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, departmentalization
of materials, labor, and factory overhead costs facilitates application of
responsibility accounting. Each department performs a specific operation or
process towards the completion of the product. For example, after the
blending department has completed the starting phase of the work on product,
units are transferred to the testing department, after which they may go to
the terminal department for completion and transferred to the finished goods
storeroom. Both units and costs are transferred from one manufacturing
department to another manufacturing department. Separate departmental
work
in process (WIP) accounts are used to charge each department for the
materials, labor, and factory overhead used to complete its share of
manufacturing process.
Process costing involves averaging costs
for a particular period in order to obtain departmental and cumulative unit
costs. The cost of a completed unit is determined by dividing the total cost
of a period by the total units produced during the period. Determining
departmental production for a period includes evaluating units still in
process. 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.
Departmental total and unit costs are
determined by the use of the cost of production report, which is described
and illustrated in detail on the
Cost Of Production Report page. Most of the activity in process costing
system involves the accumulation of data needed for the preparation of these
reports.
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