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Process costing is a method of accounting that tracks and accumulates direct costs, and allocates indirect costs of a manufacturing process. It's often used by companies that mass produce similar products or units of output.
The five steps of process costing are: Summarize the flow of physical units Compute output in terms of equivalent units Calculate costs per equivalent unit costs Summarize total costs to account for Assign costs for finished products and work in process products
Equivalent units are notional whole units that are equivalent to the number of incomplete units adjusted for their stage of completion. Process costing is important because it helps companies: Set prices for their products, Determine if costs are tracking in line with projections, Monitor profit margins, and Simplify inventory control. The result of process costing is a cost of goods manufactured (COGM) figure that is often listed on a company's income statement.
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