Which of the following is the second step of the 5 step process costing procedure?

Before The Job:

The first four stages are done before the job is being performed. The final purpose of this is to give a quotation to the clients. The calculation is done based on very little information. However, it needs to be precise. Here is the procedure:

Stage 1: List the Cost Objects

At the first stage, organizations need to identify all the possible cost objects that will be affected by taking this job. The idea is to get as close as possible to the perfect estimate

Stage 2: Estimate The Direct Costs:

At the second stage, cost objects are segregated into direct and indirect costs. Direct costs are easy to estimate. The company needs to be aware of the amount of material and labour that the job will consume. Once these facts are known, it is easy to determine the amount of direct costs that will go into a job. These estimates are very accurate and seldom need to be revised.

Stage 3: Use Pre-determined Overhead:

In the third stage, companies estimate the amount of overheads that will be incurred in the particular job. This estimate is done based on the information that is empirical. This can be contrasted with the direct costs which are estimated based on prevailing market rates. Hence these overhead estimates are almost never accurate. They need to be adjusted at later stages. However, companies try to make the estimates as accurate as possible. This helps them in the next stage.

Stage 4: Give Quotation

The direct and indirect cost estimates are collated. Companies then bid for the job with their quotation. The costs need to be accurate to ensure that the contract is won and also that the company makes a decent profit out of doing so.

During The Job:

Maintain Job Cost Sheets:

When the job is being performed, companies maintain job sheets. They track whether the actual material and labour used as per the quotation. If they are not as per the quotation, then it is an anomaly. Companies can easily trace out the cause. It is either incorrect implementation or incorrect estimation.

After The Job:

Reconcile Estimated And Actual Overheads:

After the job is completed, companies check the actual overheads with the estimated overheads. They, then remove the effect of over and under applied overheads to arrive at the final cost of performing the job.

This is quite a lengthy procedure. However, it creates control within the organization and helps ensure that resources are not wasted.

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See Also:
Standard Costing System
Activity Based Costing vs Traditional Costing
Absorption vs Variable Costing
Average Cost
Cost Driver

Process Costing Definition

In accounting, process costing is a method of assigning production costs to units of output. In process costing systems, production costs are not traced to individual units of output. Costs are assigned first to production departments. Then assign the costs to units of output as they move through the departments. The process costing method is typically used for processes that produce large quantities of homogeneous products.
The process costing method is in contrast to other costing methods, such as product costing, job costing, or operation costing systems. Using the process costing method is optimal under certain conditions. Homogeneous indicates that the units of output are relatively indistinguishable from one another. If the output products are homogeneous, then it may be beneficial to use process costing. Low value indicates that each individual unit of output is not worth much. If the output products are of low value, then it may be beneficial to use process costing. If it’s difficult or infeasible to trace production costs directly to individual units of output, then it may be beneficial to use the process costing method.

Examples of Operations To Use Process Costing

Examples of operations likely to use the process costing method over another costing method include the following:

• Cola bottling plant
• Company that produces bricks
• Breakfast cereal maker
• Company that makes computer chips
• Company that produces lumber

For example, for the company that bottles cola, it would not be feasible or worthwhile to separate and record the cost of each bottle of cola in the bottling process. Therefore, the company would assign costs to the bottling process as a whole for a period of time. Then they would divide that overall process cost by the number of bottles produced during that period of time to assign production costs to each bottle of cola.

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Process Costing Method

There are five steps in the process costing method. First, analyze the cost-flow model of the relevant inventory account to determine how much inventory was there at the beginning of the period, how much was started during the period, how much as completed during the period, and how much is left as work-in-process at the end of the period.
Second, convert the work-in-process ending inventory into a number of equivalent units produced. This means if there are 1,000 units of inventory in work-in-process, and these units are all 50% complete, then you consider this as the equivalent of 500 units produced (500 = .50 x 1,000).
Third, compute the total direct and indirect costs incurred by the production process that need to be assigned to the units completed and the units still in process. This includes the costs associated with the beginning inventory and the costs incurred during the relevant period.
Fourth, calculate the amount of cost assigned to the completed units of output and the equivalent of completed units of output still in the ending inventory. For example, if a company completed 2,000 units, and left 1,000 units half-finished, then divide the applicable costs by 2,500 units.
Fifth, allocate the relevant costs to the units of product completed and to the units of product remaining in the work-in-process account.

5 Steps for Process Costing

Follow the 5 steps for process costing.
1. Analyze inventory flow
2. Convert in-process inventory to equivalent units
3. Compute all applicable costs
4. Calculate the cost per unit of finished and in-process inventory
5. Allocate costs to units of finished and in-process inventory

What is the second step of process costing?

Which of the following is the first step of the 5 − step process costing procedure?

What are five step process costing?

How many steps are there in process costing?