Chapter 16 Overview of Process Cost Systems Notes

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CHAPTER 16

16.1 Overview of Process Cost Systems

Companies that mass‐produce similar products in a continuous fashion use process cost systems. Once

production begins, it continues until the finished product emerges. Each unit of finished product is

indistinguishable from every other unit.

Job order cost systems are similar to process cost systems in three ways. (1) Both systems track the

same cost elements—direct materials, direct labor, and manufacturing overhead. (2) Both accumulate

costs in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. (3)

Both assign accumulated costs to the same accounts—Work in Process, Finished Goods Inventory, and

Cost of Goods Sold. However, the methods used to assign costs differ significantly.

There are four main differences between the two cost systems. (1) A process cost system uses separate

Work in Process accounts for each department or manufacturing process, rather than only one work in

process account used in a job order cost system. (2) A process cost system summarizes costs in a

production cost report for each department. A job order cost system charges costs to individual jobs and

summarizes them in a job cost sheet. (3) Costs are totaled at the end of a time period in a process cost

system but at the completion of a job in a job order cost system. (4) A process cost system calculates

unit cost as Total manufacturing costs for the period ÷ Units produced during the period. A job order

cost system calculates unit cost as Total cost per job ÷ Units produced.

16.2 Process Cost Flow and Assigning Costs

A process cost system assigns manufacturing costs for raw materials, labor, and overhead to work in

process accounts for various departments or manufacturing processes. It transfers the costs of partially

completed units from one department to another as those units move through the manufacturing

process. The system transfers the costs of completed work to Finished Goods Inventory. Finally, when

inventory is sold, the system transfers the costs to Cost of Goods Sold.

Entries to assign the costs of raw materials, labor, and overhead consist of a credit to Raw Materials

Inventory, Factory Labor, and Manufacturing Overhead, and a debit to Work in Process for each

department. Entries to record the cost of goods transferred to another department are a credit to Work

in Process for the department whose work is finished and a debit to Work in Process for the department

to which the goods are transferred. The entry to record units completed and transferred to the

warehouse is a credit to Work in Process for the department whose work is finished and a debit to

Finished Goods Inventory. The entry to record the sale of goods is a credit to Finished Goods Inventory

and a debit to Cost of Goods Sold.

16.3 Equivalent Units

Equivalent units of production measure work done during a period, expressed in fully completed units.

Companies use this measure to determine the cost per unit of completed product. Equivalent units are

the sum of units completed and transferred out plus equivalent units of ending work in process.

16.4 The Production Cost Report

The four steps to complete a production cost report are as follows. (1) Compute the physical unit flow—

that is, the total units to be accounted for. (2) Compute the equivalent units of production separately for

direct materials and conversion costs. (3) Compute the unit production costs, expressed in terms of

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CHAPTER 16 16.1 Overview of Process Cost Systems Companies that mass‐produce similar products in a continuous fashion use process cost systems. Once production begins, it continues until the finished product emerges. Each unit of finished product is indistinguishable from every other unit. Job order cost systems are similar to process cost systems in three ways. (1) Both systems track the same cost elements—direct materials, direct labor, and manufacturing overhead. (2) Both accumulate costs in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. (3) Both ...
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