Costing By Departments

Costing By Departments:

The nature of manufacturing operations in firms using process or job order cost procedures is usually such that work on product takes place in several departments.

With either procedure, departmentalization of materials, labor, and factory overhead costs facilitates application of responsibility accounting. Each department performs a specific operation or process towards the completion of the product. For example, after the blending department has completed the starting phase of the work on product, units are transferred to the testing department, after which they may go to the terminal department for completion and transferred to the finished goods storeroom. Both units and costs are transferred from one manufacturing department to another manufacturing department. Separate departmental work in process (WIP) accounts are used to charge each department for the materials, labor, and factory overhead used to complete its share of manufacturing process.

Process costing 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. Determining departmental production for a period includes evaluating units still in process. The breakdown of costs for the computation of total unit costs and for costing units transferred and departmental work in process (WIP) 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 illustrated in detail on the Cost Of Production Report page. Most of the activity in process costing system involves the accumulation of data needed for the preparation of these reports.

You may also be interested in other useful articles from “process costing system” chapter:

  1. Definition and explanation of process costing system
  2. Characteristics  and Procedures of Process Costing System
  3. Costing By Departments
  4. Product Flow
  5. Procedure for Materials, Labor and Factory Overhead Costs in a Process Costing System
  6. Cost of Production Report (CPR)
  7. General Questions and Answers About Process Costing
  8. Exercises and Problems
  9. Process Costing System – Case Study

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