Definition of Process Costing

Process costing provides accounting of equal manufacturing costs per unit of production.

Process costing is an accounting system that spreads the cost of manufacturing across all units produced. It is commonly used by companies that mass produce the same or like items.

Basics

Process costing, counter to job order costing, measures the cost of production and reports it by department, since it is hard to separate each cost in continuous process production.

As an example, to compute the average cost per completed widget using process costing, you divide total costs incurred for a period by total units completed. This is typically done in a software-driven cost of production report because of the volume and complexity of calculations.

Common Users

Production and manufacturing firms most often use process costing because of its reliance on like items. Production company examples include chemical, petroleum and textile producers, while manufactured items would include bolts, screws and small electrical parts. Assembly line operations and some specific service industries also use process costing.

Benefits

Because average unit costs are monitored by department, companies that use process costing can manage the operational efficiencies of each department over time. This helps address issues with material costs and production inefficiencies.

References

• Accounting for Management: Process Costing System
• North Seattle Community College: Process Costing
• Future Accountant: Process Costing: Characteristics, Features, Application in Industry