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I'm Larry Walther.
This is principlesofaccounting.com, Chapter 20,
in which we consider process costing and activity-based costing.
We'll begin by considering process costing, recognize that the system we
looked at in the previous chapter, the job costing system, that method does not work
well in those situations where the production cycle involves a continuous
flow of raw materials through various processing departments.
Where the finished output is a homogeneous process or pool of output.
Such as, for example, where refineries process crude oil into gasoline.
We don't really have discrete jobs or units or barrels, instead,
we just have a pool of accumulated costs or
accumulated products that are processed into a pool of finished output.
And so we need to revise our accounting system to accomplish the proper
tracking of costs for production processes that occur in this fashion.
Broadly speaking, process costing accumulates the total cost of production
and allocates it proportionately to output.
Recognize that job costing and process costing while they're applied to
different types of production, the concepts are very similar.
That is we still have direct material, direct labor, and
factory overhead cost that we accumulate and assign to output.
As production is completed, amounts to remove my work in process accounts and
transfer into the finished goods inventory category.
However, the cost capturing system is different.
Recall under job costing, costs were captured for each job Using a job cost
sheet, whereas in the process costing were going to like more at the processes and
costs are typically captured by process or department.
This will necessitates a separate working process account for each production
activity or each process or major manufacturing activity as we will see.
Now, reviewing under the job costing system, the job cost fields as we have
raw materials that became direct materials in the production process.
We got it each of the respective job cost sheets.
Job A for portion of the materials you used on job A similarly for job B and C.
Likewise, when we encode the direct labor cost, we credited each variable.
And we debited the cost that was assigned to each particular job,
and then the factory overhead by some systematic and
rational process we allocated to each of those jobs.
As jobs were completed, such as for Job A, the work in process account is credited,
and the finished goods inventory is debited, as the job is completed.
Now, with process costing, it actually looks somewhat similar
in terms of the basic structure, but notice for starters that the costs
are not accumulated now by job, but they're instead accumulated by process.
So this production process involved a melting department and
then adding a skimming and an alloy process, and then finally,
a molding and extruding department.
But the cost transfer is much the same.
For example, for the materials as it's injected into production
along the way it will credit our raw materials inventory and
debit the appropriate work in process account.
The department into which the material was injected, if you will,
we would do the same thing for wages and overhead.
But as jobs are completed within each process,
the cost maybe transferred to the subsequent activity.
And so I'm crediting D,DDDD, the work in process account for
the cost that's being transferred to the skim alloy department, and
similarly the E,EEE is transferred into the mold extrude.
And finally, the finished goods coming out of the last production activity,
we're going to credit that last work in process account.
And debit the finished good inventory account as you can see
in this illustration.
The costs within each department is captured on a cost of production report.
We'll illustrate this over the next two modules.
For now, to summarize,
it provides a comprehensive information source about the material, labor, and
overhead that's incurred or assigned to each department during a period.
Whereas under job costing, costs were tabulated on job cost sheets.
And we'll see how the cost of production report is built up over the next
two modules.
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