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 an accounting method used primarily by companies that produce large quantities of homogeneous products through a continuous manufacturing process. This system is commonly found in industries such as chemicals, food processing, textiles, and petroleum refining, where production occurs in multiple sequential stages or processes.
In a process cost system, costs are accumulated for each production process or department rather than for individual jobs, as seen in a job order cost system. Because production flows through multiple stages, each process or department has its own Work in Process (WIP) account, where direct materials, direct labor, and manufacturing overhead costs are recorded.
Each process’s WIP account tracks the costs associated with that specific stage of production. As products move from one department to another, costs are transferred along with them until they reach the finished goods inventory. This allows for accurate cost allocation and ensures that all production costs are accounted for at every stage.
Why Other Options Are Incorrect:
- (a) A Work in Process account is maintained for each product – Incorrect because a process cost system maintains WIP accounts for each process, not for each product. Multiple products may go through the same process.
- (b) A materials requisition must identify the job on which the materials will be used – Incorrect because this applies to a job order cost system, where materials are assigned to specific jobs rather than to production processes.
- (d) One Work in Process account is maintained for all the processes – Incorrect because process costing requires separate WIP accounts for each production department or stage.
By maintaining a separate WIP account for each process, companies can track costs more accurately and determine the cost per unit of production at each stage, ultimately aiding in effective cost control and decision-making.