Hanson Industries produces a cough syrup in two production departments: Formulating and Bottling. All of the materials are added in the Formulating department. Once formulated, the product is transferred to the Bottling department to be packaged and shipped. If Hanson Industries uses process costing, what would be the journal entry to transfer the units to the Bottling department?

1. Debit Bottling account with  Work in Process

2. Credit Formulating account with Work in Process

Explanation:

Process costing is a costing technique that is employed when products are made from a sequence of continuous or repetitive production processes. Under process costing, direct costs are traced to and accumulated for each process and indirect cost of manufacturing are allocated based on a predetermined criteria.

From the question, it is obvious that the item being transferred by the Formulating department is still Work in Process, because Bottling department still has to work on it or add value to by packaging it before it becomes a final product that will be shipped to the customer.

Therefore, all the direct costs related to the Work in Process will be traced to and accumulated for Formulating department and the its portion of indirect cost will be added to it. This will give us the total cost of Work in Process attributable to the Formulating department which will be transferred to the bottling department.

Assuming the total cost of ork in Process attributable to the Formulating department is XXX, the journal entry for the Work in Process it transferred to the Bottling department will therefore be as follows:

                                                                                 DR                CR

Work in Process - Bottling                                       XXX

Work in Process - Formulating                                                    XXX

Being the cost of Work in Process transferred by the Formulating department to the Bottling department.

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