As we saw in Dad’s Perfect Pies, process costing works best for mass-produced products such as candy and food and even automobiles.
For each firm listed in the following, identify whether it would use job costing or process costing.
- Chewing gum manufacturer
- Custom automobile restorer
- Facial tissue manufacturer
- Accounting services provider
- Wedding Planner
- Pool builder
- Cereal producer
- Architectural design provider
As a job flows through its creation, it collects costs, both direct and indirect, on some kind of job card, physical or more likely virtual.
However, in process costing, we assign costs to the overall pools of products in each department, using equivalent units instead of partial units.
Equivalent units are used in many situations in addition to manufacturing. For instance, a university has 500 students enrolled in classes. Each student attends school on a part-time basis. On average, each student takes three-quarters of a full load of classes. The number of FTE (full-time equivalent) students is 375. The school also has 10 full-time faculty and 60 adjuncts working on a part-time basis. On average, each adjunct works two-thirds of a full load. Even though the head-count is 70 faculty, the FTE would be 10 + ⅔(60) = 30.
In process costing, units are indistinguishable from each other, so in essence, we are taking total costs for the period and allocating that to each unit in a logical manner. This means that partially finished units get only a partial allocation based on how complete they are (using equivalent units), and often the process is departmentalized and accounted for that way.
Cost accountants involved in process costing allocate overhead, assign direct costs, record and verifying financial and non-financial information, and most, if not all of that is done using spreadsheets and other software.