Process Costing
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define process costing
➛ Identify industries that use process costing
➛ Understand how costs are accumulated by process
➛ Calculate cost per unit in process costing
➛ Understand the concept of equivalent units | introductory
➛ Distinguish process costing from job order costing
Key Vocabulary
➛ Process Costing
➛ Process
➛ Equivalent Units
➛ Cost per Unit
➛ Work in Process
➛ Continuous Production
What Is Process Costing?
Process costing is used when
➛ Products are identical and produced in large quantities
Costs are accumulated by process or department, not by job.
Industries That Use Process Costing
➛ Food and beverage production
➛ Oil refining
➛ Chemical manufacturing
➛ Cement production
➛ Textile factories
How Process Costing Works
1. Production is divided into processes or departments
2. Costs are accumulated for each process
3. Total cost is averaged over all units produced
Cost per Unit Formula
Cost per Unit = Total Process Cost ÷ Total Units Produced
Example Calculation
Given
Total cost =
Units produced =
Units produced =
$50,000
10,000
10,000
Calculation
50,000 ÷ 10,000 = 5
Cost per unit = $5
Equivalent Units | Introductory
Equivalent units convert partially completed goods into
➛ The number of fully completed units
Example
100 units at 50% completion = 50 equivalent units
Process Costing vs Job Order Costing
Feature
Production
Cost Tracking
Product Type
Cost per Unit
Production
Cost Tracking
Product Type
Cost per Unit
Process Costing
Mass production
By process
Identical
Average Specific per job
Mass production
By process
Identical
Average Specific per job
Job Order Costing
Custom production
By job
Unique
Specific per job
Custom production
By job
Unique
Specific per job
True or False
➛ Process costing is used for customized products
➛ Costs are accumulated by department
➛ All units in process costing are identical
➛ Equivalent units represent completed units
Fill in the Blanks
1. Process costing is used for __________ production
2. Costs are collected by __________ or department
3. Cost per unit is calculated using __________ cost
4. Equivalent units are used for __________ goods
Calculation Practice
A factory reports
Total process cost =
Units produced =
Units produced =
$72,000
12,000
12,000
➛ Calculate cost per unit
Equivalent Units
Calculate equivalent units
➛ 200 units at 50% completion
➛ 300 units at 25% completion
Mini Case Study
A beverage company produces identical bottles of juice continuously.
Questions
➛ Which costing system should be used?
➛ Why is this system appropriate?
➛ How is cost per unit calculated?
➛ What role do equivalent units play?
Quick Quiz
➛ What is process costing?
➛ Name one industry that uses process costing
➛ How is cost per unit calculated?
➛ What are equivalent units?
➛ How does process costing differ from job costing?
Answers ➧ Here
Activity-Based Costing ➧ Here