Process Costing System
Addition of Materials, Average and FIFO Costing:

In numerous industries, all materials needed for the product are put in process in the first department. However, additional materials might be required in subsequent  departments in order to complete the units. The addition of materials has two possible effects on units and costs in process:

1. The additional materials increase the unit cost, since these materials become a part of the product manufactured, but do not increase the number of final units. For example, in a finishing plant of textile company, the the material added is often a bleach; in a wire company, a plating mixture; in an automobile assembly plant, additional parts. Theses materials are needed to give the product certain specific quantities, characteristics, or completeness; or
2. The added materials increase the number of units and also cause a change in unit cost. In processing a chemical, water is often added to a mixture, causing an increase in the number of units and a spreading of costs over a greater number.

Increase in Unit Cost Due to Addition of Materials:

In the simplest case, added materials, such as parts of an automobile, do not increase the number of units but increase total cost and unit costs. A materials unit cost must be computed for the department, and a materials cost must be included in the work in process inventory. Click here to read full article.

Addition of Materials - Increase in units and Change is Unit Cost:

When additional materials result in additional units, different computations are necessary. The greater number of units causes a decrease in unit cost which necessitates an adjustment of the preceding department's unit cost, since the increased number of units will absorb the same total cost transferred from the preceding department. Click here to read full article.

Beginning Work in Process Inventories:

The ending inventories of one period become the beginning inventories of the next period. Several methods are used in accounting for these beginning inventory costs. Two methods are illustrated here:

• Beginning Work in Process Inventories - Average Costing Method: Beginning inventory costs are added to the costs of the new period. Click here to continue reading.
• Cost of Production Report FIFO:
  Beginning inventory costs are kept separate and the new costs necessary to complete the work in process inventory computed Click here to continue reading.

Average Costing Method Versus FIFO Costing Method - Process Costing:

Both average costing and FIFO costing have certain advantages. It would be arbitrary to state that one method is either simpler or more accurate than the other. The selection of either method depends entirely upon management's opinion regarding the most appropriate and practical cost determination procedures. Click here to read full article

Difficulties Encountered in Process Costing Procedure:

Certain difficulties likely to be encountered in actual practice should be mentioned with regard to process cost accounting procedures. Click here to read full article

Discussion Questions and Answers:

Find answers of various questions about process costing system. Click here

Similarities and Differences between Job Order and Process Costing System:

Similarities between job order and process costing systems can be summarized as follows.

1. Both systems have the same basic purposes-to assign material, labor, and overhead costs to products and to provide mechanism for computing unit product cost.

2. Both systems use the same basic manufacturing accountants, including manufacturing overhead, Raw materials, Work in process, and Finished Good.

3. The flow of costs through the manufacturing accounts is basically the same in both systems. Click here to read full article

Operation Costing /Hybrid Costing System:

Operation costing is a hybrid costing system that employs aspects of both job order and process costing. Click here to read full article.

 

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