The nature of manufacturing operations in firms using process cost system or job order cost systems is usually such that work on a product takes place in several departments. In either departmentalization of materials, labor and factory overhead costs facilitate application of responsibility accounting.
Under Process cost, each department performs a specific operation or process towards the completion of the product. For example, after the Mixing Department has completed the starting phase of work on the product, units are transferred to the Refining Department, after which they may go to the Finishing Department for completion and transfer to the finished goods storeroom.
Both units Costs are transferred from one manufacturing department to another. Separate departmental work in process accounts are used to charge each department for the materials, labor, and factory overhead used to complete its share of a manufacturing process.Process cost method involves averaging costs for a particular period in order to obtain departmental and cumulative unit costs.
The cost of a completed unit is determined by dividing the total cost of a period by the total units produced during the period. However, determining departmental production for a period also involves evaluating units still in process which in turn requires the accumulation of total and unit costs by departments.
The breakdown of process costs for the computation of total unit costs and for costing departmental work in process inventories is also desirable for cost control purposes.Departmental total and unit costs are determined by the use of the cost of production report which is described and will be illustrated in detail in later posts. Most of the activity in a process cost system involves the accumulation of data needed for the preparation of these cost reports.