PROCESS COST ACCOUNTING

Comparing Job Order and Process Cost Accounting Systems

Both process and job order operations integrate materials, labor, and overhead in the process of creating items. They differ in terms of organization and management. A work order costing system focuses on the particular task or batch, whereas a cost accounting system focuses on the overall cost. It is a costing method for specific processes. Regardless of measuring emphasis, we are ultimately concerned with assessing the cost per unit of product (or service) as a result of whichever system.

The job order cost accounting system, in particular, assigns direct supplies, direct costs, and overhead to projects. The overall cost of the project is then divided by the number of units to determine the cost per unit for that job. The process cost accounting system allocates particular processes direct materials, direct labor, and overhead (or departments). The total costs associated with each process are then divided by the number of units that transit through that process to calculate the cost per equivalent unit . The differences between these two systems' approaches to materials, labor, and administrative expenses are underlined.

Direct and Indirect Costs

Process cost accounting systems, like work order operations, employ the notions of direct and indirect costs. A cost is direct if it can be traced back to the cost item; otherwise, it is indirect. Materials and labor that can be linked back to specific processes are assigned as direct expenses to those operations. Indirect expenses are materials and labor that cannot be traced back to a specific process and are attributed to overhead. In process cost accounting, some expenditures designated as overhead in a task order system may be classed as direct costs. Depreciation of a machine employed exclusively by one process, for example, is a direct expense of that operation.

Accounting for Materials Costs

The arrival of materials at GenX's manufacturing is shown by arrow line 1. These resources Prifelone, flavorings, preservatives, and packaging are all included. They also contain supplies for the Office of production support GenX operates on a permanent inventory system and performs all purchases on the spot. The summary item for raw material receipts in April is as follows (dates in journal entries). Numbers 1 through 0 are excluded since they are summary entries, frequently reflecting two or more items. more transactions or occurrences

Credit	Debit	Description	N
	11,095	Raw Materials Inventory
11,095		Accounts Payable	1
		Acquired materials on credit for factory use.

The route of direct materials to manufacturing, where they are utilized to make Proven, is represented by arrow line 2. The majority of direct materials are physically mixed into the completed product. The remaining direct materials include those utilized and obviously associated with a certain product. process. A process manager often gets supplies by submitting a materials requisition. to the manager of the materials warehouse in certain cases, materials travel continually from one location to another. Inventory of raw materials during the production process , For example, Pepsi Bottling has a procedure in which inventory travels continuously through the system. A materials consumption report summarizes the materials utilized by a department during a reporting period and substitutes materials requisitions in certain circumstances. The entry to record GenX's manufacturing department's usage of direct materials in April follows.

Credit	Debit	Description	N
	9,900	Goods in Process Inventory
9,900		Raw Materials Inventory	2
		To assign costs of direct materials used in production

This transaction transfers expenses from one asset account to another. (When a corporation has two or more production divisions, it utilizes two or more Goods in Process Inventory accounts to divide the expenses spent by each.) The passage of indirect supplies from the warehouse to the factory above is shown by arrow line 3. These materials are not explicitly associated with any one manufacturing process or department, but are utilized to support overall manufacturing activity. The cost of indirect materials used by GenX in April is shown in the following item.

Credit	Debit	Description	N
	1,195	Factory Overhead
1,195		Raw Materials Inventory	3
		To record indirect materials used in April

After posting the entries for both direct and indirect materials, the Raw Materials Inventory account looks like this. The $4,000 Raw Materials Inventory account is listed as a current asset on the April 30 balance sheet.

Raw Materials Inventory
Date	Explanation	Debit	Credit	Balance
31/3	Balance			4,000
30/4	Materials purchases	11,095		15,095
30/4	Direct materials usage		9,900	5,195
30/4	Indirect materials usage		1,195	4,000

Accounting for Labor Costs

shows GenX plant payroll expenses, as shown by arrow line 4. Labor charges of $8,920 are paid in cash and recorded in the Factory Payroll account.

Credit	Debit	Description	N
	8,920	Factory Payroll
8,920		Cash	4
		to record factory wages for April

This entry was generated by time reports from the production department and the production support office. (For clarity, we do not identify withholdings and supplementary payroll taxes for employees individually.) A production department's direct labor in a process operation comprises all labor employed entirely by that department. This is true even if the work is not directly applied to the product. If a process operation's manufacturing department, for example, has a full-time manager and a full-time maintenance worker, their wages are direct labor expenses of that process and not factory overhead.

In the production department, arrow line 5 shows GenX's utilization of direct labor. The following transaction moves the direct labor expenses for April from the Factory Payroll account to the Goods in Process Inventory account.

Credit	Debit	Description	N
	5,700	Goods in Process Inventory
5,700		Factory Payroll	5
		to assign costs of direct labor used in production

The indirect labor costs of Generation X are represented by arrow line 6. These individuals perform secretarial, maintenance, and other services that aid in the effective production of profane. For example, they order supplies, deliver them to the factory floor, repair equipment, operate and program production computers, manage payroll and other production records, clean up, and transport finished items to the warehouse. These indirect labor expenses are charged to manufacturing overhead in the next entry.

Credit	Debit	Description	N
	3,220	Factory Overhead
3,220		Factory Payroll	6
		To record indirect labor as overhead.

Following the posting of these entries for both direct and indirect labor, the Factory Payroll account displays as displayed. The temporary Factory Payroll account has been linked to another temporary account, Factory Overhead, and is now ready to accept entries for May. Following that, we will demonstrate how to apply overhead to production and shut the temporary Factory Overhead account.

Factory Payroll
Date	Explanation	Debit	Credit	Balance
31/3	Balance			0
30/4	Total payroll for April	8,920		8,920
30/4	Direct labor costs		5,700	3,220
30/4	Indirect labor costs		3,220	0

Accounting for Factory Overhead

Arrow line 7 represents overhead expenditures other than indirect materials and indirect labor. Overhead costs include insuring production assets, renting the factory building, utilizing factory utilities, and depreciating equipment that is not directly tied to a certain activity. The next entry records April overhead costs.

Credit	Debit	Description	N
	2,425	Factory Overhead
180 645 750 850		Prepaid Insurance Utilities Payable Cash Accumulated Depreciation—Factory Equipment	7
		To record overhead items incurred in April.

After this entry is posted, the Factory Overhead account balance is $6,840, comprising indirect materials of $1,195, indirect labor of $3,220, and $2,425 of other overhead.

The application of factory overhead to production is shown by arrow line 8. Factory overhead is applied to operations by tying overhead costs to other variables such as direct worker hours or machine hours utilized. Companies with process operations are increasingly likely to utilize machine hours to distribute overhead as automation increases. A single allocation basis, such as direct labor hours (or a single rate for the whole plant), does not always generate meaningful allocations. As a consequence, management might employ various rates for different areas of production. Exhibit 20.8 shows that, based on a study of its processes, GenX applies its April overhead at a rate of 120 percent of direct labor cost.
Overhead applied =Direct labor cost * Predetermined rate
$6,840 = $5,700 * 120%
GenX records its applied overhead with the following entry.

Credit	Debit	Description	N
	6,840	Goods in Process Inventory
6,840		Factory Overhead	8
		Allocated overhead costs to production at 120% of direct labor cost.

Following the submission of this entry, the Factory Overhead account displays as indicated. For GenX, the overhead applied is equivalent to the actual overhead incurred in April. Using a predefined overhead rate usually results in an overapplied or underapplied balance in the Factory Overhead account. This overapplied or underapplied amount should be closed to the Cost of Goods Sold account at the conclusion of the period, as indicated in the task order costing chapter.

Factory Payroll
Date	Explanation	Debit	Credit	Balance
31/3	Balance			0
30/4	Indirect materials usage	1,195		1,195
30/4	Indirect labor costs	3,220		4,415
30/4	Other overhead costs	2,425		6,840
30/4	Applied to production departments		6,840	0

Resources : fundamental accounting principles 20th edition (pdf) John J. Wild , Ken W. Shaw Barbara Chiappetta