Process Costing

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A process costing system is a costing system in which the cost of a product or service is obtained by assigning costs to masses of like or similar units. Unit costs are then calculated on an average basis. Process costing systems are used in industries that produce like or similar units which are often mass produced. In these industries, products are manufactured in a very similar way. The companies usually use the same amount of direct materials, direct manufacturing labor costs and manufacturing overhead costs (CliffNotes Study Guide, 1999). Industries that use process costing systems are for example: chemical processing, oil refining, pharmaceuticals, plastics, brick and tile manufacturing, semiconductor chips, beverages and breakfast cereals. The job order cost system is used when products are made based on specific customer orders. Each product produced is considered a job. Costs are tracked by job. Services rendered can also be considered a job. Service companies consider the creation of a financial plan by a certified financial planner, or of an estate plan by an attorney, unique jobs. The job order cost system must capture and track by job the costs of producing each job, which includes materials, labor, and overhead in a manufacturing environment (Willkommen, 2000). The difference between job costing and process costing is the extent of averaging used to compute unit costs of product and services. The cost object in job costing is a job that constitutes a distinctly identifiable product or service. The quantity of manufacturing resources is different in any job. It would be incorrect to cost each job at the same average manufacturing cost. So, when like or similar units are mass produced, process costing averages manufacturing costs over all units produced (CliffNotes Study Guide, 1999).

The costs of a product are important for inventory calculations, pricing decisions and product profitability analysis. It’s also important for...
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