Procedures for  Materials, Labor, and Factory Overhead Costs Accumulations:

In process costing, materials, labor, and factory overhead costs are accumulated in the usual accounts, using normal cost accounting procedures. Costs are then analyzed by departments or processes and charged to departments by appropriate journal entries. The details involved in process costing are usually fewer than those in the job order costing, where accumulation of costs for many orders can become unwieldy.

Materials Costs:

In job order costing system, materials requisitions are used to charge jobs for direct materials used. If requisitions are used in process costing, details are considerably reduced because materials are charged to departments rather than to jobs, and the number of departments using materials is usually less than the number of jobs a firm might handle at a given time. Frequently materials are issued only to the process-originating department; subsequent department other than the first, they are charged to that department performing the specific operation.

For materials control purposes, materials need not always be priced individually on requisition forms. The cost of materials used can be determined at the end of the production period through inventory difference procedures, i.e., adding purchases to beginning inventory and then deducting ending inventory. Or consumption reports which which state the cost of materials or quantity of materials put into process by various departments can be used. Costs or quantities charged to departments by consumption reports may be based on formulas or proration. Formulas specify the type and quantity of materials required in the various products and are applied to finished production in order to calculate the materials consumed. Chemical and pharmaceutical industries use such procedures, particularly when more than one product is manufactured by a department. Frequently the cost of materials used by a department must by prorated to different products on various estimated bases. This portion is described in chapter By-Products and Joint Products Costing.

For any of the materials cost computation methods discussed, a typical journal entry charging direct manufacturing materials used during a period is:

The source of the cost figures for the above entry as well as the entries for labor and factory overhead is the cost of production report which is discussed on cost of production report page.

Direct Labor:

Labor costs are identified by and charged to departments in process costing, thus eliminating the detailed clerical work of accumulating labor costs by jobs. Daily time tickets or weekly time clock cards are used instead of job time tickets. Summary labor charges are made to departments through an entry which distributes the direct manufacturing payroll:

Factory Overhead Costs:

Factory overhead incurred in process costing as well as in job order costing should be accumulated in the factory overhead subsidiary ledger for producing and service departments. This procedure is consistent with requirements for responsibility accounting and responsibility reporting.

Normally it is emphasized to use the predetermined overhead rates for charging overhead to jobs and products. However, in various process and job order costing procedures, actual rather than applied overhead is sometimes used for product costing. This practice is feasible when production remains comparatively stable from period to period, since factory overhead will then remain about the same from one month to the next. The use of actual overhead can also be justified when factory overhead is not and important part of total cost. However, predetermined overhead rates for producing departments should be used if:

1. Production is not stable.
2. Factory overhead, especially fixed overhead, is a significant cost.

Fluctuations in production can lead to the unequal incurrence of actual factory overhead from month to month. In such cases, factory overhead should be applied to production using predetermined rates, so that units produced receive proper charges for factory overhead. Similarly, if factory overhead - especially fixed factory overhead - is significant, it is desirable to allocate factory overhead on the basis of normal or uniform production using predetermined overhead rates. Indeed, the use of predetermined rates is highly recommended for improving cost control and facilitating cost analysis.

Prior to charging factory overhead to departments via their respective work in process accounts, expenses must be accumulated in a factory overhead control account. As expenses are incurred the entry is:
 

Factory overhead control		xxxxx       Dr.
	Accounts Payable		xxxxx      Cr.
	Accumulated Depreciation - Machinery		xxxxx      Cr.
	Prepaid Insurance		xxxxx      Cr.
	Materials		xxxxx      Cr.
	Payroll		xxxxx      Cr.

The use of factory overhead control account requires a subsidiary ledger for factory overhead, with departmental expense analysis sheet to which all expenses are posted. Service department expenses are kept in like manner and distributed later to producing departments. At the end of each period, departmental expense analysis sheets are totaled. These totals, which also include distributed service department costs, represent factory overhead for each department. By debiting the actual cost incurred or by using the predetermined overhead rates multiplied by the respective actual activity base (e.g., direct labor hours) for each producing department, the entry charging these expenses to work in process is as follows:
 

Work in Process - Blending department		28,200      Dr.
Work in Process - Testing Departments		32,800      Dr.
Work in Process - Terminal Department		19,800      Dr.
	Factory Overhead Control		80,800    Cr.

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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