What is a process costing system?

A process costing system, is applied by companies that produce large quantities of similar goods. 
Process costing is appropriate for companies that mass manufacture products such as Chemicals, bricks, gasoline, detergent, and breakfast cereal. The output of a single process in a mass manufacturing situation is homogeneous; thus, within a given period, one unit of output cannot be readily identified with specific input costs. This characteristic of process costing systems makes a cost flow assumption necessary. 
Cost flow assumptions provide a means for accountants to assign costs to products without regard for the actual physical flow of units. Process costing systems allow the use of either a weighted average or FIFO cost flow assumption.

The accompanying News Note discusses a small companies that manufactures custom golf clubs. This firm is different from most of the companies that mass manufacture clubs. Although the individual featured in the News Note would likely use a job order costing system, most firms in the industry would appropriately use process costing.
Share This
Previous Post
Next Post