Process Costing Used by manufacturers who mass produce large quantities of identical units in a continuous flow.

Process costing involves averaging costs for a particular period in order to obtain departmental unit costs.

Job Order and Process Cost Systems Compared

Job Order Cost System

Direct materials Direct labor Factory overhead Job Cost Sheets Dept. A and Dept. B Finished goods

Process Cost System

Direct materials

Dept. A

Dept. B

Finished goods

Direct Factory labor overhead

Direct Factory labor overhead

The cost of production report is used to collect , summarize and compute total and unit costs. Total costs charged to the department is divided by total computed production of the department in order to determine a unit cost for a specific period. 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.

Accumulate materials , labor and factory overheads costs by departments Determine a unit cost for each department Transfer costs from one department to the next and to finished goods Assign costs to the inventory of work still in process .

Three product flow formats associated with process costing Sequential product flow Parallel product flow Selective product flow

In a sequential product flow, each item manufactured goes through the same set of operations .e.g Materials are placed into production in the Blending department and labor and FOH are added. When the work is finished in the Blending department , it moves to the Testing department. The same procedure is applied again and after the completion of work , it moves to the Terminal department. After this department the product is completed and becomes the part of the finished goods.

In a 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 the finished goods.

The product moves to different departments within the plant, depending upon the desired final product. E.g meat processing

An entry to record direct materials used in a period is as follows:

Summary labor charges are made to departments through an entry which distributes the direct material payroll:

Predetermined overhead rates for producing departments should be used if: Production is not stable Factory overhead , especially fixed overhead , is a significant cost. The use of predetermined rates is highly recommended for improving cost control and facilitating cost analysis

A departmental cost of production report shows all costs chargeable to a department.

It is the most conveniant vehicle for presenting and disposing of costs accumulated during the month.

A cost of production report shows: Total and unit costs tranferred to it from a preceding department Materials, labor, and factory overheads added by the department Unit costs added by the department. Total and unit costs accumulated to the end of the operations in the department The cost of work in process inventories Cost tranferred to the succeeding department or to a finished goods store room

Information in the cost of production report is adjusted for equivalent production. To condense the illustrated cost of production report , only total materials , labor and factory overhead charged to the departments are considered.

The Clonex Corporation Blending Department Cost of Production Report For the month of January , 2010
Quantity Scehdule Units started in process Units tranferred to the next department Units still in process(all materials-1/2 labor and factory overhead) Units lost in process

45,000 4,000 1,000

50,000

50,000

Cost charged to the department Cost added by department: Materials Labor Factory Overhead Total cost to be accounted for
Cost accounted for as follows Tranferred to the next department (45,000*1.72) Work in process-ending inventory: Materials (4,000*0.50) Labor (4,000*1/2*0.62) Factory overhead (4,000*1/2*0.60) Total cost to be accounted for

Total Cost 24,500 29,140 28,200 81,840

Unit cost 0.50 0.62 0.60 1.72

77,400
2,000 1,240 1,200

4,440 81,840

The Clonex Corporation Testing Department Cost of Production Report For the month of January , 2009

Quantity Scehdule Units recieved from the preceding department Units tranferred to the next department Units still in process(1/3 labor and factory overhead) Units lost in process Cost charged to the department Cosr from the preceding department: Tranferred in during the month (45,000 units) Cosrt added by the department: Labor Factory Overhead Total cost added Adjustment for lost units Cost accounted for as follows Tranferred to the next department (40,000*3.51) Work in process-ending inventory: Adjusted cost from preceding department(3,000*(1.72+0.08) Labor (3,000*1/3*0.91) Factory overhead (3,000*1/3*0.80) Total cost to be accounted for

40,000 3,000 2,000

45,000

45,000 Unit cost 1.72 0.91 0.80 1.71 0.08 3.51

Total Cost 77,400 37,310 32,800 70,110 147,410

140,400
5,400 910 800

7,110 147,510

Method 1: 77,400 = 1.80-1.72=0.08 per unit 43,000

Method 2: 2,000 units*1.72= 3,440 3,440/43,000=0.08 per unit

The greater the number of units lost , the greater will be the unit costs.

The Clonex Corporation Testing Department Cost of Production Report For the month of January , 2009

Quantity Schedule Units received from the preceding department Units transferred to the next department Units still in process(1/3 labor and factory overhead) Units lost in process

40,000 3,000 2,000

45,000

45,000

Cost charged to the department Cost from the preceding department: Transferred in during the month (45000 units) Cost added by the department: Labor Factory Overhead Total cost added

Total Cost 77,400 37,310 32,800 70,110

Unit cost 1.72 0.87 0.76 1.63

Cost accounted for as follows Transferred to the next department (40,000*(3.35+0.1675) Work in process-ending inventory: cost from preceding department(3,000*1.72) Labor (3,000*1/3*0.67) Factory overhead (3,000*1/3*0.76) Total cost to be accounted for

147,510

3.35
140,720

5,160 870 760

6,790 147,510

Entry:
Work in process-Terminal Department Work in process-Testing Department xx xx

Labor: $37,310/43,000=$0.87 per unit

Factory overhead: $32,800/43,000=$0.76 per unit Lost unit cost: 3.35*2000 units=$6,700; $6,700/40,000= $0.1675 per unit Total cost to be transferred: 3.35+0.1675=$3.5175

The Clonex Corporation Terminal Department Cost of Production Report For the month of January , 2009

Quantity Schedule Units received from the preceding department Units transferred to finished goods storeroom Units still in process(1/4 labor and factory overhead) Units lost in process Cost charged to the department Cost from the preceding department: Transferred in during the month (40,000 units) Cost added by the department: Labor Factory Overhead Total cost added Adjustment for lost units Cost accounted for as follows Transferred to the next department (35,000*5.05) Work in process-ending inventory: Adjusted cost from preceding department(4,000*(3.51+0.09) Labor (4,000*1/4*0.90) Factory overhead (4,000*1/4*0.55) Total cost to be accounted for

35,000 4,000 1,000

Total Cost 140,400 32,400 19,800 52,200 192,800

40,000

40,000 Unit cost 3.51 0.90 0.55 1.45 0.09 5.05 176,750

14,400 900 550

15,850 192,800

Method 1: $140,400/39,000= $3.60 3.60-3.51= $0.09 per unit Method 2: 1000 units * $3.51= $3,510 $3,510/39,000= $0.09 per unit

An entry to transfer finished units to the finished goods store room:

Finished goods xxx Work in process-Terminal Department

xxx