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):

  1. 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.
  2. 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.
  3. 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:

 

Following cost flow through a process cost system

  1. 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.
  2. Direct materials, direct labor and manufacturing overhead are assigned to Work in Process Inventory for each process that uses them.
  3. The process works as follows:

 

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