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Process costing

Process costing

Process costing is the costing method applicable where goods or
services result from a sequence of continuous or repetitive operations
or processes.

Process costing is used when a company is mass producing the same item and the
item goes through a number of different stages.

Process costing is an example of continuous operation costing.

Examples include the chemical, cement, oil refinery, paint and textile industries.

Fresh Walls manufactures paint through a series of processes. The data for the first
process during a particular period is as follows:

The first stage is to input the raw materials to make the paint and mix and combine
these materials. To do this the manufacturer incurs costs for materials, labour and
overheads. By changing or processing the raw materials the value of the raw
materials increases due to the cost of the labour and overheads.

We can show this by using a process account.
Process 1 account

Litres $ Litres $

Output to
Materials 2,000 3,000 2,000 4,000
Process 2
Labour 570
Overheads 430

––––– ––––– ––––– –––––
2,000 4,000 2,000 4,000

––––– ––––– ––––– –––––
The next stage of this process is to add colour to the mixture. The output from the
first process is transferred to the next process and more value is added with extra
labour and overhead being added.

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