Process costing traces and accumulates direct costs, and allocates indirect costs, through a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to individual units of product.
Process costing is a type of operation costing which is used to ascertain the cost of a product at each process or stage of manufacture. CIMA defines process costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". Process costing is suitable for industries producing homogeneous products and where production is a continuous flow. A process can be referrwed to as the sub-unit of an organization specifically definde for cost collection purpose.
Reasons for use
Companies need to allocate total product costs to units of product for the following reasons:
1) A company may manufacture thousands or millions of units of product in a given period of time.
2) Products are manufactured in large quantities, but products may be sold in small quantities, sometimes one at a time (automobiles, loaves of bread), a dozen or two at a time (eggs, cookies), etc.
3) Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue. *Managers need to maintain cost control over the manufacturing process. Process costing provides managers with feedback that can be used to compare similar product costs from one month to the next, keeping costs in line with projected manufacturing budgets.
4) A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when selling millions of units of product a month. Managers must carefully watch per unit costs on a daily basis through the production process, while at the same time dealing with materials and output in huge quantities.
5) Materials part way through a process (e.g. chemicals) might need to be given a value, process costing allows for this. By determining what cost the part processed material has incurred such as labour or overhead an "equivalent unit" relative to the value of a finished process can be calculated.
Activity cost and duration report
This report shows the results of the activity cost and durationanalysis.
Note: You cannot generate this or other process model analysis reports from the Project Tree. You must complete the process model analysis and then generate your report from the Analysis view. Process model analysis provides information on the contents of a specific process model and therefore must be completed from the process diagram rather than from the Project Tree.
The activity cost and duration analysis returns the cost of each activity as a sum of the average costs of the allocated resources. It also computes the total working duration of the allocated resources of each activity, and the minimum working duration of the activity.
Cost and duration are key factors in any process analysis. You can use this analysis to determine the cost and duration of each activity within a process for a specified time period.
This analysis helps you to identify which activities have the potential of costing the most and taking the longest to complete. This enables you to focus attention on possible cost savings and time saving opportunities.
Note: Requirements for resource definitions are not considered in this analysis.
Note: If an activity's processing cost, startup cost, or processing time are specified as distributions, this analysis will not evaluate the values. Distribution is used by simulation.
For each activity within the process, this report displays the following information.
Column name
Description
Calculation
Activity
The name of the activity
None
Cost
The cost of the activity, including processing cost, startup cost, and costs of all allocated resources and roles
Note: Availability of resources and roles is not considered when determining this cost
For each required resource or role for the activity, the cost of that resource or rule is calculated as the sum of the following:1) The one-time cost2) The average cost per time unit multipled by the required duration for the activity3) The average cost per quantity multipled by the required quantity4) The average cost per quantity and time unit multiplied by the required quantity and multiplied again by the required duration
This value is then added to the startup and processing cost of the activity itself.
Allocated Resources Total Working Duration
The total duration of all resource requirements
The sum of all the required durations for all resources or roles for the activity.
Activity Minimum Working Duration
The processing time duration for this activity
Processing time
Notes
Any notes the analysis generates while doing its calculations
None
