PROCESS COSTING 7.

The output of a process except the last may

also be saleable in which case the process
Process costing system – is a system of may generate some profit.
accumulating costs of production by departments 8. The input of a process except the first may
or cost center. be capable of being acquired from the
➢ Department – a major functional division in outside sources.
a factory where related manufacturing 9. The output of a process is transferred to
process are performed. the next process generally at cost to the
process. It may also be transferred at
Objective: To properly allocate manufacturing costs market price to enable checking efficiency
in every department to calculate the unit cost of the of operations in comparison to the market
product for profit determination and inventory conditions.
costing purposes. 10. Normal and abnormal losses may arise in
the process.
Process Costing methods are used by the
following: COMPARISON OF PROCESS COSTING AND
JOB ORDER COST SYSTEM
1. Industries producing chemicals, petroleum,
textiles, steel, rubber, cement, flour, - Process cost system is used when products
pharmaceuticals, shoes, plastics, sugar and are manufactured by mass production
coal. while job order cost system is most suitable
2. Firms manufacturing items such as rivets, when a single product or batch is
screws, bolts, and small electrical parts. manufactured according to customer’s
3. Assembly-type industry which specification.
manufactures typewrites, automobiles,
airplanes, and household electric Similarities
appliances.
4. Service industries such as gas, water, and 1. Manufacturing Cost Elements:
heat. a. Direct Materials
b. Direct Labor
Features/Characteristics of Process Costing: c. Manufacturing Overhead
2. Accumulation of Costs. RM are debited to
1. Process Costing Method is applicable where Materials, Labor to Factory Payroll and
the output results from a continuous or overhead to FOH Control.
repetitive operations or processes. 3. Flow of costs. The accumulated
2. Products are identical and cannot be manufacturing costs are assigned to same
segregated. accounts:
3. It enables the ascertainment f cost of the a. Work in Process
product at each process or stage of b. Finished Goods
manufacture. c. Cost of Goods Sold
4. Production is carried on in different stages
(each of which is called a process) having Differences
a continuous flow.
5. The output consists of homogenous 1. Number of Work in Process accounts used.
products. Job order uses only one WIP account while
6. The input pass through two or more Process cost system, multiple Work in
processes before it takes the shape of the Process accounts are used.
output. The output of each process 2. Point at which total costs is determined. In
becomes the input for the next process a job order cost system, total costs are
until the final product is obtained, with the computed when the job is completed. In a
last process giving the final product. process cost system, total costs are
determined at the end of each month while
the units are being processed.
 3. Unit cost computation. In a job order cost In many industries, the materials are added only in
system, the unit costs are determined by the first processing department. In subsequent
dividing the total cost per job by the units departments, only the labor and manufacturing
produced. In a process cost system, the overhead costs are added. However, it is not
unit cost is equal to the total manufacturing uncommon to find manufacturing processes where
costs for the period divided by the units materials are added in first as well as in one or more
produced during the period. subsequent processing departments.

Labor costs

COST FLOW AND JOURNAL ENTRIES IN PROCESS The labor costs in a process costing system are
COSTING traced to processing departments rather than
individual jobs. The journal entry to record labor
costs attributable to a particular processing
In a job order costing system, materials, labor and department is given below:
overhead costs are traced to a large number of
individual jobs while the process costing system Work in process — Department name [Dr.]
traces costs to each processing departments. Factory Payroll [Cr.]

In process costing system, a separate work in Manufacturing overhead costs

process account is maintained for each department.
The cost flows in parallel to the flow of physical
Like job order costing, the process costing system
units. When the processing work in a department is
usually uses predetermined overhead rate to apply
completed, the units along with their cost are
manufacturing overhead costs. A separate
transferred to the next department to be
predetermined overhead rate is computed for each
undergone for further processing.
processing department and applied to production
as the units move through the department. The
PRODUCT FLOW journal entry to record manufacturing overhead
cost in a process costing system looks like the
1. Sequential Product Flow – Each product is following:
processed in the same series of steps as it
goes through the same set of operations. Work in process — Department name [Dr.]
2. Parallel product Flow – certain portions of Factory Overhead Applied [Cr.]
the work are done at the same time and
then brought together for the final process
Transfer of cost and completion of cost flow
and upon completion transferred to
finished goods inventory.
3. Selective Product Flow – Each product When partially completed units are
moves to different departments within the transferred to the next department
plant, depending upon the desired final
output. Upon completion of processing in a department, the
units and their cost are transferred to the next
Journal entries department where partially completed units are
further processed. For example, if a company has
only two processing departments, A and B, the
Materials costs
following journal entry would be made to transfer
the costs of partially completed units from
When the materials are used in a particular department A to department B:
department, the following journal entry is made:
Work in process — Department B [Dr.]
Work in process — Department name [Dr.] Work in process — Department A [Cr.]
Raw materials [Cr.]
When completed units are transferred to the
finished goods storeroom

The above journal entry transfers the cost of

partially completed units from department A to
department B. After processing in department B,
the partially completed units would be converted
into finished goods and the total cost of completed
units would be transferred from department B to
Finished Goods Inventory Account. The following
journal entry would be made for this purpose:

Finished goods [Dr.]

Work in process — Department B [Cr.]

When goods are sold to a customer

When goods are sold to a customer, the cost of

units sold would be transferred from Finished
Goods Inventory Account to Cost of Goods Sold
Account. The following journal entry would be
made for this purpose:

Cost of goods sold [Dr.]

Finished goods [Cr.]

Important points to remember

1. The materials, labor and overhead costs

can be added in any processing
department, not only in the first
department.
2. A separate work in process account is
maintained for each processing
department.
3. Once the processing work in a department
is completed, the production cost is
transferred to the work in process account
of the next department by making a
journal entry.
4. In final department, the uncompleted units
are converted into completed units or
finished goods and the whole production
cost accumulated in the final department
is transferred to the Finished Goods
Inventory Account by making a journal
entry.
5. When a customer’s order is fulfilled and the
goods are shipped to him, the cost of units
sold is transferred from Finished Goods
Inventory Account to Cost of Goods Sold
Account by making a journal entry.