Process Costing and Standard Costing: Examples and Calculations
Process Costing System
Process Costing Example:
Company ”Alfa” produces product ”Y” through two production phases: assembly and testing. At the beginning of 200X, there was no work-in-progress balance. During 200X, they started production of 800 units of product ”Y”. Of these, 350 units were finished at the end of the period, and 450 units remained in the production process. All 450 unfinished units of product ”Y” have passed the assembly phase and are in the testing phase.
During 200X, the total cost for Company ”Alfa” was 201,200 euros. The cost structure is as follows:
- Cost of direct material: 64,000 euros
- Cost of direct labor: 7,200 euros
- Overheads: 30,000 euros
- Management cost: 60,000 euros
- Selling cost: 40,000 euros
Direct material is added in the assembly phase, so all direct material costs occur in that phase. The cost of direct labor is 2,000 euros in the assembly phase and 5,200 euros in the testing phase. Overheads are 10,000 euros in the assembly phase and 20,000 euros in the testing phase. For the testing phase, equivalent units are determined for each cost: direct material 0, direct labor 0.60, and overheads 0.60.
Accounting should determine:
- Cost for each production phase
- Cost of finished products and unfinished products at the end of 200X
- Cost per product at the end of 200X
- Make the necessary recording of these events.
Assembly Phase Calculations
- Beginning inventories of work in progress: 0
- Production in 200X: 800
- Finished at the end of 200X: 800
- Ending inventories of work in progress: 0
Cost of Assembly Phase:
- Cost of direct material: 64,000 euros
- Cost of direct labor: 2,000 euros
- Overheads: 10,000 euros
- Total cost: 76,000 euros
Volume of production: 800 units
Cost per unit = Total cost / Volume
Cost per unit = 76,000 / 800 units = 95 euros/unit
Testing Phase Calculations
- Beginning inventories of work in progress: 0
- Production in 200X: 800
- Finished at the end of 200X: 350
- Ending inventories of work in progress: 450
Cost of Testing Phase:
- Cost of assembly phase: 76,000 euros
- Cost of direct labor: 5,200 euros
- Overheads: 20,000 euros
- Total cost: 101,200 euros
Equivalent Units:
Cost Allocation in Testing Phase:
Standard Overheads
Example 4:
Company “Alfa” d.d. should determine the formula of flexible budget for the assembly department from January 1st to June 30th, 200X.
Formula of flexible budget = 80,000 euro + 2 euro/h DL
Company “Alfa” d.d. has the following data:
- Estimated data (January 1st – June 30th, 200X):
- (a) Formula for flexible budget = 80,000 euro + 2 euro/hour of direct labor
- (b) Estimated annual production = 10,000 p
- (c) Standard quantity of direct labor per product = 2 hours
Calculate the standard overhead cost.
Solution:
Total standard quantity of DL for estimated production = 10,000 p * 2 standard hours of DL/p = 20,000 standard hours of DL
Overhead Allocation Rate = Estimated Annual Overheads / Estimated Annual Standard Hours of DL = 120,000 / 20,000 hours = 6 euro/hour of DR
Estimated annual overheads = 80,000 euro + (2 euro/standard hour of DL * 20,000 standard hour of DL) = 120,000 euro
Overheads = Fixed Overheads + Variable Overheads = 80,000 euro + 40,000 euro
Per standard hour of DL: 80,000 euro/20,000 h + 40,000 euro/20,000 h = 4 euro/standard hour of DL + 2 euro/standard hour of DL = 6 euro/standard hour of DR
Standard Overheads = Allocation Rate * Standard Hours of DL = 6 euro/standard hour of DL * 20,000 standard hours of DL = 120,000 euro
Standard Overheads per Product = Standard Overheads / Produced Products = 120,000 euro / 10,000p = 12 euro/p
Standard Costs
Example 1: Standard Cost of Direct Material – Variance
Data about standards:
- Standard price of direct material per unit of product (kg) = 3 euro/kg
- Standard quantity of direct material per unit of product = 2 kg/product
- Standard cost of direct material (3 euro x 2 kg) = 6 euro/product
Actual data:
- Purchased quantity of direct material: 7,000 kg
- Actual price of direct material: 3.10 euro/kg
- Actual purchasing price of direct material (7,000 x 3.10): 21,700 euro
- Produced products: 3,000 pcs
- Spent quantity of direct material for production of 3,000 products: 5,800 kg
Determine standard cost variance in price and quantity of direct material.
Solution:
Quantity Variance of Direct Material
Standard Quantity of DM = Standard Quantity of DM per Product * Quantity of Produced Product = 2 kg/p * 3,000 p = 6,000 kg
Quantity Variance of DM = (Actual Spend Quantity of DM – Standard Quantity of DM) * Standard Price per Unit of DM = (5,800 kg – 6,000 kg) * 3 euro/kg = -200 kg * 3 euro/kg = -600 euro (Favorable variance)
Price Variance of Direct Material
Price Variance of DM = (Actual Price per Unit of DM – Standard Price per Unit of DM) * Actual Purchased Quantity of DM = (3.10 euro/kg – 3 euro/kg) * 7,000 kg = 700 euro (Unfavorable variance)
Total Variance in Standard Cost of DM
Example 3: Income Statement Under Standard Costs
Company “Beta” d.d. is using the standard costing system. During March 200X:
- It has revenues from sold products in the amount of 1,000,000 euros.
- The standard cost of sold products in March was 500,000 euros.
- Total favorable variance of direct material standard cost was 10,000 euros, and the total favorable variance of direct labor standard cost was 15,000 euros.
- Total unfavorable variance of overheads standard costs was 20,000 euros.
Prepare an income statement under the standard costing method.
