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Process costing

Published on March 28, 2018   33 min
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Hello everyone. I would like to welcome you to this HSTalks lecture series on Managerial Accounting. My name is Alexander Himme, and I'm an Assistant Professor for Managerial Accounting at the Kuhne Logistics University in Hamburg, Germany. In this Module number V we'll talk about "Process Costing Systems" as another approach to determine the costs of products and services. You will see how costs flow through a process costing system and how we prepare a so-called production report that provides an overview of unit and cost information in the process costing system.
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First of all, please remember the distinction between the two possible costing systems. In Module IV, we have talked about job order costing which is used in companies that produce unique products or provide specialized services. In such a costing system, costs are always accumulated by jobs. Now in this module, let us turn our attention to process costing. Process costing is used by businesses that manufacture large quantities of identical or similar units. In such companies, production is carried out through a series of steps or processes and costs are accumulated for each process. Examples of the types of companies that use process costing are pharmaceutical companies, food and drink manufacturers. For instance, one package of aspirin is the same as another package. One bottle of soda is the same as another bottle. As a result, in contrast to job order in industries, in process costing, the important difference to job order costing is that the cost of one unit of product or service is identical to the cost of another unit. Service firms can also use the process costing system. For instance, a cheque clearing department of a bank has uniform costs to clear a cheque, no matter the size of the cheque or the name of the payee. In contrast to job order costing, process firms accumulate production costs by process or by department for a given period of time. In process firms, a large number of similar products passes through an identical set of processes. Each product within the product line passing through the processes receives a similar dose of materials, labor and overhead. Therefore, it does not make sense to accumulate cost by jobs or batches. Process costing works well in environments where relatively homogeneous products pass through a series of processes and receive similar amounts of manufacturing costs. Let us now examine in detail how a process costing system works. As a result, in contrast to job order industries, in process costing, the important difference to job order costing is that the cost of one unit of a product or service is identical to the cost of another unit.