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

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

only total materials. each item of material used by a department is listed.A cost of production report determines periodic total and unit costs. Unit cost added by the department. Total figures mean very little. . Furthermore. 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. However. Cost transferred to a succeeding department or to a finished goods storeroom. 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. factory overhead components are noted individually. including departmental and cumulative total and unit costs.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. It is customary to divide the cost section of the report into two parts: one showing costs for which the department is accountable. and the cost to be transferred out of the department. cost control requires detailed data. Total and unit costs accumulated to the end of operations in the department. labor.Materials. 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 factory overhead charged to departments are considered. A cost of production report shows: Total unit costs transferred to it from a preceding department. detailed departmental figures are needed because of the various completion stages of the work in process inventories. in most instances. a report that would merely summarize the total costs of materials. the other showing the disposition of these costs. labor. the costing of the ending work in process inventory. Information in this schedule.Either in the cost of production report itself or in the supporting schedules. Therefore. and a unit cost is derived for each item. and factory overhead and shows only the unit cost for the period would not be satisfactory for controlling costs. To condense the illustrated cost of production reports. and factory overhead added by the department. every labor operation is shown separately. labor. and unit costs are computed only for each cost element rather than for each item. adjusted for equivalent production is used to determine the unit costs added by a department.

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

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