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.
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.