Question

Question:

Process Costing:

1. To define and compare process and job costing

2. Understand the concept of Equivalent units

Answer 1

1. Definition and comparision of process and job costing

Process Costing: Process costing is a method by which the costs related to the various processes, which the raw material undergoes to become the final desired product, is allocated. This is followed mostly in case of companies engaged in the production of similar products or units.

Job Costing:  Job costing is a method by which the costs related to the particular job order are maintained and allocated to the job. This method of cost accounting is followed mostly in case of manufacturing of hetrogeneous products (i.e manufacture of dissimilar products)

Process Costing	Job Costing
Calculates cost for overall production	Calculates cost for each job
Here the cost center is Process	Here the cost center is Job
It is for standardized production	It is for Customized production
Products manufactured here are homogeneous	Jobs undertaken are hetrogeneous (i.e., different from one another
Suitable for industries undertaking mass production of similar goods	Suitable for industries undertaking client specific jobs.

2. Concept of Equivalent units

Manufacturing Plants generally comprise of closing WIP which ultimately leads to the opening WIP of the next period. The Expression of such partially completed goods in terms of completed units by applying the percentage of completion is called Equivalent units approach. This mainly arises due to the raw materials undergoing only certain part of the process. This is helpful in allocating the cost of production fairly to all units. (Opening units completed now, units undertaken for production and completed fully and units undertaken but completed partially)

Formula: Units * Percentage of completion

Example: If a Manufacturing company has 1000 units as WIP which has undergone 60% of the process (partially completed), then the equivalent units of production = units * percentage completed

= 1000 * 60%

= 600 units