Acctg 201 - Chapter 9

CHAPTER 9 – PROCESS COSTING
The basic purpose of cost accounting is the accumulation of data designed to provide management
with accurate information on the cost of manufacturing a product. The appropriate cost accounting
system for a particular entity depends on the nature of manufacturing operations.
When a manufacturing process involves the continuous production of identical units rather than
distinguishable job lots, there can be no job orientation. When there is no obvious start or finish
(because the manufacturing process is endlessly repetitive), we use a process-costing system to
accumulate and allocate manufacturing costs. In using process costing, all manufacturing costs are
allocated first to departments or processes. Departmental or process costs are then allocated to
units of product as units are completed. Instead of using job-cost sheets, the costs associated with
each department are summarized on a cost-of-productions report, with one report per department
for a period of time. At the end of each period, the costs accumulated on each such report will be
allocated between end-of-period work in process and units transferred to the next process, or, in
the case of the final process, to finished goods.
A process cost system determines how manufacturing costs incurred during each period will be
allocated. The allocation of costs within a department is only an information step, the ultimate
goal is to compute total cost per unit for income determination. During a period some units will
be started but will not be completed by the end of the period. Consequently each department must
determine how much of the total costs incurred by the department is distributed to units still in
process and how much is attributable to completed units.
PROCESS COSTING METHODS ARE USED BY THE FOLLOWING:
1. Industries producing chemicals, petroleum, textiles, steel, rubber, cement, flour,

pharmaceuticals, shoes, plastics, sugar, and coal.
2. Firms manufacturing items such as rivets, screws, bolts, and small electrical parts.
3. Assembly-type industry which manufactures typewriters, automobiles, airplanes, and

household electric appliances.
4. Service industries such as gas, water, and heat.
CHARACTERISTICS OF A PROCESS COST SYSTEM
1. Costs are accumulated by department or cost center
2. Each department has its own general ledger Work in Process Inventory account This account is
debited with the processing costs incurred by the department and credited with the cost of
completed units transferred to another department or to finished goods inventory.
3. Equivalent units are used to restate – work in process inventory to terms of completed units at
the end of a period.
4. Completed units and their corresponding costs are transferred to the last department or to
finished goods inventory. By the time units leave the last processing department, total costs for the
period have been accumulated and can be used to determine the unit cost of each and total finished
goods.
5. Total costs and unit costs for each department are periodically calculated and analyzed with the
use of department cost of production report.
COMPARISON OF JOB ORDER COSTING AND PROCESS COSTING
A job order cost accumulation system is most suitable when a single production of batch or
products is manufactured according to a customer’s specifications. A process cost accumulation
system is used when products are manufactured by eith mass production techniques or continuous
processing. Process costing is suitable when homogeneous products are manufactured in large
volume A customized cabinet manufacturer would use a job order cost system whereas a
manufacturer of 8-ounce jars of peanut butter would use a process cost system.
Under a job order cost accumulation system, the three elements of a product’s cost (direct
materials, direct labor, and factory overhead are accumulated according to Identifiable job.
Individual work in process Inventory subsidiary cost sheets are set up for each and are charged
with the cost incurred in the production of the specifically ordered unit. Upon completion of each
job, it’s cost is transferred from Work In Process to Finished Goods Inventory.
Under a process cost system, the three basic elements of a product’s cost accumulated according
to department or cost center. Individual work in process inventory accounts are set up for each
department and are charged with the costs incurred in the processing of the units that pass through
them. Upon completion of the process, the cost of work in process inventory in the last department
is transferred to finished goods inventory.
‘As enumerated in Chapter 1, there are four major differences between process costing and job
order costing. Both require accumulating the costs of goods and services. But a key difference
occurs in computing unit costs. The unit cost of a product results from dividing the accumulated
cost by a measure of volume. The denominator under job order costing is the actual units while
under process costing, it is the equivalent units of production. Equivalent unit refers to the amount
of work actually performed on products with varying degrees of completion. Translated to that
work required to complete an equal number of whole units. Another key difference is the time of
computing the unit cost. Under job order costing the unit cost is computed upon the completion
of the job. The job may be completed on the first week of the month, second week, third week. Or
last week of the month. The total costs of the jobs remaining uncompleted will be the work in
process inventory, end. Under process costing the unit cost is computed at the end of the month.

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CHAPTER 9 – PROCESS COSTING

PROCESS COSTING METHODS ARE USED BY THE FOLLOWING:

1. Industries producing chemicals, petroleum, textiles, steel, rubber, cement, flour,

3. Assembly-type industry which manufactures typewriters, automobiles, airplanes, and

4. Service industries such as gas, water, and heat.

CHARACTERISTICS OF A PROCESS COST SYSTEM

1. Costs are accumulated by department or cost center

COMPARISON OF JOB ORDER COSTING AND PROCESS COSTING

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