Definition of Process Costing
Process costing is a term used in cost accounting to describe one method for collecting and assigning manufacturing costs to the units produced. A processing cost system is used when nearly identical units are mass produced. (Job costing or job order costing is a system used to collect and assign manufacturing costs to units that vary from one another.)
Example of Process Costing
Let's assume that a company manufactures large quantities of an identical product. The product requires several processing operations, each of which occurs in a separate department. In the first department, the following processing costs were incurred during the month of June:
- Direct materials of $150,000
- Conversion costs of $225,000
If the equivalent of 100,000 units were processed in June, the per unit costs will be $1.50 for direct materials and $2.25 for conversion costs. These costs will then be transferred to second department where its processing costs will be added.
