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Session 07 - Session 7 Process Costing Process Costing In...

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Session 7 Process Costing
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Process Costing In an enterprise which produces large quantities of virtually identical products, relatively precise information about the cost of a single unit may be as useful as it is for a firm that produces small quantities of differentiable products. However, in the former case, a job costing system is not an efficient way to accumulate that information – it is too costly to implement and maintain. Consider how relatively costly it would be to install and operate a job costing system to determine the unique cost of each Bic ballpoint pen produced in a plant which produces tens of thousands of those pens each day. In this environments, a process costing system, rather than a job costing system, is used to obtain product cost information.
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In process costing, the assignment of manufacturing costs to the product occurs in two steps. Initially, the production department (process) is the cost object and costs are assigned to each department. There is a subsidiary WIP account for each department. The direct costs that are traced to a department as they are incurred and the indirect costs that are allocate to it are recorded in the WIP account for the department . Subsequently, the product becomes the cost object. As units of product pass through a department, the direct materials costs and the conversion costs recorded in the WIP account for that department are reassigned to the product. Thus, the unit cost of the products passing through a department in a period is the average of the total costs incurred by (allocated to) that department for the period.
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Because cost information is maintained for each department a complication arises when goods are transferred from one department to another. To account for that transfer a journal entry is required: Cost of Units Transferred XX WIP – Upstream Dept XX WIP – Downstream Dept To make this entry, we need to know the cost of the goods transferred.
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