Chapter 16: Accounting for Process Costing

In a process costing system, production costs flow through several stages, from raw materials to final product sales. The steps below summarize how costs are recorded and transferred in a process costing environment like that described for GenX. 1. Raw Materials and Labor Costs • • • Materials Purchase: When raw materials are purchased on credit, the materials cost is debited to the Raw Materials Inventory account. Direct Materials Usage: When materials are requisitioned and used in production, they are credited from Raw Materials Inventory and debited to Work in Process Inventory for the specific department (e.g., Roasting or Blending). Indirect Materials Usage: Indirect materials, which cannot be traced to a specific department, are debited to the Factory Overhead account. 2. Labor Costs • • Direct Labor: The costs for direct labor are debited to Work in Process Inventory for each department where labor is applied. Indirect Labor: Costs for indirect labor (e.g., supervisors and support staff) are debited to the Factory Overhead account. 3. Factory Overhead Costs • • • Accumulate Overhead Costs: Other overhead costs, like factory rent, utilities, depreciation, and insurance, are debited to Factory Overhead. These costs are necessary for production but are not tied to any specific unit or job. Apply Overhead to Departments: Overhead is applied to each department using a predetermined overhead rate, which is often based on direct labor or machine hours. GenX, for example, applies overhead at 120% of direct labor cost. The applied overhead is credited from Factory Overhead and debited to Work in Process Inventory for each department. Reconciliation of Overhead: If the actual overhead equals applied overhead, no adjustment is needed. Otherwise, at the period-end, any difference between actual and applied overhead is adjusted by either debiting or crediting Cost of Goods Sold. 4. Cost Transfers Between Departments • Transfer Costs from One Department to Another: As units move from one department to another, costs are transferred along with them. For example, when the Roasting department completes units, their costs are credited from Work in Process Inventory (Roasting) and debited to Work in Process Inventory (Blending). 5. Transfer to Finished Goods Inventory • Transfer Completed Units to Finished Goods: Once all production processes are complete, costs are credited from the last Work in Process Inventory (e.g., Blending) and debited to Finished Goods Inventory. This transfer represents units ready for sale. 6. Sale of Finished Goods and Cost of Goods Sold • • Recording Sales Revenue: When finished goods are sold, revenue is recorded. For example, if GenX sells 103,000 units of FitMix at $18.60 per unit, total revenue is credited as Sales Revenue on the income statement. Transfer to Cost of Goods Sold: The cost of units sold is debited to Cost of Goods Sold and credited from Finished Goods Inventory, transferring production costs from the balance sheet to the income statement. Example Journal Entries (Generalized for Each Step) 1. Materials Purchase plaintext Dr Raw Materials Inventory Cr Accounts Payable 2. Direct Materials Usage plaintext Dr Work in Process Inventory (e.g., Roasting) Cr Raw Materials Inventory 3. Indirect Materials Usage plaintext Dr Factory Overhead Cr Raw Materials Inventory 4. Direct Labor Costs plaintext Dr Work in Process Inventory (e.g., Blending) Cr Wages Payable 5. Indirect Labor Costs plaintext Dr Factory Overhead Cr Wages Payable 6. Other Overhead Costs plaintext Dr Factory Overhead Cr Various accounts (e.g., Utilities Payable, Depreciation) 7. Applying Overhead to Production Departments plaintext Dr Work in Process Inventory (Roasting/Blending) Cr Factory Overhead 8. Transfer Costs to Next Department plaintext Dr Work in Process Inventory (Blending) Cr Work in Process Inventory (Roasting) 9. Transfer to Finished Goods plaintext Dr Finished Goods Inventory Cr Work in Process Inventory (Blending) 10. Recording Sales and Cost of Goods Sold plaintext Dr Cr Dr Cr Accounts Receivable Sales Revenue Cost of Goods Sold Finished Goods Inventory This structured flow of production costs allows companies to track each cost component, helping managers make informed decisions and prepare accurate financial statements.