Manufacturing companies often used process costing to help them figure out how much a particular item costs to produce. When a company produces identical or nearly identical products on a continuous basis, it requires more attention and effort to relate the cost of direct material, direct labor, and overhead to a single product. In this manufacturing environment, managers assign costs to processing departments instead of the product. The relationship to a process rather than to a product is the primary difference between process costing and other costing approaches. As a cost moves from department to department, the accountant records each step along the way.
At A Glance
- There are multiple processes to manufacture a product, each with its own cost.
- When costs are allocated to a process or department, the cost moves with the item being manufactured.
- Because the costs move from department to department, the recording of the cost must match those moves.
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Journal entries are used to record and move labor, materials, and overhead in process costing.
- To take a snapshot of overall costs, accountants use equivalent units.
- Equivalent units can be calculated.
- The average of the costs, when weighted, can provide the equivalent units and the equivalent unit costs.
- Equivalent units and equivalent unit costs can be calculated using the weighted average.
