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Process Costing, Weighted Average Method, FIFO Method, Cost Accounting Help
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>> Process Costing, Weighted Average Method, FIFO Method, Assignment Help
It is a type of cost procedure for continuous or mass production industries. In this approach, it is being assumed that each unit of product possess same amount of materials, labor and overhead, so that cost in the end of process can be determined easily.
Features of Process Costing:
This approach is mostly used by such firms that are engaged in manufacture of a product on continuous basis. A process is continued in a sense in which arrangement of plant and machinery is such that the production of an item continuous for a long period of a time without any stoppage. Following are the features of process costing:
a) Cash flow from one process to another.
b) Equivalent production Computation.
c) Average Unit Cost Computation.
d) Normal and Abnormal Losses.
e) Work in Progress at year end.
f) Emergence of more than one product.
Beginning Work in Progress:
Several methods are used in accounting for beginning inventory costs. Two methods are; Average costing and First-in first out (FIFO).
In Average costing, beginning inventory costs are added to the costs of the new period. When these costs are merged with costs of new period, the problem is essentially one of securing representative average unit costs. Ordinarily, the averaging process is quite simple.
In FIFO method, beginning inventory costs are kept separate and the new costs necessary to complete the work in process inventories are computed. This procedure gives separate unit costs (a) for beginning work in process units completed and (b) for units started and finished in the same period.
Weighted Average Method:
Weighted average method is quite simple. This method adds beginning work in process costs to the preceding department’s materials, labor and FOH costs incurred during a period. And then the Unit costs are determined by dividing these costs by equivalent production figures. Units and costs are transferred to next department as one cumulative figure.
First-in first out method (FIFO):
The FIFO method retains the beginning work in process inventory cost as a separate figure. Costs which are necessary to complete the beginning work in process units are added to this total cost. The sum of these two cost totals is transferred to the subsequent department. Units started and finished during the period have their own unit costs which is usually different from the completed unit cost of units in process at the beginning of the period. So FIFO method separately identifies for management the current period unit cost originating in a department. Unluckily, the costs are averaged out in the next department, which results in a loss of much of the value associated with the use of the FIFO method.
This loss is the inherent or normal result of the process and is beyond the management’s control in short run processes. It may arise due to chemical reactions, scraping, or evaporation etc. Normal loss can be computed before its actual occurrence based on the estimates made on behalf of the previous data. A fundamental principle relating to product costing is that completed units should be valued at normal cost only. Costs of normal loss are viewed as part of cost of goods manufactured. The reason behind it is that achievement of good units necessitates the simultaneous appearance of spoiled or lost units. So normal losses are absorbed by the units completed.
It is also known as unplanned loss as it is not expected by the management. We can say it as any loss that is above the normal loss. Abnormal loss includes abnormal waste, abnormal loss and abnormal scrap. Normally, this loss is shown separately from process costs. It should be valued on the average unit cost of good production and treated as period cost and written off to the profit and loss account of the relevant period.
It arises when the normal output is less than the actual output, then the difference is known as abnormal gain. It happens sometimes that the loss sustained during the process of manufacture is less than the normal loss. It may be either due to the errors in estimation, increase in efficiency etc. It should also be shown separately. It is also valued like abnormal loss but is credited to the profit and loss account.
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