four steps to product costing

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3csoftware. com Four Steps to Process Costing By 3C Software

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What is Process Costing?Process Costing is the act of calculating the direct, indirect and allocated costs at each step of a manufacturing process.

The steps can be work centers, cost centers, profit centers, or a specific production line – any area where you want to calculate a unique and specific cost added to the product as it is processed at that step.

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The Four Steps to Process CostingCalculating process costs involves four steps:

Collect and assign direct spending

Allocate indirect spending

Calculate process rates

Assign rates to products

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1 Collect and Assign Direct SpendingThe first step is to collect the pools of direct spending at the account or sub-account level and assign them to the products. These pools represent dollars at each manufacturing that you plan to spend (or actually spend) at each step.

Typical direct spending pools include labor, depreciation, and energy. This information is usually found in the general ledger.

Wondering how some of the world’s most recognized brands calculate their

process costs?Click Here

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2 Allocate Indirect Spending

Next, spending that occurs outside the manufacturing steps is allocated based on cost drivers. Determining the most appropriate driver can be challenging, so it is important to select drivers that are measurable and tracked.

Typical manufacturing drivers include labor hours, machine hours, and square footage occupied.

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3 Calculate Process RatesOnce the direct and indirect costs are pooled, the rates are calculated and expressed as dollars per “something” where the “something” depends on the rate calculated.

Typical rates include dollars per machine hour, dollars per batch, or even dollars per unit.

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4 Assign Rates to ProductsFinally, costs are assigned to products using the calculated rates. As products move through each manufacturing step, costs are assigned at the natural cost element or cost pool level using a different driver for each pool.

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Why is Process Costing Important?Knowing the costs associated with a particular machine, department, line or location provides necessary data to make decisions on where and how to manufacture products.

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Need Help?ImpactECS by 3C Software is a comprehensive and dynamic cost and profitability modeling platform. It combines the features and functionality of a robust financial system with the flexibility and end-user control of traditional spreadsheet tools.

Learn more about ImpactECS:

www.3csoftware.com