Unit 3: Process Costing
In Unit 2, you learned about job costing. A job costing system is used by companies that produce unique products or jobs. In this unit, you'll learn about process costing, a system used by companies that produce similar or identical units of product in
batches and employ a consistent process. Process costing systems track costs by processing department, whereas job costing systems track costs by job. Process costing is best used in an assembly-line production environment.
Completing this unit should take you approximately 3 hours.
Upon successful completion of this unit, you will be able to:
- explain the differences between the job costing and process costing methods;
- use a process costing system to assign direct material, direct labor, and manufacturing overhead costs to production departments;
- define equivalent units and use them to assign costs to products using the weighted average method; and
- prepare a production cost report for a processing department.
3.1: What is a Process Costing System?
Read the Chapter 4 Introduction, and then click "Next Section" to read section 4.1. In this section, you'll read about the example of Desk Products Inc., which mass produces wood desks. It maintains an advantage over its competitors by producing one desk in large quantities: 4,000 to 8,000 desks each month. Changes in the market are causing the CEO to be diligent about keeping costs as low as possible. The most efficient method to respond to this concern is to use process costing. As you read this chapter, pay attention to how department costs are allocated based on the concept of equivalent units. Pay close attention to the production cost report and the information it gives the CEO. How does this improve her management decision making?
3.2: Direct Materials, Direct Labor, Factory Overhead
Read section 4.2. Much like job costing, process costing requires companies to assign the cost of direct materials, direct labor, and factory overhead. The nature of manufacturing a product that flows through a process of departments necessitates a different method of applying those costs.
3.3: Assigning Costs in Four Steps
Read section 4.3. As you can imagine, products manufactured in a process cost system will have varying degrees of completion with respect to its use of direct materials, direct labor, and overhead as the product flows through production. Accountants rely on the degree of completion to calculate equivalent units for the purpose of assigning those production costs at all stages.
Read section 4.4. To determine an average cost per unit, some companies rely on the weighted average method of assigning production costs to its inventory. This simple method simply averages the prior costs with current manufacturing costs to determine its average cost.
3.4: Cost of Production Report
Read section 4.5. Using the four steps of assigning costs in a process costing system, managers ultimately determine the cost of the finished goods transferred out of production as well as the value of the partially completed product. This information is summarized nicely in a standard format with the production cost report.