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 inventories is also desirable for cost control purposes.

Departmental total and unit costs are determined by the use of the cost of production report, 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.

Difficulties Encountered in Process Costing Procedures:

Learning objectives of this article:

What are the difficulties or Limitations in a process costing procedure?

Certain difficulties likely to be encountered in actual practice should be mentioned with regard to process cost accounting procedures:

The determination of production quantities and their stage of completion presents problem. Every computation is influenced by these figures. Since the data generally come to the cost department from operating personnel often working under circumstances that make a precise count difficult, a certain amount of double counts and unreliable estimates are bound to exist. Yet, the data submitted from the basis for the determination of inventory costs.

Materials cost computations frequently require careful analysis In the illustrations materials are generally considered to the the cost of first department. In certain industries, materials costs are not even entered on production reports. When materials prices are influenced by fluctuating market quotations, the materials cost may be recorded in a separate report designed to facilitate management decisions in relation to the materials market.

The discussion of lost units by shrinkage, spoilage, or evaporation indicates that the time when the loss occurs influences the final cost calculation. Different assumptions concerning the loss would result in departmental unit costs, which, in turn effect inventory costs, the cost of units transferred, and the completed unit cost. Another consideration involves the possibility of treating cost attributable to avoidable loss as an expense of the current period. Industries using process cost procedures are generally of the multiple product type. Joint processing cost must be allocated the the products resulting from the processes. Weighted unit averages or other bases are used to prorate the joint cost to the several products. If units manufactured are used as a basis for cost allocation, Additional clerical expenses are necessary if the labor hour or machine hour basis is used for charging overhead to work in process. Management must decide whether economy and low operational cost are compatible with increased information based on additional cost computations and procedures.

It should be noted that some companies use both process costing and job order costing procedures for various purposes in different departments. This is particularly true when a parallel or selective cost flow format is required. Each system or method employed by a company must be based on reliable production and performance data which, when combined with output, budget, or standard cost data, will provide the foundation for effective cost control and analysis.