Process Costing

This is a costing method that is applied where there are standard operations with continuous production of homogeneous as identical units. Hence the output is the final product of a sequence of operations. In this type of costing, costs are accumulated on the basis of process, and the cost per unit is arrived at by dividing the total process costs by the number of input of the next process and further materials can be added at each stage production. Therefore cost per unit for the second and subsequent processes is a cumulative cost for example, the cost per unit for the output transferred from process 2 is the cost of production for both process 1 and 2 and not for process 2 above. The fact that the output for the first process becomes the input for the next process means that the process costing procedure strives to maintain the cost of each process product and charge that with the first process. The aim is to transfer the cost accumulated in the first process to the next process.

This is illustrated below:

Process 1

  Shs   Shs
Direct Material: 1,000 Transferred to  
Direct Labour 500 Process 2: 3,000
Overheads 1,500   3,000
  3,000   3,000

Process 2

  Shs   Shs
Transfer from   Transfer to  
Process 1: 3,000 Finished Goods: 6,000
Direct material 1,500    
Direct labour 1,000    
Overheads 500   ____
  6,000   6,000

Examples of Industries where process costing is applied

Process Costing Procedure

  1. The production factory is divided into a number of processes.
  2. An account is opened and maintained for each process.
  3. Each process account is debited with materials, labor, direct expenses and overheads apportioned to the process.
  4. The output of a process is transferred to the next process input of that process.
  5. The finished output of the last process is transferred to the finished goods account.


The concept of Equivalent units

Equivalent Units

This is a notional quantity of completed goods in the production process. It is a collection of work application (direct materials, direct labor and overheads) necessary to produce one complete unit of output. They are the number of units that would have been produced during a period of all the departments’ efforts had resulted into completed units.

The concept is used for purposes of translating the partially completed production into its completed units equivalent. This enables cost accountants to value the work-in-progress in an objective, consistent, reliable manner.

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