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Process Costing: How to Efficiently Make Potato Chips

Learn about process costing, a method used for large-scale production of uniform items like potato chips. Discover its application, benefits, and step-by-step process in tracking and allocating costs effectively.

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Process Costing: How to Efficiently Make Potato Chips

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  1. Youtube • https://www.youtube.com/watch?v=AjRUBcAjTww&list=PL109714D44FDEFF61

  2. Process Costing How to Make Lots of Potato Chips

  3. What Is Process Costing? • A costing system used in situations where large quantities of the same item are manufactured.

  4. Who Uses It • Companies that make large amounts of the same product: • Proctor & Gamble - Bounty • Lays - Potato Chips • Crest - Toothpaste • Kellogg's - Corn Flakes • Exxon - Gasoline

  5. How to do it • Accumulate the cost of a large number of units produced, and allocate the entire cost over all units produced. Thus, every unit created has exactly the same cost as every other unit produced. Track the costs for the entire production process, and divide by the number of units produced to determine unit costs.

  6. Product goes through various Processing Departments

  7. Process Costing also gives a way to calculate costs per unit at each stage of the process.

  8. Overview Typical Situation • Direct material costs are added at the beginning of the process. • Other costs (direct labor and overhead) are added over the course of the production process. • In a food processing operation, the direct material (potato) is added at the beginning of the operation. Various rendering operations gradually convert the direct material into finished products (potato chips).

  9. Work in Process • That part of a manufacturer's inventory (Asset) that is in the production process and has not yet been completed and transferred to the finished goods inventory. • NB = DR, so adding to WiP is a DEBIT • Contains the cost of: • direct material, • direct labor, • factory overhead.

  10. Units of material input Value ($$) Cutting (potatoes) 1,000,000 500,000 Heating (oil, spices) 500,000 300,000 Direct Labor Costs Overhead Costs Cutting 200,000 200,000 Heating 150,000 150,000

  11. T-Accounts Work in Process Cutting Inputs to Cutting Outputs to Heating Units $$ Units $$ Materials 1,000,000 500,000 1,000,000 900,000 Labor ------- 200,000 Overhead ------- 200,000 1,000,000900,0001,000,000900,000

  12. Work in Process Heating Inputs to Heating Outputs to Finished Goods Units $$ Units $$ Output Cutting 1,000,000 900,000 1,500,000 1,500,000 Materials 500,000 300,000 Labor ------- 150,000 Overhead ------- 150,000 1,500,0001,500,0001,500,0001,500,000

  13. Cost per Unit Cost per Unit is: $1,500,000 = $1 per potato chip. 1,500,000

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