Process Costing
AdvancedProcess costing is a method of calculating product costs used when identical units are produced in a continuous process, by adding up the costs of each production stage and dividing them by the number of units produced.
In industries such as chemicals, oil refining, food and drink, paper and cement, products move through a series of stages and individual units are indistinguishable. Tracking each unit separately would be impossible, so costs are averaged.
Costs are collected for each process or department over a period. They are then spread across the units produced. For example, if a bottling process incurs costs of 100,000 in a month and fills 20,000 bottles, the cost per bottle for that process is 5.
A complication is partly finished goods. Process costing uses equivalent units, which convert partly completed units into a number of fully completed ones. For example, 1,000 units that are 40% complete count as 400 equivalent units for conversion costs.
Process costing is simpler than tracking individual jobs but provides less detail. It contrasts with job costing, used when each order is distinct. Some businesses use a hybrid of the two.
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