Process costing

Process costing

Process costing takes into account the cost of each manufacturing process and apportions part of the cost of each process to an individual product. Typical processes might be:

• forming, bending or machining of metal and plastic parts
• flow soldering of printed circuit boards
• heat treatment of metal parts
• paint spraying and finishing

The following example illustrates the use of process costing. Note that, when determining the total cost of manufacturing a product, it is essential to take into account the notional cost of all of the processes involved. Alternatively, where there may be a number of products sharing the same process, it may be more convenient to amalgamate these costs into a production overhead cost. The danger with this, as we shall see later, is that we usually need to apportion costs more precisely so that we can determine the relative profitability of each product that we manufacture. If this is beginning to sound a little complex, an example will show you how process costing works.

Example

Let us assume that our loudspeaker manufacturer, APS, has invested in a flow soldering plant to automate the manufacture if their crossover units. The flow soldering plant operates at a rate of 60 units per hour and its operating cost (including capital cost recovery calculated over a nominal eight year asset life) amounts to £5000/week plus £10 material and energy costs per hour. Let us determine the cost of producing each crossover unit using the flow soldering process (this is known as the unit cost of the process) assuming that it operates for a total of 40 hours each week.

Based n 40 hour operation per week, the total cost of operating the flow soldering process for a week will be given by

                                          Total = £5000 + (40 ´ £10) = £5400

At 60 units per hour, the total weekly production will be given by

                                          Total production = 60 ´ 40 = 2400

The cost, per unit, will thus be given by