There are certain steps to follow when setting up and operating a process costing system. The first step is to identify specific process costing centers. Next, you must establish the time period that will be covered by the product cost reports. The actual manufacturing cost for the process centers would then be gathered for the determined reporting period. Next, the quantity of product produced for each process center during the period is figured. After that, the unit costs for each of the process centers is calculated using the data that has been gathered. Finally, the product cost reports would be prepared.
The first step mentioned above is to identify the specific process costing centers. Each process center is a separate production process. The important criteria for a process center are that a specific and identifiable production activity takes place, the same amount and type of work is done on every unit processed through the process center, and just one type of product is going through each one of the process centers. The number of process centers involved in completing a product varies depending on the type of product, how complex the production process is, and how the manufacturing activities are managed.
Often, the unit cost of production in a process center for the reporting period is more meaningful than the total manufacturing costs of the process center. Obviously then, it is very important to know how many units have been produced. Complicating this matter is the fact that there will be some partially completed units at the end of the reporting period. These units must be evaluated to determine the amount of work that has been done on them. Once this is figured, they will be expressed as whole units, based on the percentage of completion of those units. These are called equivalent units of production, or equivalent whole units.
Unit costs for manufacturing under process costing are determined by dividing the total costs of manufacturing for the reporting period by the number of units produced during that reporting period. Equivalent units of production are also used for this computation. Unit costs are normally figured for each of the separate cost elements of the product.
Under process costing, costs of manufacturing are reported on a periodic basis using a cost of production report. This report summarizes the cost and production information for that reporting period for one specific process center. The information reported includes total manufacturing costs, production quantity, and unit costs. The cost of production report is similar to the job order cost sheet used under job order costing, but it is used to report costs for a specific time period, rather than costs for a specific job.
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