History Of Process Costing

Companies that either produce a product or provide a service must have effective costing systems in order to manage their costs with the objective of making more profit. Among several costing systems out there today, we find Process Costing. Process Costing is a system for organizations to keep track of goods produced and the costs needed to produce them. Generally, the Process Costing system is used when the products manufactured and/or produced are identical or very similar, such as bottles of bleach, tooth paste, hardware tools. Electrical Appliance Manufacturers and Automobile manufacturers typically use Process Costing mainly because almost all products they make are similar and mass produced.

In the mass production scenario, goods move through different factory departments until completely finished. As the goods move through the production process, their associated costs move with them through the organizations books. Information systems trace the exact value of raw materials put into process and the value of direct labor and overhead used to transform those raw materials into finished goods. Said information systems ensure that

According to Ronald Hilton, author of Textbook Managerial Accounting, “equivalent units refer to the amount of manufacturing activity that has been applied to a batch of physical units after adjusting for the stage of completion”. This is basically adding up the percent of completion per units. If at a given time you have 100 completed units and 200 units at 50% completion, you can report 200 equivalent units for cost calculations. When accountants need to know the costs per units made at a certain period of time, they use equivalent units to calculate them. This concept can also be applied to direct labor and overhead costs, or “conversion costs”; a term used by industry for direct labor plus overhead