Download Four Steps to Process Costing

Four Steps to
Process Costing
By 3C Software
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What is Process Costing?
Process Costing is the act of calculating the
direct, indirect and allocated costs at each step
of a manufacturing process.
The steps can be work centers, cost centers,
profit centers, or a specific production line –
any area where you want to calculate a unique
and specific cost added to the product as it is
processed at that step.
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The Four Steps to Process Costing
Calculating process costs involves four steps:
Collect and assign direct spending
Allocate indirect spending
Calculate process rates
Assign rates to products
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1 Collect and Assign Direct Spending
The first step is to collect the pools of direct
spending at the account or sub-account level
and assign them to the products. These pools
represent dollars at each manufacturing that
you plan to spend (or actually spend) at each step.
Typical direct spending pools include labor,
depreciation, and energy. This information is
usually found in the general ledger.
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2 Allocate Indirect Spending
Next, spending that occurs outside the
manufacturing steps is allocated based
on cost drivers. Determining the most
appropriate driver can be challenging, so
it is important to select drivers that are
measurable and tracked.
Typical manufacturing drivers include
labor hours, machine hours, and square
footage occupied.
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3 Calculate Process Rates
Once the direct and indirect costs are pooled,
the rates are calculated and expressed as
dollars per “something” where the “something”
depends on the rate calculated.
Typical rates include dollars per machine hour,
dollars per batch, or even dollars per unit.
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4 Assign Rates to Products
Finally, costs are assigned to products using the
calculated rates. As products move through
each manufacturing step, costs are assigned at
the natural cost element or cost pool level using
a different driver for each pool.
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Why is Process Costing Important?
Knowing the costs associated with a particular
machine, department, line or location provides
necessary data to make decisions on where and
how to manufacture products.
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Need Help?
ImpactECS by 3C Software is a comprehensive and
dynamic cost and profitability modeling platform. It
combines the features and functionality of a robust
financial system with the flexibility and end-user
control of traditional spreadsheet tools.
Learn more about ImpactECS:
www.3csoftware.com
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