What Is Process Costing ?
The method of cost accounting used by processing firms is called process costing system. For each process function, product costs lie direct materials, direct labor and factory overheads are accumulated under process costing method. For instance, the processing of a herbal medicine includes herbs processing, herbs mixing, herbs medicine making and packing.
Ascertainment of process costs facilitates to control costs, evaluate performance and efficiency of each process. The cost of production ascertained is compared with the prevailing market price of similar products to assess performance. A constant reference of costs by elements is needed to assess efficiency and performance of each process. The purpose of assessing efficiency and performance of each process can be achieved if a separate process account is maintained for each process. The process account so maintained provides necessary cost information essential for controlling the costs and evaluating performance and efficiency of each process.
Process accounting helps a manufacturing firm to ascertain the cost of production and the cost per unit of output at each stage of process. The output of one process forms an input to the next process. Transferring the output to the next process continues until the final process produces finished products.