CIMA’s definition:
- The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are average over the units produced during the period, being initially charged to the operation or process.Hence, process costing:
- Determines the cost per unit of product in an environment where IDENTICAL product is produced for all customers;
- Examples: Automobile assembly line-all cars coming out are identical; electronic assembly line where all products is identical; biscuit manufacturing though has more than one product line, each line is a separate, continuous process producing identical products; food production,etc
- In these production processes, it is NOT POSSIBLE to readily identify specific quantities of input with each unit of output.
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- The product of one process becomes the INPUT OR RAW MATERIAL of the next process;
- There is a CONTINUOUS FLOW OF IDENTICAL OUTPUT;
- It is DIFFICULT TO IDENTIFY A COST UNIT because each cost unit is part of a process;
- It is difficult to cost a cost unit hence we can only find the AVERAGE COST PER UNIT overperiod of time;
- COST CENTRES are set up and costs are collected by the cost centres;
- In process costing when manufacturing the main product(s), BY-PRODUCTS may emerge. However, these by-products need to be further processed to be marketable;
- It is possible that JOINT PRODUCTS may be produced in the processes;
- WASTE may arise during processing eg due to evaporation, etc
- Each process or department performs a particular operation(s). A certain stage of production is completed in each process. Each process is carried out by a certain department. A person is usually responsible for a process.
- An account called a PROCESS ACCOUNT is maintained for each process.This process account captures/records the following:
·All costs-materials, labor and overheads;
·Scrap;
·Output;
·Opening work-in-process;
·Closng work-in-process;
·Transfers from previous process and
·Losses or gains |