Process Costing | Managerial Accounting | CMA Exam | CPA Exam BEC

These lectures cover process costing which is product costing system that accumulates costs in processing department costing using the weighted average and FIFO method.

Introduction to Process Costing

Example: Process Costing

Process Cost Illustration FIFO

Process costing is a product costing system that accumulates costs in processing departments and allocates them to all units processed during the period, including both completed and partially completed units. It is used by firms producing homogeneous products on a continuous basis to assign manufacturing costs to units in production during the period.

Firms that use process costing include paint, chemical, oil-refining, and food-processing companies. Process costing systems provide information so managers can make strategic decisions regarding products and customers, manufacturing methods, pricing options, overhead allocation methods, and other issues. Equivalent units are the number of the same or similar completed units that could have been produced given the amount of work actually performed on both complete and partially completed units.

The key document in a typical process costing system is the production cost report that summarizes the physical units and equivalent units of a production department, the costs incurred during the period, and the costs assigned to goods both completed and transferred out as well as to ending work-in-process inventories. The preparation of a production cost report includes five steps: (1) analyze physical units, (2) calculate equivalent units, (3) determine total costs to account for, (4) compute unit costs, and (5) assign total manufacturing costs. The two methods of preparing the departmental production cost report in process costing are the weighted-average method and the first-in, first-out (FIFO) method. The weighted- average method includes costs incurred in both current and prior periods that are shown as the beginning work-in-process inventory of this period. The FIFO method includes only costs incurred during the current period in calculating unit cost.

Most manufacturing firms have several departments or use processes that require several steps. As the product passes from one department to another, the costs from the prior department are transferred-in costs or prior department costs. Process costing with multiple departments should include the transferred-in cost as the fourth cost element in addition to direct materials, direct labor, and factory overhead costs.

A process manufacturer produces products that are indistinguishable from each other using a continuous production process. For example, an oil refinery processes crude oil through a series of steps to produce a barrel of gasoline. One barrel of gasoline, the product, cannot be distinguished from another barrel. Other examples of process manufacturers include paper producers, chemical processors, aluminum smelters, and food processors.

The cost accounting system used by process manufacturers is called the process cost system. A process cost system records product costs for each manufacturing department or process.

In contrast, a job order manufacturer produces custom products for customers or batches of similar products. For example, a custom printer produces wedding invitations, graduation announcements, or other special print items that are tailored to the specifications of each customer. Each item manufactured is unique to itself. Other examples of job order manufacturers include furniture manufacturers, shipbuilders, and home builders.