Process Costing in Manufacturing: Definition, Types, and Example

process costing

Most of the cost items ordinarily are identified with specific processes and in return collected and accumulated separately for each period. For example, manufacture of timber products such as chairs and tables which is a main product while saw dust is a by-product. Job costing requires more record keeping whereas process costing requires less record keeping.

Standardizing processes is crucial for accuracy and consistency in process costing. Manufacturing companies should establish standard procedures for cost accounting, inventory management, and production control to ensure the process costing system is reliable and effective. Mobile applications can be used to track production costs on the go, allowing supervisors and managers to monitor production costs from anywhere.

Assign costs to complete and in-process units

At the same time, the scrap value of the units representing normal loss is debited to the normal loss account’ and credited to the process account. Substandard materials, breakdowns, accidents, wrong plant design, carelessness, etc., are abnormal losses. They widely vary from industry to industry, depending upon the nature of the materials used. Calculating the unit cost for any work performed during a period is a key part of a production report. Employees play a crucial role in the success of the system. Manufacturing companies should provide training and support to employees to ensure they understand the system and how to use it effectively.

process costing

Use the cost per equivalent unit to assign costs to (1) completed units transferred out and (2) units in ending WIP inventory. It is only in an ideal situation where all materials are fully used to produce complete units of a product. But in reality, when production process starts, there are many cases where the producer will experience availability of some unused raw materials either in the beginning or at the end of the year or both. On the same breath, output can either be complete or partially finished. Under process costing, costs build up over a fixed period, and are then assigned to all the units produced throughout that time frame. In a process company, factory overhead represents those costs not directly assigned to one function.

Weighted average costs

Process costing refers to a type of costing procedure commonly adopted by factories. In process costing, there is continuous or mass production and ongoing costs, which are accumulated regularly. In summary, process costing is a critical element in manufacturing, and businesses that implement it effectively can achieve significant benefits. Companies can maximize their resources, reduce costs, and increase efficiency by taking a comprehensive and strategic approach.

Mobile applications can also capture data on raw materials, labor, and overhead costs. Overhead costs can vary significantly from one production run to another, and this variability can impact the selection of a process costing method. If the variability in overhead costs is low, a method like the standard cost method may be adequate. However, if the variability is high, a more detailed method that considers the actual overhead costs, such as the actual cost method, may be more effective.


The system a company uses depends on the nature of the product the company manufactures. In job order cost production, the costs can be directly traced to the job, and the job cost sheet contains the total expenses for that job. Process costing is optimal when the costs cannot be traced directly to the job. For example, it would be impossible for David and William to trace the exact amount of eggs in each chocolate chip cookie. It is also impossible to trace the exact amount of hickory in a drumstick. Even two sticks made sequentially may have different weights because the wood varies in density.

  • For example, how would you determine the precise cost required to create one gallon of aviation fuel, when thousands of gallons of the same fuel are gushing out of a refinery every hour?
  • Enterprise resource planning (ERP) software can help with this process.
  • Process costing is used most often when manufacturing a product in batches.
  • By-products are two goods of different class or category/class where by one is a main product while the second product is of minor category/class as far as economic value (i.e., monetary value) is concerned.
  • They are also used at the end of the year to determine ending inventory values.

In this example, two groups—administrative and manufacturing—report directly to the chief financial officer (CFO). Each group has a vice president responsible for several departments. The organizational chart also shows the departments The Importance of Accurate Bookkeeping for Law Firms: A Comprehensive Guide that report to the production department, illustrating the production arrangement. The material storage unit stores the types of wood used (hickory, maple, and birch), the tips (nylon and felt), and packaging materials.

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