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Cost Flow and Journal Entries--Process Costing System:

Materials:
Materials are drawn from the storeroom using a material requisition form. Materials can be added in any department, although it is not unusual for materials to be added only in the first department, with subsequent department adding only labor and overhead in the partially completed units move along toward completion. Suppose Five Star company produces Cream Soda and has two processing departments. Some material (i.e. water, flavors, sugar, and carbon dioxide) is added in the Formulating department (first department) and some material (i.e. bottles, caps, and packing materials) is added in the bottling department (Second department). The journal entry to record the materials used in first department, formulating department, is as follows:

Work in Process--Formulating department (Dr.)---XXX
                  Raw Materials (Cr.)  ----------------------------XXX

If other materials are subsequently added  in the second department as in XYZ company the entry is the following:

Work in Process--Bottling department (Dr.)---XXX
                Raw Materials (Cr.)  ------------------------XXX

Labor Costs:
In process costing, labor costs are traced to departments--not to individual jobs. The following journal entry will record the labor costs in the formulating department at XYZ company. The following journal entry will record the labor costs in the formulating department at XYZ Ltd.

Work in Process-Formulating department (Dr.)---XXX
           Salaries and Wages Payable (Cr.)---------------XXX

Overhead Costs:
In process costing predetermined overhead rates are usually used. Each department has its own separate rate. Overhead cost is then applied to units of product as they move through the department. A journal entry such as the following records the overhead cost in the formulating department.

Work in Process-Formulating department (Dr.)---XXX
             Manufacturing overhead (Cr.)--------------------XXX

Completing the cost flows:
Once processing has been completed in a department, the units are transferred to the next department for further processing. The following journal entry is passed to transfer the partially completed units to the bottling department.

Work in Process-Bottling department (Dr.)----XXX
              Work in Process-Formulating department (Cr.)--XXX

Transfer of cost to Finished Goods Inventory:
After processing has been completed in the final department, the costs of the completed units is transferred to the Finished Goods Inventory account as shown by the following journal entry.

Finished Goods (Dr.)----------------XXX
               Work in Process-Bottling department (Cr.)-XXX

Transfer of Cost to Cost of Goods Sold:
Finally, When a customer's order is filled and units are sold, the cost of the units sold is transferred to the Cost of Goods Sold.

Cost of Goods Sold (Dr.)-------------XXX
                Finished Goods (Cr.)------------------XXX

You may also be interested in:

• Equivalent Units of Production
• Cost of Production Report-Weighted Average Method
• Cost of Production Report FIFO Method
• Job order costing system
• Similarities and Differences between Job Order and Process Costing System
• Operations/Hybrid Costing System

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