Process Costing System:
Cost accumulation procedures used by manufacturing concerns are classified as either job
order costing or process costing. The Job Order Costing System 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 a system applicable to a continuous process of production of the same
or similar goods. It 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, 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. This matter 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. 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.
Characteristics and Procedure of Process Costing System:
The characteristics of process costing system:
1.
A cost of production report is used to collect, summarize and compute total and unit
costs.
2. Production is accumulated and reported by departments.
3. Costs are posted to departmental work in process accounts.
4.
5.
Production in process at the end of a period is restated in terms of completed units.
Total cost charged to a department is divided by total computed production of the
department in order to determine a unit cost for a specific period.
6.
Costs of completed units of a department are transferred to the next processing
department in order to arrive at the total costs of the finished products during a
period. At the same time, costs are assigned to units still in process.
The procedures of process costing are designed to:
1.
Accumulate materials, labor, and factory overhead costs by departments.
2.
Determine a unit cost for each department.
3.
Transfer costs from one department to the next and to finished goods.
4.
Assign costs to the inventory of work in process (WIP)
If accurate units and inventory costs are to be established by process costing procedures,
costs of a period must be identified with units produc
