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

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

Total and unit costs accumulated to the end of operations in the department. However. Total figures mean very little. including departmental and cumulative total and unit costs. and factory overhead added by the department. . Furthermore. and the cost to be transferred out of the department. and unit costs are computed only for each cost element rather than for each item. Information in this schedule. Therefore.A cost of production report determines periodic total and unit costs. It is customary to divide the cost section of the report into two parts: one showing costs for which the department is accountable. 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. Unit cost added by the department. Cost transferred to a succeeding department or to a finished goods storeroom. the total cost is broken down by cost elements for each department head responsible for the costs incurred. the other showing the disposition of these costs. A cost of production report shows: Total unit costs transferred to it from a preceding department. only total materials. labor. adjusted for equivalent production is used to determine the unit costs added by a department. and factory overhead charged to departments are considered. in most instances.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. the costing of the ending work in process inventory. 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. detailed departmental figures are needed because of the various completion stages of the work in process inventories. a report that would merely summarize the total costs of materials.Either in the cost of production report itself or in the supporting schedules. every labor operation is shown separately. cost control requires detailed data.Materials. The cost of the beginning and ending work in process inventories. labor. labor. 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. each item of material used by a department is listed. factory overhead components are noted individually. To condense the illustrated cost of production reports.

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