Chapter 20, Problem 2BTN

To determine

Introduction:

Process Costing

• Process Costing is a method of cost allocation and calculation used when the types of goods produced are similar in nature and in large quantities.

• The cost allocation is done for all products on basis of a standard cost estimate which is calculated by dividing the total costs for each process by the number of units produced.

• The advantage of this method is that it allows for simple and efficient cost allocation and calculation especially when the variations in the types of goods produced are minimal.

Cost Classification

• The time taken from the start of the sale process, i.e. the receipt of a confirmed sales order, to the completion of the transfer of goods or services, i.e. dispatch of goods consists of several activities and costs. Components of costs comprise of Variable costs, Manufacturing costs and Fixed costs.

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced. Examples are costs of direct material and direct labor.

• Manufacturing costs are costs that are directly incurred in connection with manufacture of goods. Examples are Direct materials and Manufacturing Overhead

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced. Examples are costs of factory rent, depreciation on plant and equipment

Work In Process Accounts

• Work in Process accounts are maintained in a Process costing system to account for the various types of direct costs incurred in the form of direct material, labor and overhead.

• The costs of production directly attributable to the goods manufactured are recorded in a Work in process account.

• The costs of Goods completed in production are transferred to the finished goods from the Work in Process Account.

Why costs of some materials do not actually become part of the finished product, including some labor costs not directly associated with producing the product, are classified as direct costs.