PROCESS COSTING

MEMBERS:

TIAMSON, JON ALBERT TUAÑO, ALYZA SILVER

UY, JOHN KENNETH VALDERAMA, ANGEL GWYNETH

WENCESLAO, RHONA MAE
PROCESS COSTING
Process costing is a method used to determine the
cost of producing a product by averaging the costs
over the entire production process.
It's often used in industries where goods are
produced in a continuous flow or in multiple stages.
The total cost is divided by the number of units
produced to find the cost per unit.
This method helps in assigning costs to each stage
of production, making it easier to analyze and
manage costs in mass production settings.
PROCESS VS. JOB COSTING

Process costing and job costing are two methods for

determining product costs.
 Process costing tracks individual costs throughout
production, useful for mass-produced items.
 Job costing tracks direct and indirect costs for each
item or project, used by companies offering custom
products or services to determine profitability and
pricing.
IMPORTANCE OF PROCESS COSTING

Process costing is particularly important in the oil, chemical,

lumber, textile and food processing industries. Getting a handle
on production costs enables these companies to set the right
prices for their products and determine whether costs are
tracking in line with projections.
They can use process costing to analyze the costs of each step
of the production and distribution process and use the
information to identify areas where they can reduce costs.
WHY USE PROCESS COSTING?

- Process costing is the logical choice for keeping tabs on

product costs in industries where the individual units of output
are uniform and individually not worth a great deal — such as
reams of paper or bottles of soda — and where it's impossible
or difficult to trace production costs for each individual unit.
Instead, the cost of goods manufactured (COGM) is produced
using process costing. This usually appears on your income
statement.
 Monitor profit margins: For industries that sell in high volume and
operate with narrow profit margins, even a slight change in process
costs can make a big difference to a company's profit.
 Inventory control: Depending on the type of business, you may be
required to report inventory to the IRS for tax purposes. For large
companies producing thousands or even millions of products, this
can be a difficult task.
 Uniformity in reporting: With process costing, each department will
track their own costs and all those will be rolled up to arrive at an
overall cost to produce a specific number of items. Because all
expenses have to be added together, they all need to be reported in
the same manner and with the same cost codes.
USING THE PROCESS COSTING METHOD

- Process costing involves tracking the number of units

passing through the production process during a given
period, collecting cost information for each stage and
then using the collected information to calculate per-
unit cost.
5 STEPS IN PROCESS COSTING

To accurately estimate the cost of producing each unit, process

costing takes into account work in progress — items that have
entered but not completed the production process — at the
start and end of each period. Here are five primary steps in
process costing.
 1. Analyze inventory: Analyze the flow of items during the period to
determine the amount of inventory at the beginning of the period, how
many items were started during the period, how many were completed
and transferred out and how many were incomplete at the end of the
period,

2. Calculate equivalent units: Process costing uses the concept of
equivalent units to account for items that are unfinished at the end of
each period. For this step, multiply the number of incomplete units at the
end of the period by a percentage representing their progress through the
production process. For example, if there are 2,000 units of inventory still
in progress and they're 75% complete, they are equivalent to 1 ,500 units
for process costing purposes (2,000 x .75 = 1,500).
 3. Calculate applicable costs: Total the costs for all production
stages, including both direct materials and conversion costs.
 4. Calculate cost per unit: Divide the total cost by the number of
units. This calculation includes both completed units and equivalent
units. So, if a business completed 4,000 products and another
1 ,OOO units got halfway through production, the applicable costs
would be divided by 4,000+ (I ,000/2) = 4,500 units. If all the costs
added up across all departments to produce those units was
₱16,875, simply divide the cost by the number of units to arrive at
₱3.75 per unit produced.
5. Allocate costs to complete and incomplete products:
Allocate costs for the completed and ending work-in-progress
inventory to the corresponding accounts. This helps
determine how much money is tied up in current work-in-
progress inventory. In the above example, since the
equivalent of 500 units are in progress and it cost ₱3.75 to
produce each unit, the work-in-progress inventory cost is
₱1,875 (500 x ₱3.75). And the complete product inventory
cost is 4,000 x ₱3.75 = ₱15,000.
TYPES OF PROCESS COSTING

 Weighted Average Cost is a financial metric that takes into

account the proportional costs of different components,
weighted by their respective quantities or importance. In
business, it’s often used to calculate the average cost of
capital, where the cost of each type of capital (debt, equity,
etc.) is weighted by its proportion in the overall capital
structure. This provides a more accurate representation of the
true cost of financing for a company.
 Standard costing is a cost accounting method that involves establishing
predetermined cost standards for various components of production, such
as direct materials, direct labor, and manufacturing overhead. These
standards serve as benchmarks against which actual costs are compared.
The process typically includes setting standard rates and quantities for
inputs, and then monitoring and analyzing the variations between
standard and actual costs to identify areas of improvement in efficiency
or cost control. It's a tool used by businesses to manage costs, evaluate
performance, and make informed decisions.
 First In, First Out (FIFO) is a method of inventory
valuation, where the oldest inventory items are assumed to
be sold or used first. This means that the cost of goods sold
(COGS) is based on the cost of the oldest items in inventory,
while the ending inventory value is based on the cost of the
most recently acquired items.
PROS AND CONS OF PROCESS COSTING

For certain types of manufacturers, process costing is

the most practical and efficient accounting method
for determining product costs. Still, this method has
both advantages and disadvantages. It can be
difficult to accurately assign costs to work in
progress.
PROS OF PROCESS COSTING

Process costing can be easier to use than other

costing methods, and it can help companies zero in on
areas for potential cost cutting.
 Ease of use
 Flexibility
 Standardized
CONS OF PROCESS COSTING

Potential disadvantages of process costing include

inaccuracy.
 Errors
 Calculation difficulties (equivalent units)
 Time consuming
COST FLOW IN PROCESS COSTING

With process costing, companies track the flow of costs from

department to department, rather than tracking costs for each
individual item. Each department adds direct labor and
manufacturing overhead costs, plus the cost of any raw
materials it uses. Companies may use separate work-in-process
inventory accounts for each department or stage in the
process.
MANAGING PROCESS COSTING WITH
NETSUITE

 Process costing assigns expenses to different departments in your

business, and it accounts for various cost areas including materials and
payroll. Those costs are then rolled up to determine an overall dollar
figure and used to find the price-per-unit. All departments must use
uniform reporting and not double count efforts. Enterprise resource
planning (ERP) software can help with this process.
 By storing data from disparate areas of your company in one digital
ecosystem, you can more easily track data and costs from throughout
the manufacturing process and keep tabs on expenses and profitability.
 ERP platforms with integrated financial management
software also help you more expertly, easily and accurately
perform process costing.
 NetSuite's ERP suite helps manufacturers manage every
aspect of their business, from supply chain management
and procurement to order fulfillment and customer
relationship management (CRM).
CONCLUSION
 Process costing is an important accounting method for
manufacturers that make large volumes of identical items, such as
companies in the food processing, oil and chemicals industries.
 Process costing enables companies to estimate item costs by adding
up the expenses of each step in the manufacturing process, then
dividing by the number of items.
 To ensure accuracy, companies need to include only product-related
costs from each department involved in the process and correctly
allocate cost to work-in- progress at each stage.
 Financial management software, particularly platforms integrated
into a larger ERP tool, can help track costs by department, as well as
generate overview reports and store historical data to monitor
trends over time.
THANK
YOU!