Process Costing – Introduction

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1 Introduction

Process costing is a method of applying costing systems to goods or services that are produced in a series of processes. Every unit is assumed to have involved the same amount of work and therefore the costs for a period are charged to processes or operations, and unit costs are calculated by dividing process costs by the quantity of units produced.

2 Calculation of cost per unit

• Calculate the total of all costs incurred in the process during a period.

  • If using absorption costing then include all overheads.

  • If using marginal costing then only include variable overheads.

• Divide the total cost by the number of units produced to arrive at a cost per unit.

3 Process T-Accounts

If a T-account is shown in the examination, then the entries are as follows:

• Debit the Process Account with each cost incurred

• Credit the Process Account with the unit cost previously calculated.

It is normal and useful to have 2 columns in the Process Account – one for units and one for $’s

4 Problem areas

There are three problem areas that can occur in process costing:

• Losses

Some of the units started in a process may not end up as finished output due to loss or damage

• Work-in-progress (This problem is no longer examinable in Paper MA)

At the start and end of a period there may be some units in the process that are only partly finished and which need more work in the next period

• Joint Products

More than one product may be produced in the same process.

The first and the last of these problems will be covered in the following chapters.