Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. The following journal entries relate to the production activity for the Packaging Department in May. (8) Total materials equals the sum of the materials in the three groups.

• Job order systems are custom orders because the cost of the direct material and direct labor are traced directly to the job being produced.
• Rock City Percussion makes 8,000 hickory sticks per day, four days each week.
• Companies sum all current-period costs and divide them by the entire number of units finished and transferred out, plus the equivalent units of work-in-progress at the conclusion of the period.
• In process costing, there is continuous or mass production and ongoing costs, which are accumulated regularly.
• A company has to analyze the flow of items during the production period to determine the amount of inventory at the beginning of the period.

Process costing system is an accounting method usually used by manufacturing companies that mass produces very identical products or units of output. This costing system is used when the costs of producing each individual unit are very similar, and it is difficult to track the costs for each individual unit throughout the production process. In this article, we will discuss the process costing system examples, methods, and steps. Calculating the applicable costs is the next step in the process costing system. This involves summing up the total costs for all production stages, such as the direct materials and conversion costs. In a process cost system, the direct expenses and production overhead are calculated for every one of the stages of production.

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In a process costing system, the cost of units transferred out of each department must be determined as well as the cost of any partially completed units remaining in the department. Based on the previous calculations, the following seven cost results can be determined. These amounts are the goals of process costing and can be used to determine progress and for comparison purposes over time. Next is to allocate costs for the completed and incomplete products to the corresponding accounts in order to determine how much money is tied up in the current work-in-progress products.

• Hence, a process costing system is used to estimate product costs in manufacturing industries.
• Although it goes through many assembly lines as it incurs costs such as direct material, direct labor, and overhead, we can just sum up all costs and divide them by the total output of each process line.
• Process costing is the optimal costing system when a standardized process is used to manufacture identical products and the direct material, direct labor, and manufacturing overhead cannot be easily or economically traced to a specific unit.
• Process costing is appropriate for companies that produce a continuous mass of like units through series of operations or process.
• As one of the process costing system examples, let’s look at a supposed company, ABC Inc, that produces wire rods, that pass through multiple production departments.
• For example, General Mills uses process costing for its cereal, pasta, baking products, and pet foods.
• If these wire rods are moved to another department for further work, say, the trimming department, the cost per unit allocated will be carried along with the wire rods into this department, where additional costs will be added.

Figure 8.61 shows a partial organizational chart for Rock City Percussion, a drumstick manufacturer. In this example, two groups—administrative and manufacturing—report directly to the chief financial officer (CFO). The organizational chart also shows the departments that report to the production department, illustrating the production arrangement. The material storage unit stores the types of wood used (hickory, maple, and birch), the tips (nylon and felt), and packaging materials. The most difficult process costing method, FIFO is used to provide more precise product costing, particularly when expenses vary dramatically from one period to the next. The first units (i.e., work in progress at the start of the current period) are assumed to be the first to be completed under FIFO.

What is Process Costing?

The overall cost is $150,000, with 150,000 units produced at a cost of $1 each unit. The process costing system accumulates costs when a large number of identical units are being produced. In this case, it is more effective to accumulate costs for a large batch of products and then distribute them to individual units produced. The presumption is that the cost of each unit is the same as the cost of any other unit, hence tracking information at the individual unit level is unnecessary.

The total number of units produced during a given period is calculated. By dividing the total cost of a process by the total number of units produced, the cost per unit can be obtained. Materials, process costing examples labor, and factory overhead costs are added in each department. The sum of the departmental work in process costs is the total cost of the batch that is transferred to Finished Goods.

Choosing Between Process Costing and Job Order Costing

A grid is used to organize the unit (not dollar) information above and to calculate key amounts.

A batch is defined as each time a quantity of materials is added to the first point of production to keep the work flow going. Direct costs accumulate and indirect costs are applied to the batches as they move through the production processes. Eventually, costs are averaged over the units produced during the period to determine the cost of one item. If a process costing system does not work well with a company’s cost accounting systems, there are two more systems to consider.