Costing Systems II — Process Costing
Job costing versus process costing
In process costing the cost of a product is obtained by using broad averages to assign costs to masses of similar units — identical items mass-produced for general sale, not for a specific customer. The principal difference from job costing is the extent of averaging: individual jobs use different quantities of resources, so it would be wrong to cost each at the same average; when like units are mass-produced, averaging over all units produced is exactly right.
Example. Sino-Pak Textiles spins only Ne 20/1 for the moment. Assume one direct-cost category (direct materials); conversion costs include labour, indirect materials, energy, plant depreciation and so on.
Case I — no beginning or ending work in process (January)
| A | B | |
|---|---|---|
| 1 | Started and completed (bags) | |
| 2 | Direct materials cost added | |
| 3 | Conversion cost added | |
| 4 | Total manufacturing cost | 30,000,000 |
| 5 | Direct materials cost per bag | 3,000 |
| 6 | Conversion cost per bag | 2,000 |
| 7 | Average cost per bag | 5,000 |
Case II — no beginning but an ending WIP (February)
6,000 bags are started, 5,000 completed and 1,000 remain in process, on average 60% complete as to conversion (materials are added at the start, so they are 100% complete). Dividing 29,200,000 by 6,000 physical units would give 4,867 per bag — wrong, because the unfinished bags have not absorbed all their conversion cost. Equivalent units fix this.
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Flow of production | Physical units | Direct materials | Conversion |
| 2 | Completed and transferred out | 5,000 | 5,000 | |
| 3 | Work in process, ending | 1,000 | 600 | |
| 4 | % complete: materials / conversion | |||
| 5 | Equivalent units of work done | 6,000 | 6,000 | 5,600 |
| 6 | Costs added during February | |||
| 7 | Cost per equivalent unit | 3,000 | 2,000 | |
| 8 | Average cost per completed bag | 5,000 | ||
| 9 | Cost of bags transferred out | 25,000,000 | ||
| 10 | Cost of ending WIP | 4,200,000 |
Case III — both beginning and ending WIP (March, weighted average)
March opens with 1,000 bags in process (materials 100%, conversion 60%) carrying 3,000,000 of materials and 1,200,000 of conversion; 5,500 bags are started, 6,000 completed, 500 remain (materials 100%, conversion 50%). The weighted-average method pools the opening cost with the cost added.
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Flow of production | Physical units | Direct materials | Conversion |
| 2 | Work in process, beginning | |||
| 3 | Started during March | |||
| 4 | Completed and transferred out | 6,000 | 6,000 | |
| 5 | Work in process, ending | 500 | 500 | 250 |
| 6 | % complete: materials / conversion | |||
| 7 | Equivalent units (weighted average) | 6,500 | 6,250 | |
| 8 | Costs added during March | |||
| 9 | Total cost to account for | 32,000,000 | 19,500,000 | 12,500,000 |
| 10 | Cost per equivalent unit | 3,000 | 2,000 | |
| 11 | Average cost per completed bag | 5,000 |