Advantages of a Process Costing System

Topics: Costs, Manufacturing Pages: 6 (1585 words) Published: April 23, 2014
ACCT283B group project
Chapter 18: Process Costing

Abstract
This paper identifies the key points on Process Costing. It covers over various topics like the flow of costs through a process costing system, how to calculate equivalent units of production for direct materials and conversion costs, the preparation of a production cost report, and how to prepare journal entries for a process costing system. Examples will also be shown on how process costing is used in the real world through cases, projects, and even shown through corporation situations.

Chapter 18: Process Costing
The manufacturing process is set up into an “either/ or” setting. It all depends on the ability to trace input costs to finished goods. The two paths that it can take is either Job Order costing or Process Costing. “Process Costing System is an accounting system that accumulates costs by process and is used by companies that manufacture identical units through a series of uniform production steps or processes” (Nobles, Mattison, and Matsumura, 2013, p.1070). Process costing usually includes products that are large in batch and that might include up to a month of production. Some examples of process costing system in companies that produce continuously are cereal, bread, candy, steel, automotive parts, chips, and computers. Also, companies that refine oil, bottle drinks, sort mail, and catalog orders.

The best example of flow of costs through a process costing system is similar to the one shown in Horngren’s Financial and Managerial Accounting text book. Southwestern Candle Company divides their manufacturing operations into three processes: mixing, molding, and packaging. The Mixing Department combines direct materials such as paraffin wax and pigments. The heated mixture is then pumped to the next step which is the Molding Department. The heated mixture is then poured into molds. When the mold cools then the candles are removed from the molds and are transferred, usually by conveyer belts, to the Packing Department. After arriving to the Packing Department, the candle holders are added to each and every individual candle and then the candles are boxed. The candles accumulate production costs during each process. The company then assigns these costs to the candles passing through that process. At Southwestern Candle Company, each process is a separate department (Nobles et al, 2013, p. 1071)

Suppose the company’s production costs incurred to make 100 candles. An example on how to calculate the cost per candle is as follows:

Total Costs
Cost per Candle
Mixing
$200
$2
Molding
$300
$3
Packaging
$400
$4
Total Cost
$900
$9

The total cost to produce 100 candles is the sum of the costs incurred for the three processes ($900). The cost per candle is the total cost divided by the number of candles. $900/ 100 candles= $9 per candle

The reasoning for using cost per unit is to control costs, set selling prices, calculate account balances.
“Job Order Costing System is an accounting system that accumulates costs by job and is used by the companies that manufacture unique products or provide specialized services” (Nobles, Mattison, and Matsumura, 2013, p.1070). Some examples of job order costing would be companies in the white collar sector of business, including law firms, accounting businesses, and private investment companies. Medical businesses are also job costing including hospitals, small doctor’s offices, and medical billing companies. One more example of job costing could be film and retail companies. Retail companies, including clothing designers and retail outlets, use job costing to track sales of clothing by size, individual pieces of clothes and different styles.

There are a few similarities in job order and process costing. Both systems determine a product cost by measuring the amount of direct materials, direct labor used, and allocating over- head costs. Both systems allocate...


References: Nobles, T., Mattison,B., & Matsumura, E. (2013). Horngren’s Financial & Managerial Accounting (4th ed.). Boston, MA: Pearson.
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