Question

3. In a process costing system, direct materials are often used by multiple production departments. How does a company record direct materials cost for every production department? (example: a company has three production departments - preparation, processing, and finishing).

Answer 1

In Process Costing System, Direct Materials are issued to first process (process 1). Finished goods of first process becomes direct materials to next process (Process 2). Finished goods of Process 2 becomes direct materials to Process 3. Units finished at last process finally transferred to Finished Inventory. Journal Entries for the above is as follows.

Journal Entries Date Account Title and Explaination Debit Credit Post. Ref. a XXXXX Work In Process Inventory - Preparation Department Direct Materials Inventory XXXXX (To record direct materials issued to Preparation Department) XXXX XXXX Work In Process Inventory - Processing Department Work In Process Inventory - Preparation Department (To record materials transferred from Preparation Dept to Processing Dept) XXXX XXXX Work In Process Inventory - Finishing Department Work In Process Inventory - Processing Department (To record materials transferred from Processing Dept to Finishing Dept) d XXXXX Finished Goods Inventory Work In Process Inventory - Finishing Department (To record finishing dept to Finished goods inventory) XXXXX