Definition: Process Costing is defined as a branch of operation costing, that determines the cost of a product at each stage, i.e. process of production. It is an accounting method which is adopted by the factories or industries where the standardized identical product is produced, as well as it passes through multiple processes for being transformed into the final product.
In simple words, process costing is a cost accounting technique, in which the costs incurred during production are charged to processes and averaged over the total units manufactured. For this purpose, process accounts are opened in the books of accounts, for each process and all the expenses relating to the process for the period is charged to the respective process account.
Hence, it ascertains the total cost and unit cost of a process, for all the processes carried out in industry. Further, the average cost represents the cost per unit, wherein the total cost is divided by the total number of outputs produced during the period to arrive at the cost per unit. The cost per unit can be calculated using First in First Out Method (FIFO), Average Method and Weighted average Method.
Features of Process Costing
- The plant has various divisions, and each division is a stage of production.
- The production is carried out continuously, by way of the simultaneous, standardized and sequential process.
- The output of a process is the input of another.
- The production from the last process is transferred to finished stock.
- The final product is homogeneous.
- Both direct and indirect costs are charged to the processes.
- The production may result in joint and by-products.
- Losses like normal and abnormal loss occur at different stages of production which are also taken into consideration while calculating the unit cost.
- The output of one process is transferred to another one at a price that includes the profit of the previous process and not at the cost.
- At the end of the period, if there remains the stock of finished goods, then it is also expressed in equivalent completed units. It can be calculated as:
Equivalent units of semi-finished goods or WIP = Actual number of units in process × Percentage of work completed
Process costing is employed by the industries whose production process is continuous and repetitive, as well as the output of one process is the input of another process. So, chemical industry, oil refineries, cement industries, textile industries, soap manufacturing industries, paper manufacturing industries use this method.