What Is Process Costing? What It Is & Why Its Important

in a process costing system, each process will have a work in process inventory account.

Then Department B transfers the products to Finished Goods Inventory. Accumulates costs incurred to produce a product according to the processes or departments a product goes through on its way to completion. Companies making paint, gasoline, steel, rubber, plastic, and similar products using process costing. In these types of operations, accountants must accumulate costs for each process or department involved in making the product. Companies that use job costing work on many different jobs with different production requirements during each period.

The last entry records the cost of indirect materials used by GenX in April. A job order system measures cost per unit upon completion of a job, by dividing the total cost for that job by the number of units in that job. As we showed in the previous chapter, job cost sheets accumulate the costs for each job. Process costing is generally used by manufacturers that produce a large volume of identical items, such as companies involved in oil refining, food production, chemical processing, textiles, glass, cement and paint.

Short Answer

The total costs to be accounted for match the total costs accounted for. ATotal costs to be accounted for must equal total costs accounted for . To apply this to the real world, let’s look at the enrollment data for Sierra College, a community college located near Sacramento, California.

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Step 1 is to determine the physical flow of units. A physical flow reconciliation is a report that reconciles the physical units started in a period with the physical units completed in that period. A physical flow reconciliation for GenX’s roasting department is shown in this slide for April. Total the direct materials and conversion costs for each stage in the process.

Step 1: Costing system

Then they would divide that overall process cost by the number of bottles produced during that period of time to assign production costs to each bottle of cola. The process cost summary for the roasting department shows that the 100,000 units transferred to the blending department are assigned a cost of $762,000. The first row of the second graphic reflects units transferred out in April. The roasting department entirely completed its work on the 100,000 units transferred out. These units have 100% of the materials and conversion required, or 100,000 equivalent units of each input (100,000 x 100%).

The finished products are identical & cannot be easily distinguished unless batch coding is done. Transfers costs from Work-in-Process Inventory to Finished Goods Inventory to Cost of Goods Sold.

Chapter 16

An example of how to use Excel to prepare a production cost report follows. Notice that the basic data are at the top of the spreadsheet, and the rest of the report is driven by formulas. Each month, the data at the top are changed to reflect the current month’s activity, and the production cost report takes care of itself.

in a process costing system, each process will have a work in process inventory account.

It enables the management to further decision making. GenX’s roasting department then computes equivalent units of production under FIFO as shown in this slide. We compute EUP for each of the three distinct groups of units, and sum them to find total EUP. Robotics and Automation – Advances in technology increasingly enable companies to automate their production processes.

Chapter 18 Process Costing

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To accurately estimate the cost of producing each unit, process costing takes into account work in progress — items that have entered but not completed the production process — at the start and end of each period. Process costing is particularly important in the oil, chemical, lumber, textile and food processing industries. Getting a handle on production costs enables these companies to set the right prices for their products and determine whether costs are tracking in line with projections. They can use process costing to analyze the costs of each step of the production and distribution process and use the information to identify areas where they can reduce costs. The production manager is told to push his employees to get as far as possible with production, thereby increasing the percentage of completion for ending WIP inventory.

Companies that use process costing produce a single product, either on a continuous basis or for long periods. All the products that the company produces under process costing are the same. Use the format presented in Figure 4.2 “Flow of Product Costs in a Process Costing System” (no need to include T-accounts for raw materials inventory, wages payable, or manufacturing overhead). Notice that two different work-in-process inventory accounts are used to track production costs—one for each department. For GenX’s roasting department, we must convert the 120,000 physical units measure to equivalent units based on how each input has been used. The roasting department fully completed its work on 100,000 units, and partially completed its work on 20,000 units. Equivalent units are computed by multiplying the number of units accounted for by the percentage of completion for each input—see the second graphic.

Companies with process operations typically end each period with inventories of both finished goods and work in process. Process Costing and Analysis Chapter 16 Wild and Shaw Financial and Managerial Accounting 8th Edition Copyright ©2019 McGraw-Hill Education. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Discover the products that 31,000+ customers depend on to fuel their growth.

Ann talks with the accountant at Desk Products, John Fuller, to investigate. Relevant CostsRelevant cost is a management accounting term that describes avoidable costs incurred when making specific business decisions. This concept is useful in eliminating unnecessary information that might complicate the management’s decision-making process. For example, businesses use relevant costs in management accounting to conclude whether a new decision is economical. The company is required to keep records for each production process, such as units or costs introduced in each process and passed on to the next stage of production. Process costing is suitable for industries where the product is continuous and the end products are identical. Also, the entire process of production is standardized.

in a process costing system, each process will have a work in process inventory account.

Assign total costs to units completed and to units in ending work in process inventory. Summarize total costs to account for and Compute equivalent unit costs. Managers need to maintain cost control over the manufacturing process. Process costing provides managers with feedback that can be used to compare similar product costs from one month to the next, keeping costs in a process costing system, each process will have a work in process inventory account. in line with projected manufacturing budgets. When a customer’s order is fulfilled and the goods are shipped to him, the cost of units sold is transferred from Finished Goods Inventory Account to Cost of Goods Sold Account by making a journal entry. A local hospital has 60 nurses working on a part-time basis. On average, each nurse works two-thirds of a full load.

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