Page 765 - Accounting Principles (A Business Perspective)

19. Process: Cost systems

In "A broader perspective: Producing cans of Coca-Cola", we describe production in bottling and canning plants
that use a process cost system. Job costing and process costing have important similarities:

• Both job and process cost systems have the same goal: to determine the cost of products.
• Both job and process cost systems have the same cost flows. Accountants record production in separate
accounts for materials inventory, labor, and overhead. Then, they transfer the costs to a Work in Process
Inventory account.
• Both job and process cost systems use predetermined overhead rates (defined in Chapter 18) to apply
overhead.
Job costing and process costing systems also have their significant differences:

• Types of products produced. Companies that use job costing work on many different jobs with different
production requirements during each period. Companies that use process costing produce a single product,
either on a continuous basis or for long periods. All the products that the company produces under process
costing are the same.
• Cost accumulation procedures. Job costing accumulates costs by individual jobs. Process costing
accumulates costs by process or department.
• Work in Process Inventory accounts. Job cost systems have one Work in Process Inventory account for each
job. Process cost systems have a Work in Process Inventory account for each department or process.
Exhibit 150 shows the cost flows in a process cost system that processes the products in a specified sequential

order. That is, the production and processing of products begin in Department A. From Department A, products go
to Department B. Department B inputs direct materials and further processes the products. Then Department B
transfers the products to Finished Goods Inventory. For illustration purposes, we assume that all the process cost
systems in this chapter are sequential. There are many production flow combinations; Exhibit 151 presents three
possible production flow combinations.

Process costing illustration
Assume that Jax Company manufactures and sells a chemical product used to clean kitchen counters and sinks.
The company processes the product in two departments. Department A crushes powders and blends the basic
materials. Department B packages the product and transfers it to finished goods. Exhibit 151 shows this
manufacturing process.

The June production and cost data for Jax Company are:
Department A Department B
Beginning inventory -0- -0-
Units started, completed, and transferred 11,000 9,000
Units on hand June 30, partially completed -0- 2,000
Direct materials $16,500 $1,100
Direct labor 2,500 2,880
Actual overhead 7,500 8,600
Applied overhead 7,400 8,880

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