Question

Discuss the flow of costs in a process cost system and the journal entries to assign manufacturing costs.

Answer 1

The costs flow in a process cost system as follows:-

• The cost accumulation in a process costing system is simpler than in a job order costing system.
• Unlike job order costing system in which materials , labour , and overhead costs are traced to a large number of individual jobs , the process costing system traces costs to only a few processing departments.
• In process costing system , a separate work in process account is maintained for each department.
• The costs flows in parallel to the flow of physical unit When the processing work in a department is completed ,the units along with their cost are transferred to the next department to be undergone for further processing.

Journal entries to assign manufacturing costs:-

The cost of each manufacturing process comprise of-

1. Materials
2. Employee cost (Labour)
3. Direct expenses
4. Overheads of production

Materials - Materials and supplies which are required for each process are drawn against Material Requisitions Notes from the stores.each process for which the materials are used , are debited with the cost of materials consumed on the basis of the information received from the Cost Accounting departments.

Journal Entry of materials issued to process account-

Process Account Dr.

To Materials Account Cr.

The finished product of first process generally become the raw material of second process ; under such a situation the acount of second process is debited with cost of transfer from the first process and also with the cost of any additional material used in process.

Employee cost (Labour)-

Each process account should be debited with the labour cost or wages paid to labour for carrying out the processing activities . Sometimes the wages paid are apportioned over the different processes after selecting appropriate basis.

Process Account Dr.

To Labour (wages) Account Cr.

Direct Expenses -

Each process account should be debited with direct expenses like depriciation, repairs, maintenance, insurance etc. associated with it .

Process Account Dr.

To Direct expenses Account Cr.

Production Overheads -

Expenses like rent , power expenses , lighting bills, gas and water bills etc. are known as production overheads . These expenses cannot be allocated to a process . The suitable wayout to recover them is to apportion them over different processes by using suitable basis. Usually, these expenses are estimated in advance and the processes debited with these expenses on a pre-determined basis.

Process Account Dr.

To Production overheads Account Cr.

Summary:- The above answer contains the flow of costs in process system and journal entries to assign manufacturing costs in process system.