Basic Operational and Cost Concepts

• To understand a process-costing system, it is necessary to understand the underlying

operational system.

OPERATIONAL PROCESS SYSTEM

Is characterized by a large number of homogeneous products passing through a series of

processes, where each process is responsible for one or more operations that bring a product one step
closer to completion.

► PROCESS - is a series of activities (operations) that are linked to perform a

specific objective

Bienestar Company, a manufacturer of a wide variety of over-the-counter medications and vitamins,

uses process costing in all of its plants.

For example, its Wichita plant produces an antihistamine and uses three processes: blending,
encapsulating, and bottling. The blending process consists of four linked activities: selecting, sifting,
measuring, and mixing. Direct laborers select the appropriate chemicals (active and inert ingredients)
and sift the materials to remove any foreign substances, and then the materials are measured and
combined in a mixer to blend them thoroughly in the prescribed proportions.

In each process, materials, labor, and overhead inputs may be needed (typically in equal amounts for
each unit of product). Upon completion of a particular process, the partially completed goods are
transferred to another process. For example, when the mix prepared by the Blending Department is
finished, the resulting mixture is sent to the encapsulating process. The encapsulating process consists
of four linked activities: loading, filling, sealing, and drying. Initially, the blend and a gelatin mass are
loaded into a machine. Two thin ribbons of gel are formed, one on each side of the machine. The mix is
fed to a positive displacement pump, which inserts an accurate dose between the two ribbons of gel.
The two ribbons are then sealed together using heat and pressure. Finally, the capsules are placed in
tumble dryers and then conveyed to a drying room. Once sufficiently dry, they can be sent to bottling.
The final process is bottling. It has four linked activities: loading, counting, capping, and packing.
Capsules are transferred to this department, loaded into a hopper, and automatically counted into
bottles. Filled bottles are mechanically capped, and direct labor then manually packs the correct number
of bottles into boxes that are transferred to the warehouse.