Process costing is a system which mostly practices by a company whereby the manager of the company wants to know the cash flow from one department to another. Process costing give a clarify information to managers, therefore this activities is very important. Process costing is consisting of three ingredients which are direct materials, direct labor and manufacturing overhead. Direct material is the raw material which needs to produce a product, for example rubber for shoes, plastics for straws and etc. direct labor is a person who work and complete the product before it is completely produce.
And manufacturing over head is about the indirect materials, indirect labor, and some indirect related to the factory. For example the flow of process costing structure in GPK Assignment for manufacturing cost It is Accumulation of materials, direct labor and overhead cost is easy to be learned. We just need to understand if there is something added inside that department, we must debit it, on the other hand, if there is something subtracted inside that department, we must credit it. For example: purchase direct material; debit direct material account and credit cash account, increasing labor force; debit direct labor and etc.
Equivalent Units of Production After materials, labor and overhead costs have been accumulated in a department, the department’s output must be determined so that the unit cost can be computed. A department usually has some partially completed units in its ending inventory. It does not make any sense if we count these partially completely units as equivalent to fully completed units when counting the department’s output. There are some mathematically formulation for us to calculate the equivalent units. There are: – (Equivalent Units = Number of partially Completed Units * Percentage of Completion) Why is so important about equivalent units?
It is because it determined the cost per unit of production and Measures the work done during a period, expressed in fully completed units. There are some issues discussions about equivalent units; the present authors believe that Li’s (1966) justification represents more of a value judgment than a scientific proof. The present authors agree with Horngren’s (1972) opinion that the assumption that all conversion costs are incurred uniformly in proportion to the degree of product completion is difficult to justify on theoretical grounds.
Although Horngren (1972) did not present a method for calculating the completion level, he did begin to develop a possible solution, observing that the conversion costs sequence usually consists of a number of standard operations or a standard number of hours, days, weeks, or months for mixing, heating, cooling, aging, curing, and so forth. Thus, the degree of completion for conversion costs depends on what proportion of the total effort needed to complete one unit or one batch has been devoted to units still in process.
Similarly, Morse (1981), without presenting a solution for the problem, did indicate a conceptual approach, when he affirmed that standard cost systems are most frequently used when identical units are produced on a continuous basis. The use of standard costs eliminates the need to compute the cost per equivalent unit. The equivalent unit cost is the standard cost. Additionally, the costs transferred out are equal to the number of units completed times the standard cost per equivalent unit.
Equivalent unit’s productions can be calculated by 2 methods and there are:- 1. Weighted Average method 2. First in First Out (FIFO) method Weighted average method Weighted Average method mix together units and costs from the current period with units and cost from the prior period. In a weighted average method the equivalent units of production for a department are the number of units transferred to the next department of finished goods plus the equivalent units in the department’s ending work in process inventory. First-in-First-out (FIFO) Method
The computation of equivalent units under FIFO method differs from weighted average method in two ways. First the units transferred out figure are divided into two parts. One part consists of the units from beginning inventory that were completed and transferred out, and the other part consists of the units that were both started and completed during the current period. Second full consideration is given to the amount of work expended during the current period on units in the beginning work in process inventory as well as units the ending inventory.
Thus, under the FIFO method, it is necessary to convert both beginning and ending inventories to an equivalent unit basis. For the beginning inventory, the equivalent units represent the work done to complete the units; for the ending inventory, the equivalent units represent the work done to bring the units to a stage of partial completion at the end of the period (the same as with the weighted average method). The formula for computing equivalent units of production is more complex under FIFO method than under weighted average method.