Process - Cost Systems

Summary :

This chapter describes the kinds of operations that call for a process cost system and distinguishes it from job costing. It explains the concept of equivalent units, computing equivalent units and unit costs under the average cost procedure, preparing a production cost report, and distinguishing normal spoilage from abnormal spoilage.

When process costing applies

Process costing suits companies that produce large quantities of similar or identical units through a continuous, standardized process, such as a food or chemical manufacturer, in contrast to job costing, which accumulates costs by individual job or batch for companies producing distinct, custom units. Under process costing, costs are accumulated by department or process for a period and then spread evenly over all the units that passed through it.

Equivalent units and unit costs

Because a department typically has partially completed units in process at both the beginning and end of a period, process costing converts those partial units into equivalent whole units to make cost averaging possible; a unit that is 40 percent complete counts as 0.4 of an equivalent unit for that cost element. Dividing total costs by total equivalent units, under the average cost procedure, produces the unit cost used to value both units transferred out and the ending work in process.

The production cost report and spoilage

A production cost report ties directly to the Work in Process Inventory account, showing the physical units and costs a department is accountable for and how those costs are assigned to units completed and to ending inventory. Some spoilage is normal, an expected byproduct of the production process absorbed into the cost of good units, while abnormal spoilage, arising from unusual circumstances, is instead treated as a loss of the period in which it occurs.