Accounting: A Business Perspective (Irwin/Mcgraw-Hill Series in Principles of Accounting)

With an emphasis on the corporate approach, this text has 18 chapters devoted to financial accounting and 8 chapters covering managerial accounting. After studying this chapter, you should be able to:
• Describe the types of operations that require a process cost system.
• Distinguish between process and job costing systems.
• Discuss the concept of equivalent units in a process cost system.
• Compute equivalent units of production and unit costs under the average cost procedure.
• Prepare a production cost report for a process cost system and discuss its relationship to the Work in Process
Inventory account.
• Distinguish between normal and abnormal spoilage.
• Compute equivalent units of production and unit costs under the first-in first-out (FIFO) system (Appendix
19-A).
• Discuss how joint costs are allocated to joint products (Appendix 19-B).
Nature of a process cost system
Many businesses produce large quantities of a single product or similar products. Pepsi-Cola makes soft drinks, Exxon Mobil produces oil, and Kellogg Company produces breakfast cereals on a continuous basis over long periods. For these kinds of products, companies do not have separate jobs. Instead, production is an ongoing process. A process cost system (process costing) accumulates costs incurred to produce a product according to the processes or departments a product goes through on its way to completion. Companies making paint, gasoline, steel, rubber, plastic, and similar products using process costing. In these types of operations, accountants must accumulate costs for each process or department involved in making the product. Accountants compute the cost per unit by first accumulating costs for the entire period (usually a month) for each process or department. Second, they divide the accumulated costs by the number of units produced (tons, pounds, gallons, or feet) in that process or department.