What is an example of process costing?
Using process costing, a seltzer bottling company would assign costs to each
stage in the bottling process. It then totals the costs from each stage over an
accounting period, dividing the overall process cost by the number of finished
bottles to obtain a cost per bottle.
What are the steps in process costing?
There are five basic steps in process costing:
1. Determine the number of completed items plus unfinished items
produced during each period.
2. Translate the work-in-progress items into equivalent units of finished
goods by multiplying the number of unfinished items by their percentage
of completion.
3. Total the direct materials and conversion costs for each stage in the
process.
4. Divide the total cost by the number of units to obtain the cost per unit.
5. Designate costs for complete and incomplete products.
What are the advantages and disadvantages of process costing?
For companies that make large volumes of homogeneous products, process
costing is much simpler than job costing. It also enables companies to hone in
on the cost of each stage in the manufacturing process and look for ways to
reduce cost if necessary. But there are drawbacks, too. Process costing can
be time consuming, and it can be difficult to accurately assign product costs to
each manufacturing stage and to work-in-progress items.
What is a process costing system?
A process costing system is a method typically used within certain sectors of
the manufacturing industry to determine the total production cost for each unit
of product. It accumulates cost from each process or department and
allocates them to the individual products produced.