Course Code: ACC502

Course Title: Managerial Accounting and Control System

Class Day: Wednesday Timing:12:30-2pm

Lecture / Week No. 5

Instructor Name: Nida Waheed

Department of Management Sciences

Process Costing
 Table Of Contents

S.R# Contents Page #

1. Uses of a process cost 4-5

2. Similarities and Differences of Job Order Cost and 6-8

Process Cost Systems
3. Process Cost Flow 9-10

4. Assigning Manufacturing Costs 11-18

5. Transfers to Finished Goods and CGS 19

6. Assigning Manufacturing Costs 20-21

Question & Answer

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Reference No. 1 Topic: Uses of Process Cost Systems

• Uses of Process Cost Systems

• To apply costs to similar products that are mass-produced in a continuous fashion.
• Examples include the production of Cereal, Paint, Manufacturing Steel, Oil
Refining and Soft Drinks.

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Reference No. 1 Topic: Uses of Process Cost Systems
Uses of Process Cost Systems
• Process Cost System • Job Order Cost System
Company Product Company Product
Jones Soda, Soft drinks Young & Rubicam, Advertising
PepsiCo J. Walter Thompson

ExxonMobil, Oil Disney, Movies

Royal Dutch Shell Warner Brothers

Intel, Computer chips Center Ice Ice rinks

Advanced Micro Consultants,
Devices Ice Pro
Dow Chemical, Chemicals Kaiser, Patient health
DuPont Mayo Clinic care

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Reference No. 1
Topic: Similarities and Differences Of Job Order
Cost and Process Cost Systems
Similarities and Differences
Job Order Cost and Process Cost Systems

• Job Order Cost • Process Cost

• Costs assigned to
each job.
• Products have unique
characteristics.
• Costs tracked through a
series of manufacturing
processes or departments.
• Products are uniform or
relatively homogeneous and
produced in a large volume.

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Reference No. 1, 2
Topic: Similarities and Differences Of Job Order
Cost and Process Cost Systems
Job Order Cost and Process Cost Flow

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Reference No. 1, 2
Topic: Similarities and Differences Of Job Order
Cost and Process Cost Systems
Job Order Cost and Process Cost Flow
Similarities and Differences
• Similarities • Differences
1. Manufacturing cost elements. 1. Number of work in process accounts
used.
2. Accumulation of the costs of
materials, labor, and 2. Documents used to track costs.
overhead. 3. Point at which costs are totaled.
3. Flow of costs. 4. Unit cost computations.

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Reference No. 1 Topic: Process Cost Flow

• Process Cost Flow

• Tyler Company manufactures roller blade and skateboard wheels that it
sells to manufactures and retail outlets. Manufacturing consists of two
processes: machining and assembly. The Machining Department shapes,
hones, and drills the raw materials. The Assembly Department assembles
and packages the wheels.

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Reference No. 1 Topic: Process Cost Flow

Process Cost Flow

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Reference No. 1, 2 Topic: Assigning Manufacturing Costs

Assigning Manufacturing Costs

• Accumulation of cost of materials, labor, and overhead is same as in
job order costing.
o Debit Raw Materials Inventory for purchases of raw materials.
o Debit Factory Labor for factory labor incurred.
o Debit Manufacturing Overhead for overhead cost incurred.

• Assignment of manufacturing costs to WIP in a process cost system is

different than in a job order cost system.

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Reference No. 1, 2 Topic: Assigning Manufacturing Costs
Assigning Manufacturing Costs
Material Costs
• A process cost system requires fewer material requisition slips than a
job order cost system
• Materials are used for processes and not specific jobs
• Requisitions are for larger quantities of materials

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Reference No.1, 2 Topic: Assigning Manufacturing Costs

Assigning Manufacturing Costs

Material Costs Journal Entry
• Illustration: Tyler Company adds materials at the beginning of each process.
Suppose Tyler adds $50,000 of direct materials to the machining process and
$20,000 of direct materials to the assembly process. Tyler makes the following
entry to record the materials used.

• Work in Process—Machining 50,000

• Work in Process—Assembly 20,000

• Raw Materials Inventory 70,000

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Reference No.1, 2 Topic: Assigning Manufacturing Costs

Assigning Manufacturing Costs

Factory Labor Costs
• Time tickets may be used in both systems
• All labor costs incurred within a production department are a cost
of processing

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Reference No.1, 2 Topic: Assigning Manufacturing Costs

Assigning Manufacturing Costs

Factory Labor Costs Journal Entry
• Illustration: Suppose that Tyler Company incurs factory labor charges of $20,000 in
the machining process and $13,000 in the assembly process. The entry to assign
labor costs to machining and assembly for Tyler is:

• Work in Process—Machining 20,000

• Work in Process—Assembly 13,000
• Factory Labor 33,000

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Reference No.1, 2 Topic: Assigning Manufacturing Costs
Assigning Manufacturing Costs
Manufacturing Overhead Costs
• Objective of assigning overhead is to allocate overhead to production
departments on objective and equitable basis
• Use activity that “drives” or causes costs
• Machine time used - primary driver

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Reference No.1, 2 Topic: Assigning Manufacturing Costs
Assigning Manufacturing Costs
Manufacturing Overhead Costs Journal Entry
• Illustration: Assume that based on machine hours that Tyler Company allocates
overhead of $45,000 to the machining process and $17,000 to the assembly
process. Tyler’s entry to allocate overhead to the two processes is:

• Work in Process—Machining 45,000

• Work in Process—Assembly 17,000

• Manufacturing Overhead 62,000

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Reference No.1, 2 Topic: Assigning Manufacturing Costs

Assigning Manufacturing Costs

Journal Entry to Transfer to Next Department
• Suppose Tyler transferred goods with a recorded cost of $87,000 from machining to
assembly. Tyler makes the following entry.

• Work in Process—Assembly 87,000

• Work in Process—Machining 87,000

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Reference No.1, 2
Topic: Transfers to Finished Goods and CGS
Transfers to Finished Goods and CGS
• Assembly Department completes unit with a recorded cost of $114,000 and then
transfers them to the finished goods warehouse. The entry for this transfer is as
follows.
• Finished Goods Inventory 114,000
• Work in Process—Assembly 114,000
• Tyler Company sells finished goods with a recorded cost of $27,000. It records the
cost of goods sold as follows.
• Cost of Goods Sold 27,000
• Finished Goods Inventory 27,000

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 Topic: Assigning Manufacturing Costs
Reference No.1, 2
Question & Answer
Assigning Manufacturing Costs
Question
• In making entries to assign raw materials costs, a company using process
costing:
• a. increases Finished Goods Inventory.
• b. often increases two or more work in process accounts.
• c. generally decreases two or more work in process accounts.
• d. decreases Finished Goods Inventory.

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Reference No.1, 2
Topic: Assigning Manufacturing Costs
Question & Answer
Assigning Manufacturing Costs
Answer
• In making entries to assign raw materials costs, a company using process
costing:
• a. increases Finished Goods Inventory.
• b. Answer: often increases two or more work in process accounts.
• c. generally decreases two or more work in process accounts.
• d. decreases Finished Goods Inventory.

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.

References / Resources

1. Kieso, W. K. Managerial Accounting Tools for Business Decision Making. Wiley.

2. Peter C. Brewer, R. H. (September 25, 2009). Introduction to Managerial Accounting. Irwin: McGraw-
Hill.

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