In a process cost system,
a.a Work in Process account is maintained for each product.
b.a materials requisition must identify the job on which the materials will be used.
c.a Work in Process account is maintained for each process.
d.one Work in Process account is maintained for all the processes, similar to a job order cost system.
The correct answer and explanation is :
Correct Answer:
c. A Work in Process account is maintained for each process.
Explanation:
A process cost system is used by companies that produce large quantities of similar or homogeneous products, such as food processing, chemical manufacturing, or petroleum refining. Unlike a job order costing system, where costs are accumulated for each individual job, a process cost system accumulates costs for each stage (or process) of production.
In a process cost system, the production process is divided into multiple departments or processes, and each department is responsible for a certain stage of production. As raw materials move through different production processes, costs are assigned and accumulated in the Work in Process (WIP) account for each process.
Why Option C is Correct:
- Separate WIP Accounts for Each Process:
- Since production occurs in multiple stages, each department maintains its own Work in Process account.
- Costs are tracked separately for each process, making it easier to allocate direct materials, direct labor, and factory overhead to the correct stage.
- Cost Flow in a Process Cost System:
- Costs flow from one process to the next until the product is completed.
- When a process finishes its work, the total cost accumulated in that WIP account is transferred to the next process’s WIP account.
- Finally, the last process transfers costs to Finished Goods Inventory.
- Comparison with Other Options:
- Option A (WIP for each product): Incorrect, as costs are tracked per process, not per product.
- Option B (Materials requisition for a job): Incorrect, as this applies to job order costing, where costs are assigned to specific jobs.
- Option D (One WIP for all processes): Incorrect, as process costing requires separate WIP accounts for each process.
Thus, maintaining a Work in Process account for each process ensures accurate cost tracking and facilitates efficient cost control in mass production environments.