Process costing

Definition

Process costing is a method used to allocate costs in industries where production is continuous and units are indistinguishable from each other. It assigns average costs to each unit produced during a specific period.

5 Must Know Facts For Your Next Test

1. Used in industries like chemicals, textiles, and food processing.
2. Costs are accumulated for a period of time rather than per job.
3. Involves calculating equivalent units of production.
4. Utilizes weighted average or FIFO methods to assign costs.
5. Helps in determining the cost per unit of output.

Review Questions

• What type of industries typically use process costing?
• How does process costing differ from job order costing in terms of cost accumulation?
• What are equivalent units of production and why are they important?

Related terms

Job Order Costing:

A costing system that assigns costs to specific jobs or batches, suitable for customized orders.

Equivalent Units:

A measure used in process costing that converts partially completed units into a number of fully completed units.

Weighted Average Cost Method: An approach in process costing where costs are averaged out over all units produced during the period.