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Process Costing System: Examples, Methods, and Steps

process costing definition

Process Costing refers to a method of accumulating cost of production by process. It represents a method of cost procedure applicable to continuous or mass production industries producing standard products. Costs are compiled for each process or department by preparing a separate account for each process. Process costing suits manufacturers that produce multiple products with similar production processes. In these situations, process costing can help manufacturers calculate the cost of production per unit for each product, providing valuable information for pricing and profitability analysis.

process costing definition

Therefore, Rs.20 credited to process account will not be realised in full. Abnormal loss represents good units, which could have been produced, if operation had been carried out according to accepted norms relating to manufacturing operations. For this reason, units representing abnormal loss are treated at par with good units for the purpose of valuation. There can be abnormal gain also when the actual production is more than the expected production. The quantity as well as the values of these losses can be known through the process costing. For example, in case of mud-guard making, the various operations can be tin cutting, bending, colouring, etc.

What Is Process Costing?

In those industries where a process consists of distinct operations, the method of costing may be called operation costing, though it is still process costing in approach and application. In this method, the assumption is that the incomplete units from the opening stock are completed first and then the units introduced in the process are completed. Total cost of the process is adjusted with normal losses, abnormal losses, abnormal gains and scrap of the process. Manufacturing companies should follow best practices for cost accounting, such as GAAP and IFRS, to ensure that the process costing system is reliable, accurate, and compliant with regulations.

  • In March 202X, this department has incurred a cost of direct labor USD 50,000, overhead cost USD 30,000.
  • For example, managers using this system can assess profit margin by product and isolate problem products before they become major issues.
  • Hence, the degree of completion of abnormal loss units is first identified and then they are converted into equivalent production units to arrive at the element wise cost.
  • To determine the unit cost of output of each process, the total production cost of the process is divided by the total quantity of the output of the process during a given period.
  • The cost of normal loss in process is absorbed as additional cost by good production in the process.

In such a scenario, managers may be inclined to manipulate cost data to meet production goals, leading to ethical concerns. Technology can be used to simulate different production How to account for grant in nonprofit accounting scenarios and identify the most cost-effective approach. Simulation tools can help manufacturing companies optimize production processes, reduce waste, and improve profitability.

Features of Process Costing

If desired, the prefix ‘To’ on the debit side and ‘By’ on the credit side may also be avoided. A company may state that 10% of input will be normal loss of process A. Suppose, input in process A is 100 units, normal loss of process A should be 10 units and normal production of process A should be 90 units. (i) To calculate the cost of production of each process and each unit in the different processes. The finished product of one process is the raw material for the next process and this procedure continues until the final product arrives. Process costs are sometimes computed on the basis of average costs.

In other words, the products are made to bear a proportion of the joint cost on the basis of their ability to absorb the same. Market value means weighted market value i.e., units produced X price of a unit of joint product. In this method, all important factors such as volume, selling price, technical side, marketing process etc. affecting costs are ascertained by means of an extensive survey.


Assume in the month of August, the company completes 150,000 reams of paper, spending raw materials total of $50,000, $70,000 in direct labor, and $30,000 for overhead. This means that in this process costing system example, the company incurred a total cost of $150,000 for the 150,000 reams of paper that it produces. Hence, the cost per unit will be calculated as $1 (total cost of $150,000/150,000 reams of paper). The process costing method involves dividing the production process into distinct stages or processes. The cost of each stage is then calculated and allocated to the units produced in that stage.

A process can be referred to as the sub-unit of an organization specifically defined for cost collection purpose. In average cost method, the cost of opening WIP is added to material, labour and overhead costs incurred during the period. The cost per unit is obtained by dividing these costs by equivalent production. When prices are rising, (i.e., during inflation), FIFO indicates a lower cost of units finished and a higher inventory value as current costs are applied to closing inventory. In process costing, the emphasis is on accumulation of costs for a process during a given period of time and the number of units produced in the process during that period. To determine the unit cost of output of each process, the total production cost of the process is divided by the total quantity of the output of the process during a given period.

First in, first out (FIFO) method

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process costing definition

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