What is Process Costing?
Process costing is a cost accounting method used when a company mass-produces identical or nearly identical units through a continuous process, like chemicals, food, or paint. Instead of tracking cost per job, total costs are accumulated by department and averaged over the units produced.
Process costing assigns costs to production departments over a period, then divides total department costs by equivalent units produced to find an average cost per unit. It fits continuous, homogeneous production rather than distinct custom jobs.
- 1↓Materials enter Department 1Direct materials and conversion costs are added.
- 2↓Costs accumulate by departmentEach department tracks its own material and conversion costs.
- 3↓Units transfer to Department 2Cost per unit from Dept 1 becomes 'transferred-in' cost.
- 4Average cost per unit is computedTotal costs ÷ equivalent units = cost per finished unit.
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Step-by-step worked examples
A mixing department incurs $50,000 in total costs during the month and completes 10,000 equivalent units. What is the cost per unit?
Cost per unit = Total costs / Equivalent units Cost per unit = $50,000 / 10,000 = $5.00 per unit
The Mixing department spends $30,000 and transfers 6,000 completed units to the Packaging department. What is the transferred-in cost per unit for Packaging?
Cost per unit in Mixing = $30,000 / 6,000 units Cost per unit = $5.00 This $5.00 becomes the transferred-in cost per unit recorded in Packaging.
A bakery's process costing shows $12,000 of materials cost and $8,000 of conversion cost for 4,000 equivalent units. Find the total unit cost.
Materials per unit = $12,000 / 4,000 = $3.00 Conversion per unit = $8,000 / 4,000 = $2.00 Total cost per unit = $3.00 + $2.00 = $5.00
Flashcards
Quick quiz
Q1.Process costing is best suited for which type of production?
Q2.A department spends $80,000 and produces 16,000 equivalent units. What is the cost per unit?
Q3.What happens to the cost per unit from one department in a multi-department process?
Q4.Which industries commonly use process costing?
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Common mistakes
Using process costing for unique, custom jobs. — Correct: Use job order costing for distinct, custom jobs; process costing is for continuous identical-unit production.
Forgetting to use equivalent units for partially finished inventory. — Correct: Ending work-in-process must be converted to equivalent units before dividing costs.
Mixing up materials and conversion costs into one lump figure. — Correct: Track materials and conversion costs separately since they're often added at different points.
Ignoring transferred-in costs from a prior department. — Correct: Include the prior department's cost per unit as transferred-in cost in the next department.
FAQ
What is process costing?
Process costing is a method that averages total production costs over equivalent units when a company mass-produces identical goods in a continuous process.
What is the process costing formula?
Cost per unit = Total process costs ÷ Equivalent units produced.
What are examples of process costing?
Chemical plants, oil refineries, food and beverage processors, and paper mills typically use process costing.
How is process costing different from job costing?
Process costing averages costs across many identical units in continuous production, while job costing tracks costs for individual, distinct jobs.