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