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5.2Identify 4 steps of process costing.

5.3Review the 'Real life' scenario on page 174 and explain why process costing is likely to be suitablefor timber mills.

1 Work in process, 1 April 20 000 kg Units started during April ? Units completed during April 32 000 kg Work in process, 30 April 6000 kg 2 Work in process, 1 June 6000 m Units started in June 11 000 m Units complete during June 10 750 m Work in process, 30 June ? 3 Work in process, 1 January 100 000 L Units started during the year 134 000 L Units completed during the year ? Work in process, 31 December 90 000 LFor example, small companies, such as David and William's, and large companies, such as Nabisco, use similar cost-determination processes. In order to understand how much each product costsfor example, Oreo cookiesNabisco uses process costing to track the direct materials, direct labor, and manufacturing overhead used in the manufacturing of its products. Oreo production has six distinct steps or departments: (1) make the cookie dough, (2) press the cookie dough into a molding machine, (3) bake the cookies, (4) make the filling and apply it to the cookies, (5) put the cookies together into a sandwich, and (6) and place the cookies into plastic trays and packages. Each department keeps track of its direct materials used and direct labor incurred, and manufacturing overhead applied to facilitate determining the cost of a batch of Oreo cookies. Make Mold Bake . . Assemble Package As previously mentioned, process costing is used when similar items are produced in large quantities. As such, many individuals immediately associate process costing with assembly line production. Process costing works best when products cannot be distinguished from each other and, in addition to obvious production line products like ice cream or paint, also works for more complex manufacturing of similar products like small engines. Conversely, products in a job order cost system are manufactured in small quantities and include custom jobs such as custom manufacturing products. They can also be legal or accounting tasks, movie production, or major projects such as construction activities. The difference between process costing and job order costing relates to how the costs are assigned to the products. In either costing system, the ability to obtain and analyze cost data is needed. This results in the costing system selected being the one that best matches the manufacturing process. Ajob order cost system is often more expensive to maintain than a basic process costing system, since there is a cost associated with assigning the individual material and labor to the product. Thus, a job order cost system is used for custom jobs when it is easy to determine the cost of materials and labor used for each job. A process cost system is often less expensive to maintain and works best when items are identical and it is difficult to trace the exact cost of materials and labor to the final product. For example, assume that your company uses three production processes to make jigsaw puzzles. The first process glues the picture on the cardboard backing, the second process cuts the puzzle into pieces, and the final process loads the pieces into the boxes and seals them. Tracing the complete costs for the batch of similar puzzles would likely entail three steps, with three separate costing system components. In this environment, it would be difficult and not economically feasible to trace the exact materials and the exact labor to each individual puzzle; rather, it would be more efficient to trace the costs per batch of puzzles. The costing system used typically depends on whether the company can most efficiently and economically trace the costs to the job (favoring job order costing system) or to the production department or batch (favoring a process costing system)