whip account for prep we're going to
have a whip account for baking and a
whip account for packaging three
different whip accounts whereas under
border-crossing there's just one whip
account just one working process account
under inventory but we're going to have
one for each each department and if you
had two departments then you would have
to whip accounts under process costing
and so we're going to start with these
raw materials and then as they're
requisitioned it's going to go into the
whip account for prep and then as we
move our cookies from dough to actually
being in the oven we're going to take
the whip and decrease our whip for the
prep and then we're going to increase
our whip account for baking so let's
look at some journal entries and that'll
make it a little bit of eight maybe
easier for you to understand when we
look at how the entries will play out so
so let's start in the beginning we'll
say we've got our word requisition
requisitioning so we requisition raw
materials requisition raw materials okay
and let's say that we requisitioned for
for each process let's say let's take a
look here let me just say we'll have
whip for prep now this is our initial
dough right we're just saying okay we
need some dough here and let's say that
we take one hundred five thousand
dollars worth then we also need some
some we've got some action here with the
baking and then we've got with the
packaging
now you might think okay well what kind
of materials could we use for packaging
well we're going to have plastic for
example you know it would be art where
I'd be our input here when we think
about the prep obviously the cookie
dough maybe the baking there's some kind
of oil so we'll just say we've got a
debit of one hundred and five thousand
to the WIPP account for the prep right
the prep Department and then for baking
we'll say that it's three thousand
dollars of raw materials and then we've
got twelve thousand for the packaging
and then we'll just credit will credit
raw materials
those are Sabri V here raw mats and that
adds up to one hundred and twenty
thousand so this is our journal entry we
just were just taking some raw materials
and we're putting them into action here
and we've got again now we've got a whip
account for each department now as we go
forward we can also we're going to apply
direct labor right so obviously when we
go and actually have people that we pay
to put the cookies in the oven people we
pay to lay the dough out and all those
things we're applying direct labor and
what's going to happen is just just like
job order costing now we're going to
have those direct labor costs flow
through into the work and process
account so let's but but again the
difference from job order costing now
we're going to have the three separate
whip accounts so we'll have whip for
prep we'll have a whip for baking this
is as we have to have people actually do
direct labor in each of these
departments and then the whip for
packaging okay so now let's just say
that the amounts here let's say we're
talking about three thousand dollars of
direct labor for the prep five thousand
for banking and six thousand for
packaging and then well what do we
credit when we just credit wages payable
wages payable for the total amount that
should be fourteen thousand dollars
okay so this is now we're accounting
here for the direct labor that has been
applied to the product and now it's that
the cost of that labor is flowing
through to work in process right we've
applied some some labor some work to our
product and so we've got work in process
we don't have a finished cookie yet but
we've got some work in process now we
would do the same thing essentially for
when we do the application of the
overhead so when we apply the overhead
oh fly overhead we're going to we're
just going to have these three whip
accounts right and then we're going to
have a credit to the manufacturing
overhead so I'm not going to write all
these out again but I'll just tell you
that instead of having wages payable
you'd have the overhead right here okay
so that gives you an idea of how the
costs flow through the system now what
about between departments because if you
if you remember we say okay we go and we
take the dough we apply some labor to it
we do these things with this in our prep
Department but eventually at some point
we move it to the baking Department so
how do those costs flow between
departments right we've just kind of
talked about kind of putting raw
materials in and doing some labor at
each stage but what about in in between
these departments how would the cost
flow what would it the journal entries
look like let me cross this up because
we're not dealing with that anymore so
what you would do let's say so now we're
saying between departments so let's say
that we had 47 thousand dollars worth of
whip that we've done in the in the prep
Department and now we want to transfer
that we've done forty four seven
thousand dollars worth of work and now
we're on transferred to the next
apartment which is baking we're ready to
put the forty seven thousand dollars
worth of whip into the oven so what do
we do well we're going to take we're
going to be adding to the whip account
for baking so we're going to make a
debit there of 47 thousand
right and then we're going to credit or
reduce because remember whip is an
inventory account is an asset it's going
to be reduce with a credit forty seven
thousand okay so what we've done here is
we just say we're going to reduce the
the prep Department's whip account and
then we're going to increase the baking
department's whip account so that's just
this we're just transferring the flows
or excuse me the cost they're just
flowing right through the system right
we requisition the raw materials but now
we're saying okay in between departments
we're moving along the work and process
as we're processing this cookie and
getting it to complete with the
completed state which will be a finished
goods so now if we said okay well how
will we go getting cost you know once
we've done the baking of this how will
we go to the ultimate the the next step
where we go to packaging and again you
just do a similar process you would just
debit packaging all right and then you
would credit the baking for whatever
amounts it is that you're transferring
and then when you get to finish goods
now at that point you credit or excuse
me you debit finish goods inventory
right now you've got to finish cookie
and you're going to credit the packaging
so it's just it's just that simple we're
just moving the costs along that that
value chain that we talked about that
good so ultimately of course when we go
in and sell our cookies we're going to
have when we were debit in cost of goods
sold now it's actually getting to the
income statement and then crediting the
finished goods inventory as we get rid
of the cookies
process costing which stands out in
contrast to what we talked about before
which is job order costing and the key
difference between these two is that
with process costing we have we're
dealing with a homogeneous product right
so we're dealing with something like oil
right five quarts of oil over here is
indistinguishable from five quarts of
oil over here if we're just talking
about standard oil now a job order
costing we've actually got some
heterogeneous products and so we end up
with a job cost ticket right so we'll
have like somebody says okay I want to
chairs a table I want these different
things and that's in the job cost sheet
so we say like okay this is job 511 at
511 a and then we will go ahead and put
the the materials cost we put the direct
labor the overhead all these things
would be charged to a job but in process
costing because all the other jobs so to
speak it's basically the same product
it's all just oil right so we don't
really need like a different job ticket
for each thing so what we do is we just
allocate the costs or do the cost flows
through departments right so instead of
having what we have under the job order
costing well we might have hundreds of
jobs right we might have a thousands of
these job cost sheets and that's
basically how our costs are flowing
right they're flowing through these jobs
instead we're flowing out all our costs
are just going through the department's
for example like processing the oil
packaging add for sale those types of
things so so it's actually a little bit
easier dealing with process costing as
opposed to job order costing because
this all the costs just get dumped and
come right through these departments
instead of a bunch of individualized
jobs so let's take a look in an example
of how process costing with the look for
a firm so let's say in our example that
you make cookies this is a cookie
factory
so you
reduce cookies and let's just say
there's probably a lot more to cookies
than I'll ever know but let's just say
that we've got three departments right
so in our cooking odd we've got the
preparation that's like getting the
dough and getting the dough ready to go
into the oven then actually baking the
dough baking the cookie dough and baking
the cookies and then we've got packaging
because after we make the cookie we have
to actually put it in packages to get it
ready for sale so we've got we've got
these three departments here all right
so these are our departments and so what
we're going to do is let's just draw a
little old value chain here excuse me
just kind of an idea of how how value is
being created so we're taking raw
materials that's our that's what we
start with right this dough and we
basically we bring it in
to the prep Department right we start
prepping the cookie dough and of course
we're adding in labor and stuff and
professions say stuff and manufacturing
overhead these types of things are
coming in at this point in the process
right and then once we've done kind of
the preparation that first that first
stage now we move on to the baking bake
the cookies just put bake and then we
package these now what when things are
when our product is going through here
it's really in process right so we'll
call it work in process right that's
work in process inventory which we've
talked about before and then ultimately
it goes to finish goods then I've run
out of space here so I'll say after
things are transferred out of finished
goods ultimately it's when we sell them
and they go to cost of goods sold which
I'll just abbreviate cogs so what we
really want to focus on mainly is is the
difference with process costing is we're
going to have a whip account here with
these three we're going to have this
this whip account we're going to have a
whip account for prep we're going to
have a whip account for baking and a
whip account for packaging three
different whip accounts whereas under
border-crossing there's just one whip
account just one working process account
under inventory but we're going to have
one for each each department and if you
had two departments then you would have
to whip accounts under process costing
and so we're going to start with these
raw materials and then as they're
requisitioned it's going to go into the
whip account for prep and then as we
move our cookies from dough to actually
being in the oven we're going to take
the whip and decrease our whip for the
prep and then we're going to increase
our whip account for baking so let's
look at some journal entries and that'll
make it a little bit of eight maybe
easier for you to understand when we
look at how the entries will play out so
so let's start in the beginning we'll
say we've got our word requisition
requisitioning so we requisition raw
materials requisition raw materials okay
and let's say that we requisitioned for
for each process let's say let's take a
look here let me just say we'll have
whip for prep now this is our initial
dough right we're just saying okay we
need some dough here and let's say that
we take one hundred five thousand
dollars worth then we also need some
some we've got some action here with the
baking and then we've got with the
packaging
now you might think okay well what kind
of materials could we use for packaging
well we're going to have plastic for
example you know it would be art where
I'd be our input here when we think
about the prep obviously the cookie
dough maybe the baking there's some kind
of oil so we'll just say we've got a
debit of one hundred and five thousand
to the WIPP account for the prep right
the prep Department and then for baking
we'll say that it's three thousand
dollars of raw materials and then we've
got twelve thousand for the packaging
and then we'll just credit will credit
raw materials
those are Sabri V here raw mats and that
adds up to one hundred and twenty
thousand so this is our journal entry we
just were just taking some raw materials
and we're putting them into action here
and we've got again now we've got a whip
account for each department now as we go
forward we can also we're going to apply
direct labor right so obviously when we
go and actually have people that we pay
to put the cookies in the oven people we
pay to lay the dough out and all those
things we're applying direct labor and
what's going to happen is just just like
job order costing now we're going to
have those direct labor costs flow
through into the work and process
account so let's but but again the
difference from job order costing now
we're going to have the three separate
whip accounts so we'll have whip for
prep we'll have a whip for baking this
is as we have to have people actually do
direct labor in each of these
departments and then the whip for
packaging okay so now let's just say
that the amounts here let's say we're
talking about three thousand dollars of
direct labor for the prep five thousand
for banking and six thousand for
packaging and then well what do we
credit when we just credit wages payable
wages payable for the total amount that
should be fourteen thousand dollars
okay so this is now we're accounting
here for the direct labor that has been
applied to the product and now it's that
the cost of that labor is flowing
through to work in process right we've
applied some some labor some work to our
product and so we've got work in process
we don't have a finished cookie yet but
we've got some work in process now we
would do the same thing essentially for
when we do the application of the
overhead so when we apply the overhead
oh fly overhead we're going to we're
just going to have these three whip
accounts right and then we're going to
have a credit to the manufacturing
overhead so I'm not going to write all
these out again but I'll just tell you
that instead of having wages payable
you'd have the overhead right here okay
so that gives you an idea of how the
costs flow through the system now what
about between departments because if you
if you remember we say okay we go and we
take the dough we apply some labor to it
we do these things with this in our prep
Department but eventually at some point
we move it to the baking Department so
how do those costs flow between
departments right we've just kind of
talked about kind of putting raw
materials in and doing some labor at
each stage but what about in in between
these departments how would the cost
flow what would it the journal entries
look like let me cross this up because
we're not dealing with that anymore so
what you would do let's say so now we're
saying between departments so let's say
that we had 47 thousand dollars worth of
whip that we've done in the in the prep
Department and now we want to transfer
that we've done forty four seven
thousand dollars worth of work and now
we're on transferred to the next
apartment which is baking we're ready to
put the forty seven thousand dollars
worth of whip into the oven so what do
we do well we're going to take we're
going to be adding to the whip account
for baking so we're going to make a
debit there of 47 thousand
right and then we're going to credit or
reduce because remember whip is an
inventory account is an asset it's going
to be reduce with a credit forty seven
thousand okay so what we've done here is
we just say we're going to reduce the
the prep Department's whip account and
then we're going to increase the baking
department's whip account so that's just
this we're just transferring the flows
or excuse me the cost they're just
flowing right through the system right
we requisition the raw materials but now
we're saying okay in between departments
we're moving along the work and process
as we're processing this cookie and
getting it to complete with the
completed state which will be a finished
goods so now if we said okay well how
will we go getting cost you know once
we've done the baking of this how will
we go to the ultimate the the next step
where we go to packaging and again you
just do a similar process you would just
debit packaging all right and then you
would credit the baking for whatever
amounts it is that you're transferring
and then when you get to finish goods
now at that point you credit or excuse
me you debit finish goods inventory
right now you've got to finish cookie
and you're going to credit the packaging
so it's just it's just that simple we're
just moving the costs along that that
value chain that we talked about that
good so ultimately of course when we go
in and sell our cookies we're going to
have when we were debit in cost of goods
sold now it's actually getting to the
income statement and then crediting the
finished goods inventory as we get rid
of the cookies
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Dec 23, 2024 Last updated |
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