Process costing
In one sentenceA costing system that collects the costs of each production process for the period and divides them by equivalent units; it suits continuous, uniform production such as water and cement.
Simply put
When you produce thousands of identical units, a cost card for each unit makes no sense. You collect the process costs for the month and divide them by what was produced.
Units that were not completed are converted into equivalent units: 2,000 units that are 50% complete equal 1,000 complete units.
Worked example
A bottled water factory completed 8,000 units in a month, and 2,000 units remained 50% complete. Process costs were 90,000 SAR (assuming they are incurred evenly during processing).
Equivalent units = 8,000 + 2,000 × 50%9,000 units
Cost per equivalent unit = 90,000 ÷ 9,00010 SAR
Cost of finished goods = 8,000 × 1080,000 SAR
Cost of work in process = 1,000 × 1010,000 SAR
Cost per completed unit10 SAR
Don't confuse it with
Job order costingIt suits jobs that differ from one another, so costs are collected for each job.