Process Costing
Process costing is a method of costing that is used to determine the cost of products that are produced in a continuous process. Process costing is typically used by businesses that produce products such as chemicals, oil, and food.
The cost of a product in process costing is determined by adding up the cost of all of the direct materials, direct labor, and overhead that are incurred on the product. Direct materials are the materials that are used to make the product. Direct labor is the labor that is used to make the product. Overhead is the cost of all of the other resources that are used to make the product, such as rent, utilities, and insurance.
Features of Process Costing
Process costing has the following features:
- Continuous production: Process costing is used to determine the cost of products that are produced in a continuous process.
- Homogeneous products: The products that are produced in a continuous process are typically homogeneous, meaning that they are all the same.
- Average cost: The cost of a product in process costing is determined by using an average cost.
- Equivalent units: Equivalent units are used to measure the progress of production in process costing.
Applications of Process Costing
Process costing is used in a variety of applications, including:
- Chemical manufacturing: Process costing is used by chemical manufacturing businesses to determine the cost of chemicals.
- Oil refining: Process costing is used by oil refining businesses to determine the cost of oil.
- Food processing: Process costing is used by food processing businesses to determine the cost of food products.
Types of Process Costing
There are two types of process costing:
- Weighted average costing: Weighted average costing is the most common type of process costing. In weighted average costing, the cost of the units produced in a period is calculated by averaging the cost of the units that were started in the period and the cost of the units that were completed in the period.
- FIFO costing: FIFO costing is a type of process costing that tracks the cost of the units produced in a period based on the order in which they were started. In FIFO costing, the cost of the units produced in a period is calculated by using the cost of the units that were started first.