Process Costing
Process Costing Meaning |
A process consists of steps that must be followed in order to complete a task. In a process costing system, the costs of a production process are accumulated and assigned to the products the business produces. As part of the process costing system, a production report must be prepared. It involves accruing expenses for all interdependent processes in a cost accounting system. In manufacturing companies that employ process pricing, raw materials are transformed into final commodities after undergoing a series of processes. Typically, for cotton textiles, the first step is spinning, the second step is weaving, and the final step is finishing.
The ideal costing approach is to use process costing when identical items cannot be tracked back economically to a given unit using direct materials, direct labor, and manufacturing overhead. In batch production, process costing is especially prevalent. It is the responsibility of each department, production process, and batch process to keep track of its direct material and direct labour costs, as well as the number of units produced.
Using a process costing system, the actual cost to produce each unit varies, but the average result provides a sufficient estimate. In the event a company does not customise its end products for particular consumers, soft drinks, petroleum products, and even chairs can be manufactured and accounted for using a form of the process costing method. Manufacturers mostly use process costing. In addition to textiles, biscuits, cement, paper, and oil refining, this method of costing is also used in other industries. This diagram illustrates the sequence of processes in which the output of the first process becomes the input of the second process, and so forth.