Definition and Explanation of Process Costing System

13/08/2008 20:21


Definition and Explanation of Process Costing System:

Cost accumulation procedures used by manufacturing concerns are classified as either job order costing or process costing. The Job Order Costing System chapter deals with the procedures applicable to job order costing. It is important to understand that, except for some modifications, the accumulation of materials costs, labor costs, and factory overhead also applies to process costing system.

Process costing method is used for industries producing chemicals, petroleum, textiles, steel, rubber, cement, flour, pharmaceuticals, shoes, plastics, sugar, and coal. Process costing system is also used by firms manufacturing items such as rivets, screws, bolts, and small electrical parts. A third type of industry using process costing system is the assembly type industry which manufactures such things as typewriters, automobiles, airplanes, and household electric appliances (washing machines, refrigerators, toasters, irons, radios, television sets, etc.). Finally certain service industries, such as gas, water, and heat, cost their products by using process costing system. Thus, process costing is used when products are manufactured under conditions of continuous processing or under mass production methods. In fact, process costing procedures are often termed "continuous or mass production cost accounting procedures".

The type of manufacturing operations performed determines the cost procedures that must be used. For example, a company manufactures custom machinery will use job order costing, whereas a chemical company will use process costing. In the case of machinery manufacturer, a job order cost sheet is prepared for each order, accumulating the costs of materials, labor, and factory overhead. In contrast the chemical company cannot identify materials, labor, and factory overhead with each order, since each order is part of a batch or a continuous process. The individual order identity is lost, and the cost of a completed unit must be computed by dividing total cost incurred during a period by total units completed. The summarization of the costs takes place via the cost of production report, which is an extremely efficient, economical, and timesaving device for the collection of large amounts of data. The entire process costing discussion is presented in this chapter and other two chapters (Process Costing System - Addition of Materials, Average and FIFO Costing and By-Products and Joint Products Costing). This chapter considers the (1) cost of production report, (2) calculation of departmental unit costs, (3) costing of work in process, (4) computations of costs transferred to other departments or to the finished goods storeroom, and (5) effect of lost units on unit costs. Chapter Process Costing System - Addition of Materials, Average and FIFO Costing deals with (1) special problems involved in adding materials in departments other than the first, (2) problems connected with the beginning work in process, and (3) the possibility of using costing methods. Chapter By-Products and Joint Products Costing discusses the costing of by-products and joint products.