Process Cost System – Managerial Accounting – Cost Accounting

Links to parts of the presentation below. 0:16 Flow of Materials, Labor, & Overhead 18:37 Methods to Calculate Ending WIP and Units Completed 23:09 Equivalent Units of Production – Weighted Average Method 28:29 Cost Per Equivalent Unit Calculation – Weighted Average Method 31:18 Assign Costs to Units – Weighted Average Method 36:34 Overhead Costs 47:44 Overhead Allocation – Predetermined Overhead Rate 56:17 Overhead – Under Applied or Over Applied 1:03:57 Equivalent Units – First In First Out (FIFO) Method A process cost system is one of the two accounting system generally used in managerial accounting or cost accounting for a manufacturing company. To understand a process cost system we often contrast it to the other major managerial or cost accounting system, a job order costing system. The process costing system and the job order costing system is not completely different or opposite cost accounting or managerial accounting methods, but contrasting the two gives us a good point of reference to talk about them both. Both the process cost system and job cost system of accounting for the production of inventory use many of the same accounting. Both will record the conversion of inventory from raw materials to finished goods and finally record the sale in the form of cost of goods sold. The accounts involved in a manufacturing company related to the production of inventory include raw materials, work in process, overhead, finished goods, and finally cost of goods sold. Raw materials represent inventory that has not yet been processed, has not yet been converted to finished goods. Raw material will generally go up at the point of purchase with a debit to raw materials and a credit to accounts payable or cash. The raw materials will then move work in process or overhead depending on if we can apply the material to a process. In a job cost system, we would apply the materials to a job as we enter the debit to the work in process WIP account. Once in work in process the materials will be converted to inventory by adding the conversion costs, including labor and overhead. Work in process will include materials, labor, and overhead. Once completed the work and process will be transferred to finished goods where it is ready to be sold. When the inventory is sold the cost of the inventory is recorded in cost of goods sold. A process cost system will need to track the cost of inventory as it moves through each process. To help with the allocation of cast we will calculate cost per equivalent unit and allocate the costs that are still in a process and those that have been transferred. We can allocate costs using a first in first out method or a weighted average method. The weighted average method may be easier and have fewer steps, but both accounting methods are a type of estimate.