Principles of Accounting II. Process Manufacturing. Lesson #8. By Laurie L. Swanson. Click the button below to navigate to the next slide. Process Manufacturing. Process manufacturing involves mass production of homogenous goods in a continuous flow of steps (known as processes ).
By Laurie L. Swanson
Click the button below to navigate to the next slide.
Process manufacturing involves mass production of homogenous goods in a continuous flow of steps (known as processes).
Process cost accounting is used for process manufacturing systems.
In process manufacturing, goods are produced by moving through a series of steps or departments. In each step (or department), the product receives materials and/or labor and consumes overhead. The goods are considered in process until they pass through the final department and receive the last of their materials and/or labor. The goods are then transferred out of production as finished goods.
Goods are continuously moving through the production process and being transferred to finished goods. Likewise, goods in process continuously accumulate costs.
Unlike job order manufacturing, in process manufacturing, large batches of standardized products are produced in a continuous sequence. Tracking the cost of a single item would be cumbersome, inefficient, and costly. Therefore, in process manufacturing, costs are accumulated by department (or process), not by product.
There are numerous costs involved in the production (manufacture) of goods and it is important that all manufacturing costs be accounted for accurately and completely.
Recall that costs can be classified by function as either product (costs necessary to produce a product) or period (costs which apply to running the overall business).
When accounting for manufacturing costs, only product costs are considered.
The three components of product costs are:
View this classic clip on YouTube (1:46) to get a sense of process manufacturing.
While this is a fun clip to watch, it actually helps demonstrate some of the concepts of process manufacturing.
What did you notice that relates to process manufacturing systems?
Lucy and Ethel were working in the Wrapping Department. Did you notice the mention of other departments?
Which ones were mentioned by name?
Did you see that each product (candy) was the same and the process was applied in a continuous manner (conveyer belt)?
Did you see that the partially completed candy received additional material (wrapping paper) and labor (such as it was) in Lucy and Ethel’s department?
What costs were incurred in the wrapping department?
Direct materials – candy wrappers
Direct labor – Lucy and Ethel
Overhead – electricy, equipment depreciation, production supervisor, et al
What do you think happened to the candy when it left the wrapping department?
It went to the packing department where it would receive the final materials and labor. The candy would then be considered finished goods.