Chapter four.docx

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University of Toronto St. George
Rotman Commerce
Stojanovic Dragan

Chapter four: system design: process costing Comparison of job order and process costing  The similarities that exist between a job order and process costing can be summarized as follows; 1. Both systems have the same basic purposes—to assign materials, labor, and overhead costs to products and to provide a mechanism for computing unit costs 2. Both systems use the same basic manufacturing accounts, including manufacturing overhead, raw materials, work in process, and finished goods 3. The flow of cost through the manufacturing accounts is basically the same in both systems  The differences between these two costing systems is: 1. The flow of units in a process costing system is more or less continuous 2. These units are indistinguishable from one another  Under process costing, it makes no sense to try to identify materials, labor, and overhead costs with a particular order from a customer, says each order is just one of many that are filled from a continuous flow of virtually identical units from the production linecosts are accumulated by departments rather than order and assigned these costs equally to all units that passed through the department during a period  Job cost sheet is not used a process costing, says the focal point of that market is department  Production report: a report that summarizes all activity in the department’s work in process account during a period and that contains three parts: a quantity schedule and computation of equivalent units, a computation of total and unit costs and a cost reconciliation.--> in addition, it shows what costs are charged to the department and what disposition was made to these costs  ** exhibit 4.1 differences between job order and process costing** Process cost flows Processing departments  Processing departments: any location in an organization where work is performed on a product and where materials, labor, or overhead costs are added to the product  A company has as many or as few processing departments as are needed to complete a product or service  All processing departments have two essential features: 1. The activity performed in the processing department must be performed uniformly on all of the units passing through it 2. The output of the processing department must be identical  ** exhibit 4.2 sequential processing departments** The flow of materials, labor, and overhead costs  In a process costing systems, costs are traced to only a few processing departmentsproduction costs are not identified with specific units for baptism product, instead, and average unit cost is computed by dividing the total production cost for the period by the number of units produced during the same period  In a process costing system, work in process account is maintained for each processing departments instead of a single work in process account for the entire company  In a process costing system, the completed production of the first processing department is transferred into the work in process account for the second processing department, where it undergoes further work, whereas completed products’ cost is transferred directly to finished goods account.  After this further work, the completed units are then transferred into the finished goods  The materials, labor, and overhead costs can be added in any processing departments not just one cost of departments B’s work in process account would consist of the materials, labor, and overhead cost incurred in department B plus the cost attached to partially completed units transferred from department A  Transferred- in cost: the cost attached to products that have been received from the prior processing department  ** exhibit 4.3 T-accounts model of process costing flows** Materials, labor, and overhead cost entries  Material cost:  Materials can be added in any process departments, although it is not unusual for details to be added only in the first processing department, with subsequent departments adding only believer and overhead costs as the partially completed units move along toward completion  The journal entry for placing materials into process in the first department: Work in process—mixing..................XX Raw materials........................................XX  Journal entry to record the materials used in the second processing department, the filling department: Work in process—filling......................XX Raw materials.....................................XX  Labor costs:  A process costing, labor costs are traced to departments, not to individual jobs. The following entry records and labor costs in the mixing department: Work in process—mixing........................XX Salaries and wages payable............................XX  Overhead costs:  Predetermined overhead rates should be used to charge overhead costs to products, the same as in job order costing When predetermined overhead rates are used, each department has its own separate rate Overhead cost is that apply to two units of product as the units move through the various departments  The following journal entry is used to apply overhead cost two units of product for the mixing department: Work in process—mixing.........................XX Manufacturing overhead..............................XX  Completing the cost flows:  Once processing has been completed in a department, the product units are transferred to the next department for further processing Of the following journal entry is used to transfer the costs of partially completed units from the mixi
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