Define Process costing

- Process costing is a method of costing used mainly in manufacturing where units are
continuously mass-produced through one or more processes.

Basic purpose of Cost Accounting

1. The primary goal of cost accounting is the collection of data intended to give
management precise knowledge on the costs associated with producing a good. The
type of manufacturing processes will determine the best cost accounting system for a
specific company.
2. Cost accounting guides businesses' pricing decisions to ensure profitability and
identifies areas where they may be able to better control costs.

Process Costing methods that used by:

1. Industries producing chemicals, petroleum, textiles, steel, rubber, cement, flour,

pharmaceuticals, shoes, plastics, sugar, and coal.
2. Firms manufacturing items such as rivets, screws, bolts, and small electrical parts.
3. Assembly-type industry which manufactures typewriters, automobiles, airplanes, and
household electric appliances.
4. Service industries such as gas, water, and heat.

Characteristics of a Process Cost System

1. Costs are accumulated by cost center or department

2. Each department has a separate Work in Process Inventory account in the general
ledger. The cost of completed units transferred to another department or finished goods
inventory is credited to this account, which is debited for the processing expenses spent by
the department.
3. Work-in-process inventory is restated in terms of completed units at the end of a period
using equivalent units.
4. Finished products inventory or the final department receives completed items and their
associated charges. Unit costs for each and all finished commodities can be calculated using
total costs for the time period, which have been accumulated by the time units leave the final
processing department.
5. The department cost of production report is used to periodically compute and assess
total costs and unit costs for each department.

Differentiate Process Costing in Job Order Costing

- The best use for a job order cost accumulation system is when a single batch of goods
is produced in accordance with the demands of the customer. When products are
produced either through continuous processing or mass manufacturing methods, a
process cost accumulation system is used. When homogeneous products are made in
large quantities, process costing is appropriate. For instance, a maker of custom
cabinets would employ a job order cost system, as opposed to a producer of 8-ounce
jars of peanut butter, who would employ a process cost system.

- Job order cost accumulation systems accumulate three basic elements of a product's
cost according to department or cost center, while process cost systems charge
individual work in process inventory accounts for the costs incurred in processing units.
Upon completion of each job, the cost is transferred to finished goods inventory.

- Job costing sometimes includes customer billing to specify the precise costs associated
with each stage of the completion of a certain task or order. Process costing does not
always concentrate on the precise cost of each component of the process; instead,
expenses build up by each process or processing department.

- Manufacturing companies would benefit from understanding both task order costing and
process costing, as they can both be used to estimate product costs. Both work order
costing and process costing, which use roughly the same data to determine unit cost,
can be used by your company to track production costs and allocate resources, such as
time, materials, and labor, to your products.