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Definition and Explanation of Process Costing Systemk

Definition and Explanation of Process Costing Systemk

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Published by Michelle Andrew
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Published by: Michelle Andrew on Mar 22, 2013
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plastics. rubber. In the case of machinery manufacturer. whereas a chemical company will use process costing. (4) computations of costs transferred to other departments or to the finished goods storeroom. and timesaving device for the collection of large amounts of data. airplanes. petroleum. The individual order identity is lost. screws. water. A third type of industry using process costing system is the assembly type industry which manufactures such things as typewriters. process costing is used when products are manufactured under conditions of continuous processing or under mass production methods. cost their products by using process costing system. textiles. economical. Characteristics and Procedure of Process Costing System: The characteristics of process costing system: . sugar. the accumulation of materials costs. Thus. (2) problems connected with the beginning work in process. and factory overhead.Definition and Explanation of Process Costing System: Cost accumulation procedures used by manufacturing concerns are classified as either job order costing or process costing. a company manufactures custom machinery will use job order costing. The summarization of the costs takes place via the cost of production report. In contrast the chemical company cannot identify materials. and the cost of a completed unit must be computed by dividing total cost incurred during a period by total units completed. such as gas. Finally certain service industries. The Job Order Costing System chapter deals with the procedures applicable to job order costing. Average and FIFO Costing and By-Products and Joint Products Costing). steel. radios. Chapter Process Costing System . shoes. Chapter By-Products and Joint Products Costing discusses the costing of by-products and joint products. It is important to understand that. toasters. and coal. and small electrical parts.Addition of Materials. In fact. flour. This chapter considers the (1) cost of production report. The type of manufacturing operations performed determines the cost procedures that must be used. and factory overhead also applies to process costing system. and factory overhead with each order. and heat.). since each order is part of a batch or a continuous process. (3) costing of work in process. and household electric appliances (washing machines. bolts. labor costs. and (5) effect of lost units on unit costs. etc. For example. television sets. except for some modifications. refrigerators. labor.Addition of Materials. Process costing method is used for industries producing chemicals. process costing procedures are often termed "continuous or mass production cost accounting procedures". (2) calculation of departmental unit costs. irons. a job order cost sheet is prepared for each order. accumulating the costs of materials. cement. labor. pharmaceuticals. Average and FIFO Costing deals with (1) special problems involved in adding materials in departments other than the first. Process costing system is also used by firms manufacturing items such as rivets. The entire process costing discussion is presented in this chapter and other two chapters (Process Costing System . automobiles. and (3) the possibility of using costing methods. which is an extremely efficient.

departmentalization of materials. Most of the activity in process costing system involves the accumulation of data needed for the preparation of these reports.The procedures of process costing are designed to:Accumulate materials. At the same time. The cost of a completed unit is determined by dividing the total cost of a period by the total units produced during the period. and factory overhead costs by departments. Determining departmental production for a period includes evaluating units still in process. . summarize and compute total and unit costs. units are transferred to the testing department. Process costing involves averaging costs for a particular period in order to obtain departmental and cumulative unit costs.Costs of completed units of a department are transferred to the next processing department in order to arrive at the total costs of the finished products during a period. which is described and illustrated in detail on the Cost Of Production Report page. labor. and factory overhead costs facilitates application of responsibility accounting. For example.Total cost charged to a department is divided by total computed production of the department in order to determine a unit cost for a specific period.Departmental total and unit costs are determined by the use of the cost of production report. costs of a period must be identified with units produced in the same period. Costing By Departments: The nature of manufacturing operations in firms using process or job order cost procedures is usually such that work on product takes place in several departments. Production in process at the end of a period is restated in terms of completed units.Determine a unit cost for each department. labor. labor. Production is accumulated and reported by departments. costs are assigned to units still in process.Transfer costs from one department to the next and to finished goods. The breakdown of costs for the computation of total unit costs and for costing units transferred and departmental work in process (WIP) inventories is also desirable for cost control purposes.With either procedure. Each department performs a specific operation or process towards the completion of the product. and factory overhead used to complete its share of manufacturing process.A cost of production report is used to collect . after the blending department has completed the starting phase of the work on product. after which they may go to the terminal department for completion and transferred to the finished goods storeroom. Separate departmental work in process (WIP) accounts are used to charge each department for the materials. Costs are posted to departmental work in process accounts.Assign costs to the inventory of work in process (WIP) If accurate units and inventory costs are to be established by process costing procedures. Both units and costs are transferred from one manufacturing department to another manufacturing department.

Unit cost added by the department. in most instances. Furthermore. every labor operation is shown separately. the costing of the ending work in process inventory. Total and unit costs accumulated to the end of operations in the department. labor. and factory overhead charged to departments are considered. Total figures mean very little. It is customary to divide the cost section of the report into two parts: one showing costs for which the department is accountable. However. cost control requires detailed data. Cost transferred to a succeeding department or to a finished goods storeroom. adjusted for equivalent production is used to determine the unit costs added by a department. a report that would merely summarize the total costs of materials. each item of material used by a department is listed. and the cost to be transferred out of the department. including departmental and cumulative total and unit costs. labor.Either in the cost of production report itself or in the supporting schedules. detailed departmental figures are needed because of the various completion stages of the work in process inventories. labor. It is not only the source for summary journal entries at the end of the month but also a most convenient vehicle for presenting and disposing of costs accumulated during the month. and factory overhead and shows only the unit cost for the period would not be satisfactory for controlling costs. Information in this schedule. and unit costs are computed only for each cost element rather than for each item. factory overhead components are noted individually. Therefore. and factory overhead added by the department.Materials. A quantity schedule showing the total number of units for which a department is accountable and the disposition made of these units is also part of each department's cost of production report.Cost of Production Report (CPR): Definition and Explanation of Cost of Production Report (CPR): A departmental cost of production report (CPR) shows all costs chargeable to a department. To condense the illustrated cost of production reports.A cost of production report determines periodic total and unit costs. the total cost is broken down by cost elements for each department head responsible for the costs incurred. The cost of the beginning and ending work in process inventories. . and a unit cost is derived for each item. only total materials. A cost of production report shows: Total unit costs transferred to it from a preceding department. the other showing the disposition of these costs.

and uses process costing.Case Study: Case A. The production supervisor assigns a worker once or twice a week to remove the springs from spoiled units. because spoilage is increasing. Sectional materials costs should be reduced by the value assigned to salvaged materials. Abnormal spoilage should be charged to factory overhead account. and the total loss in scraped clothespins should be shown in the cost of production report of the department responsible for the loss. Under normal operating conditions. spoilage can go as high as 5% and is usually discovered when a faulty pin enters process or on final completion by a section. a different method is needed. However. each section has a spoilage rate of 2%. Solution: The spoiled work should be broken into normal and abnormal spoilage. No accounting entry is made of this salvage operation. In the past. . All materials salvaged should be assigned a value and placed in materials inventory. Accounting for Spoiled Units: The House Hold Aids Company assembles clip clothespins in three sections. The cost to be included in this account should be the amount accumulated against a clothespin up to the point of being scraped. The salvaged springs are placed in bins at the assembly tables in section No1 to be used again. The cost of normal spoilage should be absorbed by good completed units. The spring mechanism is the only material which can be saved from a spoiled unit. However. Lost unit costs have been absorbed by the units transferred out of the section and those remaining in the process.Process Costing System . the controller has made no attempt to account for spoilage separately.

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