Understanding Product Costing for Process Manufacturing
Process manufacturing creates multiple products by mixing, separating, forming, or performing chemical reactions. This is usually a two-step procedure, which consists of a mixing or blending step, followed by a filling or packaging step. This type of manufacturing can also include intermediate steps, such as curing, baking, or fermenting.
Some of the items that process manufacturing companies create include:
Liquids
Fibers
Powders
Gases
Pharmaceuticals, foods, and beverages are specific examples of industries that often use process manufacturing.
A process includes ingredients (equivalent to parts on a work order) and a process routing or recipe.
Ingredients are the components of a process. You attach an ingredients list to a process (in the same way that you attach a parts list to a routing) as part of setup.
If an ingredient in a process has extra costs built into its cost, the system allocates the extra costs to the co-products and by-products in the same way that the ingredients are allocated. That is, the extra costs are allocated in the same sequence that the ingredients are consumed and at the feature cost of the co-product or by-product.
The output from a process includes:
Process Output |
Description |
|---|---|
Intermediate |
The output from an operation that is used as the input to the next operation. No cost is associated with an intermediate. |
By-product |
The material that is produced incidental to (or as a residual) of the process. |
Co-product |
An end item that is produced as a result of the process. Usually, two or more co-products result from a process. |
A process is defined in a routing. The process routing defines the work centers and standard hours. The relationships between the ingredients (inputs) and the co/by products (outputs) are also defined in the process routing.
When you run the Cost Simulation - Build Temp program (R30812), you must set the processing option to include the cost for the co-products and by-products. To determine the cost for the co-products and by-products as produced in the process, the system performs this calculation:
Divides the costs for the process into the co-products and by-products according to how the feature cost percentage is set up.
The system then uses the information from the Co-Products Planning/Costing Table (F3404) to allocate the cost from each process and to determine the standard cost for the co-products and by-products.