Process Cost System
The process cost system is used to gather the manufacturing costs that involves processes to complete a product. Each process must be “costed,” and as a unit moves from one process to another. The product moves from department to department and it carries its costs with it. Each step or department cost transfers to the next step or department in the process. This is usually associated producing a large number of identical items. Examples of manufacturers who would use a process cost system would be chocolate makers, and soft drink bottlers.
Following product flow through a process cost system
Our example will be a chocolate maker. Fabio’s Chocolates divides its manufacturing operations into three processes (there many processes involved in making chocolate):
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Mixing: The mixing department combines and churns the direct materials needed to produce chocolate. Once the materials are mixed mixture is sent into the molding department.
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Molding: The mixture is molded into finished chocolate bars and other shapes in the molding department. After this process is complete, the finished product is transferred into the packaging department.
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Packaging: In the packaging department, wrappers, etc are added and the chocolate is prepared for shipping to wholesales, retailers and the general public.
The central problem in a process cost system is calculating units and dollar amounts for completed and partially completed units in a department at the end of an accounting period. Completed units move to the next department leaving us with partially completed units in the work in process inventory account of the current department. In the case of our chocolate maker, we need to calculate units and dollar amounts for:
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the completed mixture transferred from the mixing department to the molding department and,
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the partially completed mixture that remain in the work in process account of the mixing department.
Following cost flow through a process cost system
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For this manufacturer, each process is a separate department. Each department will have its own work in process inventory account. The cost of the product moves from department to department as the product moves and is packaged.
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Direct materials, direct labor and manufacturing overhead are assigned to Work in Process Inventory for each process that uses them.
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The process works as follows:
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The process begins in the mixing department. Once the mixing department’s process is complete the product along with the costs will be transferred out of the mixing department and into the molding department. At the end of this process, you will have chocolate that can be molded into different shapes and sizes for different products.
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When the molding department’s process is complete, chocolate along with the cost accumulated thus far are transferred out of the molding department and into the packaging department.
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When production is complete, the chocolate is wrapped and prepared for shipping. The finished product along with the costs up to this point are transferred out of the packaging department and into the finished goods inventory account. The cost of the finished product includes all of the costs incurred in the mixing, molding and packaging departments. The work in process and finished goods inventory accounts appear on the balance sheet. Cost of goods sold will appear on the income statement.
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When the product is sold, the costs of the finished product are transferred out of the finished goods inventory account and into the cost of goods sold account. The product is transferred to our customer.
The flow of costs for this manufacturer are shown in the figure below:
Figure 11.7 Flow of Costs for Manufacturer
The flow of costs for this products is shown below:
Figure 11.8 Flow of Costs for Product