Process Costing and Operation Costing

Cheung Yim Fai Kwok Hoi Yuen

AFC2131Cost Information for Decision Making Presentation

What is Process Costing?• Process: a series of activities that are linked together

to perform a specific objective

• Process Costing is…– Costing system– Traces all production costs Process

• Process Costing Job Costing

Job vs Process vs Operation

Job versus Process Costing

Features of process costing• Homogeneity

• Continuous flow

• Input and Output of process costing

• Normal and Abnormal losses

Example of Process Costing• Sugar Manufacturing Industry

Example of Process Costing• Cane Shredding• Milling• Heating and Adding lime• Clarification• Evaporation• Crystallisation and Separation• Spinning• Drying

Reasons for using process costing• A company may manufacture thousands or millions of

units of product in a given period of time. • Product costs must be transferred from Finished

Goods to Cost of Goods Sold as sales are made. • A fraction-of-a-cent cost change can represent a large

dollar change in overall profitability, when selling millions of units of product a month.

• Materials part way through a process (e.g. chemicals) might need to be given a value, process costing allows for this.

Manufacturing versus Service• Is process and operating costing applicable to service

businesses?

What is Hybrid Costing?

• Hybrid: a mix

• Hybrid Costing– Mix of >1 costing systems– E.g. Process + Job

Process JobHybrid

What is Operation Costing?• Operation Costing

– Subset of hybrid costing

– Direct material batches– Conversion cost process

Hybrid

Operation … …

Use of Operation Costing• Manufacturing firms:

– Very little: pure job production environment or pure process production environment

– Most: Mix of both

• Use in– Clothes– Textiles– Shoes

• Conversion input: same demand• Direct material: different demand

Why should use Operation Costing• Manufacturing firm:

– Some individual input but repetitive processes– Product: some unique but some common features

• Enable management to dispense correctly• Advantages of both Process and Job Costing

Example of Operation Costing    

ProcessorAMD Athlon™ 64 X2 Dual-Core Mobile technology TK-53

Memory1GB (2x512MB) 533MHz dual-channel DDR2 SDRAM Shared with Graphics

Harddrive120GB 5400RPM SATA Hard Drive

Monitor15.4" Widescreen WXGA (1280x800) TFT Display

Graphic CardATI Radeon® Xpress 1150 HyperMemory™ (integrated)

Optical Device8X max DVD+/-RW Drive with DVD+R double layer write capability

Anti-VirusNorton Internet Security Trial

Service1-Year Limited Next Business Day On-site Service

ProcessorMobile AMD Sempron™ technology 3500+

Memory512MB (1X512) Memory 533MHz DDR2 SDRAM

Harddrive120GB 5400RPM SATA Hard Drive

Monitor14.1” Widescreen WXGA (1280x800) TFT Display

Graphic CardATI Radeon® Xpress 1150 HyperMemory™ (integrated)

Optical Device8X max DVD+/-RW Drive with DVD+R double layer write capability

Anti-VirusNorton Internet Security Trial

Service1-Year Limited Next Business Day On-site Service

A B

Example of Operation Costing

Direct Materials Hard Drive

14.1” Monitor

15.4” Monitor

Finished Goods

Conversion costs

A

A

A

B

B

B

Technology Use in Process Costing• Process vs Job

– Less data collection– More calculations

• ERP (Enterprise Resource Planning)– Integrates all of major business processes– consistent data across all functional departments– Marketing and Sales, Field Service, Production, Inventory

Control, Procurement, Distribution, Human Resources, Finance, and Accounting.

Technology Use in Process Costing• Before: Manufacturing Industries• Now: Whole Organisation

• Software Modules – Manufacturing – Supply Chain Management – Financials – Projects – Human Resources – Customer Relationship Management – Data Warehouse

Technology Use in Process Costing• Disadvantages

– Increase the cost of training

– High cost to install

– Limitation of potential employees

– Systems can be difficult to use

Technology Use in Process Costing• Advantages:

– Better security – Software can talk to each other

• Not only the improvement in Process Costing• But also the Improvement of the organisation as a

whole

Conclusion• The use of process costing is becoming less prevalent

as most manufacturing industries produce products with dissimilar materials.

• In practice, most businesses nowadays adopt the hybrid costing system which involves both job and process costing systems.

• Besides process and operation costing, other costing systems are now becoming more popular because the manufacturing procedures are becoming more complex.

• Manufacturing industries should adopt costing systems which is suitable according to their own needs

• Choosing a suitable costing system is complicated but critical to all businesses.

Thank you

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