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 Cost System Job Order and Process Cost Systems Compared Job Cost Sheets Dept. A and Dept. B Process Cost System Direct materials Direct labor Factory overhead Finished goods Dept. A Dept. B Factory overhead Direct labor Direct materials Factory overhead Direct labor Finished goods

 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 process50,000 Units tranferred to the next department45,000 Units still in process(all materials-1/2 labor and factory overhead)4,000 Units lost in process 1,000 50,000 Cost charged to the department Cost added by department: Total Cost Unit cost Materials24, Labor29, Factory Overhead28, Total cost to be accounted for81, Cost accounted for as follows Tranferred to the next department (45,000*1.72)77,400 Work in process-ending inventory: Materials (4,000*0.50)2,000 Labor (4,000*1/2*0.62)1,240 Factory overhead (4,000*1/2*0.60)1,2004,440 Total cost to be accounted for81,840

The Clonex Corporation Testing Department Cost of Production Report For the month of January, 2009  Quantity Scehdule  Units recieved from the preceding department45,000  Units tranferred to the next department40,000  Units still in process(1/3 labor and factory overhead)3,000  Units lost in process2,000 45,000   Cost charged to the department  Cosr from the preceding department:Total Cost Unit cost  Tranferred in during the month (45,000 units)77,  Cosrt added by the department:  Labor37,  Factory Overhead32,  Total cost added70,  Adjustment for lost units0.08  147,  Cost accounted for as follows  Tranferred to the next department (40,000*3.51)140,400  Work in process-ending inventory:  Adjusted cost from preceding department(3,000*( )5,400  Labor (3,000*1/3*0.91)910  Factory overhead (3,000*1/3*0.80)8007,110  Total cost to be accounted for147,510

 Method 1:  77,400 = =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 department45,000  Units transferred to the next department40,000  Units still in process(1/3 labor and factory overhead)3,000  Units lost in process2,000 45,000   Cost charged to the department  Cost from the preceding department:Total Cost Unit cost  Transferred in during the month (45000 units)77,   Cost added by the department:  Labor37,  Factory Overhead32,  Total cost added70,   147,  Cost accounted for as follows  Transferred to the next department (40,000*( ) 140,720  Work in process-ending inventory:  cost from preceding department(3,000*1.72)5,160  Labor (3,000*1/3*0.67)870  Factory overhead (3,000*1/3*0.76)760 6,790  Total cost to be accounted for 147,510 

 Entry:  Work in process-Terminal Department xx  Work in process-Testing Department 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= $ per unit  Total cost to be transferred: =$3.5175

 The Clonex Corporation  Terminal Department  Cost of Production Report  For the month of January, 2009   Quantity Schedule  Units received from the preceding department40,000  Units transferred to finished goods storeroom35,000  Units still in process(1/4 labor and factory overhead)4,000  Units lost in process1,000 40,000  Cost charged to the department  Cost from the preceding department:Total Cost Unit cost  Transferred in during the month (40,000 units)140,   Cost added by the department:  Labor32,  Factory Overhead19,  Total cost added52,  Adjustment for lost units0.09  192,  Cost accounted for as follows  Transferred to the next department (35,000*5.05) 176,750  Work in process-ending inventory:  Adjusted cost from preceding department(4,000*( )14,400  Labor (4,000*1/4*0.90)900  Factory overhead (4,000*1/4*0.55)55015,850  Total cost to be accounted for 192,800 

 Method 1:  $140,400/39,000= $3.60  = $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 goodsxxx  Work in process-Terminal Departmentxxx