Ch. 17 - Process Cost Systems

Process Cost System

used by process manufacturers. This cost system records product costs for each manufacturing department or process.

what types of companies would use a process cost system?

• PepsiCo (PEP)

• Alcoa (AA)

• Intel (INTC)

• Apple (AAPL)

• Hershey (HSY)

what types of companies would use a job order cost system?

• Disney (DIS)

• Mayflower Transit, LLC

• Nicklaus Design

• Kabco Homes

• DDB Worldwide

the similarities in a process cost system and job cost system.

similarity

• Records and summarizes product costs.

• Classifies product costs as direct materials, direct labor, and factory overhead.

• Allocates factory overhead costs to products.

• uses a perpetual inventory system for materials, work in process, and finished goods

• provides useful product cost information for decision making.

Job Cost System vs. Process Cost System

• Job Cost System: Tracks costs per job or batch (e.g., custom guitars).

• Process Cost System: Tracks costs per process/department (e.g., soda production).

• Key Difference: Job costing is for unique products; process costing is for mass production.

understand how the cost flow works for a process manufacturer

produces products that are indistinguishable from each other using a continuous production process.

ex. 1⃣ Raw Materials → Purchased (e.g., oranges, cans)
2⃣ Work in Process → Processing & packaging (costs added)
3⃣ Finished Goods → Completed products
4⃣ COGS → Sold & recorded as an expense

know how to determine the units to be assigned costs

1⃣ Units Started + Beginning Inventory
2⃣ Minus Ending Inventory = Units Completed
3⃣ Consider Equivalent Units for partially completed work

definition of equivalent units of production

the portion of whole units that are complete with respect to materials or conversion (direct labor and factory overhead) costs.

determine the cost per equivalent

for direct materials and conversion costs is computed as follows:

• Direct Materials Cost per Equivalent Unit = Total Direct Materials Cost for the Period/ Total Equivalent Units of Direct Materials.

• Conversion Cost per Equivalent Unit = Total Conversion Cost for the Period/ Total Equivalent Units of Conversion Costs.

allocate costs to the cost to be transferred and to the ending work in process in inventory.

• product must be allocated to the units transferred out and the partially completed units on hand at the end of the period.

• the product costs are allocated using the costs per equivalent unit for materials and conversion costs that were computed.

know what the cost of production report is and what type of information it provides

• prepared for each processing department at periodic intervals. The report summarizes the following production quantity and cost data:

  • the units for which the department is accountable and the disposition of those units

  • the production costs incurred by the department and the allocation of those costs between completed (transferred out) and partially completed units.