Youtube

• https://www.youtube.com/watch?v=AjRUBcAjTww&list=PL109714D44FDEFF61

Process Costing

How to Make Lots of

Potato Chips

What Is Process Costing?

• A costing system used in situations where large quantities of the same item are manufactured.

Who Uses It

• Companies that make large amounts of the same product:

• Proctor & Gamble - Bounty

• Lays - Potato Chips

• Crest - Toothpaste

• Kellogg's - Corn Flakes

• Exxon - Gasoline

How to do it• Accumulate the cost of a large number of

units produced, and allocate the entire cost over all units produced. Thus, every unit created has exactly the same cost as every other unit produced.

Track the costs for the entire production process, and divide by the number of units produced to determine unit costs.

Product goes through various Processing Departments

• Process Costing also gives a way to calculate costs per unit at each stage of the process.

Overview

• Direct material costs are added at the beginning of the process.

• Other costs (direct labor and overhead) are added over the course of the production process.

• In a food processing operation, the direct material (potato) is added at the beginning of the operation. Various rendering operations gradually convert the direct material into finished products (potato chips).

Typical Situation

Work in Process• That part of a manufacturer's inventory

(Asset) that is in the production process and has not yet been completed and transferred to the finished goods inventory.

• NB = DR, so adding to WiP is a DEBIT• Contains the cost of:

– direct material, – direct labor, – factory overhead.

Units of material input Value ($$)Cutting (potatoes) 1,000,000 500,000Heating (oil, spices) 500,000 300,000

Direct Labor Costs Overhead CostsCutting 200,000 200,000Heating 150,000 150,000

T-Accounts

Work in Process Cutting Inputs to Cutting Outputs to Heating

Units $$ Units $$

Materials 1,000,000 500,000 1,000,000 900,000

Labor ------- 200,000

Overhead ------- 200,000

1,000,000 900,000 1,000,000 900,000

Work in Process Heating Inputs to Heating Outputs to Finished Goods

Units $$ Units $$

Output Cutting 1,000,000 900,000 1,500,000 1,500,000

Materials 500,000 300,000

Labor ------- 150,000

Overhead ------- 150,000

1,500,000 1,500,000 1,500,000 1,500,000

Cost per Unit

Cost per Unit is:

$1,500,000 = $1 per potato chip. 1,500,000