What are the four steps in process costing?

Process Costing: A Step-by-Step Guide

Process costing is a method of accounting used to allocate costs to products that are produced in a continuous or repetitive process. Unlike job costing, which tracks costs for each individual job, process costing tracks costs for a period of time and then allocates them to the units produced during that period.

The four key steps in process costing are:

1. Calculating equivalent units of production. This is the first step in process costing, and it involves determining the number of units that have been completed or are in process during the period being costed. Equivalent units of production are calculated by multiplying the number of physical units by the percentage of completion for each unit. For example, if 100 units are started during the period and 80 of them are completed by the end of the period, the equivalent units of production would be 80.

2. Determining the cost per equivalent unit. This is the second step in process costing, and it involves dividing the total cost of production for the period by the equivalent units of production. The cost per equivalent unit is used to allocate costs to the completed and partially finished units.

3. Assigning costs to completed and partially finished units. This is the third step in process costing, and it involves multiplying the cost per equivalent unit by the number of equivalent units of production for each unit. The resulting amount is the cost assigned to each unit.

4. Determining the total units to be costed. This is the final step in process costing, and it involves adding up the number of completed units and the number of partially finished units to determine the total number of units to be costed. The total cost of production for the period is then divided by the total number of units to be costed to determine the unit cost.

Process costing is a complex method of accounting, but it is essential for companies that produce products in a continuous or repetitive process. By following the four steps outlined above, companies can accurately allocate costs to their products and determine the unit cost.