Putting it Together: Process Costing

As we saw in Dad’s Perfect Pies, process costing works best for mass-produced products such as candy and food and even automobiles.

For each firm listed in the following, identify whether it would use job costing or process costing.

  • Chewing gum manufacturer
  • Custom automobile restorer
  • Facial tissue manufacturer
  • Accounting services provider
  • Wedding Planner
  • Pool builder
  • Cereal producer
  • Architectural design provider

As a job flows through its creation, it collects costs, both direct and indirect, on some kind of job card, physical or more likely virtual.

A graphic titled Job Costing System is shown. On the left is a yellow area containing direct materials, direct labor and manufacturing overhead. To the right is an orange area labeled Work In Process Inventory. Within this area are three items: Job 1127, Job 1128, and Job 1129. Arrows point from the yellow area to these three jobs. To the right of that is a green area labeled Finished Goods Inventory, which contains two items: Job 1127 and Job 1128. Arrows are pointing from the corresponding jobs in the Work in Process Inventory area to these. To the right of that is a purple area labeled Cost of Goods Sold. It contains Job 1127, with an arrow pointing from the corresponding job in the Finished Goods Inventory area to it. The Work in Process and Finished Goods Inventory areas are labeled as being on the Balance Sheet, and the Cost of Goods Sold area is labeled as being on the Income Statement.

However, in process costing, we assign costs to the overall pools of products in each department, using equivalent units instead of partial units.

Equivalent units are used in many situations in addition to manufacturing. For instance, a university has 500 students enrolled in classes. Each student attends school on a part-time basis. On average, each student takes three-quarters of a full load of classes. The number of FTE (full-time equivalent) students is 375. The school also has 10 full-time faculty and 60 adjuncts working on a part-time basis. On average, each adjunct works two-thirds of a full load. Even though the head-count is 70 faculty, the FTE would be 10 + ⅔(60) = 30.

In process costing, units are indistinguishable from each other, so in essence, we are taking total costs for the period and allocating that to each unit in a logical manner. This means that partially finished units get only a partial allocation based on how complete they are (using equivalent units), and often the process is departmentalized and accounted for that way.

A graphic titled Process Costing System is shown. On the left is a yellow area containing direct materials, direct labor and manufacturing overhead. To the right are three orange areas labeled Work In Process Inventory, which are further identified as Mixing, Molding, and Packaging. Arrows point from the yellow area to all three orange areas. Arrows also point from Mixing to Molding to Packaging. To the right of Packaging is an arrow pointing to a green area labeled as Finished Goods Inventory. To the right of that is an arrow pointing to a purple area labeled as Cost of Goods Sold. The Work in Process and Finished Goods Inventory areas are labeled as being on the Balance Sheet, and the Cost of Goods Sold area is labeled as being on the Income Statement.

Cost accountants involved in process costing allocate overhead, assign direct costs, record and verifying financial and non-financial information, and most, if not all of that is done using spreadsheets and other software.