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1. Cite examples of businesses in which process costing is

used.
2. Explain three common patterns of production flow.
3. Determine if a process cost system can be used, based
on an examination of the production environment.
4. Calculate equivalent production and departmental unit
costs.
5. Prepare a departmental cost of production report based
on average costing.
6. Prepare general journal entries to record production
costs in a process cost system.
7. (Appendix) Prepare a departmental cost of production
report based on fifo costing.
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 An important objective of any costing
system is to determine the cost of the
goods or services produced by the
company.

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 . In a process cost system, materials, labor,
and factory overhead are charged to cost
centers. The cost assigned to each unit is
determined by dividing the total cost charged
to the cost center by the number of units
produced.

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 Cost centers are usually departments but
may be processing centers within
departments. The primary requirement is
that all the products manufactured within the
cost center during the period must be the
same in terms of resources consumed;
otherwise, process costing will distort
products’ costs.
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 In manufacturing firms, production can take
place in several departments. Each
department performs a specific operation
leading to completion of the product.

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 In a process cost system, materials, labor,
and factory overhead are generally
charged to the producing departments;
however, if a department is organized into
two or more cost centers, process costing
can still be used, as long as the units of
product manufactured within the cost
center during the period are
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 Process costing, when practical, is
preferable to job order costing because
it generally requires less record
keeping, and less record keeping
means that it costs less to operate.

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 Process costing is used when products are
manufactured under conditions of
continuous processing or under mass
production methods where the products
manufactured within a department or other
cost center are homogeneous.

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 A product can move through a factory in a
variety of ways. Three different physical
production flow formats associated with
process costing are sequential, parallel, and
selective.

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 3. Physical Production Flow

(1)Sequential Product Flow

In sequential product flow, each product
is processed in the same series of steps.

Processing begins in the Cutting

Department where raw materials are
combined and direct labor and factory
overhead costs are added.
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 (2)Parallel Product Flow

In parallel product flow, certain portions

of the work are done simultaneously
and then brought together in a final
process or processes for completion
and transfer to finished goods.

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 3. Physical Production Flow.

(3)Selective Product Flow

In selective product flow, the

product moves to different
departments within the plant,
depending on what final product is
to be produced.
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 (1)Materials Costs

In job order costing, materials requisitions

are the basis for charging direct materials
to specific jobs. In process costing, the
details are reduced because materials are
charged to departments rather than to jobs,
and there are only a few departments using
materials.
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 Materials requisition forms may be useful for
control of materials. If the requisitions are not
priced individually, the cost of materials used
can be determined at the end of the
production period through a periodic
inventory approach-that is, adding purchases
to beginning inventory and deducting ending
inventory.
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 (2)Labor Costs

The detailed clerical work of accumulating labor

costs by jobs is eliminated in process costing
because labor costs are traced only to
departments. Daily time tickets or clock cards are
used instead of job time tickets. A summary entry
distributes the direct manufacturing payroll to
departments for the period.

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 (3)Factory Overhead Costs

Both job order and process costing, the

actual cost of factory overhead is accumulated
in a general ledger control account, and the
details of factory overhead costs are
accumulated in subsidiary records. In the
subsidiary records, each overhead cost item,
such as indirect materials or indirect labor, is
broken down into amounts for each department.
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 This detailed information is used as a basis
for planning future costs and for
controlling current costs. As overhead
costs are incurred, they are recorded in a
factory overhead general ledger account
and are posted to the departmental
subsidiary records for overhead.

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 (4)Combining Labor and Factory Overhead
Costs

Direct labor being charged separately to

each department by means of a general
journal entry. Increasing levels of
automation cause direct labor to be a
decreasing proportion of total
manufacturing cost.
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 Furthermore, in highly automated factories
the distinction between the tasks performed
by direct and indirect labor is often blurred.
Also, factory overhead costs such as
equipment depreciation, power, and
maintenance tend to increase with
automation.

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 process costing, all costs chargeable to a
department are summarized in a
departmental cost of production report. The
cost of production report is a worksheet
presenting the amount of costs
accumulated and assigned to production
during a month or other period.

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 It is also the source of information for
preparing summary journal entries to record
the cost of units transferred from one
producing department to another and finally
to finished goods inventory.

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 ermining the cost of the units transferred
out of a department and those remaining in
ending inventory is essentially an
allocation process. Because costs can
change over time, a cost flow assumption
must be adopted.

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 The most common cost flow
assumption used for work in
process inventory is average
costing; therefore, average
costing will be used here for
illustrative purposes.

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 equivalent unit is the amount of a resource (such
as materials, labor, or overhead) that is required
to complete one unit of the product.

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 some production processes, the addition of
materials results in an increase in the total
volume or number of units of the product.
For example, in the manufacture of soft
drinks, the syrup is often produced in one
department and carbonated water added in a
subsequent process.

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©Cengage Learning Asia Pte Ltd 2008
 The addition of carbonated water increases the
total volume of liquid product to be accounted
for. Increasing the quantity of liquid dilutes the
amount of syrup in each gallon, which in turn
reduces the amount of prior department cost in
each gallon of product produced in the second
department. The increased quantity of liquid
product absorbs the same total amount of
preceding department cost.
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