Definition of Process Costing System

Process costing is a method of cost calculation for businesses whose processes are consistent and whose products are homogeneous. Therefore, single-item factories can use process costing, while custom-order clothing companies cannot.

Usage

Process costing is used to determine how much money a firm is spending on actual production. It can use this figure to calculate how much it needs to charge for its products and how many products it needs to sell to be profitable.

Cumulative

Process costing is cumulative. Making a product requires more than one process. For example, if you make a sandwich, there is a bread-slicing process in addition to a mayonnaise-spreading process and a meat distribution process. Therefore, to accurately process cost, you need to add up the total value of all the processes involved.

Continuous

A process costing system only works for continuous production because it is using fixed figures. To ensure that these figures are fixed, the production line needs to produce the same amount of the same kind of goods everyday. Otherwise, large-scale process costing is not effective.

References

• Future Accountant: Process Costing
• Accounting for Management: Process Costing System: Case Study