What is process costing?
The cost of a product or service is obtained by assigning costs to masses of identical units
Differences between job and process costing
- Process costing uses averaging to calc unit costs
- Job costing cannot use averaging because individual jobs use diff quantities of resources
- mass producers v job shops
- high volume v low volume
- focus of process v the job
- max efficiency v max flecibility
Process costing and direct costs
Direct costs are first traced to a particular product line. these are then assigned to each unit by dividing the total costs by the total units. As each unit consumes the same direct cost averaging the cost will give the same results as tracing these costs to individual units
How is ave cost calc in process costing: WA
divide the total accumulated cost (regardless of when it was incurred) by the number of EU produced with these costs
How is ave cost calc in process costing: FIFO
- Separate out the costs incurred in different costs.
- Then separately calc the ave cost per eu for units from the diff periods
- assumes that the beginning WIP EU’s are the first ones to be completed and transferred out
whats transferred-in costs?
the finished good of one process may be the raw materials of another process.
Evaluate Process costing
no better or worse than job costing just suits different businesses better
Hybrid costing
When production systems incorporate features of both a job shop and mass producer
Operation costing
- produce a relatively wide variety of closely related products
- basic cost object is the work order
- some inputs are work order specific
- conversion by more or more operations where with each all products are treated alike
- combination of operations may be unique for each product
Purpose of allocating indirect costs
- provide for economic decisions
- motivate managers and employees
- justify costs or calculate reimbursement
- measure income and assets for external reporting
Decisions when allocating indirect costs to products
1 which costs to include
2 how many cost pools
3 what allocation base to use for each
support departments
- provide services to the other departments in the org
- non-profit making departments
Must we recognise interdependence
more recognition results in more accurate costing
support department allocation: direct method
ignore interdependence. allocate 100% of the costs of the support department to the operating departments
support department allocation: step down method
allocate the cost one support department to the other and the operating depatments. The take the cost of the support department including the allocated cost of the other department and allocated that between the 2 operating departments.
support department allocation: Reciprocal Method
simultaneous equations
