Process Costing
A cost accounting method that averages total production costs over equivalent units produced in continuous, high-volume manufacturing of identical products.
What is Process Costing?
Process costing is a cost accounting system used by companies that produce large quantities of identical or very similar products in a continuous production flow. Rather than assigning costs to individual jobs, process costing accumulates all costs by department or production stage over a period of time. The total departmental costs are then divided by the number of equivalent units produced — a measure that converts partially completed units into their full-unit equivalent — to calculate a cost per equivalent unit. Process costing is standard in industries such as chemicals, petroleum refining, food and beverage processing, and textiles.
Example
A paint manufacturer incurs $180,000 in departmental costs during March and produces 90,000 equivalent units (including partially completed batches). The cost per equivalent unit is $2.00 per unit. Finished goods are valued at this rate; partially completed units in ending WIP are valued based on their degree of completion.