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Unformatted text preview: CHAPTER 3 PROCESS COSTING I. Basic Concepts of Process Costing LO 1 - Describe the key features of a process costing system. A. Job Order versus Process Costing 1. Process Costing – Process costing is used by companies that make standardized or homogeneous products or services. a. Keeping a separate cost record for each unit produced or customer served is not necessary because each product or service is virtually the same. b. Determine how much to assign to partially complete units is the focus of much of this chapter. 2. Job Order Costing – Job order costing is used by companies that offer customized or unique products or services a. Each individual product or customer is unique. b. A job cost sheet is used to keep track of the cost of each individual unit, or job, in a job order costing system. B. Flow of Costs in Process Costing 1. Three types of manufacturing costs that must be traced to the product and recorded as inventory until the product is sold. a. Direct Materials are the major material inputs that can be traced directly to the product. b. Direct Labor is the ”hands-on” labor that can be directly and conveniently traced to the end product. Because today’s wineries tend to be highly automated, direct labor is often a very small portion of the total manufacturing cost. Thus wineries my combine direct labor and manufacturing overhead costs together in a single category called conversion cost. c. Manufacturing Overhead includes all manufacturing costs other than direct materials and direct labor that must be incurred to make the product. 2. The manufacturing costs are recorded in one of the following inventory accounts until the product is sold. a. Raw Materials Inventory represents the cost of materials purchased from suppliers but not yet put into production. b. Work in Process Inventory represents the cost of units that are in process but not yet complete. In process costing, there is a separate Work-in-Process Inventory account for each of the major processes the product must go through as it is being manufactured. c. Finished Goods Inventory represents the cost of units finished but not yet sold. 3. When the product is sold, the manufacturing costs are transferred to Cost of Goods Sold where they are matched against sales revenue on the income statement. 4. Nonmanufacturing costs are expensed as they are incurred rather than being counted as part of the cost of the product. 5. Wine making is an example of a sequential process . The grapes must be crushed before they can be fermented and aged, which must be occurred before the wine can be bottled. 6. Other companies may use a parallel processing approach in which multiple processes occur simultaneously. For example, Toyota Company could have two different assembly processes running at the same time, one that produces engines and another that produces transmissions....
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- Spring '11
- Conversion of units, Equivalent Unit