Application of Process Costing

Learning Outcomes

  • Identify circumstances most appropriate for process costing

Three iPhones and a chargerProcess costing is used when large quantities of identical items are manufactured in a continuous flow on a first-in, first-out basis. Examples of products that would use process costing are Cheerios brand cereal, iPhones, or Toyota Camrys.

There are three types of process costing, which are:

  • Weighted average costs. This version assumes that all costs, whether from a preceding period or the current one, are lumped together and assigned to produced units. It is the simplest version to calculate.
  • Standard costs. This version is based on standard costs. Its calculation is similar to weighted average costing, but standard costs are assigned to production units, rather than actual costs. After total costs are accumulated based on standard costs, these totals are compared to actual accumulated costs, and the difference is charged to a variance account.
  • First in, first out costing (FIFO). FIFO is a more complex calculation that creates layers of costs, one for any units of production that were started in the previous production period but not completed, and another layer for any production that is started in the current period.
Note: There is no last in, first out (LIFO) costing method used in process costing, since usually in these kinds of processes, the work-in-process at the end of the month is finished first, which is FIFO. An example of LIFO would be gravel pit, where the first gravel dumped in the pile is buried under tons of later deliveries and therefore trapped until most of the Last-in gravel is sold (last deliveries dumped on the pile are the first to be sold).

Watch the process of making candy corn and consider how you, as a cost accountant, would determine the cost of the product. Would you assign a cost to each piece, or to batches, or to some other unit, such as pounds of candy? Would you use an average cost, or FIFO, or LIFO?

You can view the transcript for “How Candy Corn is Made | Unwrapped | Food Network” here (opens in new window).

Before you examine the flow of costs through a process costing system, check your understanding of the appropriate circumstances to apply process costing.

Practice Question