The cost process is an accounting methodology that records and accumulates direct costs and allocates the indirect costs of a manufacturing process. Costs are allocated to products, usually on a large lot, which can include the production of a whole month. Eventually, costs must be assigned to individual units of product. Assigns the average costs to each unit, and is the opposite end of the labor cost that tries to measure the individual costs of production of each unit. The process of costing is usually an important chapter. It is a method of allocating costs to production units in companies that produce large quantities of homogeneous products. Process costing is a type of operating cost that is used to determine the cost of a product in each manufacturing process or stage. CIMA defines process cost as "The costing method applicable when goods or services result from a sequence of continuous or repetitive operations or processes." Costs are averaged over units produced during the period. The calculation of the cost of the process is suitable for the industries that produce homogeneous products and where the production is a continuous flow. A process can be referred to as the sub unit of an organization specifically defined for the purpose of cost-gathering.
Example of Process Cost Accounting
As an example of process cost, ABC International produces purple widgets, which require processing across multiple production departments. The first department in the process is the casting department, where the widgets are created initially. During March, the casting department incurs $ 50,000 of direct material costs and $ 120,000 of conversion costs (comprised of direct labor and factory overhead). The department processes 10,000 widgets during March, so this means that the cost per unit of the widgets that go through the casting department during that period is $ 5.00 for direct materials and $ 12.00 for conversion costs. The widgets are then moved to the clipping department to continue the work, and these unit costs will be carried along with the widgets in that department, where additional costs will be added.
Types of Process Costs
There are three types of process costs, which are:
1. Weighted average costs. This version assumes that all costs, whether of an earlier period or the current one, are grouped and assigned to the units produced. It is the simplest version to calculate.
2. Standard costs. This version is based on standard costs. Their calculation is similar to the weighted average cost, but standard costs are assigned to production units, rather than actual costs; After total costs are accrued on the basis of standard costs, these totals are compared to the actual cumulative costs and the difference is charged to a deviation account.
3. First-in-first-out (FIFO) cost calculation. FIFO is a more complex calculation that creates cost layers, one for any production unit that started in the previous production period but was not completed, and another for any production that starts in the current period.