Characteristics of Process Costing

Process costing is an accounting method used to determine costs in industries where the production process is fixed and large-scale. This means that process costing generally appears in the manufacturing industry, where factories are trying to make large amounts of an item as quickly as possible for as low a cost as possible.

One major characteristic of process costing is the fact that the process is controlled. This is why process costing is used--it is an industry where the process is clear-cut, which makes it possible to assign a price to it. This means that there are a wide range of industries where process costing will not work. For example, a law firm cannot use process costing to determine prices because the process to produce their product (legal expertise and advice) is not the same for every client. Indeed, its selling point is that it is different for every client. Therefore, the process cannot be streamlined and the costs cannot be kept the same for all lawyers.

Process costing uses cumulative costs from every stage of production. So, if a factory makes ketchup bottles, the people in charge of process costing would find the cost of the glass, plus the cost of the labels, plus the cost of the workers in each department and maintenance of the necessary machines. By adding up the total cost of producing a set number of ketchup bottles, the accounting team can determine how much it costs to produce each ketchup bottle--and therefore determine what price each bottle should sell for.

The final characteristic of process costing is that the process has to be continuous. If a factory makes custom equipment for large clients, it is not possible to assign a fixed process cost because the process is not continuous. The factory may be making one kind of equipment for six months and a completely different kind for the next six months; the changing of inputs and outputs will change the process and therefore change its cost. However it is possible to process cost within each of these six-month periods. If a shop is making different things every day, though, then there are too many variables and process costing is not possible.