Process costing is a method of determining the cost of producing each unit of product in a manufacturing process. This type of costing is commonly used in industries where large quantities of identical products are produced, such as food, chemicals, and pharmaceuticals.
Here are the steps involved in process costing:
- Identifying the process: The first step in process costing is to identify the process to be costed. This involves determining the physical boundaries of the process and the materials and labor that go into it.
- Calculating the total cost: Once the process has been identified, the next step is to calculate the total cost of the process. This includes the cost of raw materials, direct labor, and factory overhead.
- Counting the units: The next step is to count the number of units produced in the process. This may involve counting finished units or measuring the amount of material processed.
- Calculating the cost per unit: The total cost of the process is divided by the number of units produced to arrive at the cost per unit. This figure is then used to determine the selling price of the product.
- Analyzing variances: Finally, the actual cost per unit is compared to the expected cost per unit to identify any variances. These variances can be used to identify areas for improvement in the manufacturing process.
Process costing is a useful tool for companies that produce large quantities of identical products. By accurately determining the cost per unit, companies can set competitive prices, improve their manufacturing processes, and ultimately increase their profitability.