Cost-accumulation method that averages production costs across departments or processes for large volumes of similar units.
Process costing is a cost-accounting method that accumulates production costs by department, process, or stage and then averages those costs across similar units. It is typically used when a business produces large volumes of uniform output.
Process costing helps manufacturers assign product cost in environments where tracking every individual unit would be impractical. It is central to inventory valuation, cost control, and margin analysis in continuous-production settings.
Materials, labor, and overhead are accumulated within each process or department over a period. Accountants then calculate unit costs, often using equivalent units when work in process is only partly complete.
Costs move from one process to the next as production advances. By the time units are complete, the accumulated process costs become the basis for finished-goods valuation and eventually cost of goods sold.
A bottling company’s mixing department incurs 90,000 of process cost for 30,000 equivalent units. The average process cost is 3.00 per equivalent unit before those units transfer to the next stage.
Process costing is not a better or worse version of job order costing. It fits a different production environment. The key difference is averaging cost across many similar units instead of tracking a distinct job.