Process costing is a way of identifying and assigning the costs of manufacturing products. By dividing costs incurred by units produced, process costing allows companies to determine a cost per unit. To find cost per unit, the business must first calculate the total equivalent units produced during the period and all relevant product costs incurred.
Step 1: Calculate Beginning Equivalent Units of Production
Find the equivalent unit of production for any units begun in a previous period but completed in the current period. To do this, determine how much work on the units was completed in the current accounting period and multiply that percentage by the number of units. For example, say that a company performed 50 percent of the work for 60 units last month and completed the other 50 percent of work in the current month. The equivalent units for the current month are 60 multiplied by 50 percent, or 30 equivalent units.
Step 2: Calculate Ending Equivalent Units of Production
Determine the equivalent units of production for units that are started, but not completed, during the accounting period. For example, if the business began work on another 100 units they are only 60 percent complete at the end of the accounting period, the ending equivalent units are 60.
Step 3: Identify Fully Completed Units
Calculate how many units were both started and completed during the accounting period. For example, if the company initiated the production of 70 more units and completed them during the same period, 70 units were fully completed during the month.
Step 4: Determine Total Equivalent Units
Sum beginning equivalent units, ending equivalent units and fully completed units to calculate total equivalent units completed. For example, if beginning equivalent units are 30, another 70 are started and completed and ending equivalent units are 60, total equivalent units are 160.
Step 5: Identify Product Costs
Calculate product costs incurred during the accounting period. Generally accepted accounting principles stipulate that product cost is the sum of direct labor, direct materials and overhead manufacturing expense incurred. Direct labor is the cost of employing the workers who create the product, and direct materials are the raw materials used to create the goods. Manufacturing overhead is all other factory costs -- like rent, depreciation, utilities and supervisor salaries -- not accounted for in direct materials.
Step 6: Calculate Cost Per Equivalent Unit
Divide product costs by the total equivalent units of production for the period to find cost per unit. For example, if product costs are $4,000 for the month and total equivalent units of production are 160, the cost per equivalent unit is $25.